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TL;DR Silicon Valley Bank State of the US Wine Industry 2021
We might be done with 2020, but 2020 isn’t finished with us
Welcome to the first TL;DR.1 This is where I provide you with a summary of some recent industry report or survey and provide commentary on what it might mean for stakeholders. I do the reading and provide analysis so that you can take the weekend off. Think of it as Cliff Notes for wine and spirit professionals.
What it is
For 20 years, every January has seen the release of Silicon Valley Bank’s annual State of the US Wine Industry report. Founded in 1983, Silicon Valley Bank is a commercial bank based in Santa Clara, California that serves and funds, as one might infer from its name, a substantial number of tech companies and start-ups. What does all this have to do with wine? Well, the bank is uniquely positioned as one of the largest providers of financial services to wineries in the US; they even have a specialized Premium Wine Banking division. Under the direction of Rob McMillan, author of the report, this division has its own slew of bankers, analysts, and experts to help plan, forecast, and make the bank and its customers money.
The report is usually between 60 and 75 pages long and covers a breadth of topics including but not limited to harvest, grape and wine supply, sales channel changes, and pricing and demographic trends. There’s usually a lot of fanfare when the report is released and many wine producers know it well, but its findings tend not to trickle down to distributors, portfolio managers, sales managers, and sales reps.
What it says
One reason I love this report is that it’s self-critical. One of the first topics addressed in every edition is a review of previous predictions. The 2020 report correctly predicted a 3.9-million-ton harvest in California and that there would be low-to-negative sales growth. Of course, no one predicted the pandemic and its repercussions. As such, there was plenty the previous report got wrong.
In short, everything else was down more than expected: sales by value, sales by volume, premiumization, and more. While we’ve all encountered plenty hopeful anecdotal evidence—stories of retailers’ businesses skyrocketing—the broader reality was a bit bleaker.
Here’s a synopsis of the report’s predictions for 2021:
2021 will be a year of momentum. Don’t expect a sudden simultaneous shift in sales (in comparison to last March’s and April’s precipitous drop in business), but rather a slow and then steadily accelerating growth throughout the year as business reopen and people feel safer.
More mergers and acquisitions. With many wine and wine-adjacent businesses hurting and the cost of borrowing money historically low, expect some smaller players to get swallowed up by larger competitors. The pain of some will spell opportunity for others.
Wineries need to diversify everything: their sales strategies (more e-commerce and direct-to-consumer), their sourcing of grapes (because of wildfires), and their distribution models (selling a large percentage of your wine through the cellar door won’t cut it when potential future shut-downs force tasting rooms to close).
Millennials are and aren’t the future. Millennials are and will continue to be a very large segment of the wine-buying populace. However, they simply don’t have the buying capacity of Gen X and the Boomers. Financial inequality is real. This is true for race and gender and also generation.
Why it matters
The notion that demographics are destiny became self-evident when the pandemic struck. Cities emptied, suburban real estate prices soared, and small businesses that relied on in-person services suffered.
For the wine industry, such lessons should be instructive. For instance, when people don’t feel comfortable leaving their houses, they shop online. One mind-boggling statistic the report calls to attention is that:
“US e-commerce penetration experienced 10 years’ worth of growth at the pre-COVID pace in just three months between March and May 2020.”
Ask yourself, has the rest of the industry adapted to this or other sea changes as quickly? Have you? Has your company made clear how it plans to adjust? There is no “new normal.”
As the report states in no uncertain terms:
“The US wine industry isn’t doing a good enough job of marketing and selling its product, often remaining wedded to successful strategies of the past while the culture and consumer have radically evolved.”
What it means for you
If you’re a winery… Consider how much time, energy, and resources are spent on sales and marketing; it likely isn’t enough. Remember that you are your own biggest advocate. A good or even great distributor is not the same thing as having a plan for sales growth. Don’t confuse the two. What are you doing with your data? Nearly 50% of wineries don’t have a person responsible for reviewing their own consumer data! Also, it’s time to de-risk as much of your business as possible by having contingency plans for sourcing, flexibility with pricing, and diversity in the form of sales channels. Success should not be a function of any one variable working in your favor.
If you’re a sales rep… Prepare yourself for volatility. There are going to be tremendous peaks and valleys in the way you do business. Restaurant openings and re-openings will make spring and summer feel more like OND, but this is not some new paradigm. It will be accompanied by closures, both permanent and temporary that will throw things off-kilter. Don’t become overly reliant on those successful retailers that helped buoy your sales during the height of the pandemic. Rebalance your energy in opening new accounts and revisiting those that previously battened down the hatches.
If you’re a sales manager… Recalibrate what success in certain territories means. With major shifts in demographics, it is likely time to hire that new rep for the suburbs. Maybe it’s time to consolidate accounts under fewer reps in your metro areas. Don’t over-project sustained growth based on early successes you may enjoy this spring or summer. It’s too early to say how this will all pan out.
If you’re a portfolio manager… Know that it’s not business as usual. There are several tailwinds to contend with and much depends on what area(s) of the world or category(ies) you oversee. There will be price pressure on US wines as the oversupply of bulk juice has balanced out over the last year and suspension of European tariffs has increased competition. Expect the need to discount high-end Burgundy, Barolo, and other traditionally expensive wines as the need for cash places even greater stress to offload dormant inventory. Additionally, younger consumers’ current preference for premium spirits and craft beers, as well as lower ABV products like hard seltzers, should have everyone seeking to simultaneously clean up and prudently pivot their offerings.
Too long; didn’t read