State of the US Wine Industry 2020 Written by Rob McMillan, EVP and Founder Silicon Valley Bank Wine Division STATE OF THE WINE INDUSTRY REPORT 2020 2 Contents 1. Introduction 3 Direct to consumer — positive growth but slowing 35 Restaurant sales 35 2. Executive summary 6 Formats, varietals and packaging 36 Seven headwinds 8 Substitutes — spirits, cannabis and imports 39 Seven tailwinds 9 Spirits 40 Cannabis 41 3. 2019 predictions in review 10 Imports 44 What we got right 11 Other substitutes 46 What we got wrong 12 7. Demographics and marketing 48 4. 2020 US wine business Cohort consumption 50 predictions and observations 13 The millennial “Indulgence Gap” 52 Supply 14 The missing millennial 52 Demand 15 Marketing wine to millennials 54 Price 15 Sales and marketing for family wineries 57 Cracks in the tasting room model 58 5. Grape and wine supply 16 Today’s wine tourist 59 The 2001 planting bubble 17 Direct to consumer: Where we need to go next 60 The 2020 grape market — have we been here before? 20 The bulk wine market 22 8. Land and M&A 61 Implications for 2020 24 9. Cumulative negative 6. Wine sales 26 health messaging 64 Winery shipments 28 Neo-prohibition, the original 64 Generics and wines below $9 — still declining 30 Neo-prohibition, the sequel 66 Mid-price premium — growth, but declining growth 32 Luxury wine — threats and opportunities 33 10. Endnotes 68 STATE OF THE WINE INDUSTRY REPORT 2020 3 Introduction “ We must not think because we put a price on grapes 1 and the people do not take it, that we are therefore overproducing. When we put this product into the consumer’s hands at a reasonable price, we will find that the production will not meet the demand of the consumer, that there will be a demand for every pound of fruit we can produce.” Hon. A. M. Drew, Fresno. Official Report of the 18th Fruit Growers’ Convention of the State of California, November 23, 1894. CONTENTS | 1 INTRODUCTION | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 STATE OF THE WINE INDUSTRY REPORT 2020 4 Figure 1: How was your year? 2016 2017 2018 2019 35% 30% 25% 20% 15% 10% Percent of respondents of Percent 5% 0% The most One of A disappointing Neither a good A good year One of our The best year difficult year in our most year year nor a bad better years in our history our history challenging year years ever Source: SVB State of the Wine Industry Survey Yes, we are at a point of oversupply in the business cycle. It’s • Why are the higher-priced segments that have produced not our first. When the industry was in a similar state in 1894, most of the growth of sales dollars we’ve seen for the the Honorable A. M. Drew from Fresno, while opining on grape past 25 years flattening out? pricing, had an interesting point of view: When we deliver what • Is premiumization ending for the wine business, the consumer wants at the right price, there is no such thing and if so, why? as oversupply. • Why are price increases so hard to come by? That’s a great place to launch into the report this year because • How long will the current supply excess last? our current oversupply in California and Washington isn’t due to speculative overplanting. It’s due to the wine industry’s growing Those are difficult questions to face. But despite these miss in not providing consumers what they want. That’s not melancholy thoughts, the current operating environment isn’t an adverse statement about the quality of what our industry a complete calamity because macro views don’t tell the whole produces. We’ve never made better wine. But based on the story, and the mood of the industry is mixed. industry’s current results, making great wine isn’t good enough for the consumer today. We are increasingly missing the mark on Most of the industry will remember 2019 as a pretty good year consumer expectations, and our results show it. despite the challenges, with almost a quarter of the industry reporting that 2019 was their best year in history! How can that That said, I think the speaker at the 1894 convention was too be, given the headwinds? focused on price and missed the nuance of how marketing and branding affect demand. Evaluating the process of how a If we look more closely at the trends, we see a bifurcation of consumer places value on something and then buys it involves performance. More wineries are reporting great performance far more than looking only at the sticker price. But there’s a truth or record years, and at the same time, an increasing number of in that statement we should contemplate nonetheless. And this wineries are reporting poor results (see figure 1). year we should ask ourselves many new questions: The past 25 years was an era where the rising tide of consumer • Why is the growth rate of wine by volume entering demand lifted the boats of everyone in the wine business. We a period of decline? consistently saw increasing volumes and prices for premium wine during that period, and throughout it, every business model • Why are lower-priced segments still showing negative seemingly worked. But as we evolve into this new era where the growth in both volume and sales dollars (value)? CONTENTS | 1 INTRODUCTION | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 STATE OF THE WINE INDUSTRY REPORT 2020 5 Figure 2: Sales growth tide is slack or receding, all Those are each important questions by themselves and part of a rates of family wineries boats won’t float, and we will deeper evaluation you should consider this year. But once you do have winners and losers.1 that, what problems will you need to address? Quartile 1 –7.82% In the 1990s, the dominant Our review of the components that drive the wine business Quartile 2 3.59% competitive issue was wine. reveals that retiring wine-loving baby boomers are being replaced Quartile 3 11.29% If you made good wine, it would by more frugal spirits-loving millennials and now Gen Zers, who sell itself. In the 2000s, that consume less alcohol than prior generations. We need to attract Quartile 4 22.34% shifted to sales. You needed to those young consumers, but we are doing a poor job of that. Why? Source: SVB Peer Group evolve your sales channels — Analysis Database your path to market — and you • Substitutes: The young consumer is adopting substitutes in still had to make good wine. the form of spirits, craft beer, foreign wine, spiked seltzers and to some extent cannabis, instead of domestic wine. As we move into a low-growth environment in 2020, the • Price: Wine is more expensive than beer or spirits per serving, dominant competitive issue will shift to efficiencies. Now, you and frugal young consumers are voting with their wallets. will not only need to continue to make great wine and incessantly evolve your sales channels, but you will also need to run your • Neo-prohibition: As an industry, we’ve allowed the impact of business as efficiently as possible so your margins are better paid science from anti-alcohol groups to gather momentum. than your peers’. In a low-growth environment, there are likely to The cumulative impact of that messaging is gaining traction be winners and losers, and you want to be on the correct side of with health-conscious consumers. We’ve done little to counter that ledger. their agenda for the past 20 years. • Regulatory change: Legislators armed with preordained Much like the wineries’ reports of their year in figure 1, we conclusions from anti-alcohol studies are authoring see bifurcated results from the financial statements of wineries increasingly restrictive laws and regulations. (see figure 2). • Marketing: We have been too slow in adapting to this In bottom-quartile performers, the average growth rate in consumer change. We aren’t yet effectively marketing to young sales is negative 7.82 percent, but in the upper quartile, we see consumers and creating resonance with their values. We aren’t growth rates averaging a staggering 22.34 percent! Looking at doing a good enough job of giving them a reason to buy wine. the quartiles qualitatively, we see no trend based on case sales The adage that change creates opportunity is true even in a volume, years in business, location or business model. Each difficult market. The winners of tomorrow will be the wineries that quartile has a similar mix of wineries. What really seems to understand the evolving consumer profile, critically evaluate their define success is the management team. As a winery owner or organization’s capacity to react, develop solutions and execute manager, that’s something to reflect upon today. quickly, then evaluate their success or failure to continuously How is your management team? Is everyone in the right seat on improve. Those companies will take sales from those that the bus? As a leader, are you focusing on the most important continue to run their businesses the way they have for the past 25 things? Does your business culture embrace continuous years and stick with strategies that have always worked before. improvement? Is failure an accepted part of learning in your The winners tomorrow will be intrepid and willing to try new culture? Are you training and developing depth and talent? approaches and change the status quo. Are you empowering people to make quick decisions without We believe this report will inform your team’s thinking about the second-guessing them? Have you focused on your organization’s particular niche you occupy within the wine business.