Issue link: http://winesandvines.uberflip.com/i/918844
138 WINES&VINES January 2018 BUSINESS and domestic Malbec, noting how the popular- ity of Pinot Grigio and rosé started with Euro- pean imports but has migrated to U.S. production. A few saw a trend toward Albariño, Rhône blends, Viognier and even Zinfandel, which seems to make periodic comebacks. Few are convinced enough that they're in- vesting in these possibilities, however. One trend may not be a type of wine, but its origin. A winery CEO noted, "Regions outside of Napa in particular offer better bang for the buck; consumers will look to other regions." Some executives said the hottest trend might well be other regions gaining ground at the expense of wines from Napa and Sonoma counties. "Napa pre-eminence is coming to an end. More-than-$60 bottles (at $6,000 a ton) will be unsustainable, and we're seeing a limit to the number of iconic wines being sold in the market. Grape prices can't continue to rise." Another CEO thought a change in percep- tion is more important than types of wine: "Millennials are more focused on experiences. Whether that is wine or a trip to Patagonia, they want their time to be valuable." Another noted that Amazon, which now owns Whole Foods markets, could be a game changer by bringing convenience and selectivity. "It could fundamentally change how we go to market." Are spirits a threat? With the excitement about craft spirits, espe- cially among younger drinkers, many wineries have been concerned that spirits could hurt their sales. Yet 55% of respondents were not aware of any impact on their business, and 21% saw an increase in on-premise wine sales due to the popularity of spirits, versus 16% that saw a loss. The impact in off-premise sales was even smaller, with 12% seeing a gain, 13% a loss. However, that doesn't mean there's been no impact. One exec put it this way: "Our revenue increases might have been larger had it not been for the entertaining effect of the mixologist." In response to the perceived threat from spirits (or for other reasons), 13% of large wineries are developing spirits brands, and 3% are acquiring them. Even 10% of small winer- ies plan to develop a spirits band. But maybe there's more to be gained from emulating spirits than acquiring them. The CEO of a small winery said, "In the three-tier market, spirits companies do a better job at branding." Another observed, "Spirits and soft drinks promote brands and utilize large, high- ticket, high-exposure promotions." That seems to work for them. Yet the chief marketing officer of a large winery noted, "Wine is doing much better at DtC than spirits." Another executive stated, "The other poten- tially greater threat than spirits is baby boom- ers drinking less wine as they get older. Millennials are driving premiumization, and the wine sector should be planning to focus on that segment." The CEO of a small winery stated, "I think the resurgence in spirits is hurting beer more than wine. People still don't want to drink spirits with food." The survey didn't specifically look at the impact of craft beer on the wine business this year. What to do about threats? Large and small wineries diverged consider- ably on how to respond to issues facing the wine business. Small wineries are overwhelmingly focusing on selling wine direct to consumers, which isn't as big an issue for large wineries. However, large wineries are very focused on their relationships with distributors. They're also more likely to add new products and acquire new vineyards. A small number of wineries are adding grape varieties, a move likely intended to have more choices for wine clubs and tasting room visitors, which isn't happening with bigger wine producers. Issues identified by retailers The retailers surveyed were critical of wine companies' promotional efforts, and they also warned Napa and Sonoma wineries not to implement multiple price increases: "There's much competition from Paso Robles, Mon- terey, Washington state and Bordeaux." They also said that wineries need to do a better job of marketing. "They focus on the distributor and don't seem to focus on the consumer." Retailers asked wineries to do more in-store demos and tell their stories to the end consumer. They should also make sure their wine is stocked in local restaurants so consumers can taste it and then shop for it in the local grocery store. One winery head said, "We're putting dis- proportionate dollars into teams and market- ing. Big quality is not enough." A bright future As a whole, the industry is bullish about the future. Eighty-six percent of respondents fore- casted increased profitability for 2018; 90% expected increases in 2019, and 87% were also bullish about 2020. Their chief concerns include a proliferation of brands coupled with ever-consolidating dis- tributor and retail channels and fickle consum- ers dabbling in other categories such as spirits. Private-label brands are contributing to disrup- tion and a concern, respondents indicated. Rising labor costs and decreased availability are big issues. The supply of skilled labor is particularly challenging, survey participants noted, especially in areas where other ag prod- ucts like cannabis compete for workers. The rising cost of grapes specifically both- ers wineries. Respondents observed there's a relatively static amount of grape acreage and a mismatch between supply cost and bottle price. There's no price elasticity to recapture lost margin. The situation has become critical in some regions of the North Coast. Many wineries are facing margin compression, es- Percent Rated Very Important or Critical KEY ISSUES IMPACTING PROFITABILITY/GROWTH Consumer demand for wine Labor State regulations Local regulations Pricing Water National political environment Wholesale consolidation Grape and wine supply Retail consolidation 0 20% 40% 60% 80% 100% n Small Wineries n Large Wineries Percent Rated Very Important or Critical SOLUTIONS TO ENHANCE PROFITABILITY/GROWTH Selling more wine brands DtC Brand relationships in retail Brand relationships in wholesale Selling more wine brands DtT Facilitating new distributor entrants Adding new services Adding new products Buying and/or controlling more vineyards Planting new grape varieties Becoming certified as sustainable, etc. 0 20% 40% 60% 80% 100% n Small Wineries n Large Wineries