American wine report warns of over-supply and under-consumption

American millennials’ lack wine enthusiasm: Is that a glass half-empty or a glass half-full?

While European winegrowers are still worrying about the real possibility of 100% tariffs on wines shipped to the U.S., American winegrowers have their own domestic concerns about over-production paired with under-consumption.

“Today, the wine supply chain is stuffed,” says Rob McMillan in his Silicon Valley Bank 2020 State of the Wine Industry Report released today.

This oversupply, coupled with eroding consumer demand, can only lead to discounting of finished wine, bulk wine and grapes. U.S. wine consumers will discover unprecedented retail value in 2020 and should buy up.”

McMillan, who founded and heads the bank’s wine division, cited other potential industry wine woes and silver linings:

• The large millennial population hasn’t totally “embraced” wine as have previous generations, which, McMillan notes, is both a problem and an opportunity for sales growth;
• Even though production of wine from the 2019 vintage is likely to be slightly less than normal in Oregon and Washington and average to less in California, the shortage is not large enough to help drain the wine swamp;
• Wineries are reporting feast or famine – a higher percentage than usual reported financial problems, while 71% said 2019 was a good year for them and 24% said it was their best year yet;
• At the same time, 49% of wineries surveyed see dark clouds on the horizon, while only 1 percent were similarly pessimistic a year earlier;

Perhaps most surprising, McMillan predicts taking vineyards out of production will have to occur before over-supply is diminished, something that really hasn’t occurred in the U.S. since Prohibition.
In other areas, “Total off-premise sales from wholesale depletion data and other information sources show that wine sales in restaurants are now showing negative volume growth,” the report says.

“Most information sources show off-premise and total wine volume turned negative in 2018, while total value sales are still showing slightly positive growth.” In other words, the market is still being driven by those drinking “better” rather than those drinking more.

McMillan says that while most smaller family-run wineries will be reporting annual sales growth of 3% to 7%, he thinks that increase will nevertheless represent a slowing down of growth that will bode ill for the future. Significantly, he ties this slowdown to what has been the growth engine for many of American wineries – direct-to-consumer sales through cellar door sales and wine clubs – citing “a lag in innovating alternate DTC strategies.”

Among the broader threats to the American wine business, McMillan singles out attacks on wine drinking as unhealthy, the growth of substitute beverage segments and increased import sales. To the latter point, while the report does not address whether potential 100% tariffs for most European wines will result in a significant uptick in American consumption of domestic wines, McMillan responded to an inquiry from the drinks business, saying “the pain experienced in Europe from tariffs, won’t be counted as gain for the US wine business, and, in fact, could turn out to be bad for both continents.”

“Today, there are winners and losers in the wine trade,” McMillan says. “The winners are those with solid management teams who are willing to evolve their sales and marketing strategies, execute quickly on a plan, then evaluate success or failure to continuously improve.”