The Wine Industry is Headed For Self-Inflicted Decrepitude

They say that you can lead a horse to water, but you can’t make him drink. It seems like we’re in need of a corollary these days: you can show the wine industry signs of its demise year after year, but you can’t make people believe it.

Each year, Rob McMillan, head of the Wine Division of Silicon Valley Bank releases his State of the Wine Industry Report. It’s chock full of interesting data points about how the American wine industry feels, how business has been for the past year, and how the fundamentals of the wine economy have been performing.

The latest version of the report was released last week, and simply put, the news is not great. There are plenty of other commentators out there who have spent time picking apart the extremely detailed analysis that McMillan and his colleagues have done.

Here’s the bottom line for those without the time to read much, or who were just excited to click on an image featuring wine and zombies: two worrying trends continue unabated in the American wine industry.

The first is the trajectory of negative volume growth. While some (small) parts of the industry are growing, other (much, much larger) parts of the industry are shrinking, averaging out to fewer sales last year than the year before, and fewer sales next year than this year.

The continued weakness of wine at lower price points adds a particularly distressing edge to this trend. Wines between $8 and $15 are typically the wines a) most readily available and b) what many entry-level drinkers can afford to buy.

The second, even more terrifying trend is the stated lack of interest in wine by younger adults that are about to enter their prime drinking and buying years. Given the opportunity, younger adults of drinking age say they are more likely to reach for alcoholic drinks that they believe are more fun, less expensive, and healthier for them (think White Claw).

The writing on the wall. Courtesy of the Silicon Valley Bank 2023 State of the Wine Industry Report

It doesn’t matter what you’re selling. If the graph of your customers’ inclination to buy your product looks like the one above, you can only come to one logical conclusion: your product isn’t relevant to younger generations.

Which means you have a marketing problem.

Of course, Rob McMillan has been telling that to the wine industry for several years.

The Wine Industry is Headed For Self-Inflicted Decrepitude
The once and future customers of the American wine Industry.

But for all the facts and figures, all the stone-cold numbers pointing to the fact that the US wine industry is headed towards an unhappy future, one thing in particular in this year’s State of the Wine Industry report scared me more than any other, and truly seemed like the first dreadful knell announcing a future that none of us want to see.

You see, McMillan hasn’t been merely content to shout at the wine industry each year about how they weren’t connecting with new generations of wine drinkers. He actually tried to do something about it.

McMillan and a bunch of other industry heavyweights got together, solicited pledges of $1 million and built a plan to create a national wine marketing board using the same kind of government funding that brought us the “Got Milk?,” or “Beef, It’s What’s For Dinner” campaigns.

In order for that plan to go forward, McMillan needed producers representing more than 67% of the wine industry to raise their hands and agree to pay a small tax in order to fund the effort on an ongoing basis.

But some of the wine industry’s biggest players said no. And after a year of lobbying, cajoling, arguing, and pleading, McMillan and his colleagues have given up.

That, my wine loving friends, is the most terrible news I have heard about the wine industry in a very long time.

The guy with the boat and the life preserver was sitting right there, and the swimmer, barely keeping his head up, between choking on gulps of seawater, said, “Nah, I’m fine,” and waved him off.

It’s hard to wrap my head aroun how the wine industry believes things are going to turn out when it seems content to do the same things it’s always been doing even as the market for wine weakens, sales drop, and a whole generation of drinkers builds loyalty with other beverages.

The biggest buyers of wine right now, the Baby Boomers, are dying. And those that aren’t dying are busy asking themselves whether they really need to buy any more wine, because they’re not entirely sure they’re going to be able to drink all the bottles they have in the time they have left.

If the wine industry can’t figure out how to appeal to the generation that’s going to replace them, then there’s really only one thing they can hope for. But who in their right mind wants to actually wish for a zombie apocalypse?

The Wine Industry is Headed For Self-Inflicted Decrepitude

If it doesn’t wake up and smell which way the wind is blowing, the American Wine Industry is soon going to get the customers it deserves.

