Wine Industry and Its Conundrum

Tim KentUncategorized Leave a Comment

In the early 1990’s, the U.S. wine industry exploded into a rapid rise of growth, lasting nearly three decades.  U.S. wine consumption ascended from 400 million gallons per year to more than 800 million gallons.  Today, though, the wine business finds itself in a three-year trend of negative growth.  

“I don’t want to sugarcoat it—2023 has been a tough year,” said longtime industry analyst Danny Brager during a recent wine symposium.  According to the SVB Wine Industry Report, total volume decreased by about 3 percent nationally in 2023 after losing 3.2 percent in 2022 and a 1.3 percent in 2021. 

North Carolina is no exception.  Excise tax collections for table wine were down 3.3 percent in 2022 and 1.4 percent in 2023.  Tax collections are a direct reflection of volume sales.  Simply said, people are drinking less wine these days.  To better understand why wine has hit the proverbial skids, one must understand what triggered the rapid growth some 30 years ago.

The French Paradox  Residents of France are known for enjoying high-fat foods such as pate, brie and butter.   Yet the French also have lower rates of heart disease than people in the United States.  How could that be?  A 1991 segment of 60 Minutes explored the subject in detail and concluded that medical research proved that red wine had a “flushing effect” which promoted healthy arteries.  By emulating the French and their love of fine wine, Americans now had good reason to follow suit.

The timing of the 60 Minutes story roughly coincided with the entry of the Boomer population into its peak years of earning power and enjoying the good life.  The wine revolution had begun!  Today, though, the paradigm has shifted for multiple reasons.

Boomers Aging Out  The Baby Boomers are still drinking red wine.  However, persons of age 60 and over are the only demographic where wine consumption is growing.   As Boomers approach their golden years, younger generations have not yet adopted a similar dedication to fruit of the vine.  Every consumer over 60 who stops drinking wine is replaced by a younger drinker half as likely to select wine over other beverages, including beer, liquor, hard seltzers and ciders.

“We have not done a great job as an industry around making wine approachable and relevant to younger consumers”, says Tom Steffanci, president of Deutsch Family Wine & Spirits.

Abstainers   About half of Generation Z is now of legal drinking age (LDA) and the trend line is unfavorable for the alcohol industry.    75 percent of all LDA Gen Z consumers say they are moderating their alcohol consumption.  Millennials are at 70 percent and Gen X is at 60 percent, compared to the Boomers at 54 percent.  

Research shows that younger consumers display attitudes such as “going out less” and “drinking on special occasions only”.  But moderation isn’t being driven solely by a wellness movement.  “Income pressures now appear to be the main driver of moderation, with consumers also looking to save money by prioritizing ‘essential’ spend and going out less,” says Anastasia Timofeeva of International Wine and Spirits Research (IWSR).

Post-Pandemic Fallout   Suffice to say, the Covid-19 lockdown changed consumer behavior.  While restaurants were closed during the pandemic, wine sales at grocery and specialty stores skyrocketed.  N.C. excise tax revenue for wine increased by more than 4 percent in 2020 as wine drinkers bought their beverages by the bottle (or case), instead of drinking a glass in a bar or restaurant.  It’s no surprise that wine volumes since 2020 have decreased by comparison.

Now that restaurants have reopened, it’s still not a thriving U.S. market for wine in the on-premise.  According to NielsenIQ, there is a decline of 4,700 in fine dining establishments since 2017, where wine is typically the drink of choice.  Restaurant owners haven’t helped matters with pricing strategies which often place a 6-ounce glass of wine at a higher price than a cocktail, and bottle prices which have been marked up by 4 or 5 times above those found at retail .  

Neo-Prohibitionists   The public health community is now working overtime in an effort to change the narrative about alcohol and moderate drinking.   The World Health Organization and celebrities such as CNN health correspondent Dr. Sanjay Gupta are promoting a message that no level of alcohol use is safe for your health.  

The current U.S. Dietary Guidelines say that men may enjoy two drinks a day while women may have one drink.  Those guidelines are currently under review by federal agencies with a new issue coming out in 2025.

Glut of Wineries and Grapes There’s no shortage of wineries—100 thousand or more worldwide and 11,691 of those are in the United States.   At a time of reduced wine consumption, product supply is far exceeding consumer demand.

So, How Does Wine Rebound?   Despite its massive size, the wine industry does a poor job of promoting itself to consumers.  The alcohol business spent $1.7 billion on advertising in the U.S. during 2022.  Of that total, wine was responsible for just 6.5 percent as beer (51.5%) and spirits (29.6%) led the way.

Shoppers often find themselves puzzled and overwhelmed when they enter the supermarket wine aisle because the industry decided years ago to identify its products by style (Chardonnay, Merlot, etc.) , rather than by brand names.  Advertising has helped enable labels like Josh and Meiomi to be among the few recognizable wine brands.  The Josh brand is prospering in the $11-15 price range while that industry segment was down 12% overall.

Survival Strategy  SVB’s McMillan been keeping tabs on the wine business for more than three decades.    McMillan says adaptation is the best strategy and believes the father of evolution provides the right answer.  “(Charles) Darwin said species that survive external pressure are those ‘most adaptable to change’”, says McMillan.

Gallo, the largest wine company in the U.S., adapted by creating  a spirits division several years ago which includes the High Noon canned liquor cocktails.  High Noon sold 21.4 million cases in the U.S. during 2023 and is now the #1 spirits brand (by volume) in America.

Mergers and consolidation are likely to increase, especially because higher-priced wines ($20 and up) are the current industry sweet spot.    In recent months, Duckhorn acquired Sonoma-Cutrer, Gallo purchased Rombauer and Treasury Wine Estates bought DAOU—all examples of the biggest wine companies getting bigger by purchasing identifiable luxury brands.

“In all the years I’ve been in the wine business, which is quite a few, I’ve never seen it quite this challenging,” says Cline Cellars CEO John Grant. Grant told,  “I think the industry is experiencing systemic change.  Let’s face it, 10 years ago in the wine industry, all boats were rising with the incoming tide; you just had to be there participating in order to benefit right from the growth. The opposite is true now.”

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