Oversupply of premium wine, slower sales growth to spur discount brands, says Silicon Valley Bank forecast

It used to be enough for U.S. wineries to make great wine and find ways to get it into the hands of consumers, but vintners large and small now are going to have to bring their marketing and efficiency A-game to survive the erosion of sales growth from oversupply and increasing competition from other drinks - and teetotaling, according to a newly released report closely watched by the industry.

It was a great year for 71% of the wineries that responded to a survey for Silicon Valley Bank's 19th annual State of the Wine Industry report, released late Tuesday night, and for about a quarter of those optimists it was their best year ever. Yet pessimism about the marketplace rose rapidly last year, to 49% from 1% a year before.

“Today, the supply chain is stuffed. This oversupply, coupled with eroding consumer demand, can only lead to discounting of finished wine, bulk wine and grapes,” wrote Rob McMillan, founder of the bank's wine division and author of the 71-page report. The slowing sales was exacerbated by the record 2018 California wine grape harvest and somewhat smaller 2019 crush.

But the glut will be good news for wine lovers but challenging for producers and growers, according to McMillan.

“You'd have to go back to the 2000-2001 era to see the kind of things that we're going to have to do to clear up the supply chain,” he told the Business Journal. A ramp-up in plantings for higher-end wines to satisfy the expanding palates and bank accounts of high tech's newly wealthy led to a big oversupply when the tech economic bubble burst in 2001. Fred Franzia came into that environment and bought hundreds of thousands of gallons of Napa Valley cabernet sauvignon in bulk at a big discount, and the result was the Charles Shaw brand sales phenomenon known originally as “Two Buck Chuck,” after its bottle price.

“You'll see wines destined for $35 to $55 bottles sold as a private label or in (Costco Wholesale's) Kirkland boxes, but instead of more generic Sonoma cab or pinot noir, it will be more specific Russian River Valley pinot,” McMillan said.

This could help with the problem wine has been facing with declining market share among younger consumers, compared with craft spirits and beer, both of which can cost less for comparable levels of quality.

“If there's a silver lining in any of it, if we're going to provide these great values at lower price points, then maybe that'll help drive some future sales to a more interested young consumer.”

The report forecasts sales growth this year for the premium wine segment (over $9-$10 a bottle) will be 3% to 7% by value, down from 4% to 8% predicted for 2019. Actual performance averaged 5.3% in 2018 and 7.2% through September of last year, according to the bank's analysis of financial statements.

A look under the hood at family wineries' fiscal engines shows three-quarters had a good year, with average sales growth by quartile of 3.6%, 11.3% and 22.3%. Yet the lowest-performing quartile of vintners had negative sales growth of 7.8%.

With quartiles made up of producers of varying characteristics, the standout commonality in better performance was management acumen in increasing business efficiency and marketing prowess to understand how to reach newer generations of consumers where they are, rather than waiting for them to come to the tasting room to join the wine club, according to McMillan.

“It was not about size or even location in determining success, whether they were in Napa, Sonoma or Oregon,” McMillan told the Business Journal. “But it was wineries with dialed-in marketing teams who were looking at the marketplace and using data to look at what they needed to do then changing strategies rapidly if they need to.”

With about 60% of North Coast wineries in the bank's latest survey relying on direct-to-consumer sales, and tasting room interactions factoring heavily into those transactions, it's a model that needs adjustment to take the winery experience on the road to consumers, McMillan said.

“They need to start looking at the data,” he said.

The bank's survey for the report showed that wineries are getting the message that they need to know who and where their key customers are, employing modern big-data tools to make marketing efforts as efficient as possible. Last year, 18% of respondents had an employee devoted to consumer data analysis full time and 27% part time, up from 8% and 25% in 2018.