Post on 14-Jul-2015
transcript
By Rob McMillan Executive Vice President & Founder, Silicon Valley Bank Wine Division707.967.1367 rmcmillan@svb.com
State of the Wine Industry 2015
Wine report
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State of the Wine Industry 2015
17 Predictions:
Looking back, moving forward
8 2014:Ourpredictionsinreview
12 2015:Ourviewonwhat’snext
216 Demand forecast:
Up and to the right19 Shiftsinoilproduction
favortheU.S.consumer
23 AstrongerU.S.dollarmeanscheaperimports
24 Interestratesarelikelytorise
25 U.S.consumersshowconfidenceintheeconomy
26 U.S.employmentoutlookriseswiththetide
28 TheMillennialshaven’ttakenoverjustyet
332 Supply:
New challenges impact planting and pricing
34 Supplyandconsumptionshiftworldwide
37 RecordyieldscontinueontheU.S.WestCoast
442 Bottle pricing:
Highs move higher and lows trend down
547 Financial
performance: 2015 looks like a breakout year
Table of contents
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State of the Wine Industry 2015
Come along with us as we explore how economic factors, increased demand, record yields and pricing opportunities are setting the stage for one of the better years the industry has seen in a decade.
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The2000filmstarsTomHanks1asChuckNoland,aFedExexecutivewhoaskstheloveofhislifetomarryhimandthengoesdowninaplanecrashintheSouthPacific.Hesurvivesthecrash,washesuponadesertedislandandlearnstoliveoffwhateverthetidewashesin.
He’sdesperate,butresourceful—heevencreatesanimaginaryfriendoutofavolleyball,whichhenamesWilson.Afterbeingstrandedformorethanfouryears,Chuckfinallymakeshisescape.Butwhenhereturnstocivilization,hefindsthathisfiancée—alongwiththerestoftheworld—hasmovedon.
Afterthemarketcrashweallexperienced—whichwasn’tanywalkonthebeach—theeconomyandthewinebusinessarenowreturningtoaboutwherewewerebeforethecrashinmanyways.But,likeChuck,we’refindingthatnoteverythingisasweleftit.
Thingshaveindeedchanged,andthere’snothingwecandoaboutthat.Weneedtoberesourcefulandstayfocusedonournextmove,justlikeChuck.Thequestionis:Doyouseethenewdayinaclearlight?Ifyoudo,howwillyounavigatetosuccessinthisevolvedworld?
Inthisreport,SiliconValleyBankgivesyouacompass.Basedonourextensiveexpertiseanddeeprelationshipsinthewineindustry,weasseswheretheindustryfindsitselftoday,andofferourviewonwhereit’sgoingin2015.
Don’t tell anyone, but I love movies that tug at the heartstrings. I guess I’m just one of those guys
who likes tractor pulls and walks on the beach. That’s probably why one of my favorite films is Cast Away, the symbolic backdrop for this year’s State of the Wine Industry report.
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State of the Wine Industry 2015
Predictions: Looking back, moving forward
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2014: Our predictions in review
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State of the Wine Industry 2015 | Predictions: Looking back, moving forward
WhenChuckNolandrealizeshe’sstranded,heconsidersjumpingoffacliff.Butfirst,hesetsupatesttodetermineifitwillwork.Itdidn’t,andwhenhelookedbackonhisexperiment,hesaid,“Itwaswhat,ayearago?Solet’sjustforgetit.”
ItwouldbegreatifwehadawaytotestourbeliefsbeforejumpingofftheproverbialcliffasChucktriedtodo,especiallythisyearaswemakeeconomiccallsonoil,interestratesandcurrencies,whicharenormallysuckers’bets.Trackingallthecomponentsthatimpactthewinebusinessandeconomy,thenforecastingoutayearisahugechallenge,butweknowithelpsourclientsplantheircoursefortheyeartocome.
Beforewelookforwardto2015,let’sputthepastbehindusandreviewthepredictionswemadeinour2014report.
When we create this report each year, we begin with a fundamental understanding of consumer demand versus current supply. It sounds simple enough, but the surrounding business conditions continue to evolve each year right along with the consumer and the economy.
Global and U.S. economic factors• Wecontinueinaperiodofdomesticeconomic
stagnationthatshouldresetourviewofgrowthopportunities,businessreturnsandpricesforyearstocome.Othereconomicpredictions:
– Short-termandlong-terminterestrateswillcontinuetobeverylowandstableforthenext12monthsandprobablylonger.
– Oilpricesareanunknownatthispoint,butwiththeUnitedStatesnowleadingtheworldinproduction,lowerpricesatthepumparehelpingwithmiddle-classrecovery.
– UncertaintyfromWashington’sinabilitytodevelopabudgethasbeentemporarilyliftedasoftheendof2013,butthedebtceilingdebateloomsforFebruaryorMarchof2014withoutaccountingmaneuvering.
– TheFedwillreducebondpurchasesbutretainanaccommodativepolicyfor2014atleastasemploymentlevels—particularlytheparticipationrate—areviewedwithgreaterfocus.
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– Consumercreditisnotgrowingsubstantiallyandprobablywon’t,basedonincreasedregulationandmorecautiononthepartofborrowers.
• AfterayearofgrowthinU.S.GDPin2013,weexpect2014tomoderateonaquarter-to-quarterbasis,butshowbetteryear-over-yearresultsattheendof2014.
• TheeurowilllagtheU.S.recovery,andthecurrencywillweakenasquantitativeeasingslowsintheUnitedStates,leavinganopportunityformorebottledimportsandadditionalpricingcompetitionfromoffshore.
Supply• In2013,wesawasecondconsecutiveharvest
ofexcellentqualityandyieldacrossmostappellations.
• HarvestontheWestCoastwasagainlargethroughallthreestates.InCalifornia,weareestimating3.94milliontons,makingitthesecondlargestharvestonrecord.
• Inventoryisbalancedinallsegmentsaslongasthe2014harvestisaverageandconsumerdemandincreasesaspredicted.
• Thewinesatthehighestpricepointsreportparticularlyshortinventorypositions.Thehighvolumeandverysmallestateproducersreportinventorypositionsslightlyabovetheirrequirements.
• Massivebulkimportswillcontinuetodominatethelowest-price-pointwinecategories,butbulkimportsshouldbeheldbackbythesizeofthe2013harvestandsuppliescurrentlyincellar.
