High inventories will take time to move in a slow market
January 16, 2020
Sonoma, Calif. – An industry-wide backlog of wine will take time to move as growth in U.S. wine sales moderates, but a presentation by Jon Moramarco, editor of the Gomberg, Fredrikson Report and managing partner of market research firm bw166, notes that opportunities exist as the market grows in step with the population.
The market as a whole totals 409 million cases and is settling down to a 1% growth rate, but Moramarco noted this is in line with growth of the legal drinking age population overall. This means the slowdown should be seen as normal rather than heralding disaster.
“It may not be the dynamic growth we’ve seen in past years, just because the growth of 21-year-olds has basically stabilized,” he said. “Growth is going to be more challenging, but understand this is not just about beverage alcohol, it’s across all consumer categories.”
But the slowdown comes as California continues to grapple with wine produced from the massive 2018 vintage, an issue that underlay many of Moramarco’s comments and the concerns of his audience. The situation is such that the California industry was looking at about 14.4 months of inventory, from packaged wine to bulk product.
“Historically, the California industry has maintained a 13.4-month inventory, so we’re about one month long,” he said.
An extra month’s supply might not be a big issue for a single winery, but when the entire industry is grappling with an extra month worth of product, it adds up. Moramarco’s calculations put the extra volume at 24 million cases, or 8% above average. The last time the industry faced such a glut was the early 2000s, but the industry was also enjoying stronger growth.
“We had a marketplace that was growing 3% or 4%, so that inventory was able to be used up much more quickly,” he said. “With a market only growing about 1%, it’s going to take a while to work through so there’ll be a few challenges.”
Those challenges will require producers, distributors and retailers to be savvy to the market, which continues to grow. Growers have been taking steps since 2017 to rein in the grape supply, he said, anticipating a slowdown in growth – which remains growth, rather than a contraction. Spending is increasing even if volumes aren’t, rising 4% in the latest 12 months.
“We have high inventories and low growth in demand, maybe in that 4% range,” he said. “It’s not a decline in demand, but when you have high inventories and only 4% growth it takes longer to work it through.”
Moramarco gave a couple of examples of how producers could move wine.
Cabernet Sauvignon from Napa, for example, may find its way into négociant-type wines priced between $15 to $20 a bottle.
“These négociant-type wines are going to put pressure on wines from other regions when they come in at lower prices,” he said. “The challenge for the industry is how we make sure this does not negatively impact the Napa brand other than short-term.”
This is different from discounting, which some commentators have treated as an inevitable result of the large backlog of wine seeking a home.
“It’s going to be worked through with new labels, négociant-type wines,” Moramarco emphasized. “Honestly, the worst thing a producer can do is take an existing brand and lower prices to work through inventories because it’s very hard to get that price back up.”
Discounting also doesn’t make sense in a market where consumers are showing a willingness to trade up. The question is, which opportunities will let producers, distributors and retailers capture those dollars and grow the market?
This is where he feels Sauvignon Blanc, a small but feisty varietal with growing tonnage, is pertinent. It’s popular with consumers, as rising imports from New Zealand indicate, and pairs well with the more diverse cuisines younger generations are embracing. It opens the doors for producers to look beyond pairings with steak and seafood to complementing noodles, sushi and other foods that resonate with America’s increasingly diverse cultural makeup.
“I truly believe the styles … of Sauvignon Blanc [and] where food is evolving, too, there are more options that will take care of the Sauvignon Blanc issues much more quickly,” Moramarco said, discussing the grape’s excess tonnage in the Central Coast.
Taking the diversity of the market into account will be critical as producers hone in on opportunities to grow marketshare.
“You have to look at age bands and the state of the evolution of people’s lifestyle,” he said. “That will help drive where people should be marketing to, speaking to and how they do things.”
The essential challenge producers face is that population growth won’t drive increases in consumption for the foreseeable future.
“I wish I could say, ‘here is the magic wand for how to work through the inventories,’ but unfortunately I don’t think there is one,” he said. “All producers, everybody in the industry, needs to define market opportunities much more clearly and talk about where [are] the opportunities to compete and win.”