SVB Banker Warns Vintners Adapt or Die

There have been a million reports it seems documenting the fact that alcohol consumption is slowing and, especially for those in the 21-to-34 age group to turn from wine to spirits, or canned cocktails. Rob McMillan, evp/founder, Silicon Valley Bank Wine Division, has a warning: adapt or die.

He cited Charles Darwin. Most people believe Darwin's "survival of the fittest" influenced evolution and natural selection. But that's not true, Darwin said the species that survive external pressure are "those most adaptable to change."

"Waiting for a fictive cohort to age sufficiently to discover wine or believing that our strategies "have always worked before" is toxic to adaptation when the context driving demand changes. That is something the weakest
businesses will do. Their lack of adaptation will cause a predictable outcome," McMillan says in SVB's just-released annual State of the Wine Industry report.

The solution to the bev/al industry's changing circumstances, he said, "is to change unity collaboratively or, if we must, go it alone."

"Competition within a group or species is a net zero-sum game. I win. You lose. Successful adaption is more likely to occur when the challenged group works together to find solutions," McMillan told the wine industry.

Looking at 2024 as a whole, here are his predictions for the wine industry:

Absent an external event, the economy will unlikely enter a recession in 2024.
• Tasting room visitation that was lower over the past two summers will grow in 2024.
• Slower in 2023 through October, DTC sales will grow again modestly in 2024.
• Total wine category sales will end in 2023 with negative volume growth between minus 4% and minus 2%. Volume growth will remain negative in 2024. Value sales will hover near 0% growth, plus or minus 1.5% in 2023, and remain in that range in 2024.
• Premium wineries will end 2023 with slightly negative volume sales. Value sales growth between 1% to 4% is expected, strengthened by a good Q423. Total premium wine sales by value will improve in 2024.
• Premium wineries currently have balanced inventory positions and will successfully take small bottle price increases in 2024. High-production wineries will find price
increases more difficult.
• The industry is presently built to overproduce. Total wine consumption is decreasing by volume. Retail inventories are backing up into wholesale. Wholesale inventories are bulging, and wineries are being more cautious about carrying inventory in a reduced-demand
environment. Without improving demand, retailers can only rebalance inventories by buying less from wholesale while selling through their existing inventory.
• The planted acreage in CA and WA is exceeding current demand. Oregon’s planted acreage is in balance with demand. When will we see a market correction for grapes and bulk wine in grapes intended for lower-priced wine? It’s likely going to happen in 2024.
• Bottle prices are showing some resilience as of this writing in late 2023, but with demand fragile and too much supply at retail and wholesale, it wouldn’t take much for the industry to increase the use of flash sales sites and increase volume discounts and promotions in 2024.

Mc Millan says premium wineries are in good shape to profit this year. He notes the value of premium wine is still growing, but volume sales will finish lower for the 2023 calendar year, partly due to the light 2020 vintage sold in 2023.

There's a significant oversupply at wholesale that will produce a higher-than-needed inventory supply. The oversupply at wholesale will likely linger through 2024. And that leads to the inevitable conclusion that unless demand improves, some vineyards must be removed in many traditional winegrowing countries, including the U.S.

Why Demand Is Lower

Fewer customers have a preferred beverage than in the past. Rather, they drink across categories. That's one reason sales of under-$12 wine have been dropping for years. Also, consumers are more likely to substitute RtDs, spirits, and cannabis for wine. For those 19-30, cannabis use has increased to 28.8% of the cohort from 16.9% while alcohol use eased to 67.5% from 68.4%.

McMillan also warns that "the anti-alcohol lobby, led by the World Health Organization, is having success with its message – truthful or not, that "there is no safe amount of alcohol to drink."

McMillan strongly believes wineries should collaborate to meet this threat. But, he says, he isn't aware of any collaborative effort. Regardless, "the goal for every winerey should be to improve efficiencies and take back market share from spirits, sports drinks, cannabis and beer producers.

"Success is within reach for anyone willing to adapt," McMillan says.

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