Demand• SVB’spredictionofsalesgrowthinfinewinewill
increaseforthefirsttimeafterthreeyearsofconsecutiveandaccuratepredictionsofdeclinesingrowthrate.Wepredictsalesinthefinewinebusinesswillincrease6–10percentover2013.
• Webelievewearetrendingtoatransitionpointthatwillprovechoppyformostretailers,astheBoomershitretirementandtheeconomicstateoftheMillennialsreplacingthemiscloggedwithhighlevelsofstudentdebtandweakjobprospects.WhilealldatapointtoincreasingdesireforconsumerfinewineintheU.S.population,thecapacityfortheseyoungerconsumerstomoveupmarketmaybeimpacted,leadingtoagreaterseparationbetweenluxurywinesand“aspiringluxury”wines.Thepricepointsbetween$10and$20shouldseethegreatestconsumerdemand,inadditiontoluxurywinesandthosedeliveringanenhancedconsumerexperience.
• TheMillennialgenerationisconsumingmoreforeignwinethanothercohortstoday.ThelikelyoutcomeisnotpositiveforU.S.producersgoingforward.Amarketingorderdeliveringapositivemass-marketmessagetoconsumersaboutdomesticwinequalityissomethingtheindustryshouldstronglyconsider.
2014: Our predictions in reviewcontinued
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State of the Wine Industry 2015 | Predictions: Looking back, moving forward
Pricing• Therearebroadexpectationsinthewine
businessagainthatbottlepriceincreasescanbetaken.Webelieveincreaseswillagainprovedifficult,thistimemorebecauseofthevolumeofwineavailableforsaleversusadeterioratingeconomy.
• Grapepricinghashitahighmark,andcontractsshouldseerenegotiationsdownwardinexchangeforterm.Currentsupplyhasalreadyadjustedpriceslower,reflectingcurrentheavysupplystocks.
Planting• Grapeplantingisrestrainedcomparedwithprior
periodswhensupplywasinbalance.TheCentralValleyisatthegreatestriskinplantingaheadofdemand.
• Withoneofthedriestwintersonrecord,andfollowingthreedroughtyears,waterconditionsenteringthisfourthyearofdroughtmayplayalargerroleinplantingandproductiondecisions.Preparationfortheworst-casesituationforyourvinesandwineryshouldbeconsidered,andremediationandhedgingstrategiesshouldbedevelopedattheearliestpossibletime.
Financial performance• Thegeneralfinancialconditionofthewine
industryisimprovingslowly.Attheendof2014,winerieswillsaythattheyearwasgood,butnotgreat,financially.
• Grossprofitofwinerieswillbenegativelyimpactedin2014duetohighergrapecostsfromthe2012vintageyear.
• M&Aandvineyardacquisitionswillcontinueatarecordpacein2014.
• Direct-to-consumersaleswillcontinueasthelargestgrowthchannelformostwineries.
• Finewineproducerswereunabletopasshighercostsontoconsumersorrecoverhigherpricingfrompriorperiodsin2013.Weexpectthattocontinuein2014.
Some 2014 predictions we got right:• WedidcorrectlypredicttheFedwould
reducetheirbondpurchasesbutretainanaccommodativepolicyandnotbeboundbytheirpriorstatementaboutunemploymentrates.Wethoughttheywouldlooktoothermeasuresofemploymentsuchasthelaborforceparticipationrate,andtheydid.2
• TheUnitedStatesdidleadtheworldrecovery,andtheEurozonelagged.
• Theharvestlastyearwasthesecondlargestonrecord,butwewerealittlelightinthetonnageguess.
• Thebottlepriceincreasespresagedfromwinerysurveyresultswerehardtocomebyforproducers.
• Grapepriceswereatahighpoint,andwe’veseenrenegotiationsdownward.
• Bulkimportsinthelowestpricesegmentshavebeenheldbackbythehugeharvest,andthedroughthasproducedchangesinproductionandplantingdecisions,withtheCentralValleyinthemostvulnerableposition.
• Wepredictedinterestrateswouldcontinuetoremainlowfortheyear.
• WenotedbetterGDPonayear-over-yearbasisatyearend2014,butwedidn’texpecttohit3percentgrowthfortheyear.Thatwasagoodcall.3
And a few things that didn’t turn out as forecast: • Wehintedatlowerpumpprices,butthedropin
oilwe’veseenexceededourexpectations.
• Ourleadcommentregardingeconomicstagnation,whiletrue,overstatedthepotentialoftheU.S.economy,whichhasprovenmoreresilientinthesecondhalfoftheyear.
• Whiletheeurodidweakeninthebackhalfof2014,wehaven’tyetseenincreasedoffshorecompetitionorbulkimportsasweguessed.
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State of the Wine Industry 2015 | Predictions: Looking back, moving forward
LikeChuckNoland,youmighthavethoughttoyourself:“Igottakeepbreathing...becausetomorrowthesunwillrise.”Andthesundidrise.
Thecurrentsthatmighthavetossedyouaroundonedayalsobroughtpositivechangethenext,maybebecauseyourodeitoutonaraft,orperhapsyouusedthisreportasameansoffixingyourcoordinatesanddevelopingaplan.
Asinpreviousreports,ourpredictionsforwhat’sonthehorizonareinformedbyourexperienceslivinginthebusiness,ourannualWineConditionsSurvey,analysisandinterviews.
We’vearrivedatthefollowingtouchpointsthatwehopewillhelpyousetyourcoursein2015.
2015: Our view on what’s nextThere may have been some years after the crash when you or someone you know didn’t have a clue what to do next.
Global and U.S. economic factors• WeareseeingrealstrengthintheU.S.economy
goinginto2015,whichwillpushwinedemandup:
– Oilpricedeclinesaretransferringwealthtooil-consumingcountriesandwilldeliverhundredsofmillionsofdollarsinstimulustoU.S.consumersin2015.
– TheemploymentpictureisimprovingatanacceleratingpaceintheUnitedStates.WeexpecttheU3unemploymentrate(theprimarymeasureofunemployment)willapproach5percentduringtheyear.
– Japan,ChinaandtheEUaredeliveringsub-optimalresults,andthosecurrenciesareweakeningagainstthedollar.
– ThelikelihoodtheFedwillincreaseratesin2015hasgrown,andwepredictsomemovementinmessagingfirstinearly2015,andactualratemoveshigherbyQ3.
