Rob McMillan, founder of Silicon Valley Bank’s (SVB) Wine Division, issued his annual State of the Wine Industry Report this week, saying the wine business has reached a “tipping point.” The industry had expected millennials to take the baby-boomers’ place in wine consumption. They haven’t.
“Due to many factors, including their limited financial capacity, a preference for premium spirits and craft beers, delayed careers, negative health messaging regarding alcohol and the legalization of cannabis, the millennial consumer has temporarily stalled in growing their wine consumption,” McMillan writes.
The cannabis factor
In an email to Wine Enthusiast he noted that cannabis demand, which skews to younger males, “is likely having a limited substitution impact with young consumers.”
When asked if wine and cannabis could profitably co-exist, McMillan replied, “That remains to be seen. Today, there is a modest impact in the young drinking consumer with cannabis, but its use still carries a negative connotation socially…But what if it’s taken off the Schedule 1 drug lists by the federal government? And what if celebrities start to announce, such as Francis Ford Coppola recently [did that] they will start their own [cannabis] brands?”
Growth in wine sales decreases
Using data from Nielsen Beverage Group, McMillan found “off-premise sales of wine have tipped negative in [terms of] volume sales at the end of 2018. Total wine sales by value are still slightly higher–but the trends are alarming.”
“We had negative growth. We haven’t seen negative growth since 1993. So that’s a big deal,” said McMillan.
For 2019, McMillan forecasts off-premise retail sales will grow between 0.5% and 2.5%, while volume will decline to between -0.5% and 1.5% growth.
“The growth that’s there is coming from non-syndicated ‘premium value’ retailers such as Aldi, Lidl, Costco, and those stores selling wine in box or private label formats, but it’s insufficient growth to stem the deceleration of wine,” said McMillan.
Can premium wines save the day?
Overall, he is expecting retail pricing to be flat in premium wine as the industry works through sluggish volume growth and a slight surplus of wine.
There should be some price cuts in the $15 to $17 price range. Wines below $9 a bottle will continue to shrink in both volume and value.
Prices for grapes and bulk wines are expected drop in the California market, though SVB expects Oregon’s future to be brighter.
As for mergers and acquisitions, those too have peaked, says McMillan. He expects the market to slow with the major players “largely content and digesting their current acquisitions.”
McMillan adds that some sellers in 2019 “will discover they have waited just a little too long to begin the marketing process, and sales prices will fall somewhat.”