Peak Wine: Is the Endless Growth of the Wine Industry Coming to an End?

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Wine lovers may soon find that their passion is about to face some changes and hurdles in the coming years. 24/7 Wall St. tracks many industry trends in consumable goods, and that pertains to beers, wines, spirits, tobacco, food and beverages, and other newly legalized recreational and medicinal substances. One recent report stood out as effectively calling an end to the growth after a 20-year boom in the U.S. wine industry.

The State of the Wine Industry 2018 report from Silicon Valley Bank, which is located among California’s great wine regions, predicts that the wine industry is at the tail end of a 20-year growth period. This was the bank’s 17th such annual outlook for the industry.

It is important to understand that this view may not be universally held, but it comes from a group that knows a thing or two about forecasting trends affecting its customer base. Before getting into some of the forecasts from Silicon Valley Bank, note that the most recent full year of data from the Wine Institute (a competing report) showed that 2016 was a record year, with 238 million cases (up 2.0%) and a retail value of $34.1 billion (up 4.6%). The Wine Institute also noted that California wine sales to all markets, including shipments in the United States and exports, also set a record of 285 million cases in 2016.

But going back to the main issue of “peak wine,” Silicon Valley Bank’s report cites multiple issues for the end of a 20-year run. Retiring baby boomers were one issue, and the report also noted that “frugal millennials are driving a rotation of consumer preferences.” Wine industry sales growth is said to be ebbing as younger consumers and retiring baby boomers have an impact on buying behaviors and preferences.

Several outcomes are included. The report showed that consumers continue to leave lower-price segments and were favoring better-quality offerings. Still, their view is that total sales growth is leveling off. The report predicts that wine industry sales will rise by 2% to 4%, while overall wine case volumes will grow only up to 1%.

Source: courtesy of Silicon Valley Bank

 

The 2018 outlook suggests that overall wine industry pricing will remain flat, with price increases difficult to pass through to consumers. The premium wine segment, with bottles over $10 apiece, is called to grow in a range of 4% to 8%, down from the estimate of 10% to 14% in 2017. Increasing imports are expected to continue in the lower premium price points. The 2018 outlook shows that there is a price component for millennials and for the older generation alike:

Millennials are migrating away from red blends and introductory wines and are starting to have a positive impact on other lower-priced still wine categories, both domestic and foreign. … While boomers are still the leading consumers of fine wine, they are consuming less as they age, are changing their spending patterns in dollars spent and are moving away from the high price points as they adjust to living on a fixed income.

In addition, it may be hard for new producers to get a leg into the market. The reason is that overall wine supply is balanced. Several other industry trends also will have an impact on the wine industry if they come true:

  • Chardonnay is demonstrating particularly strong demand, while Cabernet is balanced with flat to downward pressure at the high end of the market.
  • North Coast grape prices had seen rapid growth in the past five years, although this is now expected to slow.
  • Acquisitions are expected to cool somewhat from the torrid pace of the past three years, although foreign purchases of U.S. wineries and significant transactions for vineyard properties are still likely.

Wine lovers should not really take this report as an end of the wine industry. In fact, the overall 2018 outlook is expected to be good despite some of the big caution that the report might indicate.

Rob McMillan, founder of Silicon Valley Bank’s Wine Division and author of the report, said of the outlook for the industry:

2018 will be a good year for the wine industry, and while there will still be sales growth, the rate of growth is slowing. The successful wineries 10 years from now will be those that adapt to a different consumer with different values – a customer who uses the internet in new and interactive ways, is frugal and has less discretionary income than their generational predecessors.