– Interestratemoveswillhappenataslowpace,giveninflationwillbeincheckfromlower-pricedimportsandfuelsavings,leavingdeflationstillaconcern.
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2015: Our view on what’s nextcontinued
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State of the Wine Industry 2015 | Predictions: Looking back, moving forward
– WebelieveU.S.GDPgrowthwillimproveover2014andcomeinnear3percentforthefullyear.
– TheunknownintheworldequationisunrestfromcountriessuchasRussiaandIran,shouldtheiroil-basedeconomiesfaltermorethantheyalreadyhave.
• AslongastheindustrializedworldeconomiescanholdtheirownandnotdragdowntheU.S.economyastheirownrecoverycatchesup,themiddle-incomeU.S.consumerwillseeimprovedprospects,andwewillbetoastingtothat.
• Thedropinthepriceofoilhasbeenduetosaggingworlddemandearlyintheyear,butwebelievetheimpactofthefrackingboomhasaddedtothesituation,puttingoilpricesintoastrongdownwardtrend.Weexpectoilpricestoremainlowthroughout2015.
Supply• Whenharvestisanalyzedandreported,we
expectwe’llannounceathirdconsecutiveharvestofheavyyieldandgreatqualityacrossmostappellations.Thatisunprecedented.
• Whiletherearevarietalsandregionswherethereisexcesssupply,webelievefinewineproducerswhofeelslightlylongwillfindthegallonsintheircellartobeablessingindisguisebytheendof2015.
• Massivebulkimportswillcontinuetodominatethewinecategoriesatthelowestpricepoints,butbulkimportsshouldbeheldbackbythesizeofthe2014harvestandsuppliescurrentlyincellar.
Demand• Startinginmid-2014,winespricedabove$20a
bottlebrokeoutstronglyhigher.“Tradingup”isacleartrendagain.Redwinesinparticularshowedthestrongestgrowth.Weexpectthattocontinuethroughout2015.
• Growthinsalesofwinespricedabove$20wasdrivenbyacceleratingvolumewithlittleinthewayofpriceincreasesgettingthroughtotheconsumer.
• Winespricedbelow$9perbottleperformedpoorlybothonandoffpremisein2014.Thepoorperformanceislikelytocontinueinto2015.4
• Afterfinishingtheyearatthetopendofourpredictedgrowthinsalesof6–10percent,wearepredictingabreakoutyearofgrowthinthefinewinecategoryinthe14–18percentrangein2015.
We are predicting a breakout year of growth in the fine wine category in the 14–18 percent range in 2015.
Pricing• Whilethelargesupplyofwinesinthecellars
shouldnormallyindicatecontinueddepressedpricing,webelieve2015willbeayearofbothvolumeandpriceincreasesinthefinewinesegment,drivenbyanimprovingeconomyandhigherdemand.
Planting• Grapeplantingopportunityisshiftingnorth:
– OregonandWashingtonareshowingstronggrowthinplantingonapercentagebasis,andweexpectthatwillcontinuefortheforeseeablefuturegivenfavorablequality/pricedynamicsrelativetothefinewinegrowingregionsinCalifornia.
– ThegrowingregionsintheNorthCoastarerunningintodifficultyinpermittingandhighlandcosts.Replantingiscontinuinginoldervineyardsandthosewithredblotch.Suitablesitesforexpansionarebecomingmoredifficultwitheachpassingyear.
– TheCentralValleyreportsitwillpullabout20,000acresofgrapesthatweredirectedtowinespricedunder$7,whicharestructurallyoversupplied.5
Financial performance• Direct-to-consumersaleswillcontinueasthelargest
growthchannelformostwineries.
• Mostwinerieswillsay2015wasoneoftheirbestseasonsbytheendoftheyear.
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State of the Wine Industry 2015
Demand forecast: Up and to the right
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The hardest job a winery owner has is balancing wine supply with demand
two years before it’s sold. Of course, there are supply issues to be dealt with in any given year. But when there is good supply, as is the case today, determining how much wine to bottle is pretty difficult without first deriving a sales growth forecast.
To do that, you have to understand the direction the trade winds will take consumer demand next year. The good news we are happy to deliver: We believe consumer demand for higher-priced wine will be up and to the right in 2015.
As Chuck Noland said, attempting to get back to civilization on a makeshift raft: “This could work! This could work ...”
19 ShiftsinoilproductionfavortheU.S.consumer
23 AstrongerU.S.dollarmeanscheaperimports
24 Interestratesarelikelytorise
25 U.S.consumersshowconfidenceintheeconomy
26 U.S.employmentoutlookriseswiththetide
28 TheMillennialshaven’ttakenoverjustyet
Our base financial forecast for 2015We are particularly positive on the year ahead. We expect the fine wine business will see accelerating growth, while at the same time, the cellars are full with several consecutive years of very good vintages.
Oil pricesTheglobaleconomywasslowinggoingintotheendof2014,butbeneaththatwasthecrashinoilpricesthatwilltransfertrillionsofdollarsinwealthfromoil-producingcountriestooilconsumers.Asofthiswriting,Europe,JapanandChinaareeachworkingonmethodsofsupportingtheireconomieswiththeirownversionofquantitativeeasing,rightatthesametimetheUnitedStatesisendingitsbond-buyingprogramsandstartingtoshowsignsofstabilizedGDP.
The economyTheworldeconomiesarestillquitefragile,anddeflationisariskthatcanpulldowntheimprovementtheUnitedStateshasmadethusfar.Thatsaid,thecountriesweshouldbemostconcernedwithareJapan,thoseintheEuropeanUnion,ChinaandIndia.Eachofthosecountries,alongwiththeUnitedStates,benefitsfromthecollapseinoilprices.It’salittleoptimistic,butwebelieveloweroilpriceswillprovetobethecatalystthatignitesmorerobustbusinessconditions.
Interest ratesInterestratesplayarolein2015.WebelievetheFedwillhaveahardtimeraisingratesinthefirsthalfoftheyear.Oncerecoveryismorecertain,iftheworldpoliticallandscapeiscalmandifourforecastoflowoilpricesprovesout,wedoexpectrateincreasesinthebackhalfof2015.
Consumer confidenceWhilearaiseininterestrateswillslowconsumerspending,webelieveGDPgrowthwillendtheyeararounda3percentgrowthrate,andtheUnitedStateswillstarttoleadtherestoftheworldalongineconomicimprovementwithourconsumerspurchasingimportedgoods.
