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Predicting the future of the wine business

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There’s been a lot of reporting on the Wine Industry Financial Symposium’s latest wine industry survey, as for instance here and here, so I thought I’d get my two cents in. The WIFS survey was of “wine industry leaders,” and these assuredly are the [mostly] men who literally are paid to figure out the future, and are in the best position to foresee it and, they hope, influence it.

I’m not a wine industry leader. But I do have a certain perspective on things that I like to think is unique in some ways. As a wine writer who’s heavily involved in the California wine industry, and with my own connection to, and insight into, consumers, I see trends in my own way. So I’ll piggy-back on the WIFS survey to share my thoughts on some of its conclusions. (Everything in italics is taken from one of the the two articles cited above.)

respondents…are attempting to improve margins by increasing wine prices where feasible, reducing operating costs, improving operating efficiencies and emphasizing their relationships with growers.

This is always the case and always will be. The trick is to maintain quality while reducing those operating costs. I’m seeing an awful lot of truly bad wine lately, more than usual. Either these winemakers don’t know they’re making bad wine (hard to believe), or they’re being compelled to make and release bad wine because of economic pressures.

Many believe consumers will slowly increase purchases of high-priced brands as the economy recovers…However, others feel that the previous levels of conspicuous consumption will not return.

Sure they’ll return. Nothing changes human nature. People like the feeling of buying expensive things, whether it’s Air Jordans, Diesel jeans or a $75 bottle of wine. The economy, already improving, will continue to do so, and people will return to buying expensive wine. I do wonder how many expensive brands any market can support, even in a roaring economy. We’ve never seen as many triple-digit-priced wines in history. Can there be room for them all?

The executives’ top concerns (in order) include globalization and competition from imports, government regulations (especially of labor and environmental issues), availability of water and distribution and retail consolidation…taxes, competition for land, climate change, packaging innovation and supply cycles of shortage and surplus.

Nothing they can do about any of these, except figure out how to deal with them all. Doing business in America is complicated. The best companies adapt instead of complaining. The government may coerce a company into doing business in a more environmentally-friendly way, but in the end, that redounds to the company’s success.

Three-quarters are focusing more on consumer-direct sales…

DTC is going to be a major factor for wineries, especially smaller ones. The big companies are happy with the distributor system, which isn’t going anywhere anytime soon. (Sorry, Tom Wark.) Nor should it. Distributors play a major role in getting wine to every nook and cranny in the U.S., and they’re also instrumental in keeping the price of wine down. That’s a good thing. But the little wineries that can’t get distributed have no choice but to explore DTC. Which leads us to the next, somewhat controversial conclusion:

Most [industry leaders] don’t find social media very important to their companies. Asked to rate the importance from one to five, they rate Facebook at 2.5, with Twitter and their company blog at 2.27.

You’d think that after so many years of social media adherents lecturing wineries that social media is The Next Big Thing, the wineries would have gotten the message. Apparently not; these ratings are really mediocre. Why would smart leaders brush off something so potentially important? Because they are smart. Smart enough to realize social media isn’t as important as everyone said it was, and most likely never will be.

When you look at the growth of the biggest 16 U.S. wine companies, That doesn’t leave much for smaller wineries. You can say that again. There are at least 7,000 wineries in America, which means that 6,984 of them have to compete for whatever’s left over after The Big Guys take their share. This gets back to direct-to-consumer. I can’t tell you how many small wineries tell me how important their clubs are to sales. I mentioned human nature above; another aspect of it is that people like belonging to like-minded groupings, whether they’re blood families or people who root for the same sports team. Winery club members are loyal. If I had a winery, I’d be working constantly to boost membership in my club. And I’d be using social media as part of the mix.

Finally, the grape shortage (real, impending, rumored, getting worse, getting better, all of the above?) looms large in all these discussions about the health of the California wine industry. Yes, there’s been a shortage for some years, but 2012, from what I’m told, is surprisingly hefty in yield. Of course, we won’t have the official numbers for a little while (the state’s Grape Crush Report doesn’t come out until next year), but hopefully, a bountiful vintage this year will ease the shortage, cutting producers some slack so they won’t have to raise prices.

More proof, by the way, that the economy is rebounding comes from Wine Business Monthly’s salary survey, which paints a pretty rosy picture. Everybody’s getting raises!

  1. “I’m seeing an awful lot of truly bad wine lately, more than usual. Either these winemakers don’t know they’re making bad wine (hard to believe), or they’re being compelled to make and release bad wine because of economic pressures.”

    What about the past two (2010 and 2011) poor years weather wise? I know a lot of 2011 in any variety hasn’t hit the market yet, but do you think the two poor years played any significant role in the bad wine you’ve seen lately?

