Wine businesses must adapt to changing consumer habits, or go the way of the wine cooler, warns industry watchdog Rob McMillan.
McMillan’s the founder and executive vice president of the Silicon Valley Bank Wine Division, which produces its annual “State of the U.S. Wine Industry” report, an influential overview of the coming year’s economic trends for industry markets, consumers and producers.
As it has in recent years, the 2024 report homes in on a few concerning market trends: decreasing Gen Z and Millennial consumers, post-COVID downturn in overall sales, and the drop in demand for discount wines.
Yet this year McMillan takes on a particularly foreboding tone in his introduction to the report, likening the need for wine industry reinvention to the Darwinian theory of evolution: Those wine businesses which don’t adapt to changing circumstances will be selected out.
McMillan begins the report with one of “The Origin of Species” greatest hits: It is not the strongest nor most intelligent of the species that survives. It is the one that is the most adaptable to change.
And if that little nugget—routinely attributed to Darwin, but actually a paraphrase of natural selection made in a 19th century speech to American businessmen—doesn’t drive the point home, McMillan lays it out a bit more bluntly: “Waiting for a fictive cohort to age sufficiently to discover wine or believing that our strategies ‘have always worked before’ is toxic to adaptation when the context driving demand changes,” says McMillan, before adding: “That is something the weakest businesses will do. Their lack of adaptation will cause a predictable outcome.”
And for those who think that “predictable outcome” is one of thriving success, we’ve got some shares of Underground Cellar we’d like to sell you.
Here’s a brief overview of the 2024 State of the U.S. Wine Industry report, NBb-style…
****
Alcohol, Demographics & Health
While this topic falls as chapter 8 of the report, we’re moving it to the top because it’s the topic that deserves the most attention from the industry—younger consumers aren’t as into wine as their older counterparts.
“There is no clear trend for most age bands except the youngest,” writes McMillan, who points out that beginning around 2000 spending among those under 25 began to shift away from wine toward other beverages, goods and services. While variable factors are involved in the ongoing downward trend—greater choice in beverage options, health consciousness, rising cost of living and the mainstreaming of cannabis among them—this could be the single-greatest threat to the industry: Those who will have the most money to spend in the coming decades may not be spending it on wine.
Even if one removes non-alcohol factors from the equation, consumers overall are still leaning toward spirits and beer over wine. U.S. shares of the global alcohol market in 2023 found spirits and beer garnering 42% each of the total revenue share, with wine checking in at 16%, according to a February report by the Distilled Spirits Council of the United States.
Of particular concern to McMillan is data showing responses to a survey question asking: What (alcohol beverage) would you most likely bring to share at a party?
While wine and beer fared best among options including spirits, flavored malt beverage, hard seltzers and ready to drink (RTD) beverages such as ciders and alcopops, wine only separated itself from the pack as something to bring to a party with the 65-and-older set, 58% of which would bring wine to share. Wine’s numbers hovered around 30% for people aged 35 to 64—and finished fifth for those aged 21 to 34 at 16%.
McMillan highlights this as an important data point. “The bottom line is for every consumer over 60 who stops consuming wine, they are replaced by younger consumers with a mindshare of wine half that of their elders.”
Adds McMillan: “Time is not on our side.”
He says the selling and marketing of wine must be better than it is today. “We understand the issues. However, we have been reluctant to change our tried-and-true methods,” he writes. “Success will come when we put more effort into attracting new consumers, promoting the various occasions where wine can be enjoyed, improving the number of occasions existing younger consumers consume wine, and adapting to consumers with different values than the over-60s crowd.”
Demand and consumption in U.S. and abroad
The United States isn’t alone in seeing a decrease in wine consumption—worldwide wine consumption has been on a steady downward trend since 2017. As a result of that, vine acres are being pulled to reflect the lower demand. Hopes in the early 2000s that the burgeoning Chinese market would balance the scales failed to materialize when, “a [government] crack-down on displays of wealth in the early 2010s began a decade-long decline that continues today,” writes McMillan.
The report points out that consumption trends are partly a story of the changing old-world versus new-world drinking patterns. Between 1960 and 2014, France, Germany and Italy reduced alcohol consumption by 41%. The new-world countries of Australia, New Zealand, Canada and the U.S. increased consumption in that span by 16%. Unfortunately, today the countries growing in consumption are not making up for the decline in the rest of the world, McMillan says.
With birth rates and alcohol consumption on the decline in the largest-consuming nations, McMillan writes, perhaps wine marketing would have its best success in the nine countries expected to hold half the world’s population by 2050: India, Nigeria, the Democratic Republic of the Congo, Pakistan, Ethiopia, the United Republic of Tanzania, the U.S., Uganda and Indonesia.
In the United States, meanwhile, wine-sales growth is forecasted to continue its decline further by volume, according to almost every data source, the report says. McMillan concedes that “wineries are in a quandary because they can’t ignore their best older consumers, yet they must simultaneously change positioning for younger consumers.”
He offers two solutions: Either the industry as a whole should collaborate on marketing to expand and diversify its consumers and wine occasions, or be more effective as individuals “fish(ing) for the same consumers in the same pond.”
