Is the US wine boom over?

Thursday, 16. March 2017 - 15:00

What if the 40-year-long US wine boom, which increased wine consumption threefold and turned that country into the world’s biggest wine market, is over?

And what if the end of the wine boom means US consumption grows only as much as the increase in the country’s drinking-age population, about 1% a year?

What if the days of annual 5% to 10% growth in the US never return, given an aging population and increased competition from craft beer and spirits?

What if prices remain flat, since more and more wines will be chasing the same number of wine drinkers? And what if consolidation among retailers, distributors and producers make it more difficult for all but the biggest producers to make an impact on those overwhelmed consumers?

Wonder no more

The slowdown in US consumption could well be underway, having started during the recession. And if no one can say for certain if or when the rest of this scenario will occur, several wine industry analysts who have parsed the numbers, as well as an influential study, say it’s more likely than not. “If you look at the numbers, you could say that this started before the recession,” says Jon Moramarco, managing partner for the BW 166 consultancy. “In this, you could also say that wine in the US has been a somewhat mature market for a while now.”

Steady growth

In the early 1970s, the US was a minor wine-drinking country, where average consumption was about 4% of that in France. By the beginning of the recession 40 years later, that ratio had improved to 25%, and consumers in the US drank more wine than anyone else – one of every eight bottles produced in the world. That growth was powered by California’s improvements in quality and marketing, starting with the fighting varietal movement in the 1970s; the discovery of the French paradox in the 1990s; and the liberalisation of the US retail market, including the end of state dry laws over the past two decades. It was the golden age of US wine for both producers and consumers, and the perception was that the US market would make everyone rich and happy forever. Before the recession, a Gallup poll found that wine had replaced beer as the US consumers’ drink of choice, something that was almost unprecedented.

But not anymore, given the slowdown in US growth. In one respect, this seems contradictory. There are more wineries in the US than ever – almost 11,000, twice as many as in 2006. In Washington state, which has the second-most wineries after California, “we continue to see steady growth, and we don’t have any indication that this growth may be slowing,” says Steve Warner, president of the Washington State Wine Commission. That includes a 50% increase in vineyard plantings from 36,000 acres (14,560 ha) in 2009 to more than 54,000 acres in 2016. In addition, the value of the wine sold in the US, as measured in dollars, continues to grow more than the volume of wine sold. The value has grown 25% since the recession started in 2007, compared to 21% for volume. This is premiumisation, in which US wine drinkers have moved from wines costing less than $7.00 a bottle to those costing between $7.00 and $15.00.

But that doesn’t change what a study from Wine Intelligence in London calls a significant change in US consumption: “The US has been showing a steady annual volume growth rate of 1% for the past five years. With a consumption rate of just over 12 L per adult per year and 60% of US adults currently abstaining from wine, it has long been thought of as a market with significant growth potential. … Two measures suggest that the US market for wine may have peaked – or at least paused. There has been a reduction in the average consumption per head of wine in the last few years, coupled with a reduction in the number of very frequent wine drinkers – that is, those drinking wine on a near daily basis.”

The end of an era

Not every analyst agrees about the reduction in the number of most-frequent wine drinkers, though that may be because different studies measure frequency in different ways. In addition, some analysts foresee the possibility that the number of high-frequency drinkers could increase, making up the difference. But there is no doubt per capita consumption has been flat since 2012. “What you’re seeing is flat to slowly down in the number of occasional wine drinkers,” says Christian Miller, the proprietor of San Francisco Bay Area’s Full Glass Research, which provides economic and market analysis and research for food and beverage producers and marketers. “And that’s a significantly larger population than the most-frequent wine drinkers.”         

What happened to end the wine boom? It wasn’t so much one thing, say the analysts, as the confluence of a variety of factors, including the aging of the Baby Boomers, who powered the growth in US wine when per capita consumption doubled between 1968 and 1988. They’re still the most important wine-drinking demographic, accounting for about two-fifths of US wine sales. But that is trending down, according to a study from Silicon Valley Bank, and is well down from its historic highs. Younger demographics, and especially the Millennials, are not coming to wine as quickly as expected. They were going to do for wine what the Baby Boomers did in the 1970s and 1980s, but that hasn’t happened so far.

