January 21, 2021
Was a pandemic-fueled year of business closures aided by a shorter wine grape supply and other factors nobody could have predicted a year ago? Silicon Valley Bank addresses these in its annual report and a two-part webinar.
The bank's 20th annual State of the Wine Industry Report did what it typically does: it looks back at the previous year and projects some likely trends going forward. While nobody was predicting a worldwide pandemic on Jan. 1 and the fallout to come, the report's author, Rob McMillan, executive vice president, did rightly point out some cracks in the industry's foundation a year ago despite a record bull market with no sign of recession at the time.
In his 19th annual report, McMillan came close to a bullseye with a crush prediction of 3.95 million tons. This would be 50,000 tons heavier than was realized in a year that saw a tremendous amount of uncontracted acreage due to the apparent wine grape oversupply.
"We led the chorus, starting in 2019 and extending into early 2020, that the grape supply in California was acutely long," he writes in his 2021 report.
McMillan hosted an hour-long webinar in mid-January with four wine industry leaders to highlight his report and recap a season marred by unforeseen economic impacts related to COVID, and wildfires that destroyed vineyards and left many grapes tainted with smoke. Included in the videocast with McMillan were Amy Hoopes, president, Wente Family Estates; Erik McLaughlin, chief executive officer, Metis; Devin Joshua, managing director, Merryville Vineyards; and Paul Mabray chief executive of Emetry.
McMillan's prediction of an "acute" oversupply became a common drumbeat repeated by others in the industry. Some vineyard owners opted out of grapes altogether, particularly in the San Joaquin Valley, where crops like almonds can be more profitably produced.
What obviously is not known just yet is how long it will take for the industry's oversupply of grapes to achieve sustainability, though there are signs that it could come sooner than later.
"Washington had its smallest crop in the last 10 years," McLaughlin during the webinar.
As bad as the economy got during the depths of government orders to shut down restaurants, bars and wineries, light crops in the Pacific Northwest and the loss of grapes due to smoke taint or dumping absent a contract with no spot market opportunities, may turn the industry around quicker if warnings are heeded.
Jeff Bitter, president of Allied Grape Growers in Fresno has repeatedly said the industry needs to cull about 30,000 acres of vineyards to return the industry to sustainability.
McMillian pointed to the removal of vineyards and grower decisions to replace them with almonds, a popular choice among growers in California's Central Valley, where wine grape prices lag compared to other regions in the state.
Also of acute concern among wine industry leaders are the marketing changes that must take place to sustain a profitable balance of supply and demand. With wineries closed and restaurants still largely shut down, the channels to sell wine have shifted. Consumers are buying wine online. Though the tasting rooms are largely closed, some have been able to employ an appointment-only method of tasting that shows promise for several reasons.
"The tasting room model was kind of broken," McMillan said.
Prior to COVID-19 the wineries with tasting rooms opened them to the public and waited for people to arrive, sample the wine, and perhaps buy something they liked. Or, as in many cases, would make wine tasting a social outing, but would not buy anything after tasting the various samples.
Wineries are now embarking on an appointment-only business model that allows them to collect more information on buyers and attract consumers who may be more inclined to buy wines and become repeat customers. It has also allowed winery owners to more efficiently staff tasting rooms, Hoopes said. One of the things she and other winery owners are learning is how to properly staff these wine tasting rooms with people who can more effectively sell wine to consumers.
McLaughlin witnessed the appointment-only model employed in other regions of the country to great success. Currently there is a "mass experimentation" of new marketing practices, including the appointment-only model.
"The appointment model to me is a critical step," McMillan said.
In this, retention remains key, according to Mabray. It's been commonly said at wine association meetings that it's not the first bottle of wine sold winery owners are most concerned with, but the repeat purchases of additional bottles that makes for a sustainable business model.
Digital sales need to be better embraced, Hoopes continued.
One of the positive impacts of the pandemic has been the forced adoption of e-commerce by consumers and sellers.
"Sixty percent of wine buyers are new to buying it online," Hoopes said. "Now the onus is on the wineries. Are we ready?"
Hoopes believes the pandemic could force a "golden age of wine" that wineries need to adapt to.
McMillan's outlook for 2021 is predicated on an expectation of economic growth and recovery as vaccines and therapeutics gain traction related to the COVID-19 virus.
"The pandemic experience will have owners thinking more about the strategy of focusing sales into narrow channels," writes McMillan in his report.
McMillan further predicts that the hospitality industry may not return to the ability to serve at full capacity until the last quarter of 2021, meaning sales in those channels will be slower to return than perhaps other marketing avenues.
The pandemic also created a resurgence of dining at home and in-home delivery as restaurants were forced to close. Still, wine proved to be "recession-resistant," McMillan said. He further noting in his virtual meeting that as data point to higher wine consumption during the pandemic, it is likely there could be a spike in wine consumption once economies of scale fully reopen and consumers start to feel as if the pandemic is behind them.
The reliance upon "premiumization," a term coined to suggest consumers were "buying up" their wine purchases lower priced bottles to higher price points may need to be tempered, McLaughlin warned. While this phenomenon buoyed the industry in the past, he thinks wineries might not be able to push prices much higher without pushback by consumers.
A second part to the hour-long webinar hosted by McMillan was planned for Jan. 21.
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