Last week, Silicon Valley Bank and Vintank teamed up to present a rather well-researched and thorough look at what the wine industry has in store for itself in the near future.
Predictions are, of course, only for the exceedingly brave (or exceedingly foolish – or both), since they’re ripe for the 20/20 vision sniper cross hairs of retrospective perspective later. But I tend to admire the cojones it takes to put your thoughts out on a public limb, opening it up for those who would use them as a perch for even greater ideas, not to mention as fodder at which any thick-skulled woodpeckers can take pot shots. An example: the bold predictions that Vintank made about the wine biz for 2011, many of which didn’t materialize in 2011 but are starting to show signs of instantiating themselves in early 2012 – in fact, the SVB report bolsters several of those bold Vintank 2011 predictions (the growth of direct wine sales, for example, in what they term “the 5th Column), for those who have more pachyderm-like memories (and are keeping score). Vintank: 1; Woodpeckers: 0?
You can download the report, its summary slides, and an even higher-level infographic summary at SVBs website.
While the results (understandably, given the source) have a serious CA-focus, there are tidbits therein that the worldwide wine industry can take away from it.
For example, U.S. wine producers may be set for shorter supply, increased prices, and a big challenge from EU country wine imports.
Not exactly good news for the U.S. wine biz…
The problem for the U.S. are recovering grape prices, and what is clearly a situation of decreasing inventory for many wineries. This could put upward pressure on wine bottle prices and downward pressure on flash sale companies that have based their business models on the oodles of unmovable inventory that plagued wine producers in recent lean economic years.
While all of that not-so-goodness is happening, the debt crisis in the EU is driving the Euro down while the dollar gains, which means imports from the EU could be available at bargain prices, and so are going to start to look very attractive to U.S. merchants.
The SV report also talks about the pervasiveness of social media, particularly in reaching… not Millennials (a segment that will undoubtedly continue to grow in importance but are still small potatoes when it comes to real current spending on luxury bottles), but Baby Boomers, who are spending the big bucks on wine right now. By the way, if you still want to keep your head in your… sand and deny that big changes are coming eventually with those Millennials (or write that change off as too-far-away-to-care-about), consider just how fundamentally – and quickly – things have changed to get us to the near-constantly-connected state where we are today.
The report also mentions that, ironically, the bigger the wine producer, the more positively their view of social media; the smaller, the more negatively they view wine online. I call that ironic because it’s clearly the smaller producer who can enjoy the most power and leveling-of-market-playing-field by wielding social media properly.
As you can see, lots of food for thought in all of this for the super-wine-geeky – particularly those of us who dig EU wines, and especially dig them when the prices are right – and especially for the U.S. wine producer, for whom the new SVB report should be required reading.
Think SVB is on the money here? Or are they so out on a limb that their projections deserve a ferocious bout of woodpecking?
Cheers!
Those of us who buy Euros are still waiting for the terrible debt news coming out of Europe to weaken it… I've stopped holding my breath, as our own debt problems continue to hurt the dollar. Right now, it is hovering around 1.32, and would have to plunge to under 1.00 for European wines to be a "bargain." If it does weaken eventually, there is always the question of whether the average American consumer will accept "old world" wines as a substitute for CA.
BTW, the biggest news in the North Coast right now is that the banks have money to lend again, and many stalled projects are moving ahead full steam.
James – I wouldn't touch euros right now :).
I think the average consumer is looking for a good wine that they enjoy at a good price, regardless of source, so if the euro continues to decline AND those other factors manifest in higher domestic wine prices, I see the EU wines as potentially taking some domestic U.S. market share.
All the more reason to buy local wines!
CWP – way to hustle! ;-)
"the debt crisis in the EU is driving the Euro down while the dollar gains, which means imports from the EU could be available at bargain prices, and so are going to start to look very attractive to U.S. merchants."
This certainly is a likely scenario but not a bargain prices, as the author suggest. What is omitted form teh analysis is the (sometime lavish) subsidies that the Euro governments give to their domestic wine business. That funding will disappear, should France, Italy, Greece and Spain tighten their belts. And what of transportation – that certainly hasn’t and likely won’t get less expensive. Candidly, anyone who has gone into a retail shop and seen a Euro wine for $6 or $7 should really think about if it really can get any cheaper than it is now. I probably won't, in my opinion.
