Co-authors: Deborah Steinthal, Scion Advisors® , Erica Valentine, Scion Advisors® and John Hinman, Hinman & CarmichaelLLP.
COMPLETE WHITEPAPER (CLICK HERE): All 3 installments!
EXECUTIVE SUMMARY
Over the next 24 months, consumer demand for wine will continue to grow globally and the United States consumer will be leading the way. However, the wine industry will see the fall out of weak players as the strong get stronger, predict industry advisors, Steinthal, Valentine and Hinman.
The Great Recession (1) has accelerated the professionalization of the wine industry. Figure 1 illustrates how wine industry A-players are adopting new business practices at a faster rate, managing more strategically, and building more financially-viable businesses.
|
Stronger Will Get Stronger
|
Weak Will Drop Out
|
|
Pruned, profitable product portfolios
|
>$50 category takes long term hit
|
|
Focused, differentiated brands
− Wine culture shifts as consumers seek closer social connections with their favorite brands.
|
>100 ‘hobbyists’ quietly close doors
|
|
Stronger, leaner teams
|
1000 jobs lost
|
|
Cash becomes king
|
100s of equity lines close down
|
|
More diverse sales channels
− 100’s of new retail private and control labels launch
− 100’s of new consumer channels launch
|
1000’s of brands drop out of national distribution
|
|
Selective growth thru acquisition
− Excess grape supply gets absorbed by $12-25/bottle wine categories, driving category quality up.
|
100’s of properties sell and/or go into foreclosure
|
|
Next generation owners step up
|
Next generation owners drop out
|
|
Figure 1 – Over the next 24 months: A-Players are Building More Financially-Viable Businesses
NEXT 24 MONTHS: KEY PREDICTIONS, THE NEW ROAD
... Looking ahead to 2012, five interlocking dynamics continue to be increasingly important to for winery CEOs to manage. These dynamics are straining both large and small players, forcing major operational changes along with new modes of marketing and distribution to better engage with consumers.
- Global grape supply pressures will exist: There is no substitute for brand strength.(See blog on October 26)
- Consolidation will likely continue in all 3 tiers: Margins shrink on all sides; 85% of retail space will be occupied by 10 wine companies.
- Producers (See blog on October 26)
- Distributors have consolidated from 5 to 4 major distributor houses, leaving most mid-sized wineries in a worst-case situation. Over the next 24 months, the three-tier distribution system will become even less available to smaller players. Smaller wine businesses will continue to seek out alternative paths to market. State regulators will invest in technology to enforce existing regulations rather than making access for consumers easier. (Re)newed competition from spirits and craft beer will cut into the wine category’s ‘share of mind’ with the large distributors. Pre-packaged cocktails will infringe on wine sales, with TV ads driving consumer pull at retail and eroding market share for wine. Anti-trust (1) will become a new legal battle front. Consolidation could encounter a backlash on both sides: wholesale and retail. Demand will increase for integrated logistics models. Consolidation among these models will blur the lines between logistics providers and agency or e-retail models: mywinesdirect.com; wine.com; Adams Wine Group; Inertia Beverage Group; Winetasting Network; Copperpeak, Provino – among many others.
- Retail business models will also undergo dramatic change. Over the next 24 months law suits, currently pending in the federal court system, will force regulators to revisit discriminatory regulations that impact retailer markets. Retail powerhouses will expand very profitable private and control label offerings, and will add to the competition for the ‘consumer share of mind’ (2). Brick and mortar stores such as Safeway and BevMo will be selling more wine direct than they have in the last two years. Retailers who jumped in over the past few years with direct shipping across state lines will take cautionary steps in anticipation of a more open (but still complex) state direct shipment permit system.
As regulatory bodies continue to clarify and interpret state law, we will continue to see more integrated new business models enter the wine industry over the next 24 months. More compliant e-retailer models, trusted merchants and 3rd party marketing agent businesses will emerge – on the back of a new generation of wine clubs and hundreds of new consumer networks such as Snooth, Wall Street Journal, Sunset Wine Club, New York Times, and winestilsoldout.com.
