Wines priced under $11 are seeing double-digit drops in volume in the US — upwards of 10%.
“I don’t see heavy production companies that manufacture and sell inexpensive wine as full competitors for small wineries producing higher-priced premium wine,” Rob McMillan of the Silicon Valley Bank told Wine Business International.
“Wines above that are seeing a remarkably strong operating environment. The customers buying more expensive wine aren’t generally the same as those buying cheaper wine.”
It costs more to make less
Since consumers are reaching less for wines under $11, this will impact margins in large production facilities if they are not fully utilized, according to McMillian. “But the reduction in volume sold may, in the final analysis, have an even larger impact with distributors who aren’t set up to take advantage of DTC and see that channel as a competitor to three-tier sales. Large distributors need volume to fill their trucks and trains to see growth,” he said.
Essentially, if they make less wine, it costs more to ship and sell that wine because one truck or container isn’t generating the same profit. “The good news is the decline of the inexpensive bottle is rising the value and taste of more premium wines, as companies focus on those offerings,” McMillian said.
Goodbye “Two Buck Chuck”
In areas of the country that have access to Trader’s Joe grocery stores, Two Buck Chuck was infamous. The cheap, drinkable wine from the store’s Charles Shaw line sold for $1.99. However, inflation has struck Chuck, and photos on Reddit show the Trader Joe’s staple on sale for $4.49.
One Redditor wrote: “I didn’t realize how bad inflation was until I saw the price” of the Charles Shaw wine.
In New York, the only Trader Joe’s liquor store abruptly closed in August, leaving devoted drinkers without access to Two (or Four) Buck Chuck.
Continued rise of premium
As the Baby Boomer generation reduces its market share of wine buyers, millennials want a premium taste or experience.
If a millennial goes out for the night and plans to spend $11, they’ll choose a craft beer instead of a glass of wine that’s overpriced in a restaurant. Silicon Valley Bank predicts a 20% decrease in wine consumption in the next decade if the wine industry fails to react.
“What we are witnessing is declining sales below $11 and improving sales above that by value,” McMillian said. “Those high-priced goods are largely purchased by consumers who have established wealth and income. We will always have the wealthy, so there should be demand for wines that are rare and possess a strong brand. Today that wealth skews to the large cohort of baby boomers. But as those older wine-loving consumers sunset and are replaced by younger consumers who see beer and spirits as pure substitutes for wine, we should expect price pressure even on expensive bottles.”
How producers can react to the drop in wine volume
The 10% drop in the volume of wines under $11 eats into significant profits for producers and vineyards.
The industry has an acute oversupply due to diminishing volumes sold. “That will lead to vineyard removals — and fallowing in some cases — and reduced returns for growers,” according to Silicon Valley Bank’s annual report.
In order to turn more significant profits and meet costumer’s desires, vineyards and production companies will need to diversify sales channels, such as their direct-to-consumer channel, in order to offload any extra bottles. For example, vineyards can run a “buy a case, get a bottle free” promotion to encourage growth.
Vineyards should also focus on their premium wines and the experience that goes with that, whether partnering with a restaurant, hotel, or event to showcase their brand and the lifestyle that goes with it.
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