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
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Theeconomyhasbeenmakingmeasuredprogress,butheadinginto2015,therevelationoffracking6asaforcehasaddedbetween0.5percentto1.0percenttotheU.S.GDP,oraboutathirdoftotalGDPaccordingtoestimatesfromBridgewaterAssociates,GoldmanSachsandothers.
TheUnitedStates,whichwasimportingtwo-thirdsofitsoilatapoint,isnowproducingtwo-thirdsofitsneed.Theemergenceoffrackinghasledtoaradicalchange:U.S.oilproduction,whichwasroughlyhalfofSaudiproductioninJuly2011,hasnowincreasedtojust10percentbelowSaudiproduction(Figure1).Asofthiswriting,thepriceofoilhasdroppedtobelow$50abarrel.Atitspeak,onJuly3,2008,itwas$145.40abarrel.
Whydoesthismattertothewinebusiness?Highgaspricesareataxondomesticconsumptionofgoodsandservices.Lowergasprices,whicharedown$1.00offtheirhighpointasofthiswriting,favorablyimpactshippingandproductionofindustrialgoodsandaddabout$230billiondollarsannuallytoU.S.disposableincomeatthatprice(Figure2,seepage21).
Lowergascostsareparticularlygoodforthemiddle-wageearnerswhohavethusfarlaggedtherecovery.Thatgroup,whoaremorelikelytolivehandtomouth,willspendeverydollartheyget.
Shifts in oil production favor the U.S. consumerThe big story of the U.S. economy going into 2015 is the precipitous decline in oil prices.
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Figure 1
Daily oil productionMillions of barrels per day
n Saudi Arabia nUnited States
2014
Source: Bloomberg, Silicon Valley Bank
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
ThatinturnhelpstheUnitedStates,whoseeconomyisbuiltonconsumerspending.The$60fallwearealreadyseeinginpriceputsabout$1,000peryearinanaveragefamily’spocketifthepriceismaintained.7
Whileearlierpricedropsweremorecloselylinkedtoaslowdowninworldeconomicoutput—andsomeeconomistsstillbelievethedropisonlyabouttheworldslowdown—pricesshouldbeheadedlowernomatterthecause,withsomeanalystspredictingoilwillfallbelow$40abarrel.A$40fallinthepriceofoil,whichiswhatwe’veseenfromJunetoNovemberof2014,representsashiftofroughly$1.3trillion;closeto2percentofworldgrossoutput.Thattransfergoesfromproducercountriestoconsumercountries.
ThelosersintheUnitedStateswillbetheoildrillingcompanieswhohaveexpensivelandleases,whichatthecurrentpricearehittingtheirbreakevenonpumpingcosts.Regionalbanks,companiessupplyingequipmentandoilservices,andprobablyrealestateinTexasmaywellseesomecontractionsaswell,butunlikelythekindofimpactseenafterthe1986oilpricecollapse.
Formostofthewinebusiness,Texasisanimportantconsumingstate.TwentypercentoftheTexaseconomywasbasedontheenergysectorinthemiddle1980s,whenoilcrashedandtookthestatedownwithit.Butatthispoint,Texashasdiversifiedsubstantiallytothepointwhereenergyisonly11percentofthestate’seconomy.8Still,weshouldexpectourfriendsintheRepublicofTexastofeelthepinchin2015.
Whatitmeansislower-pricedoilisn’tacyclicalchangeoranotherbubble.Thebubblewaspoppedwhenoilhit$145abarreljustbeforetheGreatRecession.Wedon’tknowexactlywherethebottomis,andsomepredictaboomerang,withpricesratchetingbackup.
Fromourposition,thisisnotashort-termpriceadjustment,butratherasecularchangethatwillhelpheavyusersofoil,includingcountriesintheEuropeanUnion(EU),Japan,China,theUnitedStatesandIndia,eachofwhomareimportantcontributorstoahealthyworldeconomy.ThisisagoodthingfortheU.S.economyandtheaveragewineconsumer.
Lower gas costs are particularly good for the middle-wage earners who have thus far lagged the recovery.
Shifts in oil production favor the U.S. consumercontinued
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$1.592007 2008 2009 2010 2011 2012 2013 2014
Figure 2
Average retail U.S. gas priceRegular gas price ($USD/gallon)
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Source: GasBuddy.com
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
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Hereintherealworld,shiftsinthevalueofcurrency—particularlyintheU.S.dollar—havefar-reachingimplications,wellbeyondourownlittleisland.
Intheearly1980s,wesawaverystrongdollarandveryhighinterestrates.ThedollarwassostrongthatimportsofforeignwinebegantocrushouremergingU.S.winebusiness,whichwasstillstrugglingwithwinequality.9Itwasn’tuncommonbackthentofindaverynicebottleofBordeauxfor$10againstaninterestingdomesticwinelikeawhitecabernet,oramustangsinglevarietal.Astrongdollarmakesimportscheaper,increasingtheopportunityforforeigncompetition.
TheU.S.dollarhasseenremarkablestrengthoflate(Figure3).Sincethemiddleof2014,itsvaluehasclimbedalmost10percentcomparedwithabasketofworldcurrencies.Whythedramaticchange?
Currenciesarerelative,andtheimprovementintheU.S.dollarispartlyduetoaslowdownintheworld’smajoreconomies.Atthesametime,theU.S.economyhasshownsignsofrealstrength.Japanhasgonebackintoarecession.China’sGDPhasbeendeceleratingforsometimeasitstruggleswithaswitchfromaproducingeconomy
toaconsumingeconomy.AndinJune2014,theEuropeanCentralBankunveiledarangeofanti-deflationmeasuresmeanttoweakenthecurrencyandimproveexports.Thedropinoilpricesplaysaroleinthestrengthofthedollar,andintimesofworldturmoil,theU.S.dollarservesastheworld’sreservecurrency.
WeexpecttheU.S.dollartocontinuetogainstrengththrough2015,astheU.S.economyimprovesaheadofworldindustrialeconomies,andinterestratesbegintorise.
A stronger U.S. dollar means cheaper importsIf you were on a deserted island nation like Chuck, what would you use for currency? Of course, the answer is nothing, because currency has no value if there is no one to trade with. 1 columns (3”w)
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Figure 3
U.S. dollar indexn DXY Currency PX low nDXY Currency PX last nDXY Currency PX high
Source: Bloomberg, Silicon Valley Bank
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
Interest rates are likely to risePredicting movements in currencies, oil prices or interest rates is probably a foolish endeavor, but call me a fool.10 Each of those price changes impacts our winery and vineyard clients.
