subscribe: Posts | Comments      Facebook      Email Steve

Some execs are “worried,” but really, there’s nothing to worry about wine’s future



Nobody asked, but here’s my two cents on “top Golden State vintners [express] concern about the future of the $23.1 billion industry, especially among the discerning millennial market.”

That’s from Tuesday’s Santa Rosa Press Democrat, which reported on “a UC Davis survey of 26 senior executives” in the state, and found that “Everyone was a little bit worried.” Those execs included Joseph Gallo, from you know who, Jay Wright (Constellation) and my own boss, several levels up, Rick Tigner.

Seems the chief worry is “the intrusion into the wine category of spirits and craft beers,” according to the guy who conducted the survey, the well-known emeritus of Davis’s Graduate School of Management, Robert Smiley (who I had the pleasure of interviewing numerous times during my magazine days).

What do the execs base their impressions on? One of them said more “people are starting out with craft beers and then as dinner goes they switch over to wine.” I suppose this does “rob” the industry of that extra glass of sold wine. I like to start the evening out with a cold IPA, especially when the weather is warm, but that doesn’t stop me from consuming my share of wine. Still, I can see that if the theoretical consumer used to drink three glasses of wine at night, and is now drinking just two, with a bottle of beer making up the difference, that represents a 33% decrease in consumption.

Another exec wrote that he and his wife “have been having more cocktails than we’ve ever had in the past…”. That too, the exec speculated, “is maybe taking a little bit of the wine-by-the-glass business away.”

Then there’s the liquor store owner who said,“Ten years ago we were about 70 percent wine. Now we are down in the 60s.” Even with increased wine sales in the U.S., the execs are troubled by this nibbling away at the margins.

I have several reactions. One is that, after following this industry for more than 30 years, I’ve seen multiple times when winery execs were afraid that the sky was falling. It never did. Here in California, we’re coming off several boom production years (despite the drought) and quality has never been higher. Profits seem to be up everywhere at well-run companies, the mood is optimistic among employees, and with all the bashing California wine gets from certain quarters, it remains the best seller in America. Prices continue to rise, and where wineries are holding the line, they’re feeling pressure to increase—if only slightly—the cost of cases. That wouldn’t be happening if wineries felt truly threatened.

It is true that beer and spirits consumption is on the rise, but my feeling is that we’re becoming more of an alcohol-drinking country, so a rising tide lifts all boats. It’s also true, as I’ve insisted for years, that wine is fundamentally different from beer and spirits. Wine signifies aspiration. Beer never did; it signified only getting drunk. Neither did spirits signify anything, except a quick buzz at the end of the work day. Now, that is changing, because the craft beer and spirits producers have stolen from wine the concepts of lifestyle and aspiration that have always fueled wine. It is now possible to drink (as I do) great craft beer and spirits and appreciate them, not only for alcoholic punch, but for complexity, deliciousness and even (dare I say it?) intellectual interest. But I still believe aspiration goes along more with wine than any other drink. And America is an aspirational country.

What then for the wine industry? It can’t become complacent. It has to continue to appeal to its existing consumers, and not alienate them, as it learns how to reach out to younger Millennials. The messages and the products therefore must be extremely well-thought out and crafted with precision. But successful wine companies know how to do that. Believe me, they’re working overtime figuring this stuff out. If I were a betting man, which I’m not, I’d put my chips on the wine industry. Spirits seem to come and go in America; their fundamental problem is that they’re simply too strong for millions of people to drink on a regular basis, throughout the meal, for the rest of their lives. Beer always stays popular, but it’s craft beer that’s got all the excitement now, and craft breweries are small; they do not, I think, represent a threat to the wine industry in the long run, although some stores are giving them increased shelf space.

Wine, by contrast, has staying power. There’s a reason it’s been top beverage in the western world all these centuries, and is now becoming top beverage in the developing world, too. Human nature doesn’t change; wine is more consonant with human nature’s aspirational elements than either beer or spirits. It’s the Goldilocks of alcoholic beverages: not too strong, not too weak, just right. Am I an admitted booster? You bet. But that doesn’t make me wrong.

  1. If you are a business person, you will worry about anything that might affect your industry, whatever it is. The most important thing is profits. Are profits going up, down, or staying about the same?

