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Slowing Sales Force Wineries to Review Market Position

by Peter Mitham
June 07, 2019

Sonoma, Calif. – Know your markets: that’s the advice to wineries from Jon Moramarco, editor of the Gomberg, Fredrikson Report and principal of market research firm bw166 LLC.

“The reality is, everybody has to look at the markets they’re competing in, the channels they’re competing in, and understand how they’re going to gain market share,” he said in a webinar coinciding with release of Gomberg Fredrickson’s latest quarterly review of the wine market.

Since domestic shipments show little growth, and export options are limited by a fractious trade environment, wineries have to be selective about where they’re going to sell products, and how they’re being positioned against competitors.

The report indicates that total shipments from California wineries increased to 71.3 million cases in the first quarter, up just 0.6% from the same period a year ago. Domestic shipments increased 2.6% but failed to offset a 13.6% drop in exports.

Wineries of all sizes are impacted in some way, even though wineries outside the state’s top seven producers – which together claim more than 72% of the market – are seeing strong growth. While sales of wines from the state’s top wineries increased 1.4% over the past year, the state’s smaller wineries saw sales increase 6.1%.

Scale isn’t the sole reason for slower growth at the top. When actual case volumes are considered, the top seven wineries sold an additional 618 cases in the first quarter while all other wineries shipped an additional 1,026 cases.

Various headwinds are tempering sales activity, however.

On the one hand, the volume of wine sold over the past 15 years have increased only slightly faster than the drinking-age population. Sales have increased at a faster clip, but that’s starting to hit a barrier in terms of the disposable income those adults have.

Consumer spending on alcoholic beverages increased to $250 billion in 2018, Moramarco said, up from $140 billion in 2003. This works out a compound annual growth rate of nearly 4%, or more than three times the increase in servings. This underscores the trend to premiumization that has served the wine industry well to date, but it means that wine is now $2.15 per five-ounce glass, versus $1.28 for a bottle of beer or 93 cents per shot of spirit. Moramarco said wine is not a cheap thrill for budget-minded drinkers: “Wine is a more expensive product to consume than beer or spirits.”

This has helped to cool sales.

“Consumers have been slowing down their spending a bit after seeing a little bit of a spike in late 2017,” he said.

This means wineries need to put more thought into where people are spending their money, and how to tap into that spending. But the shift of 30 brands from Constellation Brands Inc. to E. & J. Gallo Winery – announced this spring and still subject to regulatory approval – underscores the challenges even large wineries face in the current environment.

The two wineries, with the Wine Group, currently rank among the top three in the business. But by divesting several key brands, Constellation will go from annual sales of 42.4 million cases to 18.9 million cases, or 4.7% of the total U.S. market. This is only slightly larger than Trinchero. Gallo, by contrast will increase to annual sales of 86.3 million cases, or 23.8% of the U.S. market.

While none of the brands are set to disappear, Moramarco said Gallo will find it difficult to position its wines as alternatives since it will be the primary provider even more so than before the deal closed.

“It’s going to be interesting how category management works going forward, because Gallo may not have a strong No. 2 to be that validator [of its products],” he said.

While smaller wineries often face an overwhelming amount of competition, the brands Gallo is acquiring are mature entities at the more affordable end of the market. They’re cast-offs as consumers have opted for more expensive wines, but as survivors they’ve got few competitors serving as counterpoints.

The Wine Group has a sizeable portfolio of brands in the same price range, but Moramarco says how people talk about the industry will undoubtedly change after the deal goes through.

“We’ve tended with Gomberg to refer to the ‘Big Three,’ being Gallo, Wine Group and Constellation,” he said. “After this sale … we’re going to have to look at how we talk about the Big Three or the Big Four, or how we talk about the industry a bit more.”

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