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Silicon Valley Bank Releases Annual State of the Wine Industry Report

Date: 05/04/09

Shifting Economic Conditions to Have Lasting Impact In Fine Wine Businesses

Silicon Valley Bank has released its annual "State of the Wine Industry Report." Based on in-house expertise and primary research among West Coast wineries, the report forecasts flat growth in the fine wine segment and modest growth in higher volume segments in 2009. SVB's research also finds that the distribution channel for modest wine producers and many smaller brands is "effectively closed," suggesting lasting changes in sales strategies.

"Wine businesses across the board are being pushed to new limits in the current environment," Rob McMillan, founder of SVB's Wine Division and author of the report said. "We believe we are at the beginning of a longer-term change in the fine wine market that will generally compress the pricing of wines and separate out high-priced cult brands that deliver consistently good quality from the me-too entrants. Inevitably this will lead to a certain percentage of wineries that will quietly exit the market at bargain prices in the next two years. The sustained negative market conditions will have an impact on high-end family wine businesses that will last well past the bottom of the present recession."

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"We are at a change point that has been coming for quite some time now," McMillan told Wine Business Online. "We've been talking for two or three years about a bifurcating of the industry into high volume and direct-to-consumer models," he said. McMillan said the recession has forced this change to occur faster because some distributors are eliminating small brands. More wineries are going direct, but at a time that consumer buying habits are changing. "When you look at the price points between $50 and $100, it ends up being an incredibly difficult market right now."

"I've been able to talk to a lot of distributors now nationwide, and they are all struggling too," McMillan said. "They are doing the natural things. They're going to start cutting accounts that aren't profitable and to layoff sales people that aren't selling. They're looking for nationwide solutions. They don't want to sell a wine that's 300 or 1,000 cases - and if you're a new brand, forget it."

While the report predicts slightly improved sales in Q2, positive Q4 sales, and continuing increases in consumption, McMillan said it's clear to him that the recession is "not a short-term problem" and that wineries should plan for it being more than a one-year situation.

"This is not a fear mongering, the world is coming-to-an-end scenario, but it is a real bump in the road," McMillan said. "This is not in any way a situation like the 1990s where a rising tide and increasing wealth floated all boats," he said. "We are going to be bumping around in a rocky business climate for a number of years." Alan Greenspan recently testified that economists are wrong 40 percent of the time, McMillan said. "Let's hope I'm wrong, but a wise business person is going to be looking at the tea leaves and planning for things to be worse than they were two years ago."

Nearly 500 wineries throughout California, Oregon and Washington participated in the survey. Data from SVB's Peer Group Analysis program, which contains information from more than 100 premium wineries obtained over several years, was also used.

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