The take-home message from the Unified Wine & Grape Symposium was largely positive for many California wine grape producers: consumers should continue to “trade up” while China may offer further bottled export opportunities.

Still, not all is roses, though Rosé is, as one speaker from the State of the Industry address put it is “on fire.”

The strong U.S. dollar relative to other world currencies could be a dim spot, according to Danny Brager, senior vice president of beverage alcohol practices with The Nielsen Company.

What’s selling?

Brager says wine is certainly selling, though fragmentation in the marketplace is driving how, where and to whom it is being sold. He says larger brands of all products, including wine, are not selling like they once did as Millennials (born between 1982 and 2004) tend to be choosier, and in some cases, more frugal than their Baby Boomer parents.

The current Millennial generation is said to be making less money today than their Boomer parents at the same life stage. Nevertheless, “Last year was a pretty good year for wine,” Brager continued.

Overall, wine trends seemed to be more stable in 2016 as the growth rates for beer and spirits seem to have slowed. Wine continues to compete with beer and spirits on almost every occasion, Brager says. In total, consumers spent about $234 billion on beer, wine and spirits last year as wine and spirit consumption continues to rise while beer consumption sinks.

In spite of all the talk about craft beer, Brager says consumption of the fermented beverage slowed last year.

To better understand the craft beer market, Nielsen asked regular craft beer drinkers the following, “In general, would you say you are drinking more, less, or about the same amount of wine as you did a year ago.” Most – 57 percent – said their wine consumption did not change. Twenty percent said they were drinking more wine and 22 percent said they were drinking less. No longer is craft beer the “new thing” for consumers as marijuana legalization begins to take hold in some states and is pushed elsewhere. Though some speakers at this year’s Unified Wine & Grape Symposium delved a bit deeper into the new marijuana discussion, the State of the Industry address largely avoided the topic.

While Brager has not seen anything conclusive on marijuana in states where it is now legal (at least by voter referendum), Nielsen recently asked consumers how it might impact their consumption of alcohol. About eight in 10 said it would have no effect on their alcohol consumption.

According to Brager and others in the wine industry; American consumers, and to a large extent many global consumers, are “trading up” in their choice of wine. The more oft-used term industry insider’s use is “premiumization.” Essentially, consumers are willingly buying more expensive bottles of wine – a move that bodes well for everyone along the wine chain except those selling wine for under $8 a bottle.

Brager says studies show a greater growth rate for wine sold at over $11 per bottle, whereas wine in the $4-$8 a bottle range appears to be in decline. Still, wine selling for under $8 a bottle accounts for 58 percent of glass-bottled wine volume, though Brager characterizes this segment as “ailing.”

Current varietals leading with consumers include Sauvignon Blanc, followed by the red blends, Pinot Noir, and Cabernet Sauvignon. Sauvignon Blanc from New Zealand seems to be more popular with consumers than its U.S. counterpart. Pinot Gris, Chardonnay and Moscato remain in positive territory, though their growth rates are more conservative.

According to Brager, Rosé is “on fire” with a growth rate of close to 50 percent. France leads this variety with 62 percent of the dollar share. The U.S. market share is about half that figure.

Brager’s message was one of fragmentation in the wine markets. No longer do markets have just one or two target audiences. Consumers are more diverse, demanding and fragmented than ever before, he says. Moreover the percentage of people at both ends of the financial spectrum continues to increase while the middle class continues to shrink.

“The pace of change is occurring faster over time,” he says.

The result of this consumer fragmentation is a host of challenges for marketers and wine grape growers as changes in taste can cause wines that just a few years ago were quite popular to effectively disappear as nobody buys them anymore. Still, consumers have choices as wine makers continue to create new ways to address this fragmented consumer base.

Wineries are answering the challenge of fragmentation with consolidation, particularly in the premium markets. This can be seen in market share numbers as the top five wine companies represent about 60 percent of wine sales and the top 12 roughly 80 percent of market share by volume. These numbers continue to rise.

