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136 WINES&VINES January 2018 BUSINESS B oth small and large wineries agreed that labor supply, pricing and govern- ment regulations are among the most prominent challenges affecting their profitability and growth, according to a recent survey by The Wine Business Institute at So- noma State University. However, on many other topics there was surprising divergence based on the size of the winery being surveyed. Wineries of all sizes were equally con- cerned about labor. One CEO stated emphati- cally: "Who will be picking the grapes if we deport everybody?" The No. 1 concern among small companies was continuing demand for wine in the face of competition from other beverages. But large companies were less apprehensive. Likewise, both were concerned about state and local regulations, but small wineries were more worried. Other issues that concerned at least half of respondents were pricing and water. Three issues getting great attention from large companies were less concerning to small ones: wholesaler and retail consolidation— perhaps because smaller wineries have largely given up on the three-tier system—and grape and wine supply. The owner of a Sonoma County company selling more than 1 million cases of wine an- nually admitted: "For small wineries, getting representation is tough. Who wants you if you're under 25,000 cases?" Premiumization remains hot topic Premiumization is a big discussion point in the industry, as the trend toward good growth at higher price points and poor growth at lower price points continues. Interestingly, 29% of survey respondents felt unaffected by price changes, and about the same percentage had raised prices around 5%, while 17% of those surveyed had raised prices more than 5%. The names and companies of all those surveyed were made public, but individual comments were not linked to the survey par- ticipants' names in the report. One CEO complained: "We can't raise price. We're moving up slowly, creeping up. This is true for everybody. The workhorse brands like Mondavi and Far Niente can't raise price." Another said, "We're riding the curve gently upward. We fit in a slot where we previously could be under-$10 in hot deals, but now that category is under-$15. Volume has moved from under-$9 to under-$15." One CEO pointed out: "By-the-glass premi- umization has grown while by-the-bottle on premise has been off." The COO of a large winery said, "We cannot raise prices on our three-tier distribution wines, but we are creeping up. We can raise prices in our DtC (direct-to-consumer) channel." The president of a small winery said, "You need to create a new higher priced brand to compete in grocery stores, not just raise prices. People are spending more but buying different brands. "The traditional partnership between wholesalers and producers has dissolved. The idea of 'brand building' is now quaint and old-fashioned." In response to cost pressure, 69% of survey respondents planned to increase prices; 50% will hedge with a mixed portfolio, and 48% plan to develop a premium wine brand. Only 8% plan to acquire a premium brand and 6% to divest a value brand in response. One executive thinks the current premium- ization trend will soften, and people will trade down when the economy turns. "With good technology in the vineyard, the consumer doesn't have to spend as much as they did previously to get higher quality wine." Disagreement about the future The industry seems to be better at recognizing trends in hindsight than in advance, and the biggest number of survey and interview re- spondents couldn't identify coming trends. The most popular response to a question about trends was "not sure." However, some named Italian blends, and many mentioned Tempranillo, Cabernet Franc Wineries Diverge on Profitability Concerns Small wineries wary of consumer demand; large producers eye consolidation by wholesale and retail tiers By Paul Franson KEY POINTS The annual executive survey presented at the Wine Industry Financial Symposium identified winery concerns regarding profit- ability and growth. Survey respondents were executives at lead- ing large, medium and small wineries, plus retailers and other key industry players. A tight labor market and tension between premiumization and the ability to raise prices were cited as key concerns by many respondents. SONOMA STATE TAKES OVER EXECUTIVE SURVEY A fter many years of being directed and presented by business school dean Robert Smiley of the University of California, Davis, the Wine Industry Financial Symposium's annual Executive Survey was adopted by The Wine Business Institute at Sonoma State University (SSU) in 2017. The survey team included Wine Business Institute executive director Ray Johnson, SSU endowed chair Damien Wilson, SSU professor Liz Thach and SSU executive in residence Tim Wallace. The team interviewed CEOs and other top executives at leading large, medium and small wine producers, retailers and other key industry players, which included 54 interviews and 175 survey responses.