The wine industry is heading for a bumpy ride in the next decade, and those without a well-planned and realistic strategy in place will either get very lucky or fail.
Here are disparate pieces of data that those in the wine industry should consider: 1) The gross value-added of non-financial companies after inflation has turned negative. 2) Restaurant sales of wine are shifting away from family-owned wineries and have slowed overall. 3) Auto sales have fallen every month this year following seven straight years of record-setting volumes. 4) The number of new wineries in California has grown nearly 200 percent since 2006. 5) The number of distributors has dramatically declined.
The gross value-added of non-financial companies is a measure of the value of goods after adjusting for the costs of production, and it has now turned negative on a year-on-year basis, according to Bloomberg. Historically, when this happens a recession is soon to follow. What this can mean is that inventory is becoming more expensive to keep and less valuable to sell. Many wines have to be aged, so it’s particularly expensive to hold when its potential future value is declining.
In 1990, family-owned wineries sold much of their wine through restaurants, according to Rob McMillan, executive vice president and founder of Silicon Valley Bank’s Wine Division. However, as a result of many factors—including the rapid expansion of the number of wineries and the reduction of the number of distributors—the percent of wine sold in restaurants by family-owned wineries has dropped dramatically.
As of August 1, according to Business Insider, the big three U.S. automakers were down: GM, -15 percent (-8 percent expected); Ford, -7.4 percent (-5.5 percent expected); Fiat Chrysler, -10.5 percent (-6.1 percent expected). This comes after seven years of impressive growth; however, these declines are wildly out of alignment with what were previously lowered lower expectations. When consumers don’t purchase cars they are often holding back on other discretionary or delayable items, too, such as wine.
The number of bonded wineries in California has grown from 2,447 in 2006 to 4,653 in 2016, according to the Wine Institute. If we look beyond California, there were 5,416 wineries in the United States in 2006, and by 2016 that number had grown to 11,496.
The ratio of wineries to distributors has flipped in the last couple of decades. There were only 1,755 wineries and more than 3,000 distributors in the U.S. in 1996. By 2016, the number of distributors had dropped to about 700, but the number of wineries bloomed to more than 11,000.
Given these data, one might expect the sane investor to pause before investing in the wine industry. There are rays of hope: The sale of “premium wines” (more than $15 per bottle) continues to grow (although slowing), and wine consumption in the United States is still growing, too.
Bringing it together
We have a collection of data all pointing to trouble for both the broader economy and especially for the wine business. Because of the nature of the business, the many new wineries’ inventories will not come online for at least a year or two. When they do, we might expect the bumps to begin, and once they start, the ride is not likely to end for many until they find a new way to compete in what will likely become an increasingly brutal business.
Don’t get me wrong: I’m not predicting the end of the world, and I realize the hazards of making economic predictions in any case. What I’m suggesting is that some data seem pointed in a direction that is counter to much of the current momentum in the wine industry. My message to winemakers is to consider how to proactively respond if things are about to turn negative and ponder alternative strategies. But my hope is that when you see me on the street in a few years you can call out a snarky comment, regarding the 2017 column where I suggested you might want to pause before you expand your ultra-expensive Napa Cabernet brand.
“Hey, smart guy,” you might yell from your new Bentley-Tesla self-driving hybrid. “Good thing I didn’t listen to you, went with my gut and grew my Chateau-la-ego brand of $250 wines because now I am richer than Bill Gates!”
Trust me, if that happens I’ll give you a big thumbs-up.
“That’s wonderful news!” I’ll yell back, and I’ll be grinning from ear to ear.
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