Trading Up? The New Conventional Wisdom About the U.S. Wine Market

Last week I wrote about the unexpected state of the U.S. wine market today, where sales of wines above about $9 are strong and growing while the below $9 segments are stagnant or in decline. Thinking back to the dismal state of the wine market a few years ago, with trading down and heavy discounting, the current situation comes as a big surprise.

What accounts for the transformation of the U.S. wine market? And is this the “new normal” that we should expect for future years? Let’s look at the emerging conventional wisdom on these questions.

Trading Up?

I don’t know many people who think that the shift toward more expensive wines is a simple reversal of the recession years’ trading down, although that doesn’t mean that it doesn’t happen. Consumers seem as price sensitive as ever, which is why store shelves are still papered with “shelf talkers” like the one shown here that beckon buyers with discounted prices.

Yes, discounting is still going on, although perhaps not quite at the same level as during the Great Recession. The best argument for trading up is that consumers who had an opportunity to sample better wines during the deep discount days and  liked them now are feeling more economically secure and are continuing to buy them at higher prices. I’m sure that this is happening to a certain extent, but I don’t think it is the whole story.  Consumers are simply too focused on price to have suddenly changed.

Price resistance means that most consumers aren’t willing to pay more for the same or similar wine, but they are willing to spend more for something different. Who is doing this?

The Millennial Theory

One theory holds that the changing shape of the wine market is driven by younger wine drinkers — we often call them the millennials here in the U.S. but I have also seen the term “echo boomers” used and Constellation’s latest Project Genome study calls them “engaged newcomers.” As a group they tend to buy wine less frequently than some other groups (they also drink spirits, craft beers and so on) but spend more per bottle. This is the opposite of my behavior as a young wine drinker and probably a good thing.

If what we think we know about millennials is true, then they can account for some of the trend towards higher price wine sales, but they are certainly  not the whole story.  They don’t explain the shift away from lower-priced wines because they were never the driving force there. And they cannot account for all of the upmarket shift because at this point they don’t buy enough wine to move the whole market this way. Millennials are part of the story, but not the whole answer. What else?

The Bad Wine Theory

One very interesting theory is that the relative quality of wine below about $9 has fallen, driving customers away in search of something better to drink. They have found it, too, in craft beers, ciders and spirits.

W. Blake Gray recently made this point in a column titled “Wine under $10 sucks. Should we care?”  Tim Atkin made a similar point about wine in the UK market.  It’s very difficult to find decent wine below £5, he says, which is a change from the past.

A recent article on Bibendum’s website tells the sad UK story, which this graphic illustrates. If you want to get value in wine in the UK, it seems you have to move upmarket. The actual cost of the wine is more than a third of the total cost of a £20 bottle, but less than 10% of the cost of a £5 wine. Shocking!

This deteriorating value of inexpensive wines, if true, is a surprising situation. Only a few years ago we experienced something of a revolution when the character of commercial quality wine improved  quite dramatically (I called it the Miracle of Two Buck Chuck in my book Wine Wars). A structural surplus of decent wine and grapes on the U.S. and world markets made it possible for winemakers to assemble products at low price points that rivaled some brands in higher price segments. The unexpected value they provided drew millions of consumers into the wine markets Is poor quality and value pushing them away?

Well, poor value is certainly part of the answer in the U.K., where high wine duties have distorted the market and undone much of the miracle of the past. And I have some friends in California who complain that cheaper and lower quality bulk wine imports are now filling bottles of California-brand wine. The brand is associated with California (like Barefoot, for example) but the wines themselves come from many places (and are so-designated on the packaging).

Have quality and value suffered? I’m an economist not a wine critic, so I will leave it up to you to decide, but some of my California friends think that’s what’s happened. If this is true, then where is the better California wine going? Some of it is sitting in tanks, which are pretty full after a couple of generous vintages in a row. The rest? Some of it, I think, fills the bottles of wine brands specially created for the new market environment.

The Branded Age

This supply-side theory holds that smart wine executives have noticed that many consumers are willing to pay more for something different (and are put off by the commodity wines) and they have responded by creating new brands to fill specific upscale market niches. This helps explain the great proliferation of wine brands and even virtual wineries on the scene.

