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Why A Recession May Hit the Wine Business Differently

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Food, Consumer & Retail September 12, 2023
Food, Consumer & Retail September 12, 2023
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The wine industry has been here before. A recession is on the horizon.

But this time could be a little different. I can't recall a time when wine businesses were so squeezed from so many different directions, all at once.

Demographic shifts, generational tastes, and an increasingly competitive market could make this recession different from any I've witnessed in my 25-plus years in wine finance. Here's why:

We may not get a quick bounce-back this time

When in a recession, or faced with the prospect of one, people don't necessarily drink less—but they do spend less.

Those who usually think nothing of splurging $85 on a robust Cab from Napa might scour the shelves for something closer to the $25 mark.

Typically, once a recession subsides, the bounce-back is swift. Customers are keen to return to their favorite luxury labels. But these aren't typical times, and wine businesses may be forced to face a longer wait for that bounce-back than usual.

The economic situation remains in flux. My colleague Scott Anderson, our economist, is expecting a sharp slowdown and a rise in unemployment.

Mild or not, when wine consumers' dwindling savings come face-to-face with slowing job gains, they're going to feel it.

What does that mean to the wine business? As we prepare for a shallow, protracted recession or a sharp slowdown, and with a cluster of market challenges in the mix, we should be aware that there's no guarantee the industry will recover as normal—or even if there's a "normal" left to return to.

The challenges are complex and layered

Wine businesses are pretty accustomed to challenges but perhaps not this many, all at once. Even back in 2019, consumption was down for the first time in 25 years.

The pantry-hoarding behavior of people in lockdown brought an uptick, but it was fleeting, and the running down of overflowing wine racks may have even contributed to the recent drop. The latest data from Gomberg shows total wine shipments to the US market were down 9 percent (those from California were down 8 percent) from 2021 to 2022.

Bottlenecks in the supply chain, though easing, are still having an impact, with glass shortages and hikes in shipping costs further tightening the squeeze on profit margins.

With the number of wine distributors at an all-time low (there's roughly one per 13 wineries nationally and one per 36 wineries in California, according to Wines Vines Analytics), getting bottles to market is trickier than ever. And that market is shrinking as retailers close or consolidate, with the ongoing Kroger-Albertson merger a case in point.

Smaller and less-established wineries, with more limited sales channels, face greater challenges, relying on direct-to-consumer and brokers.

Meanwhile, the market for imported wines continues to grow, driven by lower prices and perhaps a little post-pandemic wanderlust.

There is light breaking through the clouds: Depending on location, 2022 quality was fairly good, though in the north coast the heat spikes reduced yield. For small and medium wineries, especially, particularly fine vintages can only boost customer loyalty.

Individual wineries are also bucking trends. Bread & Butter Wines, owned by our client Winery Exchange, has seen an almost 20 percent uptick in sales of bottles under $15—a category that's fallen by more than 2 percent overall. This suggests the customers are out there for wine businesses that can cater to their tastes and reach them with clever branding.

We're experiencing a demographic shift

Data suggests millennials are largely responsible for the overall dip in consumption. From 2015 to 2019, people aged 21 to 34 dropped from 33 percent of the total wine-drinking population to just 28 percent.

So, even as we face an unprecedented array of cyclical challenges, a meaningful demographic change is playing out in the background—and its impact is likely to outlast even the most protracted recession.

At a headline level, wine tastes appear pretty constant. Cabernet Sauvignon and Chardonnay generated the highest net sales in 2019, though newer trends were already having an impact: White Zinfandel was fourth on the list.

Some millennials are snubbing wine completely in favor of craft cocktails, hard seltzers, and cider—beverages that typically fall into that $15 and under price category, making for an easy shift. And while there are signs of slowing, the canned wine market continues to grow. According to Grandview Research, the canned wine market is predicted to expand from $211.4 million in 2020 to $571.8 million by 2028. It's no shock that wine-drinking millennials are leading the shift here too, with 40 percent of them having purchased "vin in a tin."

This can't all be put down to passing trends. Across all age categories, sustainability and convenience are increasingly important. People are drawn to authentic, relatable brands they feel a personal connection to, and which share their values. Some winemakers are heading this call, selling higher-quality wines in boxes, which boast a dramatically lower carbon footprint than glass bottles.

Whether it's a box, can, or bottle, what's on the outside really does count. With aisle after aisle of wines competing for customers' attention, branding matters more than ever—especially as people tend to spend more cautiously in a recession.

Businesses successfully transcending demographic shifts are, for the most part, offering competitively priced wines in less traditional packaging, whether that means a can or simply an eye-catching label.

There's an opportunity here, for established players and those newer to the industry. The Duckhorn Portfolio, a Napa pioneer and staple of boomers' wine racks, has bucked trends by also appealing to millennials with its premium-priced Decoy wines. A diversified sales strategy, combined with strong brand integrity, has won over a different demographic.

Central Coast's DAOU also draws in younger crowds with its meaty, $30 Cabernet Sauvignon and a sculpture-filled mountain location that's basically social media catnip. It's the ideal backdrop for age groups who, according to a survey by the Wine Market Council, are highly engaged with wine tourism: 46 percent of Gen Z-ers and 34 percent of millennials surveyed hoped to visit California wine country within two years, compared with 15 percent of boomers.

At store level, for DAOU, that exposure has translated into a staggering 55 percent growth in the mid $20 a bottle range.

In wine, as with any consumer goods, changing demographics needn't be an obstacle. For the most resilient, and forward-looking brands, the shifting market brings opportunities. But unlike a recession, which may require relatively short-term planning, the changes we're seeing in the market today demand a longer-term strategy.

After Bank of the West earlier this year joined BMO, the eighth-largest bank in North America, I reached out to New York-based Andrew Strelzik, senior analyst in BMO Capital Markets Equity Research, who covers restaurants and beverages. I wanted to know how demographics have affected the industries he covers and whether there might be lessons for wine businesses. Many companies are still grappling with generational changes in preferences and taste, but Andrew noticed the companies that successfully adapted tended to focus on keeping their brand whole in the eyes of their customers.

"There needs to be a thoughtful and slow-and-steady approach where you focus on establishing brand identity and authenticity as key elements—even before you make a full push into new categories," he said.

"With millennials and even Gen Z consumers, we see the importance of brand authenticity in the restaurants segment, especially with the emergence of fast-casual restaurants. If the marketing is grounded and if your brand is not trying to become something that it's not or be everything to everybody, then you fare much better."

Both sustaining through a recession and evolving to meet a changing market require just the right financial partner that can address the unique needs of wine businesses. Since joining BMO, my team has been able to combine our longtime, on-the-ground wine industry expertise that helped us facilitate the biggest private equity buyout of a winery ever with new capabilities that will allow us to tap private sources for liquidity and raise capital in challenging markets.

But we're not just here to help navigate a temporary recession. We're here to help wine businesses understand, anticipate, and adapt to more permanent industry changes—and emerge stronger than ever.

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Adam Beak

Head, Wine and Spirits, BMO Commercial Bank


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