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Imported Wine to Gain Market Share

Weakening euro and California grape shortage may leave U.S. market vulnerable, bank report says

by Andrew Adams
wine imports
Rob McMillan of Silicon Valley Bank forecast in the wine division's annual report that California's shortage will give way to growing market share for wine imports. Source: Silicon Valley Bank
San Rafael, Calif.—Consumers will turn to affordable imported wine in coming years as the domestic wine industry works to overcome a production shortage.

That scenario is one prediction from Silicon Valley Bank’s annual state of the wine industry report released this morning. Rob McMillan, founder of the bank’s wine division, said the weakening value of the euro versus the dollar and California’s short grape supply will cede market share to imports. “As continuing demand growth in wine is starting to exceed our ability to fill from domestic sources, market share in total wine sales will be handed over to imports in 2012. The guess here is that growth will come from EU countries,” McMillan writes in his report.

Domestic producers won’t be able to meet demand because of the low supply of bulk wine and a shortage situation for many grape varieties, especially Cabernet Sauvignon and Zinfandel. The bank’s report is based on its own in-house research and a survey of nearly 500 wineries.

Most of California’s premium grape regions have posted low net inventory levels, and even with the rash of fevered planting forecast for coming years the market is not expected to return to balance for five to eight years. “We believe we are fast trending to a position not yet experienced in the business: one where supply will be structurally short for an extended period in both the high-volume production wineries and the fine wine business, demand will continue to grow at a little slower pace, and the dollar will strengthen relative to the wine-producing regions in the euro zone, making those imports cheaper.”

Some relief may come this year with a bumper grape crop. McMillan noted in a webinar hosted by the bank that he’s noticed many North Coast growers leaving kicker canes this year for extra bud set. “People are farming for higher yield,” he said. “It wouldn’t surprise me to see a record, or heavy, crop.”

Tony Correia, an agricultural property valuation expert, and Paul Mabray, chief strategy officer with VinTank, joined McMillan as speakers during the webinar.

Correia said grape prices and land costs would continue to increase. He noted there’s already some tension between growers looking for the best price in a short market and wineries who are still unable to raise their bottle prices to pre-recession levels.  Based on Silicon Valley Bank’s research, wineries of all sizes are planning to buy more grapes and pay more as well. Correia said Napa Valley Cabernet Sauvignon continues to lead with an average cost of nearly $5,000 per ton and high-end grapes going for $8,000 or more to the “quite frankly absurd” price of $50,000 per ton.

Boomers and Gen X driving the market
McMillan said he expects to see the domestic wine industry post 7%-11% growth, which is a slight drop in the growth rate from 2011. Wineries in the highest price segments, $41 and higher per bottle, plan to raise prices. A little more than 35% of the wineries surveyed by Silicon Valley Bank expect to raise prices “minimally,” while 30% plan to hold their prices steady.

The millennial generation (ages 21 to 34), once seen as the trendsetter and engine of future growth in the wine industry, actually account for the smallest share of sales at nearly every price point. McMillan said consumers in that demographic, with an average net worth of just $3,662, don’t have the means to be a prime target for wineries.  “By a large margin, the boomers are still buying the most wine,” he said. Instead of trying to lure in the youngest generation, wineries would be better advised to focus on generation X (ages 35 to 46), who on average have 10 times higher net worth than millennials and are poised to begin buying at higher price points.

But just because the younger generation may not be buying as much wine, that does not mean wineries are off the hook when it comes to social media. McMillan described what he terms as the “fifth column” of the wine industry, or disparate companies with online solutions to help sell and market wines. These include e-commerce sites, flash sites, consumer information sites such as Cellartracker and mobile applications like HelloVino.

Social media serves as a common thread through all these different business models, and it is crucial for wineries to stay involved with the medium even if they may not understand it or see its value, McMillan said. “It’s almost as if you decided you didn’t believe in the telephone at this stage.”

Speaking of flash sites, McMillan said the changes in the market will force those companies to change their strategies to a more traditional retail model as wineries will no longer have excess inventory to sell at wholesale or lower. “The producers will have no reason to sell cheap wine these days,” he said.

In the years ahead
Other predictions by Silicon Valley Bank include:
• A difficult market for négociants to find wine of consistent quality for the price point.
• Fewer private labels.
• More transitions, sales and mergers taking place than at any time in memory.
• The continuation of mergers among wholesalers.
• The U.S. economy will gradually improve with more middle class consumers jumping on the moving train.
• Slight bottle price increases will not bring prices back to levels prior to the recession.

Posted on 04.18.2012 - 10:35:22 PST
To read the full report, ebook, inforgraphic, and webinar see the following:
Rob McMillan, Silicon Valley Bank

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