Silicon Valley Bank recently released their 2018 State of the Industry report on the U.S. wine market and if you haven’t read it you should. It is well researched, written, and argued. Most important, it will challenge your ideas about the U.S. wine industry and make you think.
Most of the media reaction to the report has focused on two “boom and bust” elements: the predictions that (1) the 20-year wine market expansion is coming to an end and (2) that the relentless rise in grape prices and vineyard valuations in Napa Valley will pause or plateau.
Both of these predictions are significant although, as the report notes, calling a “turn” in the market is inherently problematic and will be difficult to assess until a few years down the road. In the short term, for example, the report notes that the U.S. wine market should continue to grow in 2018, although at a slower pace. Value will grow faster than volume due to the “two track” U.S. market with growth in premium wine sales offsetting declining lower-shelf demand.
This Changes Everything?
Boom and bust make headlines, but there are two important points that the SVB report makes that I think should get more attention. The first is the fact that we are witnessing fundamental changes in the retail market environment. Not just retail wine market, retail everything (or just about). Who buys, when, where, and how, who consumes, when, where, why, and how. Even the way people pay is changing. Amazon is one driving force in this environmental transformation, but only part of it.
This fact was driven home to me a few weeks ago when I read that the Swiss luxury group Richemont (controlled by South Africa’s Rupert family), announced plans to buy out Yoox Net-a-Porter, an Italy-based luxury “etailer.” Richemont’s brands include Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC Schaffhausen, Panerai and Montblanc. High end stuff.
You might think that consumers would be willing to buy books and t-shirts online but that they would hesitate to throw down $5000 or more for jewelry or a watch without holding it in their hands. But you would be wrong, or so the Richemont folks believe. The idea kind of takes my breath away.
It’s a new world for wine as for other things, the SVB report suggests. And the patterns and practices that were successful in years gone by, including but not limited to bricks-and-mortar versus online sales, are not guaranteed to work in the future. Time to question and rethink.
Talking ‘Bout the Generations
A second interesting but possibly under-appreciated point that the SVB report raises concerns generational analysis of the wine market. Most of what you read about wine today frames the changing market demographics in terms of baby boomers versus millennials. But, as this figure from Statista.com suggests, there is a “missing middle” to this analysis. The figure shows 2016 median household income by age of householder.
Lost in the focus on rising younger, poorer millennials versus declining older, richer boomers is the Gen-X generation who are in their 40s now (more or less) and reaching their peak earning (and consuming) years. They are, SVB argues, an important but sometimes underappreciated market for wine. And, as a recent Wine Access study reveals, although Gen-X is a smaller cohort than boomers or millennials, they are willing and able to spend proportionately more on wine.
I think these are very useful insights, although I’m always a bit cautious regarding generational analysis. My years as a university professor taught me that the differences between generations are sometimes less important than diversity within them. Sometimes it is appropriate to generalize about a generation, but not always.
Take boomers, for example. The conventional wisdom is that baby boomers have driven the wine market growth — and this is true — but remember that most boomers don’t drink wine regularly and many don’t drink it (or any alcohol) at all.
The boomer wine boom is driven by a relatively small segment of this generational group. In a way, the boomer wine phenomenon is about a subgroup that is at least somewhat atypical of its cohort — and that difference is key.
The SVB report goes well beyond boom and bust to include these significant insights and many others, too. Highly recommended for anyone who wants to understand the American wine industry today and where it is headed.
Congratulations to Rob McMillan and his team for a thought-provoking report.