Business of wine guru Rob McMIllan, founder of Silicon Valley Bank, published his annual summary of the state of the U.S. wine business last week. Despite record breaking sales capping off many years of steady growth, according to the report, the rate of growth is slowing and the future looks challenging. The basic problem:
Baby boomers, who control 70 percent of US discretionary income and half of the net worth in the US, are moving into retirement and declining in both their numbers and per capita consumption.
Millennials aren’t yet embracing wine consumption as many had predicted. Damaged financial capacity is a major contributor, but cannabis legalization is another factor explaining their slow adoption of wine.
Recent negative reports about wine and health, consolidation of distributors making it difficult for some wineries to find a market, the continued emergence of Big Box stores’ private labels, and the increasing cost and declining supply of labor are among the additional factors dragging down growth rates.
But the main issue is aging baby boomers and disinterested millennials, who seem to be embracing craft beer, cocktails and cannabis rather than wine. The Great Recession of 2008 delayed the career prospects of the millennial generation just as they were entering the job market. That loss of income and job experience, coupled with massive student debt and expensive housing in urban areas, will limit their disposable income for many years thus creating strong headwinds for sales of premium wine.
That trend runs up against the pricing strategies that wineries have been using the past few years. Consumers have shown they are willing to pay a bit more for a bottle of wine. Sales of wine under $10 have been flat or negative for some time, while sales have increased in the premium market. So what did wineries and retailers do? They raised their prices without necessarily improving quality. The wine that used to cost $8 now might cost you $12-$15. Of course, not every winery was able to raise prices but enough of them had sufficient market clout to do so and the strategy acquired a name—premiumization.
But that doesn’t seem like a wise strategy if you’re trying to sell wine to cash-strapped millennials. Might that have something to do with their reluctance to embrace wine? $15 is a lot of money to pay for the simple, sugary cough syrup that the big distributors are putting on supermarket shelves. Allegedly, millennials are into experiences rather than things. The only experience many so called premium wines offer is boredom.
Rob McMillan predicts premiumization has run its course and wineries will struggle to raise prices. A return to real value might be a good idea if it’s not too late.