- Slow economic recovery will slow wine market liberalization: Producers and retailers will scramble to understand and position for a new generation of wine consumers. The Great Recession has catalyzed a consumption shift: a largely Baby boomer-driven wine economy will soon be supplanted by Millennials. Baby boomers, driving growth in wine consumption for the past 30 years, will enter retirement in droves. As they adjust to fixed incomes, they will consume their cellar reserves and “downsize” their purchases, both by volume and price point. Millennials, who will become a larger consuming population than boomers, will pick up some of the slack. Some are already adventurously seeking out imported wines and new varietals.
Nutrition, wellness and the green planet movements (biodynamic, organic, sustainability practices) have yet to prove to be growth drivers for the wine category. Consumers will continue to seek quality regardless of origin, and more than ever before, they will demand value.
ENGAGEMENTdb (3), a July 2009 report, indicates that the most valuable brands in the world are experiencing a direct correlation between top financial performance and deep social media engagement. Social media already allows wine customers to share their preferences in real time as aging media pundits become marginalized and irrelevant to today’s consumers. Over the next 24 months, wine culture will shift as consumers seek closer social connections with their favorite brands and continue to rapidly adopt social network technology to share their authentic stories.
A great example is the Benziger harvest video: their video outreach has attracted wine tweeters and drives people to their Facebook fan page. Imagine – a Gary Vaynerchuk for each winery!
Social media could make direct to trade programs even more viable if wine fulfillment and distribution challenges can be worked out cost-effectively. Liberalization will open up slowly as permits get easier to acquire and as states understand the tax value of eliminating caps on consumer shipments.
Wine has become main stream and is now an American tradition. While many wine industry leaders would say that today they have a ‘tiger by the tail’ and chaos prevails, we still hold by our analogy: “a perfect storm gathering has generated monumental change, and by year 2015, the wine and alcoholic beverage distribution system will be more efficient, and more unforgiving of failure, than it is today.
The challenges are now multifaceted and more complex than ever before: regional, national and global in scope. They include legal, political and cultural developments. The speed of change is accelerated by economic drivers, technological innovation, and the forces of globalization.”
HOW TO PREPARE FOR NEW OPPORTUNITY
Rather than just “battening down the hatches”, well-positioned wine business leaders are supporting their crew with tools, training and other lifeline supports to ride out the storm. Strong and strategically-focused leadership is vital in steering wineries through these challenging times. Here are some important practices and strategies to consider. (Click here to read more)
About the authors
Deborah Steinthal (deborah@scionadvisors.com) is the founding partner of Scion Advisors, a Napa-based wine business advisory firm which enables clients to build more financially-viable businesses. She has been an executive across a variety of industries globally and helped companies transform from start-up through high growth, restructure due to poor performance and integrate new acquisitions.
Erica Valentine (erica@scionadvisors.com) is a senior associate of Scion Advisors. With over 15 years as a marketing executive at Constellation Wines and Seagram Chateau & Estates, and 10 years consulting with privately owned wineries, venture capital and web-based businesses, Valentine advises companies on how to differentiate and compete successfully in a complex marketplace, creating and implementing marketing and sales programs that work.
John Hinman's (jhinman@beveragelaw.com) experience spans the modern history of the wine industry and includes regulatory defense before state and federal government agencies, distribution litigation throughout the U.S., arbitration and mediation of relations between grape growers and wineries, and deep involvement in the direct shipping battles from the very beginning. He is founder of Hinman & Carmichael LLP.
(1) Anti trust: Whole Foods sold off 31 Wild Oats stores, keeping only 42 and selling the Wild Oats name in an antitrust ruling. The National Beer Wholesalers Association (NBWA) is embarking upon a Congressional project to legislatively overrule Granholm (and the line of pro wine industry Commerce Clause SCOTUS cases since 1984). Such a reversal would be coupled with new federal legislation providing an exemption from the anti-trust laws for anti-competitive activity authorized by a state under the 21st Amendment.
(2) Consumer share of mind: A 5th circuit ruling on retailer direct sales is due this year: Total Wine won in MD. 300 private label SKU’s at Trader Joe’s leaves less space for traditional brands. At least five states (NY, TN, NJ, CO and KY) are actively seeking to reverse decades old laws that prohibit the sale of wine in grocery stores. This is a consumer and tax revenue driven battle that is not going away.
(3) July 2009 report, ENGAGEMENTdb, (www.ENGAGEMENTdb.com/report) |
