Bank Forecasts Recovery of Fine Wine Sales

Industry is in balance heading into 2014, according to report from Silicon Valley Bank

by Paul Franson
Source: Silicon Valley Bank
Santa Clara, Calif.—After three years of declining growth rates, fine wine sales will grow between 6% and 10 % this year, according to Silicon Valley Bank, which released its annual State of the Wine Industry Report today.

The 42-page report, www.svb.com/wine-report which is based on a survey of nearly 650 West Coast wineries, in-house expertise and ongoing research, covers trends and current issues facing the U.S. wine industry.

Supply in balance
The report dispels some recent discussion in the industry warning of a wine shortage. “Despite news to the contrary in recent months, wine supply is in balance heading into 2014, and we expect the highest rate of sales growth since the recession, despite a tough economy,” Rob McMillan said during a live video broadcast that accompanied the release of the report. McMillan is the founder of Silicon Valley Bank’s Wine Division and author of the report.

He added, “News is good for the consumer: Demand is up, supply is in good shape and pricing is stable. For the winery, however, grape costs and flat consumer pricing means lower profitability.”

Inventory is balanced in all segments assuming the 2014 harvest will be average. A third record or near-record harvest would create surpluses, according to the report.

McMillan added that inventory is tight on the most expensive wines, while high-volume and very small estate producers report modest inventory surpluses.

Like the U.S. economy, the wine business is assuming a barbell shape with distinct low and high ends, McMillan noted. “It’s hard to find any average in the whole wine businesses,” he said.

No substitute for baby boomers
McMillan also discouraged wineries from expecting young millennial buyers to cause a boom in the near term. “While this year is ultimately expected to be a healthy one for U.S. wineries, if we peer into the future five to seven years, we believe the headwinds will increase significantly as more baby boomers retire,” McMillan said.

“Fifty- and 60-somethings purchase about half of fine wine in the U.S. (44% by the report). As they retire and their purchasing power declines, the younger generation can’t pick up the slack immediately, due to their lower income, and access and the proclivity to purchase more foreign wine.” Almost 12,000 baby boomers retire each day, the report said.

Other key findings and predictions from Silicon Valley Bank’s State of the Wine Industry Report include:

Wineries are once again healthy, with three-quarters reporting good to solid financial health.

2013 prediction
The bank expects the 2013 harvest to reach 3.94 million tons when the final numbers are in, making it the second-largest harvest on record in California after the 4 million tons harvested in 2012.

Inventory is in balance. Grape planting is restrained compared to prior periods when supply was in balance, and only the Central Valley is at great risk of planting ahead of demand.

It also found 21,500 acres being planted or replanted to fine wines in California. The total acreage of these premium grapes is about 135,000 acres.

Little room for price increases
The report indicates that 78% of wineries plan to hold the line or increase wine prices, but the bank forecasts that it will be challenging to raise prices.

McMillan stated that many wineries believe they can increase bottle prices this year, but he suspects that bottle pricing will remain stable, with the wineries unable to pass increased grape and bulk wine costs along to consumers except in some higher priced luxury wines. This will depress winery gross profits. He also predicted that grape prices have reached a peak and could soften.

The report also found that luxury wines and $10-$18 bottles will see the greatest growth in demand.

The live video broadcast moderated by McMillan also featured appearances from Mario Zepponi of Zepponi & Co., Glenn Proctor of the Ciatti Co. and Paul Mabray of VinTank.

Market remains lively
Mergers and vineyard acquisitions will continue at a record pace, the report predicted. Zepponi said that the distress sales ended in late 2011 and early 2012. “Now people are selling due to owner fatigue or succession or estate issues.”

He said he’s seeing a lot of interest from foreign buyers, but not many deals have been signed. Wineries and large vineyard owners continue to dominate the acquisitions.

Proctor added that he’s seeing smaller independent growers and wineries planting and replanting, however.

Though not much was said about the subject, McMillan noted that California has entering the third year of a drought, and that might affect planting and production in 2014.

Though the report focused on premium wines, it noted that massive bulk wine imports will continue to affect the lowest price categories. Bulk imports should be held back by the size of the 2013 harvest and the bulk supply currently in tanks, however.

The report predicted that direct-to-consumer sales would continue as the strongest growth channel for most wineries, especially premium small producers. This includes digital sales, but Mabray emphasized that producers have to invest if they expect to succeed. He noted that once-hot flash sellers have consolidated to a few.

Strategic decisions
Proctor observed, “In the ’90s, you could almost print money in the wine business, but now you have to run your company like a business. You need to be strategic in your thinking and planning.”

Finally, McMillan summed up the situation. “I remain optimistic but not grandly. We have a good year ahead of us but we remain in a period of lower GDP performance that should reset our view of growth opportunity, business returns and prices for years to come.”

He warned, “Astute fine wine producers will be adjusting their strategies accordingly.

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