Inparticular,anincreaseininterestrateswillraisewineries’costsoffinancing,whichimpactstheirdecisionmakingandtimingoncapital-expenditurebudgets.Forthosewinerieswithoutlocked-inrateprotection,thatwillalsoreduceprofitabilityonfloatingratedebt.11
FromaU.S.domesticperspective,ourCentralBankendeditsbond-buyingprograminlate2014asplanned.Intheory,thatshouldhavedrivenrateshigher.BecausetheU.S.dollarisstilltheworld’sreservecurrency,andRussiadecidedtodestabilizetheUkraine,afloodofworldpurchasesactuallyloweredbondratesforaperiodaftertheprogramended(Figure4).That’swhyit’ssofoolishtoactuallypredictpricemovements.12
Whilethe2013announcementoftheendoftheFedbond-buyingprogramcausedachillintheU.S.stockmarket,theplannedendcombinedwiththestill-improvingU.S.economicindicatorshadnorealimpactattheendof2014.
Now,withstrongyear-endeconomicdatain2014,anydiscussionofrateincreasesbeingheldoutinto2016hasbecomequieter.Thegrowingconsensusisinterestrateswillstarttoincreaseinthemiddleof2015.13Afterall,theFedhasconsistentlymessagedthatrateincreaseswillbedatadependent.
Withyear-end2014growthinemployment,rightalongwithgrowthinhoursworkedandwages,thedataareprettyconclusive.WearepredictingachangeinFedforwardguidanceinQ1andactualrateincreasesinQ32015.
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Figure 4
10-year treasury rates decrease in 2014
Source: Bloomberg, Silicon Valley Bank
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U.S. consumers show confidence in the economyAfter the U.S. economy crashed and consumers washed up on the beach of broken dreams with no shelter or home, they found they were locked in a battle just to survive.
LikeChuckduringhislowpoints,consumersbegantoexpressdoubtandfear.Concernsaboutourfinancialsystemledtotherealizationofthegrowingdividebetweenthehavesandhave-nots,withmanywonderingifwewereevergoingtomakeitbackwithoutchangingtheeconomicrulesandstatusquo.
FortheUnitedStatestotrulyregainitsfooting,weneedtoseethemiddleclassre-establishitstraditionalpurchasingstrengthandstarttopaddleoutintotheeconomicsea.Thegoodnewsforthoseconsumers:Yourshipiscomingin!
Whilewedon’ttalkmuchaboutconsumerconfidenceinthisreportbecauseit’salaggingindicatorofeconomicactivity,itisworthnotingthatGallup’smeasurementofeconomicconfidencehastakenadecidedlyupwardmovementinthebackhalfoftheyear(Figure5).14Thatiscoincidentwithmanyothermetrics,includingwhatweseeinfinewinepurchasingactivity.Whatismoreimportantinmymindistheacceleratingconfidenceshowninthemiddle-incomeconsumersmakingmorethan$90,000ayear.Thatisagrowthopportunityforthewinebusiness.
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Figure 5
U.S. economic con� dence index scores by incomen Middle and lower income (less than $90,000 annually)
nUpper income ($90,000+ annually)
2012 2013 2014Source: Bloomberg, Silicon Valley Bank
For the United States to truly regain its footing, we need to see the middle class re-establish its traditional purchasing strength.
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
U.S. employment outlook rises with the tide
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Figure 6
Employment strengthTotal private job openings, hires and quits (seasonally adjusted, in thousands)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Recession
nHires
nJob openings
n Quits
Source: Bureau of Labor Statistics
While there are various measures of economic vitality, nothing is as important as employment.
TheU315CivilianUnemploymentRateisthemostcitedmeasureofunemployment,andasofthiswriting,theratehasdroppedto5.6percent.16Morethan300,000newjobswerecreatedinNovember,making2014alocktofinishasthestrongestyearofjobsgrowthsince1999.Theunemploymentratecontinuestodeclineinasteadyfashion.Atthecurrentpace,itshouldhit5.5percentinthesecondquarterof2015.
TheBureauofLaborStatisticsreportsthatjobopeningshavenowsurpassedthegrowthfrom10yearsago(Figure6),andemployersinmanyindustriesarereportingdifficultyagainfindingemployeesforthehospitalityindustry,aswellastechnicalandskilledlaboropenings.Asofthiswriting,restaurantandhotelopeningshavethe
longest-openjobpostings,arguablybecausetheyarelowerpaidjobs.Atsomepoint,thosesalaryoffershavetocomeup,whichagainisagoodsignforthemiddleclass.
It’sperhapsabitcounterintuitive,butanotherencouragingsignisthatmorepeoplearequittingtheirjobs—asignthatemployeesaremoresecureintheirjobsandconfidenttheycanfindbetter-payingopportunitieselsewhere.Ifthesetrendscontinue,it’sonlynaturaltoexpectanuptickinhiringandsomewageinflation,asigntheeconomyisheatingup.WiththestrengthoftheNovemberjobsnumbersandgiventhegrowthinjobopenings,weexpecttoseewageinflationstarttoemergeasatrendbeginninginQ22015.
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State of the Wine Industry 2015 | Demand forecast: Up and to the right
The Millennials haven’t taken over just yetWhen Chuck went down in the South Pacific, he was an overweight, middle-aged, clean-shaven executive. Four years later, he was a bearded, skinny man who looked like he was from the Middle Ages. Imagine his shock when he returned to the world he once knew to find that his appearance wasn’t the only thing to change dramatically. His fiancée had remarried, she had a daughter and something he had never thought possible had come to pass — there was now a pro football team in Nashville!
Cominginto2015,producersinthewineindustrymightfeelthatsamesenseofshockanddisbelief.WithallthehypeoverthepastdecadeabouttheMillennialgenerationovertakingtheBoomers,ifChuckwereinthewinebusinessandreturnedtohislifetoday,hemightexpecttofindtheteetotalingBoomersinrockingchairswiththeMillennialsattheheadofthetable.Butdespitethehype,thathasn’tcomeevenclosetohappening.Millennialshaveyettomakeadentinthefinewinebusiness.Sowhythedifferencebetweenthemediareportsandreality?