Again, he warns about the dangers of ignoring the changing trends among younger drinkers. “The younger demographics consume wine differently, on dissimilar occasions compared to the past… success will favor those who adapt.”
You get what you pay for
Consumer purchases of wine bottles under $9 have been in decline since 2013, with purchases in the $9 to $12 range hitting a sweet spot with wine drinkers over that time span. While the Two Buck Chucks of the wine aisle (not to mention the Three-to-Nine Buck Chucks) have been on a downward trend, premium wines—in all price categories ranging from $12 to $100-plus have seen steady growth since 2013. Last year, the greatest grown of any price category was in the $12 to $15 range for a bottle. That said, the rate of growth in premium wine sales slowed last year, leaving McMillan to question whether bottles over $12 would also slide into the same pattern of decline as cheaper wines. He describes it as “concerning,” but says it’s too soon to consider the trend a permanent shift. “The premium wine segment, by any measure, is better positioned… at present,” he concludes.
Big Wine
McMillan observes that larger wine companies—E&J Gallo, the Wine Group, Constellation Brands, Trinchero Family Estates, among others—are taking action to bolster revenues. Some by investing in or acquiring new brands; others by shifting focus to more promising products, such as spirits, Mexican beer or cannabis. Some in the wine business decry the latter move as demonstrating a lack of leadership in the industry; McMillan, however, sees it as merely adapting to a changing consumer. For those hoping Big Wine will focus on providing new wine products and launching national advertising to promote wine, he says: Don’t hold your breath. “Hope is not a strategy—we need a path,” McMillan says.
Bad mood rising
The report also addresses “wine industry sentiment” using the Michigan Consumer Sentiment Index methodology to gather insights into the “mood” of those in the wine business. “Sentiment is low this year, the weakest it’s been during the past five years,” says the report. The biggest mood-lowering concerns are the economy, labor and consumers shifting to substitute beverages such as spirits, sports drinks and soda. Of particular concern is that younger consumers are switching to cannabis, which among that demographic is considered healthier than wine.
Bottle pricing
To put a bandage on declining consumer demand and rising costs, some wine companies raised prices in 2023—a move easier for premium wines, whose purchasers were less concerned over a few dollars here, a few dollars there for their brand of choice. Overall, and especially for non-premium brands, raising prices proved difficult when consumers were already facing rising costs of living and increasing alternative beverage options. A $1 difference on a previously $8 bottle equates to a 12.5% price change—which would likely not go unnoticed to consumers in that range.
In the direct-to-consumer (DTC) channel, however, bottle prices are actually rising. This is due partly to the fact that during the pandemic, when on-site tastings and purchases were interrupted, wineries offered major discounts to encourage purchases through DTC. Post-COVID, wine lovers flocked to wineries and tasting rooms, and DTC pricing dropped the discounts, and prices have risen to pre-pandemic norms.
Sales channels
As direct sales from premium wineries have grown over the recent years, sales to wholesalers and restaurants have declined, says the report. In the past 10 years alone, the percentage of an average winery’s sales to restaurants has dropped from 31% of total sales to 11%—and the cause is largely down to the restaurant industry. McMillan chalks it up to restaurants’ shift from book-like wine lists to one-page beverage lists where wine selection shares space with spirits, cocktails, beer and other beverages. Plus, restaurant owners are more cautious about carrying large inventories of pricey wines and may be hesitant to buy any wine that doesn’t yield a quicker return. Restaurant markups continue to increase, he adds; now a glass of wine in a restaurant is more than twice as expensive as spirits. Devaluing wine by the glass is “not the best formula to stimulate wine demand in restaurants,” he writes.
A depletion problem
Depletion—the amount of a beverage sold from distributors to retailers—has been on a downward swing ever since business normalized after the pandemic. While wine depletion has seen negative growth for several years, it’s not the only beverage industry suffering slower sales at the corner liquor store—the spirits industry began a downward trend beginning in 2022 and its depletion has fallen about 13% since.
“It’s become clear that the depletion problem in wine is really a depletion problem with beverage alcohol,” writes McMillan.
Unfortunately, falling depletion is currently coupled with a big oversupply. Coming out of COVID alcohol producers “got busy making more” but overestimated subsequent demand, says McMillan.
“Until demand improves for your brand, conservative sales forecasts should be the norm for all wineries selling into grocery and restaurants,” concludes the report.
****
In reflecting upon the litany of challenges faced by wine businesses, McMillan asks if the industry should go it alone, collaborate or “try something else”—and borrows a quote from Jeremy Rifkin in his book, The Empathetic Civilization:
“Darwin came to believe that survival of the fittest is as much about cooperation, symbiosis and reciprocity as it is about individual competition and that the most fit are just as likely to enter in cooperative bonds with their fellows.”
Competition within a group or species is a net zero-sum game, asserts McMillan—”I win. You lose.” However, successful adaptation “is more likely to occur when the challenged group works together to find solutions.”
The question, McMillan ultimately poses, is: “Will we?”
