The Silicon Valley Bank has made its annual assessment and predictions for the U.S. wine industry. The outlook isn't all good.
Last year, the bank predicted a "breakout year" for
U.S. wineries, with a resurgent economy and consumer optimism. This year's report, written by Rob McMillan, executive vice president and founder of SVB's wine division, notes generational shifts among the U.S. consumer base as well as inexpensive imports as threats to the industry's well-being.
Cheaper imported wines, fueled by the strength of the dollar, are a boon for consumers. We'll see not only more French, Italian and Spanish wines at favorable prices, but also fascinating wines from South Africa, southeastern Europe, Turkey and Georgia. But those imports are competing with domestic wines for a somewhat tighter market. Younger consumers, the millennials and Generation X'ers, are proving to be adventurous in their taste for alcohol; they spread their affection (and money) among wines, craft beers, meads, ciders and artisanal cocktails. That led to a sharp decline in the growth of wine sales in restaurants last year.
"The drop in restaurant sales took place in all price points," McMillan writes. "We believe (this is) explained by more at-home consumption and a behavior change of our frugal millennial consumers, who are more likely to satisfy their restaurant consumption needs by starting with a beer or cocktail, then having a glass of wine rather than a bottle of wine with dinner."
The rising competition from craft beers, ciders and cocktails is becoming known as "the new normal" for wine producers. It will be the focus of the annual USBevX trade industry conference.
In last year's report, McMillan wrote that millennials were having a negligible impact on the wine market. This year, however, millennials — which the report defines as those 21 to 37 years old — accounted for 16 percent of wine sales, overtaking the oldest generation, which McMillan calls "matures" (68 and older), who accounted for 11 percent. Baby boomers (50 to 67) are still the largest consumer bloc, at 41 percent, but that number is declining as they march toward retirement. Generation X (38 to 49) will probably surpass the boomers as wine consumers by 2021, and the millennials will become the most influential group by 2035, if not earlier, the report predicts.
As a result of those shifts, the cheapest wines (under $8 per bottle, favored by older consumers) will continue to decline in sales, and hundreds of acres of vineyards in California's Central Valley will be uprooted and planted to other crops, the report predicts. Consumers will favor the $11-to-$15-per-bottle level, still lower than the $20-plus enthusiasm SVB predicted last year. And that will again help imports, which typically offer better quality in that price range than California wines. (That's my opinion, as most California wines under $15 taste as though they were made according to a recipe or a marketing plan.)
Higher-end wines from smaller producers will continue to be in demand, with Virginia, Oregon, Washington and the Paso Robles area of California recording the largest price increases over volume sales in 2015. (This is apparently the first time Virginia merited significant mention in the SVB report, and it was the only non-West Coast region highlighted.)