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Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

Summary:
Rob McMillan, the founder of Silicon Valley Bank's Wine Division, writes in the 19th annual State of the Wine Industry Report that the US wine industry is "past the tipping point and starting a phase of declining growth in volume." McMillan said an oversupply of wine would lead to premium juice priced at better levels could be an incentive to reverse declining consumption trends among millennials. He noted a bust in the industry is imminent and will lead to "vineyard removals." The consolidation of the industry is required to curb oversupply consolidations and let the market find a natural equilibrium in prices. The current environment is unhealthy, he added, with wine prices at a five year low. Here is McMillan's perspective of why the wine industry is headed for a hard landing:

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Rob McMillan, the founder of Silicon Valley Bank's Wine Division, writes in the 19th annual State of the Wine Industry Report that the US wine industry is "past the tipping point and starting a phase of declining growth in volume."

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

McMillan said an oversupply of wine would lead to premium juice priced at better levels could be an incentive to reverse declining consumption trends among millennials.

He noted a bust in the industry is imminent and will lead to "vineyard removals." The consolidation of the industry is required to curb oversupply consolidations and let the market find a natural equilibrium in prices. The current environment is unhealthy, he added, with wine prices at a five year low.

Here is McMillan's perspective of why the wine industry is headed for a hard landing: 

"…our current oversupply in California and Washington isn't due to speculative overplanting. It's due to the wine industry's growing miss in not providing consumers what they want. That's not an adverse statement about the quality of what our industry produces. We've never made better wine. But based on the industry's current results, making great wine isn't good enough for the consumer today. We are increasingly missing the mark on consumer expectations, and our results show it."

McMillan warned that the industry must prepare for "a low-growth environment in 2020."

"In a low-growth environment, there are likely to be winners and losers, and you want to be on the correct side of that ledger." 

In 2018, McMillan said:

"Sales growth forecasts for the next five years should be tempered. The fundamental underpinnings that created the industry growth are changing, which means the tactics that were relied upon to ride this wave of success to this point will slowly prove flawed without business adaptation."

Trends in industry sentiment show that for the first time in four years – a decelerating economy is starting to weigh on producers

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

The rapid growth of the last twenty years is coming to an end. Here are the seven industry headwinds developing:

  1. Baby boomers, who control 70 percent of US discretionary income and half of the net worth in the US, are moving into retirement and declining in both their numbers and per capita consumption, while millennials aren't yet embracing wine consumption as many had predicted.

  2. The industry has reached the point of acute oversupply due to diminishing volumes sold. That will lead to vineyard removals — and fallowing in some cases — and reduced returns for growers.

  3. Absent offsetting promotion of the health benefits of moderate wine consumption, the cumulative impact of negative health messaging will continue to cast a shadow over consumption, particularly for the young consumer.

  4. Wine imports and substitutes are a real and growing threat for mindshare among emerging wine consumers.

  5. A lag in innovating alternative DTC strategies beyond the tasting room and club models is limiting DTC growth for family wineries.

  6. Wine companies aren't addressing the values of the young consumer in their marketing. We aren't giving them a reason to buy wine over spirits.

  7. Labor availability is limited, and the price for labor is increasing.

McMillan predicts that "sales value growth range between 3 percent and 7 percent for the premium wine segment, down about 1 percent from the 2019 sales growth estimate. For the off-premise retail store channel, value will fall between negative 2 percent and 0 percent. Volume will fall in a range between negative 1 percent and negative 3 percent."

It appears in the early 2020s, as vineyards go bust – the supply of crush wine grapes will level off and start to decline.

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

The bust of the wine industry is great news for oenophiles, who will now be able to purchase bottles at a reduced cost.

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

However, bad news for vineyards as growth rates in sales has been declining since 2017. Blame the millennials, of course.

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

Millennials have limited interest in wine – that's why the industry is freaking out because their largest clients are baby boomers – and those folks are getting ready to keel over.

Wine Prices To Plunge As Millennials Spark Imminent Vineyard Bust

To summarize, a perfect storm of forces from an evolving economy is already triggering a wine bust.  However, interest rates via the Federal Reserve could be slammed to zero ahead of the next recession that would almost guarantee zombie vineyards would exacerbate an imbalance in the industry for an extended period. The good news are deflationary pressures leads to lower prices that would lead to more consumption among broke millennials.

The other thing, baby boomers are nearing their final decades of life, and with millennials shunning wine for seltzer and marijuana – the wine industry must be trembling in their shoes. What's to come is an entire industry must convince millennials wine is good. Maybe that is done through lower prices and letting the industry go bust. 

Tyler Durden
Tyler Durden (a pseudonym) represents the idea that a return to truly efficient markets is a possibility and a necessity. After having experienced the inner workings of capitalism at various asset managers and advisors, Tyler believes that the current model is flawed and a deleveraging at every level of modern society is needed to reinspire the fundamental entrepreneurial spirit.

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