November 2017 Issue of Wines & Vines

Wine Industry Suppliers Report Client Growth

DtC shipping, premiumization and new brands offer avenues for success

by Kate Lavin

The U.S. economy has maintained an upward trajectory during the past year, extending from dollar appreciation to the gross domestic product. This positive trend has been evident across most parts of the wine industry, as wine buyers continue to reach for higher priced products at retail, through direct-to-consumer (DtC) shipping and other sales outlets.

For the 10th consecutive year, Wines & Vines reached out to wine industry product and service providers to get their perspectives on the state of the wine industry past, present and future.

Jeff Clark, an industry expert in Live Oak Bank’s Wine & Craft Beverage Group, says it’s a great time to be in the wine business. “We have enjoyed steady growth in sales with younger generations embracing wine, albeit in their own fashion. Interest rates remain low, and we have enjoyed good harvests in recent years,” he said.

The vast majority of wine industry suppliers agreed, with 97% of respondents to our survey reporting the financial health of their wine industry clients was as good or better than the previous year. Suppliers shared anecdotes of vineyards that earned sustainable certifications and were able to charge more for their grapes, increased sales in the DtC sector and improved wine quality that demands higher prices in the marketplace.

Unlike 2016, when zero supplier respondents described their wine industry clients’ finances as “getting worse,” 3% of wine industry suppliers chose this option in our multiple-choice survey. Still, the figure is a vast improvement from 2011, when 19% of suppliers said their clients’ financial health was worsening.

Making deals
Mergers and acquisitions have continued during the past 12 months, with wine-production facilities and mature, producing vineyards among the most desirable properties for buyers. E. & J. Gallo Winery created shockwaves in the wine industry that will reverberate for years to come this April, when it purchased Stagecoach Vineyard in Napa Valley for $180 million, according to deeds recorded in Napa County.

The deal was just one more example of an industry looking to cater to wine consumers with increasingly refined tastes and more money to spend on luxury goods.

Roger Nabedian, senior vice president and general manager of Gallo’s Premium Wine Division, said at the time, “This purchase affirms Gallo’s commitment to compete in the luxury wine segment and provides us the opportunity to continue making and selling luxury wine offerings such as Louis M. Martini, William Hill Estate and Orin Swift.”

The Martini and William Hill brands already sourced fruit from Stagecoach, but more than 30 other brands had vineyard-designated wines attributed to the 600-plus-acre vineyard in the Atlas Peak appellation. Gallo agreed to fulfill existing contracts, but once those agreements are concluded, the fruit from this prestigious site could go to the high-end labels in E. & J. Gallo’s 71 million-case wine portfolio.

Emerging trends
Almost 17% of wine industry suppliers reported the kind of “premiumization” evident in the Stagecoach deal was one of the top wine sales trends affecting their businesses. Other popular selections included the “expanding direct-to-consumer market” and “proliferation of new brands.”

Providers of wine packaging agreed the increased number of wine brands ushered in more creative freedom, with one supplier opining: “New consumers are more accepting of alternative packaging.” Still more agreed that the use of screen printing, metallic foils and other non-traditional items were picking up as more established brands rolled out new offerings geared toward a younger set of consumers.

Prices and financing
While wine consumption and sales are moving in a positive direction, more suppliers say their winery and vineyard clients are having a tough time accessing the cash and financing necessary to make capital improvements this year. Borrowing rates are still low, and banks have not returned to the tight-fisted lending practices that followed the financial crisis of 2008, but 11% of survey respondents said their “clients’ ability to find cash or financing to pay for products and services” was “getting worse.” One winemaking consultant speculated that was because few wineries are in need of loans—possibly attributable to flush sales and self-styled avenues to reach consumers.

“Credit is readily available to wineries that are cash flowing. I am not seeing asset-based lenders like I have seen in the past. This makes it challenging for wineries that are struggling to obtain credit,” Clark from Live Oak Bank reported. “We are seeing unique equity arrangements fulfilling this financing need.”

This year, 54% of suppliers responding to Wines & Vines’ survey said they plan to raise their prices in the coming year, while just 3% said prices will go down.

Jostran Lamontagne, director of stainless-steel tank producer La Garde, advised buyers that when making large purchases, it is better to consider long-term planning than short-term requirements.

“Probably the most important thing you should look at is not only what you will spend for tanks this year, but what is the investment you want to make,” he said, adding this consideration is especially important for those looking to build or add winery extensions in the future. “If you can produce more wine per year, then you save money, and you make more profit.”

Like other tank producers, La Garde is subject to the whims of the commodity market. To stay current with the fluctuating price of stainless steel as well as exchange rates, Lamontagne updates pricing to reflect raw materials costs every month.

“We want to allow our customers to benefit from the exchange rate, and we look for the best price for stainless,” he added.

The year ahead
As the year draws to a close, more than three-quarters of wine industry suppliers expect the wine sector to grow in the next 12 months—albeit slowly.

Businesses familiar with winery plans say there are many new wineries and brands planning to launch. Others contend DtC wine sales are primed to take off as more and more states open to direct shipping (see more about this topic on page 28 in the Viewpoint column by winery owner Jason Haas).

A handful of suppliers believe unsettled economic news and export issues such as the unsigned North American Free Trade Agreement loom large over what the future could hold for winery and vineyard owners, and residential groups continue to oppose expanded hours and events permitting among tasting rooms. But the general feeling among suppliers is positive.

Clark remarked that wineries are being increasingly innovative when it comes to embracing lesser known varietals and creating unique experiences for wine club members, adding: “We are also seeing continued business succession as wineries are being assumed by the next generation, and as partners exit the business.”

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