Gloom Permeates Wine Industry, Silicon Valley Bank Survey Finds

For the first time since 1994, the total U.S. wine business faces negative volume growth, Silicon Valley Bank warns.  

No wonder sentiment, as measured by its "Net Sentiment Index," has plunged into negative territory.  Its "Net Sentiment Index," which is now six years old, stands at a negative 15.78, down sharply from a negative 2.08 last year.  

The largest negative impact comes from the economy.  With inflation hitting all producers and few if any able to pass on those cost increases, lower net margins are common.

Add to that a strong dollar caused by increasing interest rates with no Fed slowdown on the horizon, a slowing China market related to COVID lockdowns, and geo-political instability particularly in Europe dragging down world economies and imports have a leg-up against domestic producers and that could be a piece of the -34.64 reading for substitutes.

But substitutes are more than foreign wine. Consider:

• In a total US wine business that is closing in on negative volume growth for the first time since 1994, substitutes become your neighbors winery.
• But certainly cocktails and high-end spirits play a larger role in that bleak index reading. Other data from SipSource shows that spirits and craft cocktails started to show strong growth during reopening  from Covid, while wine growth by volume turned negative when restaurants started to reopen.
• There is more here - such as consumers younger than 65 drinking more across categories.

Labor, which led the negative response indicators last year comes in at -29.82. The relative number is a strong negative no matter how it's viewed though, SVB says.

Labor is more expensive and quality of staffing harder to find since businesses reopened post-lockdowns, particularly in areas where the cost of housing is high. For agriculture, immigration policy also plays a role in making field labor more scarce and driving up field labor costs.

On the plus side of the ledger, the wineries responding to SVB's annual survey so far report good consumer demand with an index indicator of  +18.67. It is interesting to hear about all the issues in labor availability and associated cost increases, higher cost of inputs like glass and fuel and pressure from imports and other substitutes - and still see that consumer demand is good.

That is one of those indicators where you have to know who is responding and in this case, it's the premium wineries above $15 bottle price who make up the larger part of the wine industry. The lower price brands wouldn't be so quick to put consumer demand at the top of their list, given the butt-kicking wine has taken against spirits with restaurant reopening, SVB opines.

One of the factors that makes premium wine recession-resistant is the consumer base which generally speaking is white-collar with family incomes above $100,000 annually. Particularly for the higher earners, the lock-downs created a savings rate that was unprecedented.

Even today, the top 10% of wage earners still have 2 trillion dollars of savings ready to buy discretionary luxury goods, and those dollars have been burning holes in consumer pockets, explaining part of the positive consumer demand reading for wine.

The maximum low is negative 100 and the maximum high is positive 100. The calculation employs the Michigan Consumer Sentiment methodology and subtracts negative responses from positive responses, and ignores neutral responses. The methodology makes it difficult to have a reading above 50 in either direction. For example, if 50 people believed the economy as they define it had a positive impact on their operation, 20 believed it was neutral, and 30 believed the economy had a negative impact, the resulting index would be 20. (50-30=20) To get to 100 positive, 100% of the respondents would have to respond the economy had a positive impact on their operations.

Silicon Valley Bank Calls for Survey Participation

Silicon Valley Bank noted that it is still about 30% short of the responses needed to provide statistically significant results when it publishes its annual Wine Industry Survey in a few months.

It urged wine industry members to participate.  Here is a link to the questions and here is a link to the survey.