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November 2013 Issue of Wines & Vines
 
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Opinion: Wine Industry Outlook

 
by John Hinman
 
 
The pressure building on the wine industry is to find profitable and available routes to market.

Distributors are almost all full and can only handle the major brands and the largest of the next level of production. This is a function of the success of the wine industry (not just in California) in making better wine (lots of really good players out there) and of an increasingly sophisticated customer base who drink wine, beer and spirits depending on the occasion and on their inclination. This is also a function of politics, and of the restrictive legal system perpetuated by the wholesalers in combination with the anti-alcohol forces.

The younger demographic is really into spirits, which, because it’s an easier sale than wine (and cheaper and easier to transport than beer, with a higher profit margin and an easier-to-describe story to the salespeople) is taking up space at the distributors and knocking out a lot of wine producers. This is a trend.

Coupled with the retail chain (on and off premise) focus on higher profits through lower costs, the result is more and more private and control label business going through the clearing wholesale system at the biggest customers. This also includes PL/CL spirits and beer. This means that there will be less available shelf and wine list space and cutthroat competition for the space. This is a trend.

For the wine industry I see the need for wineries to increasingly have to focus on on-premise hospitality (events, tastings, social media-driven occasions and so forth) in order to maintain their margins, which will (for most small and medium size wineries) be more and more dependent on DTC. The constraint here is having events in agricultural zones, and how aggressive one can really be. For examples see what is happening in Santa Barbara county, in Lodi, in Napa and throughout the state. In other states the constraint is no different and maybe even more restrictive (witness the issues in Oregon). This is a trend.

With respect to your commentators, I agree that there will be growth but that it will occur based on population demographics (more Millennials coming into the legal drinking age and more Boomers drinking more—see the Wine Market Council releases), more social media marketing and better products more than anything else.

As for the comments about credit, put yourself in the place of a banker trying to decide whether or not a particular small or medium size winery can buck the difficult route to market trends and pay back larger credit lines as they expand. The banks are still (for the most part, there are exceptions) sitting on the sidelines because the historic value base (land, brand and vineyards) is not increasing in value (at least as far as we’ve seen) as it was a decade ago. Also, because of the aging out of the winery owners that bought in during the late 1980s to earl '90s period, more properties will come available.

John Hinman of Hinman & Carmichael (San Francisco, Calif.) has been working in beverage law for more than 35 years and is a leading analyst of wine industry trends. He gave us some insights into winery margin trends, sales issues and resulting credit shyness at the banks.  

 
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