  2. Tony Correia says:

    Steve, agree entirely. As many do, i enjoy a nice craft beer with lunch, and an occasional aperitif of an afternoon, but neither will replace my wine with dinner. It is indeed a sign of a maturing culture. But industry execs will continue to fret over whether I, or any American consumer, is drinking THEIR wine, or someone else’s….

  3. doug wilder says:

    Along the lines of what makes wine different that you didn’t mention is that a spirit or beer are likely not going to show influence in respective qualities, or quantities of vintage variation. Grey Goose Vodka and Lagunitas IPA are popular because of their consistency and market penetration. I would reasonably expect part of the erosion in wine market share is because of the explosion of new spirits and beer products. If not mistaken, the largest slice of the spirits side of the equation is mostly controlled by multi-billion corporations, with craft beers being at the opposite end of the spectrum and likely contributing single digits to the hopped beverage field. I agree with your comment on the niche uses you personally find for spirits and beer. A bottle of vodka may last 2 months in my house, where a six pack of beer may not last a weekend depending if I am working the garden or not. If I meet friends for a drink, it is usually beer. If I have finished tasting wine for a couple weeks. I go with a vodka/grapefruit cocktail. Dinner is usually a glass of a wine I may have just opened.

  4. Steve – I somewhat disagree. I see problems looming in terms of on-premise wine sales. The price disparities for the same bottle of wine from wine list to wine list is bad for wineries and on-premise wine sales. I feel that one of the main reasons why wine sales are declining in restaurants compared to beer and liquor, is because a bottle or glass of wine is more expensive than a beer or cocktail, and it is usually far easier to decide between a beer or cocktail versus a glass or bottle of wine, particularly when wine lists are multiple pages. If you get a chance, I recommend you read an opinion piece I wrote for the September issue of Wines & Vines – “A Case for Suggested Restaurant Price.” You can also just insert, “A Case for Suggested Restaurant Price” in a search engine, and it should pop up. In this piece I state that wineries and distributors need to exert some control over restaurant wine prices so these price disparities are minimized.

    I also strongly disagree with this thought that the growth of craft beer will not impact US wine sales, and instead impact Coors and Budweiser. Somebody who drinks craft beer doesn’t drink Budweiser and Coors. In fact they look down on it.

  5. Bill Haydon says:


    Your proposal has to be the most ridiculous thing that I’ve ever read and a real indication of the narcissistic, wine industry arrogance that believes everybody exists to serve your interests.

    Does it even occur to you that the cost percentage for a glass of wine is higher than either a beer or a craft cocktail? It is, even when the restaurant is getting the cost of the bottle out of the first glass (that would be a 20 or 25 cost percentage based on size of pour), and that doesn’t even account for loss from stale wines which is not a consideration for either beer or spirits. So seriously, who the hell are you to suggest that restaurants lower their profit margins on wine even further? And guess what the unintended blowback to your proposal would be? That’s right, restaurants would even further marginalize wine and focus on beer and cocktails as profit margins on wine get even worse.

    Are you even aware that wine is already one of the least profitable items in a high end restaurant (20-25% cost on btg and 33% cost on bottles). That’s generally higher than food costs and much higher than beer, liquor or non-alcoholic costs.

    Calijuice is expensive on a wine list for the sole reason that it is grossly overpriced to begin with.

  6. I love that Bill Haydon is such a miserable git! Seeing him seethe his days away, must be a joy to those around him

  7. Josh, you make some good points. Of course all this speculating on everybody’s part is reading the tea leaves, since nobody really knows. I do know that wineries are making very strong efforts in the on-premise arena. They are trying to keep prices down, not always successfully. My own experiences in the San Francisco Bay Area and in wine country may not be typical of the situation across the country, but I am seeing strong demand in by-the-glass programs in the $12-$15 range.

  8. To Josh’s point, at another juncture during the conference (which I attended), the observation was made that millennials are more likely to purchase by the glass than by the bottle, making by the glass prices and the comparison w/ cocktails and beers more apt. My observation is that the degree of “worry” implied by the PD article was vastly overstated–the impression I got at the conference was that wine industry executives (like any executive) were simply looking at competitive pressures and planning accordingly. Water (for example and obviously) was a bigger concern. Interestingly, labor/lack of immigration reform seemed to have dropped from the collective consciousness, though I feel that is still a huge issue. All in all, times are pretty darn good with two large and good quality harvests in a row on the North Coast.