Good points, David – I guess the question is, if they can get any cheaper, can they get *much* cheaper; it will also depend on how far up the domestic prices go…
The EU smells blood, and they are howling at our gates with both existing and new imports for the U.S. market. Last week several importers at the Spanish Wine Cellar in San Francisco told me that they are ready to pick up a number of new supply chains out of France, Italy, Portugal, Spain, and other european countries because the price is right, and the market conditions are in the shape of a perfect storm. When Rob MacMillan said that U.S. wine sales would expand by anywhere from 7 to 11 percent in 2012 over the previous year, and you take into account that the actual supply/inventory increases from the U.S. producers is much smaller than that, it's quite easy to see an very large global producer shift-in-share on top of that overall market growth. The very large european wine producers are gearing up to the hilt to make maximum gains on their shares of the growing U.S. market, as well as their share of exports to the United States. . Did you see the mind-blowing promotions from Seguras Viudas at Coachella? On the other hand, the small producers gains will be very much less, on a par with their modest expectations.
Rich – looks like out shores are about to get stormed!
Joe, although price has a lot to do with wine picks from American consumers, one thing that has been going on for some time is the shift every year from Cali wines to wines from all over the world. Imported wines have grown quite organically here because like the way they TASTE. I do not feel they will be getting cheaper because they are already very reasonable in price and many over deliver on flavor and have a style that people here seem to like whether Spain, Australia, Italy and dare I say Argentina. A very good read and spot on with Rob's analysis. Cheers!
Thanks, Tim!
The shortages we are forecasting are industry wide and include both lower and higher price points. Wine consumption is still on the rise in the US. But leaving the Euro discussion on the sidelines for a moment, where will the future wine supply come from to satiate domestic demand? The god of consumer desires will be served, so clearly that growth has to come from offshore to the extent we can’t fill it. Offshore includes the usual suspects like Argentina and other non-EU countries as well. (con't)…
(con't) …….But back to the Euro, we’ve seen a drop from about 1.50:1 to about 1.30:1 over the past year or so. In the same period, first we saw drops in EU imports when the exchange rate was high and the worries were on the US domestic economy, to now where there is growth in EU shipments as fears shift away from the US economy and onto a protracted recovery in the Eurozone.
We aren’t suggesting there will be a flood of imports from Europe. We are predicting market share of European and imported wined will grow in the next 18 months. We do expect the Euro to weaken more and contribute to cheaper imports, all at the same time we are taking small price increases for domestic wines. All the stars seem to be aligned for domestic market share to grow.
………sorry …… imported market share to grow.
Thanks for the additional insights, SVB! So you're saying that the domestic market may expand to absorb more domestic U.S. wine while the EU market share here grows as well? Or am I misinterpreting that?
1WD – Yes. We expect domestic sales to grow this next year and market share to be lost to foreign wine sales. Said another way, growth in foreign wine will be more than growth in domestic wine sales.
We also believe we are "trending to shortage" but not yet truly short. We believe we might see a record harvest this year and that might stall a true shortage in grapes for another year. But to the extent domestic demand isn't met, its got to come from off-shore. We are suggesting the stars are aligned to see imports take a larger market share of domestic sales AND at the same time, domestic sales will increase.
@SVBWine – thanks, really appreciate you chiming in with the additional details. Great job on the report and webcast last week. Cheers!
Thanks for the props and covering the report's release.
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I wonder if, in the same way that Chinese may arrive deus ex machina to buy European bonds, if Asian markets could also begin to show increased demand for exported American wines. That would be a welcome result for the producers.
Also, for those wondering about the "mystery" of enduring strength in the Euro (see WSJ today), perhaps it's just that there are not really attractive alternatives. The money has to be in some currency, right?
Nick – great point; fiscally speaking, U.S. producers would be crazy not to make that play.
Just a little chart to add to the record. This is a ten year history of "EURUSD" exchange, assuming the link works. Food for thought. http://www.google.com/finance?chdnp=1&chdd=1&…
I just love the lurches in this business. Upward price pressure on domestic wines will be interesting to see play out (to say the least!) In a world of options, I fear the American consumers are not likely to stand still for it other than in limited counter-to-the-rule examples.
Of course I said "in a world of options." Look for domestic interests to beg special interest legislation to protect from foreign "subsidized" products (because of course, ours are not, no sir, not even with zirp?).
I do wonder, also, how domestic production of non-ca non-pac nw wines will factor as well. Every Last Place in the country I go people can't stop talking about their local wines. CA needs wine price increases like it needs more earthquakes, IMO.
Nick – even if there is legal protection, we'd still be talking about an ENORMOUS number of SKUs, so it's probably a lot closer to that world of options anyway.