  2. Brian, great question. I do think 2010 played a role in some of these wines being unripe. I’m starting to get 2011s but not the reds yet.

  3. Steve:

    I only need small, incremental changes to the wine distribution system to make me happy:

    -Winery to consumer shipping in all states
    -Retailer to consumer shipping in all states
    -Wine allowed to be sold in grocery stores in all states
    -Direct Winery to retailer sales in all states
    -No more states in the business of selling wine.

    As you can see, none of these commonsense proposals involve getting rid of wholesalers. Where they provide value, they would be used. I merely have an issue with requiring their use.

    Good stuff, Steve.

  4. Steve,
    The lack of wineries focus on social media does not represent their intelligence, just their lack of focus on another relevant and important channel. If the survey asked e-commerce, mobile or any other digital initiative, the numbers would be just as meager. The wine industry doesn’t focus on digital (including SM and e-come) – one of the most important sales and marketing channels in modern history.

  5. Steve,
    Totally agree social media enhances the relationship that one already has with a winery. Having come from dot-com, web, etc. b4 leaving completely to focus on winegrowing, winemaking and wineselling (my 3 w’s) – I’m convinced wine is experiential.

    I need to first engage the customer w/ my product & story and then maintain the relationship using social media as one of my tools to keep the customer connected. I suspect large distributed brands have discovered this and therefore see less importance of social media vs. more traditional marketing efforts that focus on volume selling.

    Also – having personally self-distributed my brand in Illinois since 2008, I agree there’s a role for traditional distribution methods and the 3-tier system. Our winery will likely never fully realize its benefits given our small size. I merely want the opportunity to represent myself and be provided an open playing field. To echo Tom Wark, besides DTC, I’d like to see DTR in all states.

  6. Good post Steve. I missed the Symposium event as I was taking a look at Argentina which I will bring up in a separate posting of my own. But on the one point you made about expensive wine, its a relative term. People have returned to buying expensive wine, relatively speaking …. realtive to the slow recovery and relative to the huge writedown in consumer net worth. Will they return to profligate ways of the past in their consumption patterns? Thats hard for me to envision given the number of impeiments and shrinking of the Boomer spenders who drove the last wine spending boom. (Millennials wont get us there at least until 2020 so thats not the solution either.)

  7. Great post as usual – Go ahead and give yourself a raise!

  8. Great post Steve…

    I am very disappointed with the lack of comments and those that are here are mostly from the usual suspects. Is there really on a handful of wine industry people that are interested in the “big picture” and big problems of the business. My experience in the field (trade tastings, meetings and event) tells me yes, but I dream that I am wrong.

    Couple of things from Tom’s post:

    Tom Wark says:
    October 1, 2012 at 4:52 pm
    Steve:
    I only need small, incremental changes to the wine distribution system to make me happy:

    -Winery to consumer shipping in all states: shoulda been done already (those fighting it don’t understand and think they will loose money or their living… they just need to open their minds, maybe hire some young people and listen to them)

    -Retailer to consumer shipping in all states: happens already (well most states), the laws just need to catch-up to the retailers… all are too small to worry about and the wholesalers & importers fighting changes to the laws don’t want a war with their best and biggest clients

    -Wine allowed to be sold in grocery stores in all states: while I agree with this one, it needs to be handled very carefully and can’t happen full-bore till point one is implemented and running fairly efficiently.

    -Direct Winery to retailer sales in all states: this also must be implemented before the grocery store happens nation-wide ~ otherwise consumer choice and small producers will suffer heavily

    -No more states in the business of selling wine: so obvious it needn’t a comment

    one last item that Tom didn’t mention and really no one does is the Restaurant wine issue, I have my own strange ideas on this but regardless that issue needs to tie in because the wine industry uses restaurant placements as a marketing tool… a weak one usually but done right it can be quite strong (see Sonoma-Cutrer, Peter Michael and Burgundy for a couple of examples)

  9. Steve Pickner says:

    Very Interesting Article. Steve writes, “Many believe consumers will slowly increase purchases of high-priced brands as the economy recovers…However, others feel that the previous levels of conspicuous consumption will not return.” It seems to me that many of the haves have acquired so much wealth that, unless a financial meltdown occurs, they are and behave as if they are fairly immune to what is generally going on with the financial markets. I mean bottles of 1982 Chateau Lafite were going for between 3 and 4 thousand dollars as recently as five days ago. https://truebottle.com/index.html?action=search&searchterms=1982+Lafite+Rothschild&bottlesize=3&region=0&timeframe=6&excludeterms=carruades

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