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America’s Wine Decline

Numbers, they say, do not lie. But the numbers to which you pay attention matter greatly. Much ado has been made in recent years about America’s ascendancy to become the world’s largest consumer of wine by volume, a title it achieved in 2014 and has kept since (as-yet-unreported numbers from the last two years notwithstanding). America seems to be drinking more wine than ever, but that seemingly good news belies a much more disturbing trend that suggests America’s wine industry is in some fairly serious trouble.

Rob McMillan has been watching the American wine industry for three decades, having founded the Wine Division of Silicon Valley Bank in 1992. SVB, as it is more commonly known, finances a significant portion of the country’s wineries and wine businesses, and has unmatched visibility into the financials of thousands of wineries. Each year, based on information gleaned from those financials, as well as an industry-wide survey, McMillan assembles his State of the Wine Industry Report and attempts to provide a snapshot of where the industry is headed.

‘Let’s talk about the elephant in the room’, said McMillan in his live-streamed presentation of the report. The elephant, hiding under big flashy numbers like rising wine consumption and many high-end wineries saying that 2021 was the best year in the history of their business, was this: McMillan’s analysis shows steadily shrinking growth rates for the industry as a whole for the last 20 years.

You don’t have to have an MBA or a degree in statistics to know that when it comes to business, you want your graphs to go up and to the right. The American wine industry’s graph goes down and to the right.

Continue reading this article on JancisRobinson.Com

This article is my monthly column at JancisRobinson.Com, Alder on America, and is usually available only to subscribers of her website. If you’re not familiar with the site, I urge you to give it a try. It’s only £8.50 a month or £85 per year ($11/mo or $111 a year for you Americans) and well worth the cost, especially considering you basically get free, searchable access to the Oxford Companion to Wine ($65) and maps from the World Atlas of Wine ($50) as part of the subscription costs. Click here to sign up.

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Will the Wine Industry Learn the Lessons of the Pandemic?

As humans, we’re evolutionarily engineered to fear change. And for good reason. It often presages hardship in some form, whether social, emotional, physical, or economic. Certainly, we’re all experiencing both fear and hardship in many ways at this moment, even if (and I count myself among the number of extremely fortunate) we’re simply working from home in our pajamas with a well-stocked kitchen and wine cellar. Watching the economic toll the pandemic takes on the entire economy has been heartbreaking, and in particular its effects on the wine business and hospitality industry.

Where the wine industry is concerned, much has been made of the realities that were forced upon 95% of American wineries almost overnight when tasting rooms, restaurants, wine bars, and retailers all closed their doors to the pandemic. To those of us watching from afar, that was a kneecapper. To those in the industry, it seemed a slash across the jugular.

In every major crisis, there is the moment where it is upon us, in which we often freeze in fear. Then there is the moment we react, driven (often by adrenaline-fueled desperation) to compensate for the change. And then there is the moment, where we first have a slight bit of perspective on just what it is we are going through, regardless of whether the crisis itself is over.

For the American wine industry, that first brief moment of perspective may have been yesterday, when Rob McMillan, Executive Vice President and Founder of the Wine Division of Silicon Valley Bank hosted a video conference entitled “State of the Wine Industry – Special Edition.” McMillan is perhaps one of the foremost analysts of the American Wine Industry and his annual State of the Wine Industry report is required reading for anyone interested in American wine. He brought several expert guests along to spend an hour analyzing the first real tranche of data that exists about the actual effects of the pandemic on the industry.

Reports of Our Death Have Been Greatly Exaggerated

The data presented offers a somewhat startling picture that, at least on the surface, suggests that rather than the bottom dropping out of the wine industry as many of us feared, in fact, the wine industry is doing better than it was projected to do before the first news of COVID-19 hit the airwaves.

But let’s unpack that a little before we get too excited. The data presented on this video conference by Danny Brager, Senior Vice President of the Nielsen Group’s Beverage Alcohol Practice came from the scan data collected at grocery stores, chain liquor stores, and other larger retailers who report sales data to Nielsen. That means of course, that unless a winery’s wines are sold in such outlets, they are not included in any report of sales.

