Monday, November 18, 2019

The perilous state of the US wine industry?

There has been much talk lately of a slow-down in wine sales in the USA, if not an actual decrease in sales. Indeed, there are similar comments for other wine markets, as well (eg. Wine sales plummet £146m in the on-trade). I thought that it might be worthwhile to look at a picture of some of the data, rather than simply present a few summary details, as occurs in most of these commentaries.

It is simplest to look at the Big Picture, by considering total sales, including all wine shipments from California and the other US states, as well as imports entering US distribution (including bulk imports bottled in the USA). These data are available from Market IQ at the VINEX wine marketplace, covering the years 2002 to 2018, inclusive.

The data for the volume of sales are shown in the first graph. “Table wine” includes all still wines not over 14% alcohol, while “Fortified wine” includes all still wines over 14%, plus sake.

US wine sales by volume 2002-2018

At first glance, all three wine categories show strong upwards trends, suggesting a healthy wine industry. However, all three graphs indicate a recent slow-down in sales — that is, they are all approaching a plateau. Indeed, some simple mathematical modeling of the Table wine category suggests a plateau of c. 353 million 9-liter cases, sometime around 2025.

The plateau implies saturation of the current market. The forecast saturation point is perilously close to the sales of 339 million cases last year, indicating a very small increase in the size of the market over the next half-decade.

This modeling is very simplistic, and it does not actually take into account a possible down-turn in sales (or the creation of some new market possibilities). That is, it is a forecast not a prediction — a forecast is based on the premise “if things continue the way they are currently going”, rather than using a crystal ball.

So, things, indeed, do not look good for those people who want the wine industry to continue growing. If the US population is continuing to grow, then sales of all goods can be expected to grow with it — and the population has been growing at c. 0.65% per year for the past 5 years. The wine industry is currently not keeping pace with the population.

Another aspect to look at is, of course, the total retail value of the wines. Using the same data source, this is shown as the blue line in the next graph. The estimated retail value includes markups by wholesalers, retailers and restaurateurs, for both on-premise and off-premise sales.

US wine sales by value 2002-2018

At first glance, this looks much better, because there is no apparent plateau — sales continue to grow in a nice linear manner, year by year. However, we all know that inflation also tends to make prices do this, irrespective of any actual increase in sales. So, to get a better picture of the real changes in retail value, we need to adjust for inflation, which ran at a yearly average of 2.1% over this same time period (see US Inflation Calculator).

I have shown this adjustment for the pink line. Things doesn't look quite so good, now. Indeed, there have been times when the increase in total wine value did not keep pace with inflation. There is also a small hint of a plateau here, which we might expect from the above graph of sales volume.

A similar pattern is seen if look solely at wine shipments from California, as listed by MarketIQ. Over the same time period, the volume increased by 46% while the value increased 87%.

The difference between the two graphs (volume versus value) is often attributed to premiumisation, which I have discussed before (Has there really been recent premiumization in the wine industry?). That is, drinkers are now allegedly drinking less wine of a higher per-bottle value than did their predecessors. Many commentators seem to think that this is a Good Thing.

However, Damien Wilson has noted out that this is not necessarily so (Is wine premiumisation a doom loop?). He points out that past history, notably in France, shows us that the two things involved in premiumisation (decreasing volume of sales and increasing per-bottle price) counter-act each other unequally, rather than balancing each other. That is, the total value of retail sales decreases through time, so that the wine industry contracts.

He rightly emphasizes that “there is a real risk that the focus on pushing pricing upwards will only end in the market’s downward spiral ... As the number of wine consumers in the US has stalled in recent years, the local wine sector should avoid profiteering in favour of new market investment ... Should wine producers chase short-term profit by pushing prices higher – or is it time to focus on creating more wine consumers for long-term business growth?”

These are wise words, because a healthy industry needs an increase in the actual number of consumers through time; and the current wine industry in the USA does not seem to have this.


  1. David writes:

    ". . . the [U.S.] population has been growing at circa 0.65% per year for the past 5 years. The wine industry is currently not keeping pace with the population."

    That is a statistic that few in the wine industry know -- or take into account when they make their annual dollar and unit volume sales projections.

    While I don't subscribe to the philosophy that "demography is destiny," we marketers in the wine industry must acknowledge this inconvenient truth: 16% of adult-aged U.S. wine drinkers consume 96% of all wine in the U.S.

    [See cited news report below.]

    The other 84% of adult-aged U.S. wine drinkers consume the remaining balance of 4% of all wine in the U.S.

    The 16% frequent wine drinker group is not growing over time.

    But the 84% infrequent wine drinker group is subject to "cannibalization" by cannabis, where recreation use is legal in the U.S.

    The wine industry has had no success converting non-wine drinkers into first-time or infrequent wine drinkers.  (Religious observance and medical health reasons preclude their imbibing.)

    Under the most optimistic scenario, the proverbial "pie" of wine drinkers can only grow -- at best -- by the natural rate of population growth.

    Excerpt from
    (May 12, 2010, 2012):

    “The Market for Fine Wine in the United States”
    [Fine Wine 2010 Conference in Ribera del Duero (Spain)]


    By Graham Holter
    Associate Director – Publishing
    Wine Intelligence market research firm (United Kingdom)

    According to the data presented by [David] Francke [at the time, managing director of California’s Folio Fine Wine Partners], U.S. wine drinking is compressed into a small segment of the population.

    SIXTEEN PERCENT OF CORE WINE DRINKERS consume wine once a week or more frequently, which ACCOUNTS FOR AROUND 96 PERCENT OF CONSUMPTION. Thirty-five million adults drink virtually all of the wine sold in America, Francke said.

    [CAPITALIZATION used for emphasis. ~~ Bob]

    1. Thanks for your comment. I agree that demography is NOT destiny. It is, however, the limit of the market opportunity. That is, it defines the maximum size of the domestic pie. If the wine industry is to grow, then it must either increase its slice of this pie, or try to increase the size of the pie (ie focus on world markets). Trying to increase the value of the current slice is not a long-term strategy.

    2. I dunno... a $70B industry with ~ 5% CAGR over the past five years doesn't sound like such a disaster to me. While growing the custom base is obviously a good thing, there are hundreds of industries with lower or negative unit volume growth that keep chugging along due to premiumization.

    3. Forecasts are risky, if course, However, I think that the point the commentators are making is about the uncertain future, given the number of current players, rather than the undoubted success of the recent past.