Each year I enjoy Jon Fredriksen’s talk about the state of the U.S. wine market at the Unified Wine and Grape Symposium, but recently I have noticed that his list of the hottest wine brands is full of unfamiliar (to me) names. These aren’t new wineries, simply new brands created by innovative existing large- and medium-sized wine firms.

Jon’s data suggest to me that these are some of the wines that are attracting buyer interest and pulling the market along. An example? Take The Wine Group, which is the second largest wine producer in the U.S. with 57.5 million case sales according to Wine Business Monthly. A few years ago I thought of them in terms of brands like Almaden and Franzia wines, which are  in that lower market tier that is stagnating today.

Now when I think of The Wine Group I think of Cupcake Vineyards, which at 3 million cases is small compared to Franzia’s 26 million, but perfectly fits that upmarket profile and is often priced right at or just above key $9-$10 threshold along with Apothic, 14 Hands and other hot brands.

Which Theory? The New New Normal?

No single theory explains what has happened and the market is full of special cases. Take Argentinian wines, for example. Customers are buying more expensive products from Argentina now in part because the cheaper labels have disappeared. With inflation still soaring and the exchange rate stuck, many Argentinean firms cannot afford to export cheaper Malbecs to the U.S., which shifts the center of gravity upmarket.

All these ideas (and others, too) are part of the explanation of today’s transformed market. It’s a perfect story of effects (or a train wreck, depending which end of the market you are in). Is this the new “new normal” and, if so, how long will it last? That’s a question for next week.

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Thanks to everyone who commented on last week’s columns — great ideas! Keep them coming.

9 responses

  1. This is very interesting. I think that “under $9” segment was never a “happy place” before. From my experience of shopping in CT/NJ stores, this segment was dominated by well drinkable Portuguese and Spanish wines, both of which now moved to the next “above $10” category, so in that under $9 segment you can still find something drinkable only at the Trader Joe’s. California was never a player in that segment.
    I think overall, people are still price sensitive overall, but the key driving factor I believe is simply a change in outlook on the wine from been “an occasional treat” to more of an everyday phenomenon – people simply drink more wine, and as they become more accustomed to that, they are more eager to allow themselves occasional splurges, whether driven by clever sales tactics, marketing or popular opinion.

  2. As always with the wine business, Mike, we’re guessing since there are few numbers about consumer behavior and the numbers that do exist are proprietary. Who is trading up? How are they doing it? Where are they? As I continually remind people, there has never been a definitive study made public that demonstrates that wine drinkers trade up. Everyone just assumes it is so. Does anyone know a wine drinker who from Bogle to Hess to Silver Oak?

    And it’s not that cheap wine sucks (which I told Blake Gray). Otherwise, how do we explain Barefoot and Cupcake? Neither Blake nor Tim Atkin would drink those wines, but their sales continue to grow from large bases. So quality is not an issue.

    Rather, the answer is much more complicated and may have something to do with wine becoming a consumer packaged good. This is not something the industry spends much time discussing in public, and the idea that wine is now purchased in much the same way as ketchup and laundry detergent would make many people in wine crazy. But we do have a number for that — 42 percent of wine sold off-premise comes from grocery stores. That most wine writers and wine analysts don’t buy in the grocery store doesn’t change the number/

    • This makes a lot of sense. One of the interesting thinks I experience in speaking to wine industry groups is the big disconnect between those who have no interest in supermarket sales and those who critically depend upon them. The industry includes them both, of course, and as you say, the representative daily winedrinker is more likely to be a supermarket buyer (in states where supermarket sales are legal). Thanks for your comment!

  3. Thank you Mike, that is a lot of think about. When I first heard that the low end price segment demand was reducing my first thought was that like you, when I started drinking wine (at the legal drinking age of course), it was a cheap sweet red and as my palate developed I traded up the wine food chain. Could it be that the new generation entering the legal drinking age are no longer choosing wine, even the cheap stuff, to drink? and by not choosing the wine alternative there is a reduction in the low end demand? If wine is becoming commodified and the competition in that segment is expanding, the wine industry has a lot of work to do. If we don’t have a solid base of consumers at that starting segment what would things look like in 5, 10, 20 years for all segments of the wine industry?