And what do those sales data say? That instead of the basically flat (zero) growth projected for American wine sales this year so far, sales are instead up 28% in volume and 31% in value over the past 9 or 10 weeks. Panic buying of wine was a real thing, folks. Of course, ask your average 6ooo-case-production winery in Dry Creek Valley if their sales are up 28% in the last 8 weeks, and you’d be thankful you’re forced to do so from six feet away, lest you get a fist in your facemask.

Succumbing, Surviving, or Thriving in the Pandemic

The fate of smaller wineries in this time of upheaval depends, and will continue to depend on just how digitally savvy they were, or how digitally savvy they are becoming in the face of the new realities being thrust upon us all.

Beyond the shocking increase in wine sales numbers, perhaps the most interesting single slide presented in McMillan’s conference was his analysis of the direct-to-consumer channel mix of smaller winery sales before and after the pandemic thanks to data from VinSuite (an e-commerce provider that powers e-commerce and back-office systems for the wine industry). Or in less business-speak, where and how smaller wineries are managing to sell wine to their customers in this crazy time.

Source: Silicon Valley Bank State of the Industry – Special Edition Webinar

The green box on the left is pre-COVID-19 and the green box on the right is post COVID-19. Pay attention to the size of the blue and purple areas in particular. Blue represents POS (Point-Of-Sale — i.e. Tasting Room), purple represents e-commerce sales and green represents phone sales. What you see is that in the space of two weeks, most wineries dramatically shifted their sales channels to e-commerce, phone, and their wine clubs. That is, those who had the capability to do so.

Here’s another look at the same data, but this time as gathered through a survey conducted by McMillan and Silicon Valley Bank:

Will the Wine Industry Learn the Lessons of the Pandemic?
Source: Silicon Valley Bank State of the Industry – Special Edition Webinar

The above graphic demonstrates the truly remarkable shift that some wineries were able to make under extreme circumstances.

The Lessons That Need To Be Learned

You see, you can’t shift business to your e-commerce channel unless you have one. You can’t call your customers and sell to them on the phone unless you know who they are. You can’t send promotions and drive sales into your wine club unless you run it with something other than pencil and paper.

During the webinar, McMillan showed this devastating, but not particularly surprising chart:

Will the Wine Industry Learn the Lessons of the Pandemic?
Source: Silicon Valley Bank State of the Industry – Special Edition Webinar

More than half of the wineries that McMillan spoke with don’t have anyone, even part time, whose job it is to answer the most basic questions about that winery’s customers — who they are, what they care about, when they buy, what they buy, etc.

This pandemic has made concrete the adage of desperate times and the desperate measures that become required. If you can believe it, in desperation, many wineries actually picked up the phone and called their customers (in addition to customers calling them, of course). They knuckled down and (gasp) sent promotional e-mails to their winery club members (and maybe even the thousands of people who were lapsed winery club members). Maybe they gritted their teeth and offered up free shipping on their web site.

And what happened? They drove 50% more sales from their wine clubs. They took phone and e-commerce sales from 3% of their business to 26% of their business. Yes, some of these numbers might represent more of what “happened” to wineries rather than their ability to effectively execute, but the lesson to take from it remains unchanged: many of the things that wineries were forced to do in the pandemic they could have been doing all along.

Which brings me around to the question in the title of this piece. Will wineries learn from this pain and the extremity of today’s circumstances, or not? Here are some (not all) of the crucial lessons that this pandemic has to teach.

You must have a modern, functional, mobile-friendly, e-commerce web site

Selling online is the new normal and is non-negotiable. When customers show up on your web site to buy your wines or join your wine club, they have to be able to do so quickly and easily.