  9. Bill – Thanks for reading my post and providing a comment. IMO the restaurants need the wineries far more than the wineries need the restaurants. Right now I believe roughly 80% of wine sales take place through retailers, 16% at restaurants and 4% are direct to consumer (at the winery or through mailing lists). DTC sales are only going to grow over time, and wineries make far more money through these sales.

    Let’s take the 2011 Chateau Montelena’s (“CM”) Napa Valley Cabernet Sauvignon. This is a popular restaurant wine, and CM sets the wholesale price at $19 so that the restaurant price is around $100. CM uses a distributor to sell the wine to retailers and restaurants. In this case, they sell the wine to a distributor for $19, and the distributor sells it to retailers and restaurants for $33. If you go to wine-searcher, you see that the average retail price in the US is $47, and four retailers in California (The Wine House in LA, K&L, Beltramo’s and sell it for $45. The wine can be purchased at the winery for $50. Currently, in San Francisco restaurants that I have reviewed, the lowest price is $85, highest is $120, and the average price is $102. If you use my Ideal Restaurant Price Formula, you will see that a fair price for this wine in a SF restaurant is less than $102. If the restaurant sells the wine for $100, they are making a profit of $67. That is not too bad.

    2011 Chateau Montelena NV C/S
    $85 at Alexander’s Steakhouse SF
    $97 at Waterbar
    $100 Alexander’s Steakhouse Cupertino
    $110 at Sundance Steakhouse Palo Alto
    $120 at Fleming’s Steakhouse Palo Alto

    If restaurants want to sell more wine, pricing has to become more consistent and transparent. These large price differences are bad. Look at the example above. The bottle of wine is the exact same at each restaurant (same producer and vintage) but there is a $35 price difference.

    Steve and Clay – I agree with your points. Overall, I think the US wine industry is in great shape. Quality continues to improve, tasting rooms are crowded and people always want to talk about wine.

  10. To supplement Josh’s numbers, let me volunteer these calculations.

    2011 Chateau Montelena NV C/S:

    $85 at Alexander’s Steakhouse SF. Wine menu price = 2.6 times $33 cost of goods sold (COGS). Gross profit margin on selling price = 61%.

    $97 at Waterbar. Price = 2.9 times COGS. Gross profit margin = 66%.

    $100 Alexander’s Steakhouse Cupertino. Price = 3.0 times COGS. Gross profit margin = 67%.

    $110 at Sundance Steakhouse Palo Alto. Price = 3.3 times COGS. Gross profit margin = 70%.

    $120 at Fleming’s Steakhouse Palo Alto. Price = 3.6 times COGS. Gross profit margin = 73%.

    Historically, college-level hotel management and hospitality programs taught their students to price their wines at 3.0 times COGS.

    in the above example, the CM would sell for $100 on the wine list.

    “Transparency” is coming to restaurant wine list pricing through savvy diners (using their smartphones to access Wine-Searcher or dedicated apps) who “deconstruct” wine list COGS and gross profit margins.

  11. Bill observed:

    “Are you even aware that wine is already one of the least profitable items in a high end restaurant (20-25% COGS on by-the-glass and 33% COGS on bottles).”

    Yes — but wine inventory doesn’t present the risk of waste or spoilage during its on-premises storage the way that fresh food ingredients do. So its higher COGS/lower gross profit margin percentage is an acceptable trade-off.

  12. Bob – I could not agree more with this statement ““Transparency” is coming to restaurant wine list pricing through savvy diners (using their smartphones to access Wine-Searcher or dedicated apps) who “deconstruct” wine list COGS and gross profit margins.”

    Steve – Did you happen to catch Barbara Banke’s recent quote on ? “There simply aren’t enough quality vineyards, she says, to meet soaring wine demand from the emerging middle class abroad and from millennials here at home. “Within five to 10 years, absent a miracle, there will be a global wine shortage,” Banke says.”

    Do you feel that we’ll be seeing a global wine shortage in 5-10 years as well from what you know? If so I guess maybe craft beer/spirits cutting into sales won’t matter as much after all.

Leave a Reply


Recent Comments

Recent Posts