Inordertotakeadominantroleintheeconomy,theyoungergenerationneedsjobsthatpaywellandanappetiteforthejuiceofthevine.ThelatestdatafromtheU.S.DepartmentofLaborshowstheworkforceissplitinequalthirdsbetween
Boomers,GenerationXandMillennials(Figure7).Whileequallysplit,thereareimportantdifferences.Boomersarestartingtohitretirementageandpullingbackfromtheworkforce,whileMillennialsarejustgettingstartedintheircareersormaystillbeinschool.17Thosewhoareinjobshavethehighestunemploymentratesandanunnaturalburdenofdebtfromstudentloans.
Anothercriticaldifferencebetweenpotentialwineconsumersisincomeandwealth.Tobeameaningfulconsumeroffinewine,youneedtobeinthetop25percentofwageearnersintheUnitedStates,orsubstitutewineforfoodinyourbudgetasI’vebeenknowntodoonoccasion.Aswe’vedocumentedinpastreports,thevastmajorityofthenation’swealthlieswithBoomers.
60%
50%
40%
30%
20%
10%
0%
20
18
16
14
12
10
8
6
4
2
0
Figure 7
The workforce in 2015Projected size of U.S. labor force (in millions) by age
16-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+
Figure 8
Potential � ne wine consumers by agePercentage of families in group ($75,000–$100,000+ annual income)
21-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+
$100,000+
Source: U.S. Census Bureau, Silicon Valley Bank
nMillennials
nGeneration X
n Boomers
n Silent Generation
Source: Department of Labor
60%
50%
40%
30%
20%
10%
0%
20
18
16
14
12
10
8
6
4
2
0
Figure 7
The workforce in 2015Projected size of U.S. labor force (in millions) by age
16-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80+
Figure 8
Potential � ne wine consumers by agePercentage of families in group ($75,000–$100,000+ annual income)
21-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+
$100,000+
Source: U.S. Census Bureau, Silicon Valley Bank
nMillennials
nGeneration X
n Boomers
n Silent Generation
Source: Department of Labor
29
In order to take a dominant role in the economy, the younger generation needs jobs that pay well and an appetite for the juice of the vine.
30
State of the Wine Industry 2015 | Demand forecast: Up and to the right
Thereisanobviousandstarkdifferenceinincomesamongthethreecohorts.Figure8(seepage29)depictsthepercentageoffamilieswithineachagebandwhomakemorethan$75,000.Aswe’veconsistentlypointedout,thegreatestspendingyearsarebetween35to55yearsofage.Thedatashownhereindicatethemajorityofpeoplecapableofbuyingwinefallwithinthatagegroup.
InourannualWineConditionsSurvey,18weaskedwinerieswhohavecustomerrelationshipmanagement19systemsinplaceandcouldtracksalesbyagegroup,totelluswhatthecohortmarketshareswerefromeach,showninFigure9.Notsurprisingly,theBoomersleadsalesinthefinewinecategory,andtheforgottenGenXhasthesecondlargestmarketshare.Theresultsofthissurveyquestionhavenotmateriallychangedinthethreeyearswe’vebeenaskingit.
Whenwesortouttheresponsesfromthesurveybyaveragepricepoint(Figure10),wehaveanotherwaytounderstandrealbuyingbehavior,segmentingwinedrinkersbypricesegment.Boomersaredominantacrosstheboardonprice,takingthemarketshareineverypricerange.GenXshowsupsecondinmarketshareinallprices.MillennialsappeartohavealargermarketsharethanMatureshowever,withtheexceptionofthehighest-pricedwines,andtheyarestartingtoovertakeMaturesinthelower-pricedcategories.
Wecan’tstressmoreemphaticallythatoneday,Millennialswillbeatthecenteroffinewinesales.Buttherealityis—nomatterwhatagenerationiscalled,themostactivebuyersoffinewineandluxurygoodswillcontinuetobeinthe35-to55-yearagegroup.Theyoungergenerationisjustnowenteringanagewheretheycanparticipateinamoremeaningfulway.Today,thelargestconsumingcohortistheBoomers,andthecohortwiththegreatestimmediategrowthopportunityisGenX.That’swherewealthiscentered,andthat’swhereincomesupportspurchasingathigherprices.
1 columns (3”w)
Figure 9
Year-over-year sales trends in � ne winen2012 n2013 n 2014
50%
45%
40%
35%
30%
25%
20%
15%
10%
0%Millennials
(21-36 yrs old) Gen Xers
(37-48 yrs old)Boomers
(49-66 yrs old) Matures
(67+)
Source: Silicon Valley Bank 2014 Wine Conditions Survey
The Millennials haven’t taken over just yetcontinued
Today, the largest consuming cohort is the Boomers, and the cohort with the greatest immediate growth opportunity is Gen X.
31
50%45%40%35%30%25%20%15%10% 5% 0%
Figure 10
Boomers top the charts in bottle sales across all price points
n Boomers (49-66 yrs old)
n Gen Xers (37-48 yrs old)
n Millennials (21-36 yrs old)
n Matures (67+)
Source: Silicon Valley Bank 2014 Wine Conditions Survey
<$15 $15-$19 $20-$29 $30-$39 $40-$69 >$69
Bottle prices
32
State of the Wine Industry 2015
Supply: New challenges impact planting and pricing
3
33
34 Supplyandconsumptionshiftworldwide
37 RecordyieldscontinueontheU.S.WestCoast
Last year, we began our report with this: “Perhaps the biggest story of 2013 was
grape supply — which is better than having the economy get top billing.”What a difference a year makes, because this year the economy got top billing, in a good way. This year’s grape supply is, well, one more year of ho-hum great quality and big yields for the third year running, which has pressured grape and bulk prices lower.
So, put yourself in the position of a grape grower. You had three great years in a row. If you were in sales, three record years would get you big bonuses. But what does that get you as a farmer? Lower prices for your grapes and a collapsing spot market. It just doesn’t seem right, but the lot of grape growers is being subject to the whims of Mother Nature. At times, it seems they have no control over their destiny.
They might feel like Chuck Noland, who looked back on his experience and said, “I had power over nothing. ... I knew, somehow, that I had to stay alive. Somehow, I had to keep breathing.”
34
State of the Wine Industry 2015 | Supply: New challenges impact planting and pricing
Supply and consumption shift worldwide In recent years, the traditional producing countries seem to have suffered greater variability in weather events impacting both volume and quality.