You Must Know Who Your Prospects Are: Get An E-mail From Everyone

You can’t build relationships with people you can’t talk to, and you can’t sell wine to people you can’t reach. For most of the wine industry, the only list of e-mails that seems to matter day-to-day is the list of people who are actively buying wine off their mailing list. That’s because many wineries don’t make an effort to get contact information from different types of customers — those who stop by a tasting room, for instance. Even worse, many wineries have huge lists of customer e-mail addresses that they do nothing with. As if somehow when someone decides to cancel their club membership they can never be contacted again. And these days, it’s not just e-mail addresses. You want phone numbers, too.

You must know who your customers are, what they’ve bought, and how to contact them

A spreadsheet of customer names doesn’t cut it. You need a database that lets you do that voodoo-like thing called CRM, Customer Relationship Management. It’s a pretentious, business-y term, but what it means is keeping track of as much information about your customers as you can so that you can answer questions such as: which customers are most valuable? Which customers are most in danger of going away? Which customers are most likely to buy the latest offer? Which customers are your best advocates?

You Must Actually Build Relationships With Customers

You really find out who your friends are in a crisis. Most wineries have a purely transactional relationship with their customers. They make offers, customers buy, they say thanks, and maybe offer some perks for loyalty. But how many wineries ever communicate to customers without something to sell? How many actually reach out to get to know their customers better beyond their preference for white over red? Very few indeed. Which is why it felt strange as hell to be getting e-mails for the past few weeks from wineries expressing “best wishes for my health and safety in these trying times” along with an offer for free shipping on half cases. Relationships are the currency of today’s world and the basis for building long-term value in any business. For any winery that needs to sell direct-to-consumer they are essential.

You Must TURN Customers INTO Advocates

There’s nothing in the world of marketing with higher ROI than word-of-mouth. Most wineries have scores, even hundreds of loyal fans who can easily, happily be conscripted to spread the word. Amy Hoopes, President of Wente Family Estates, shared an anecdote during the webinar about getting a branded postcard from a friend during her shelter-in-place. It was a postcard that a winery had given to its most loyal customers with the hopes that they’d send it along to friends to connect from a distance. In addition to a pretty picture of the winery, it contained an offer for her to use that friend’s member-only price to try a bottle of wine, and her friend happened to be recommending the Sauvignon Blanc. She bought a couple of bottles, liked it, and bought a case. For the price of a printed postcard and postage, they sold 14 bottles of wine and started a new relationship.

You Must Provide Value

One of the biggest conundrums presented by the pandemic surrounds the idea of lowering prices. What should wineries be willing to do in order to get a sale in the most trying of times? “Don’t discount if you can afford it, you will be much happier on the other side of this pandemic,” suggested Paul Leary, Founder and Principal at Assemblage Consulting Group, during the discussion. Once people have paid $45 for your Cabernet, they are not that excited to pay $55, no matter the circumstance. Yet this crisis is a buyer’s market. Just look at some of the comments on the list of winery DTC deals I posted here on Vinography. Some consumers feel that a single-digit discount simply wasn’t enough, and unfortunately Amazon has ruined us all against paying for shipping. There are no easy formulae for creating a perception of value, but economics teaches us that it is required to make a sale.

You Must Stay On The Dinner Table

“We have an opportunity here that we will never have again in our lifetimes,” said McMillan towards the end of the session. “Our entire country has been forced to have family dinners. And guess what, they want to have wine with it.” Earlier in the session Max Heinemann, Wine & Spirits Client Manager at Nielsen shared statistics showing that for those consumers who have ordered alcohol to go with their takeout meals, 60% have also purchased red wine and 50% have also ordered white wine.

“We’ve established new habits,” continued McMillan, “and guess what? They’re not going to go away. Companies have figured out that working from home works. We’re going to have 2 income families with both people home by 5 PM, without the time required for a commute.”

Those people are going to sit down to a family dinner together with far more regularity than ever before. Our job is to make sure they’re drinking wine.

*      *      *

It is not, in fact, true that the pair of Chinese characters that make up the word crisis also include the character for opportunity, despite a nearly infinite number of English-language motivational speeches to the contrary.

But even though we fear change, it can still be the best thing for us. Especially if we’re willing to learn from it.

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