  4. The supermarket theory makes the most sense to me. Cheaper offerings are on the bottom shelf, expensive wines are literally ‘top shelf’ with the $10-$15 USD bottles at eye level to the consumer. But what of consumers like myself who drink Bogle Petit Syrah (under $10) AND Darioush Cab (~$95)? I have a wide range, and yes, that range has shifted slightly higher, but I still buy Ste. Michelle Dry Reisling at about six bucks a bottle regularly, along with my (mostly $25-$30) choices.

    • Hard to beat the CSM Dry Riesling — especially at that price! Wendy presented it at a blind tasting at Riesling Rendezvous a couple of years ago and when the price was revealed she received a standing ovation from the international wnemakers there.

  5. Mike, part of the answer lies in the equation, return on investment per square foot. What is happening is a direct correlation to contributional marginal return per square foot for the retailer. The retailer has “X” amount of square feet to dedicated to alcoholic beverage sales, their allocation of square feet is based on return, not friendship.

    Let’s say you can place on your floor a 3 case-stack of Chardonnay retailing for $8.99, the retailer (Whole Foods) paid $6.00 per bottle, the average sales velocity is 24 bottles per week or a gross return of $72 for that case stack location. Now along comes “Mr. Craft Beer”, using the same amount of square footage, he can provide Whole Foods or any retailer a much greater return on their SF. The same selling price of $8.99 per 6-pack but the weekly sales velocity ranged from 9 to as high as 15 cases. These numbers were part of a 3 month case study I did in 2010 in Chapel Hill NC, these numbers were norms not averages. I was a senior manager of a wine & craft beer distribution company. What was also interesting was size of discount between craft beer and wine, The craft beer discount ranged from $1 to as low as .50 per 6-pack. The wine discount ranged from $1.50 to $4 per 750 ml. So why does the wine industry have to discount so deeply? Why has discounting been a norm in the wine industry? We can discuss that another time.

    The large wine companies realized they had to move upstream to be able to provide retailers a better return on their investment.

    Concerning millennial’s, they will NEVER become wine loyalist until the wine industry learns how to communicate with them, never. The industry has traditional communicated with the cognitive side of the brain, in a “voice” (character, language, tone, purpose) directed towards male behavior. As long as this communication flaw continues, millennial’s will spend their disposable income elsewhere.

    Best regards from Sonoma

  6. Mike part of the reason lies in the fiscal equation return on square foot, but a better measurement would be cubic feet. The retailer or department manager has “X” amount of SF to allocate to alcoholic beverages. Thus the retailer must put together a portfolio that will provide the greatest contributional margin return.

    In 2010 I conduct a study in Chapel Hill NC, the numbers listed below were part of that study and norms not averages were used, the study was conducted in 4 Whole Foods stores. The markup for craft-beer and wine were equal 50% markup, 33% gross profit. At the time I was a senior manager of a wine & craft beer distribution company. The price points used in the study were $7.99, $8.99, & $9.99 for a 750 ml. of wine or a 6-pack of beer. So I had an $8.99 Chardonnay that cost the retailer $6 per bottle, the sales velocity was 24 bottles per week. Thus the retailer contributional gross was $72.00. Along comes “Mr. Craft Beer”, in the same foot-print at the same $8.99 price point ( now for a 6-pack) the sales velocity increases to a low of 28 units to a high of 60 units. The norm discount for craft beer was .50 or $1 per 6-pack versus $2.00 per 750 ml. Which leads me to question WHY has discounting been an accepted industry norm? It has a lot more to do than supply & demand. Remember the old saying “stack they high and let them fly”, it’s back but applies to craft beer.

    The large wine companies realized this economic fact of low return per SF and started moving their selections upstream (they were forced to). But they must stay out of the craft-beer minefield of $7.99 to $9.99 price points. The 22 oz craft beer offering is also playing havoc with is this price point range, but they were not part of the study.

    Concerning millennial’s they will NEVER become wine loyalist until the industry learns how to properly communicate with this generation, never. The wine industry has traditional communicated to the cognitive brain and industry “voice” (character, tone, purpose, language) was targeting male behavior. Until the industry learns how to communicate with this generation they will choose to spend their disposable income elsewhere.

    • “The wine industry has traditional communicated to the cognitive brain and industry “voice” (character, tone, purpose, language) was targeting male behavior. Until the industry learns how to communicate with this generation they will choose to spend their disposable income elsewhere.”

      And how would you communicate with them so they “buy”?

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