Worldconsumptionofwinehasstalledoutatabout240millionhectoliters(Figure11),butthereisaclearshiftinconsumptionawayfromFrance,ItalyandSpain,andtowardtheUnitedStates,theUnitedKingdom,ChinaandArgentina(Figure12).Today,about39percentofwineisconsumedoutsideEuropeancountries,comparedwith31percentin2000,20andtheUnitedStatesisnowtheworld’stop-consumingcountry.
Worldproductionhasbeengoingthroughashiftforaboutadecade.Since1998,thehigher-consumingcountriesofFrance,Italy,Spain,PortugalandtheUnitedKingdomeachexperiencedsignificantdeclinesinpercapitawineconsumption,somuchsothatby2006,Europewasproducingabout150millioncasesmorethanitcouldsell.Cateringtopopularsentiment,insteadofdumpingthewine,producerswerepaidfortheirsurplusinwhatwastermedemergency distillation—
2 columns (6.3”w)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 est 2014
Figure 11
Worldwide production vs. consumptionn Production
n Consumption
300
290
280
270
260
250
240
230
220Mhl
Source: L’Organisation Internationale de la Vigne et du Vin
35
ItalyFrance
40
35
30
25
20
15
10
5
0
U.S.Mhl
GermanyChina U.K. Russian Federation
Argentina SpainAustralia
Figure 12
Global consumption trends2000-2013
n Increased consumption in millions of hectoliters
2 columns (6.3”w)
Source: L’Organisation Internationale de la Vigne et du Vin
36
State of the Wine Industry 2015 | Supply: New challenges impact planting and pricing
aprogramwhereexcessgrapeproductionwasconvertedintoindustrialethanol.Finally,theEUrecognizedtheobviousnon-marketsupportmechanismswerekillingpricesfortheirsuccessfulfarmersandperpetuatingadisastrousoversupply.
Afterseveralyearsofnegotiations,theEUputintoplaceacontroversialCommunalRegulation(CMO)inlate2007,phasingouttheemergencydistillationprogramentirelybymid-2012andpayingEuropeangrowerstouproot175,000hectares(about430,000acres)ofeconomicallyunsustainableandlesser-qualityvineyards.
Spain,Italy,France,PortugalandHungaryhavebeenthemajorbenefactorsoftheCMO,and—inconcertwithincreasingworlddemandandmoreEUexports—theresulthasbeenthatthelakeofwinethatonceexistedinEuropehasnowdrieduptoapond.Still,withthoseinitiatives,in2014theOrganisationInternationaledelaVigneetduVin(OIV)announcedFrancehadagainreclaimeditstopspotoverItalyamongworldproducers,with46.2millionhectolitersproducedintotal.21
Italyhasledtheworldinexportvolumesforsometimenow(Figure13);however,FranceleadsItalyandSpaininthevalueoftheirexports,witheachreportingthevalueofexportsat€7.8,€5.0and€2.5billioneurorespectively.CountriesmakingmovesinworldexportsincludeChile,whichhasmovedintothefourthpositionworldwideoverAustralia;andSouthAfrica,whichhasleapfroggedseveralcountriestomoveintothesixthspot.
Supply and consumption shift worldwidecontinued
Figure 13
Trends in export volumesSix-year span (2008-2013)
Source: L’Organisation Internationale de la Vigne et du Vin
25
20
15
10
5
0
South Afri
caMhl
Argentin
a
Portuga
l
New Ze
aland
U.S.
German
yChile
Australi
aIta
lySpain
France
37
Thiscontinuesapatternthatbeganwiththe2012harvest,whichpresentedarecordyieldinalltheWestCoastwine-growingstates.Californiahitarecord4.02milliontonsatharvest,withOregonandWashingtonexperiencingequallyoutstandingvintagesinbothqualityandvolume.
WineriesdesperateforsupplycomingofftwoconsecutivelowproductionyearsinCaliforniastillboughtupprettymuchalloftheuncontractedfruitthatwasleftandavailablein2012,andwerepaidwellfortheirexcessproduction.
2013wasanotherlargeharvest—slightlyoffthe2012productionrecordinCalifornia,butstillfantasticquality.OregonandWashingtonexperiencedmoredifficultgrowingconditionsin2013.
Now,withtheoutstanding2014harvestinCalifornia,onehastowonderifthe4milliontonharvestisnowthenorm.Or,willvolumeofdomesticallyproducedfruitretreat?
EachoftheregionsontheWestCoastreportedexcellentqualityin2014,withthePacificNorthwestleadingtheway,followedbyNapaandSonomaCounty.Lodi,theSierraNevadaandtheCentralValleyalsoreportedgoodqualitybutwithgreatervariability.TheCentralValleyandCentralCoastreportedexperiencingthegreatestvariabilityduetodroughtandwindinsomelocations,whichreducedberrysizeandyield(Figure14,seepage38).
California’s high yields create excess supplyMostestimatesforthe2014harvestaresomewherearound4milliontonsasofthiswriting,whichwouldmakeitthethirdlargestharvestonrecord.Ourguessisslightlylowerthanthat,basedondiscussionsandinformationfromourannualWineConditionsSurvey(Figure15,seepage38).Butwefallintolinewiththegeneralconsensusthattheyearwillprovetoberightuptherewiththelargestthreeorfourcropsizesever,andtheheavyvolumeischangingtheshapeofthesupplybalanceinthebusiness.
Record yields continue on the U.S. West CoastIn 2014, we ended with a three-peat in California thanks to another great harvest and yield. Oregon had perhaps its best harvest of all time, with both strong yield and excellent quality, and Washington reportedly experienced nearly ideal growing conditions and normal yields.