The top 10 wine brands – those with the largest year-on-year increase from 2015 to 2016 – include four Gallo brands and two Constellation brands. Also gaining traction are the alternative packaging opportunities for wine. No longer do consumers simply have the typical 750 ml bottle or the occasional larger bottle with its screw top. Wine on tap, single-serve containers, boxes, and now cans, are being found on store shelves and in consumer carts.

The largest segment of the wine-on-tap market is currently the movie theater, he said.

Brexit: a ‘speed bump’ or wrong turn?

Mike Veseth, author, editor of The Wine Economist, and professor emeritus of International Political Economy at the University of Puget Sound, highlighted possible impacts Brexit could have on global wine markets, pointing to happened to the British Pound. Last summer’s decision by British voters to exit the European Union may not be friendly to U.S. wine exports into the United Kingdom, though the impacts are largely unknown at this point.

Veseth asked his audience: “Why would you care about Brexit?”

Simply put, the U.K. is the No. 2 import market for bottled wine behind the U.S. It is also No. 2 for sparkling wine and #2 for bulk wine imports.

“That makes them a big target for exporters because their market is structurally easier to work in than our U.S. market,” Veseth said.

Brexit could take time to implement as British Prime Minster Theresa May indicates she will begin a two-year countdown at the end of March to leave the EU.

“Nobody knows what that really means,” Veseth continued.

What is known so far is the British Pound is weaker than it was before the vote which will eventually push up the price of imported goods. Because current taxes represent over 50 percent of the cost of entry-level wine to British consumers, Veseth worries U.S. wine exports to the U.K. could suffer. If there’s good news in this scenario it’s that the U.S. “is not the biggest loser in this,” Veseth says. France, Italy and Spain stand to lose more, though the wine they sell to the U.K., if it doesn’t go there, will need to be sold elsewhere.

Balance of supply

Glenn Proctor of The Ciatti Company is a wine and grape broker based near the premium vineyards of Napa and Sonoma. In short, global supply and demand appears balanced, though California coastal grapes are “tight.” He thinks premiumization will continue as long as the global economy remains on its current track. This premiumization will not simply come from coastal California varieties. Proctor believes grapes grown in California’s Lodi and Delta region will find their way into more premium destinations as wineries look to supplement their coastal supply.

Global wine production and consumption in old-world countries remain relatively flat as new-world figures trend positive. Better wine consumption is seen in the U.S. and China, he says. China could prove to be a positive market as it currently is buying more premium wines and could continue to increase its wine purchasing in the coming years.

Australian wine grape production remains relatively stable at two million tons though much like California, some wine grapes are being pulled in favor of almonds.

California view

Nat DiBuduo, president of Allied Grape Growers in Fresno, Calif., told the audience that the wine grape industry may need to start a conversation about funding an assessment to promote California wines as his organization continues to look for ways to help San Joaquin Valley (SJV) grape growers – namely those outside of the Lodi/Delta region – find more economically sustainable opportunities for the grapes they grow. DiBuduo wants to differentiate California wines and grapes in a way that will yield economic benefits across the board, not just with the regions that currently enjoy premium or near-premium status.

“There are thousands of growers heavily invested in and committed to growing quality San Joaquin Valley wine grapes,” he said. “Their problem is economic sustainability.”

DiBuduo believes vineyard removals, particularly in the SJV, and the lack of new vineyard development there will “continue to be the norm unless and until wine shipments at the sub-$7 price stabilize or production of San Joaquin Valley wine grapes regularly makes it into bottles sold for more than $7.”

Additionally, DiBuduo sees the reluctance of some wineries to purchase grapes from certain American Viticultural Areas (AVA) because they believe those grapes are over-priced. As a result, wineries may look to other regions where grapes are more moderately priced, while still buying enough grapes to protect their AVA.

He also wonders if some AVAs are “in jeopardy of becoming mono-varietal” as some white varieties are pulled and replanted in Cabernet Sauvignon “because they can.”

DiBuduo remains optimistic about the California wine grape industry as he believes Cabernet Sauvignon, Pinot Noir, Pinot Grigio and Chardonnay will continue to dominate California varietal offerings under statewide yields that should average four-million-tons going into the future.