“I see this with my daughters, who’ve grown up around wine,” says Paul Tincknell of Tincknell & Tincknell, a wine sales and marketing firm in Sonoma. “They know wine and they enjoy wine, but they aren’t loyal to wine like my wife and I are.”

The growth in craft beer and spirits is also a factor. Again, the younger demographics see those as alternatives to wine – something the Boomers did not. In fact, say several analysts, there is some evidence that Millennials and Gen X-ers are happy to drink cocktails and beer with dinner instead of wine – unheard of behaviour from the Boomers – based on data from restaurant occasion sales.

Then there’s the rise of the Neo-Prohibitionist movement, which has focused on health issues to curb drinking. Designated drivers, for instance, were unheard of when the Boomers came of age, but drunk driving deaths in the US have declined by one-third over the past 30 years as the concept has become popular. And there are also indications, says Miller, though nothing definite, that the younger demographics may be drinking less overall than the Boomers did at the same age. In this, says Moramarco, wine’s foreseeable future is not about continued growth but a battle for market share with beer and spirits, especially since the size of the overall alcohol market may also grow only as much as the drinking-age population. But that’s not his most sobering statistic. Consider, he says, that there are about 125,000 wine SKUs on US shelves in any one year, but that the high-frequency wine drinker buys only about 75 bottles a year.

The brave new world

The formula for European sales in the US during the boom seemed simple – find an exporter who could navigate the US three-tier system, and the money would flow in. Which, of course, wasn’t quite the case. But 40 years of continuous growth tended to gild the lily. “One of the most difficult things about working with European producers is educating them about the US market,” says Tincknell. “And it’s not just about the legal issues. They need to understand the differences in the US market, and that one size doesn’t fit all.”

So how do producers adjust to this new landscape?

The first thing to do, says Tincknell, is to understand that the US wine drinker is not a wallet to be picked, but a consumer who has choices. “My take is that we’ve regressed in the marketing of wine,” he says. “You’ve got the biggest producers, like Gallo and Constellation, and they have the resources to market nationally, while everyone else just assumes the consumer will buy theirs because they should. The first thing we tell our clients is, ‘Your wine isn’t special.’ If you’re going to sell a $40.00 wine, it has to offer $40.00 worth of value, and not just cost $40.00 because you think it should cost $40.00.”

Second, the US remains an underdeveloped wine market for Europe apart from its traditional markets on the East Coast and California. The middle of the country offers sales opportunities, even in today’s environment, that many European producers haven’t considered.

“You have to look for markets that aren’t mature,” says Andrea Boscu of Villa di Geggiano in Chianti, who adds that it’s not enough to expect to sell all of your wine in New York anymore. “The US is Italy’s first market, and we all have great expectations for it. But you have to cultivate it.” As part of this, says Boscu, you need to look at markets for your wine where you might not be selling it now and that have potential. This could be somewhere like Texas, with its four large cities and a growing wine culture. Boscu says tiny Vermont has provided surprising opportunities, thanks to groundwork by his importer.

Cultivating also means visiting these new markets, which could be the difference between selling 10 cases and 100 cases a year, Boscu says. Not enough European producers, considering the expense and inconvenience of US market visits, make the effort, he says. “But if you don’t show your face, you aren’t going to sell as much wine, and maybe that’s a difference they don’t understand.”

Finally, says Boscu, understand that the US consumer is more knowledgeable and wants “to have good wines without spending a fortune. They understand the price connection to quality.”

In this, the wine boom did more than sell wine. It taught US wine drinkers more than they had ever known – something that will stay with them even as the wine boom ends.
Jeff Siegel

This article first appeared in Issue 1, 2017 of Meininger's Wine Business International.