“Today, wine supply is moving into unknown territory. We have now reached the point where we have a large and unhealthy excess in grape supply in all price segments,” writes Rob McMillan founder of Silicon Valley Bank’s Wine Division based in Saint Helena, California. “Creating this is a unique set of circumstances we’ve not experienced before.”
McMillan is the author of one of the most-respected annual reports in the North American wine world, Silicon Valley Bank’s Annual State of the Wine Industry Report. While it comes out once per year, McMillan is constantly paying very close attention to the wine industry in the U.S., “pondering” as he says, what’s working and what’s not.
When he starts to notice something that may become a relevant line for the report, he puts out feelers and starts conversations that add texture and perspective. This approach includes posts on his blog, SVB on Wine, which invite conversation from readers, many experienced members of the wine industry.
This week he issued his unknown territory post, quoted above. He predicts that this year’s wine grape harvest (on a macro level, in the U.S.) will further an imbalance: too much supply, too little demand. At the end of the season, some growers will be left with more grapes and juice than there are buyers to make wine, and ultimately buyers to drink wine.
And while it’s happened before, McMillan says this year is different and I’ll get to that, but first let’s look at what’s worked in the past.
Traditional options for growers include dropping fruit, essentially trimming clusters of grapes early so that the vines yield less at harvest. Growers could also opt to pull out vines, perhaps those that are aging out. They could then plant something else, if local economics allow, or if they are a winery, they could purchase grapes from elsewhere and attempt to cut costs in the process.
Growers could also make the wine themselves by employing a custom crush facility if they don’t run a winery alongside their vineyard operation. McMillan says this approach “doubles down” on that fruit, incurring additional costs in the hopes that the market rights itself in time for future profit.
In the past, any combination of these approaches had also been balanced with a healthy level of demand, a landscape where American consumers had a bigger appetite for wine. And while some categories of wine still experience modest growth, McMillan notes a cooling of demand on a macro basis: “flat volume growth and potentially a negative.”
“From a demand perspective, we are seeing negative volume growth in those regions that produce wines that are positioned below $9 at retail,” writes McMillan in his post. “More recently though, volume in higher price point regions has shown zero to minimally positive growth rates, and luckily still modest positive growth in sales dollars.”
“On a volume basis, we are close to hitting slack. We haven’t seen negative volume growth since 1994 in the business, but we are very close to that today.”
The demand that exists currently “can’t get us out of jail,” says McMillan. Instead, he encourages a swift adaptation in the marketing department, compelling more consumers (particularly younger ones) to invite wine into their lives.
And while not every grower is in this position (some are doing quite well individually, or on a regional basis) selling more wine to more people has always been the goal, and these circumstances serve to ratchet up attention in this area.
Good for the Consumer
For wine drinkers and consumers who haven’t started drinking wine but are considering it, this means that now is an excellent time to scout values and introduce themselves to a buyer-friendly marketplace.
You see, the problem with this year’s harvest (generally speaking, in North America) is certainly not quality. In fact, in an effort to reduce yield, some of what comes off the vine at harvest time has the potential to be more concentrated.
“Some fruit that could have gone into a $50 bottle will go into a $20 bottle instead,” says McMillan. This means that trusted wineries may have some spectacular deals, and that négotiants — those who buy grapes or wine from another producer and label them — could have access to more top-quality fruit.
It also means that some currently released wine could be discounted, to move through the vintage in preparation for what’s to come. It might take a bit of hunting, but these wines are out there and will continue to be made available. (Hint: McMillan was impressed by something he found at Trader Joe’s, but he didn’t leak specifics to me.)
This is exciting for any wine consumer, but it’s especially attractive to younger people, price-conscious shoppers and just-starting-out wine drinkers. As McMillan says, now is the time to stock up and build a mini-cellar that hits above its weight. “Bring them out in a few years and tell the story at a dinner party,” he suggests.
A Silver Lining for the Wine Industry
One way to look at this imbalance is through the lens of the consumer. It’s an opportunity to build a category that dazzles with a combination of price, accessibility and quality. In other words, packed with value. “The silver lining for the industry, when price is part of the conversation, is that this gets wine into the hands of younger consumers,” says McMillan.
Combine this buying atmosphere with amplified efforts to reach out to consumers through meaningful marketing and increased digital shopping options, and this moment in time becomes filled with opportunity. McMillan adds, in his commentary, that it’s “not yet a train wreck. There is still time to evolve and work together on demand.”
While price isn’t the only driver, many people will be inclined to pull out their wallets for an exceptional deal on a well-made product. This is not because the product is cheap — on the contrary — it’s because the consumer feels they are getting more than they paid for. In this case the “get” could include wine grown under the best conditions, by some of the best producers in the U.S. wine industry.
“They get their hands on good wine for a few months and can’t go back,” says McMillan. “At the end, [wine producers] are selling to the consumer and it could be a self-correcting situation.”