Wine Leaders: Industry is Stabilizing, But Stabilizing Just 1st Step to Recovery

Vineyard removals such as Beckstoffer Vineyards is doing is one reason industry leaders say the industry is finally resetting itself. Other signs: slowing sales declines, sharper financial discipline and a shift from denial to action, according to panelists on a Wine Industry Network webcast.

Rob McMillan, founder of Silicon Valley Bank's wine division and author of its long-running wine reports, said there's been a psychological shift – finally, everyone is acknowledging there's a problem. And now what we’re seeing are people actually doing.”

“Almost anywhere you look, what you’re seeing are things aren’t as bad as they were,” he said. “It’s not declining as it was, and that’s what you really are looking for in sort of a bottoming.”

'A Bottoming' Leads to Recovery: A Historical Look Back

"A bottoming" isn't a recovery, but it's a necessary step toward a recovery. Nearly everyone has heard of Black Tuesday, Oct. 28, 1929, when the Dow Jones Industrial Average of 30 blue-chip stocks dropped 12%. That was actually the end of the 1929 stock market crash, which happened over three days – Black Thursday (Oct. 24), Black Monday (Oct. 28), when the DJIA dropped nearly 13% on Black Tuesday. By July 8, 1932, stocks had lost nearly 90% of their value, with the DJIA closing at 40.56,.

That was the beginning of the bottom. By 1933, entrepreneurs were beginning to establish new ventures --E&J Gallo Winery, Louis M. Martini Winery, Menominee-Marinette Brewing Co., Parducci Wine Cellars, Stack's Breweries in the alcoholic beverage space, among them. The stock market did not recover for 25 years, finally closing above its September 1929 peak of 381.17 on Nov. 23, 1954.

That 25-year stretch is sort of misleading, because it assumes an investor just held a static basket of stocks without receiving or reinvesting any cash payouts. That's not what happened, of course.

Because the Great Depression caused massive, historic deflation with the prices of everyday goods, housing and services dropping so dramatically, a smaller amount of nominal dollars in 1934 held the same exact purchasing power as the larger pre-crash amount in 1929, so investors who bought at the 1929 peak "broke even" in 4.5 to 5 years.

Likewise, investors who consistently reinvested their dividends broke even in 10 years. Dividend yields at the time averaged an unbelievable 14% at the absolute bottom of the market crash.

A K-Shaped Economy

Then, as now, there were bankruptcies, business failures and foreclosures. "That's part of the healing process," McMillion said. Economist Robert Eyler of Sonoma State University said the wine sector's reset is occurring during a "K-shaped economy," in which higher-income households continue to spend while lower- and middle-income households pull back under pressure from inflation and interest rates.

Eyler warns we haven't seen the "final convulsion" yet – and that's necessary before recovery really sets in. And, indeed, that's what happened during the 1930s – a combination of the introduction of Social Security deductions from paychecks along with poor fiscal policy led to a sharp recession in 1937-38 that wiped out many of the gains in wages and business willingness to invest that had been made.

As was the case back in the 1930s, credit and cash are extremely tight, with banks and wine buyers limiting risk. Glenn Proctor of Ciatti Co., the wine and grape brokerage, said he expects money to come back in about 12 to 18 months.

“I do think in the next year we’re going to start to see opportunities will be looked at, and money will come back in and say, ‘Okay, I can see long-term value in this, and I’m going to buy a vineyard winery, come back in,’” Proctor said.

Agility Not Size

Charles Darwin did not say humans survived and dinosaurs didn't because we were fitter – "survival of the fittest." What he talked about was survival of the most adaptable, and Michelle Muth, a principal in the accounting firm Baker Tilly, said agility, not size, will be key to the recovery.

The most successful wineries are really the ones that are not just reacting to what’s happening in the market, but they’re really intentionally shaping their business around where the market is going,” she said. “They know which brands and channels deserve their investment and attention, and they know when to say no.

“The businesses that succeed won’t necessarily be the ones with the biggest brands or the highest production. They might be, but they’ll really be the ones who become more disciplined, more data-driven, and more willing to adapt,” she said.

Chase the Customer

McMillan said SVB's midyear direct-to-consumer research shows the strongest performers are chasing opportunity, investing in DtC. Wineries must "take the experience on the road" to places like the Rockies and the Sunbelt, rather than rely on legacy tasting room traffic.

(A side note: We think part of that "chasing the customer" will involve advertising in reliable local and regional media. A wine dinner is wonderful, but it only reaches a few people. Well-placed advertising can reach thousands of people in a target market, unlike social media which might reach tens of thousands, but they may not be where you're trying to sell.)