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Sobering News

Author: Tim Carl
April, 2016 Issue
Columnist

Tim Carl
All articles by columnist
Author: Tim Carl
April, 2016 Issue

If we could study how consumers were acting in 1938 we might get a better idea about where things may go for us in the near term.

Many in the wine industry wait with bated breath for the Silicon Valley Bank (SVB) yearly wine report This year’s news is sobering, with few bright spots.

On the positive side, the report predicts that fine wine sales will continue to grow and overall sales in dollar terms are expected to increase—but only slightly. On the cautionary side, SVB predicts that 2016 will see a decline in U.S. per capita wine consumption for the first time in 20 years and that wine sales will remain flat for the fifth year in a row. All of this sent shock waves through the wine industry, because many believed continued growth was recession-proof and inevitable.

What’s causing the stagnation? I have a theory.

If we could study how consumers acted in 1938, we might get a better idea about where things are headed in the near term. Back then, the United States had come out of the Great Depression and things were just settling in to the new normal. I bet you’d find that while consumers were initially frivolous, they’d also gained cautiousness and frugality over time, increasingly scrutinizing products to determine their quality-to-price ratio. This profile perfectly describes my grandmother, a child of the depression who told stories of celebrating its demise with “wild” spending (the family bought a new car). But there was no trace of such celebratory behavior when I knew her. By then, she was extremely cost-conscious.

Of course, consumers now are also faced with added circumstances that weren’t at play during the 1930s. Baby boomers, for example, who fueled the recent wine boom, aren’t drinking as much as they age, and the Gen Xers (born 1965 to 1979) and millennials (born between 1980 and 1995) still aren’t making up the difference. According to data presented by SVB, “While retaining the largest demographic footprint for wine consumption, baby boomers are now beginning a slow decline in consumption, which will accelerate in the next six years as the median-age boomer reaches retirement age.”

For a long time, the wine industry looked to millennials as the replacement for the baby boomers. The hope was that this large, new generation would consume wine regularly and be willing to pay high prices. But new data suggests millennials are trading wine for craft beer and spirits, more likely to buy a $5 craft beer than a $15 bottle of wine.

Why? Perhaps because they lived through the Great Recession and came out of the recent recovery with an unprecedented $1.3 trillion in college-loan debt. This new generation also has very little trust in the status quo.

Another contributing factor is that the world economy is slowing. In 2015, the Chinese economic growth rate slowed to a 25-year low of 6.9 percent. According to a recent survey of CEOs conducted by consulting and accounting firm PricewaterhouseCoopers, only 27 percent of top executives are confident that global growth will improve over the coming year (a 10 percent decrease). Couple these data with falling oil prices, the rise of the Islamic State and fears of the spreading Zika virus and we’re faced with increasing pessimism. This can foster recession and cause people to tighten their belts—which may mean decreasing consumption of non-necessities, like wine.

We’re also faced with shifting wealth distribution, with more capital in the hands of fewer families. Recently the GDP has hovered around 2 percent, whereas capital growth rates are at 5 percent. What that means is, if you have money, you can grow it faster than those pegged only to the GDP (e.g., wages). This lets wealth concentrate and may provide less disposable income within the broader population.

There are other trends afoot that may affect wine sales. There’s the push to legalize marijuana, the National Transportation Safety Board’s push to lower the blood-alcohol limit levels from 0.08 to 0.05 and changing tastes, all of which should give pause to those making both short- and long-term wine business decisions.

The preliminary U.S. Department of Agriculture’s annual grape crush data reported that in 2015, the average price of all California grape varieties was down 10 percent from the previous year, but that District 4 (Napa County) received the highest average price, up 6 percent. District 3 (Sonoma and Marin counties) received the second highest, up 5 percent. Is this fantastic news? Considering the statewide volume of grapes harvested was down, maybe not. For example, District 3’s Pinot Noir increase in price per ton was welcome news, but because the harvested volumes were down by 35 percent and other varietals were short as well, the result was that gross grape revenues for District 3 were down 25 percent compared with 2014. Napa had a similar story.

Will the wine industry remain vibrant and strong in Sonoma, Marin and Napa? Let’s hope so, but to ensure that it does may take looking exceptionally clear-eyed into the future with one eye on the mirror looking back to the past.

 

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