Booze Rules Blog

This blog is dedicated to occasional (and hopefully interesting) reports of state and national alcoholic beverage regulatory developments that we encounter in our practice. Booze Rules (and any comments below) are intended for informational use only and are not to be construed as legal advice. If you need legal advice please consult with your counsel.

Wine Opinions: What do you think are the trends affecting the wine industry?

by John Hinman 11.04.13

Note: When Wines & Vines was putting together its November 2013 Supplier issue we were asked to identify the trends that we saw affecting the wine industry in 2014 and beyond.  Our response (below, edited for this blog) was published in the online magazine and we thought that we would pose the question to our readers in the industry who follow this blog. We invite you to weigh in with your thoughts: What do you see as the future trends affecting the wine industry?

Opinion: Wine Industry Outlook

The pressure is building on the wine industry to find profitable and available routes to market.

Distributors are almost all full and can only handle (as salespeople) the major brands, the cult brands that sell themselves and the largest of the next level of production. This is a function of the success of the wine industry (not just in California) in making better wine (lots of really good players out there) and of an increasingly sophisticated customer base that drinks wine, beer and spirits depending on the occasion and on their inclination. This is also a function of politics, and of the restrictive legal system perpetuated by the wholesalers in combination with the anti-alcohol forces that prevent suppliers in most markets from creating their own distribution arms.

The younger demographic is really into spirits, which, because it’s an easier sale than wine (and cheaper and easier to transport than beer, with a higher profit margin and an easier-to-describe story to the salespeople) is taking up space at the distributors and knocking out a lot of wine producers. This is a trend.

The nation’s retail chains (on and off premise) are focused on higher profits through lower costs; which translates to an increasing reliance on private and control label business. The result is that the PL/CL business that is going through the clearing wholesale system to the biggest customers is further putting pressure on distributors’ margins, forcing them to raise margins on the smaller producers. This also includes PL/CL spirits and beer. This means that there will be less available shelf and wine list space, cutthroat competition for the space and pricing issues for all but the most robust brands. This is a trend.

For the wine industry we see the need for wineries to increasingly have to focus on on-premise hospitality (events, tastings, social media-driven occasions and so forth) in order to maintain their margins, which will (for most small and medium size wineries) be more and more dependent on DTC. The constraints include restrictions on events in agricultural zones, and how aggressive any one winery can really be as a hospitality provider. For examples look at what is happening in Santa Barbara County, in Lodi, in Napa and throughout the state with Agricultural zoning battles. In other states the constraint is no different and maybe even more restrictive (witness the zoning issues in Oregon). This is a trend.

With respect to your (the Wines & Vines) commentators, we agree that there will be growth but we think that it will occur based on population demographics (more Millennial’ s coming into the legal drinking age and more Boomers drinking more—see the Wine Market Council releases), more social media marketing and better products more than anything else.

As for the comments about credit, put yourself in the place of a banker trying to decide whether or not a particular small or medium size winery can buck the difficult route to market trends and pay back larger credit lines as they expand. The banks are still (for the most part, there are exceptions) sitting on the sidelines because the historic value base (land, brand and vineyards) is not increasing in value (at least as far as we’ve seen) as fast as it was a decade ago. Also, because of the aging out of the winery owners that bought in during the late 1980s to early ’90s period, more properties will come available. The romance of the wine industry is not what it once was; most people going into the business now understand that it is a business. This is a trend.

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