38
State of the Wine Industry 2015 | Supply: New challenges impact planting and pricing
Figure 14
Percentage of wineries reporting excellent harvest quality
87%Oregon
64%
25%
73%Washington
72%Napa County, CA
Sonoma County, CA
58%Lake County, CA
50%Anderson Valley & Mendocino County, CA
50%Central Coast, CA
50%Mid-Coast, CA
46%Central Valley, CA
44%Sierra Foothills, CA
Lodi & Other Delta Counties, CA
2014: High yields, high quality
25
20
15
10
5
0
Figure 16
Bulk wine available by regionMillions of gallons
nCentral Coast nNorth Coast nSonoma nNapa nCalifornia overall
2006 2007 2008 2009 2010 2011 2012 2013 2014
62%
43%
85%
Figure 15
The Paci� c Northwest led the pack in reporting higher-than-average yields
Oreg
onW
ashi
ngto
n Na
pa C
ount
y, CA
Mid
-Coa
st, C
ASo
nom
a Cou
nty,
CACe
ntra
l Coa
st, C
ACe
ntra
l Val
ley,
CA
Ande
rson
Val
ley &
Men
docin
o Cou
nty,
CA
Lodi
& O
ther
Del
ta C
ount
ies,
CASi
erra
Foot
hills
, CA
Lake
Cou
nty,
CA
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Silicon Valley Bank 2014 Wine Conditions Survey
Source: Turrentine BrokerageSource: Silicon Valley Bank 2014 Wine Conditions Survey
2014: High yields, high quality
39
2010and2011werepoorharvests,asyoucanseebythebigdipintherightsideofFigure16.Butatthetime,givenwherewewereinachallengingrecovery,itwasn’tatotaldisastertohaveacouplethincrops.
By2012,winerieshadpushedthroughthebulgeininventoryfromdeceleratedsalesandstartedneedingsupplyagain.Therecord2012harvestwasmetbyproducersandgrowersalikewiththesamejoyChuckexperiencedafterhelostandthenfoundhisbestfriend,Wilsonthevolleyball.
2013wasadifferentexperienceforgrowers.Withtherecordyieldfrom2012stillfillingcellars,bulkwinereadilyavailableand2013contractsbeingfullymetfromtheoutsetofharvest,someexcessgrapeswerelefthanginglongerthanneededjusttocleartankspace,overageoptionsweredeclinedbywineries,someexcesscouldn’tfindahome,andenforcementofqualitystandardsatdeliverywasthenorm.Grapesthatwouldhavebeengladlyacceptedin2012,flawsandall,wererejectedoutrightin2013.Spotpricesalsoshoweddeclinesaswouldbeexpected.
Thisiswhatwepredictedinlastyear’sreportforgrapesupplybalancein2014:
“Onthewhole,we’renotworriedaboutthebulkmarketbeingheavyatthispointdespitetwoback-to-backrecordyears,norarewetoodisturbedbyanyofthevarietalreportsofslightexcess.It’sreallygoingtogetdowntowhatconsumptionandharvestlookslikein2014.Withourviewofbothbetterconsumptionandguessinganaverageyieldin2014,webelievewearereallypretty
well-positionedinthecellarsandwithbulkavailability,withtheslightexceptionofmerlot,chardonnayandlower-costbulkjuiceintendedforhigher-productionwineries.”
Thepredictionwasprobablyjustaboutright—ifonlyMotherNaturewouldhavecooperatedandgivenusanaverageyield.Whileourtakeonlower-costjuiceseemedspoton,giventhethirdconsecutiverecordyield,thereisnowafairamountofjuiceouttherelookingforahome,butactivityonbulkpurchasingislowbecauseproducershavewhattheyneed.
Today,youcanprettymuchdescribetheshapeofsupplyaslong,asyoumovefurtherdowntheladderofexpectedpriceperton.It’sverylongunder$8andslightlylonginthewinedestinedformiddle-tierbottlespricedbetween$9and$18.However,thehighest-pricedbottles,andparticularlyredwineandNorthCoastcabernet,areshort(Figure17,seepage41).
Shifting cargo in low-priced winesOnceChuckwasabletoescapethebarrierreefinhisraft,hediscoveredhowhislow-pricedconveyancewasn’twell-engineeredforthewindandweatherthehighseasthrewathim,andhislittlecraftstartedtolosepiecesinthemidstofthestorm.Inasimilarway,thegrapegrowersproducingforthelower-pricedsegmentshaveexperiencedoutsideforcesontheiroperationsandhavelostsomepiecesoftheirtraditionalbusinessmodels.
In California, one has to wonder if the 4 million ton harvest is now the norm. Or will volume of domestically produced fruit retreat?
Record yields continue on the U.S. West Coastcontinued
40
State of the Wine Industry 2015 | Supply: New challenges impact planting and pricing
41
TheCentralValleyhaslongbeenandstillisthegatewayforU.S.consumerstocuttheirteeth.Inthiswriter’sview,it’scriticaltothelong-termhealthoftheU.S.winebusiness.Asearlyas2004,we’venotedthethreatimportedbulkwinecouldhaveonourCentralValleywinegrowers,particularlythoseproducingwineforthelowest-pricedwinesegment.ItwascleartousbackthenthattheInternetwouldmakeaccesstounlimitedamountsofbulkwinearealpossibilityforthelargest-productionwineries.Ifthereisn’tanydifferenceforthoseproducersexceptprice,ourCentralValleygrowersaremoresignificantlydisadvantaged.Webelievedthatneededtobeaddressedinsomewaybackthen,andwestillbelievethatnow.22
InaNovember2014presentationattheSanJoaquinValleyWinegrowersAssociation,thepresentersnotedseveralissuesthatneededtobedealtwith.Thepartofthemarketproducinggrapesdestinedforwinespricedlessthan$7hadbecomeoverplanted.Foreignbulkimportsthattypicallygointothosebottlesweretakinganequivalentof30,000,000casesannuallyinmarketshare,whichissomewhereneartheequivalentof60,000acresofgrapeproductionlost—cededtoforeigncompetition.
Uncomfortablewouldbethebestwaytodescribethemoodin2014intheCentralValley.Whilecontractedfruitdeliveredgoodprices,uncontractedgrapesintheBigValleyattractedpricesaslowas$100perton,impactingabout10–15percentofthevalley’stotalproductionaccordingtoestimates.
Cabernet Sauvignon
Est. tons crushed
Bulk inventories Bulk demand
Napa Valley î î Strong
Sonoma County î î Strong
North Coast î è Strong
Central Coast ì ì Moderate
Northern Interior ì ì
Weak to moderate
Southern Interior ì ì
Weak to moderate
Chardonnay
Est. tons crushed
Bulk inventories Bulk demand
Napa Valley è ì Moderate
Sonoma County î è Moderate
North Coast î ì Weak
Central Coast ì ì Weak
Northern Interior î î Weak
Southern Interior î î Weak
Figure 17
Supply and demand 2013 vs. 2014
Source: Turrentine Brokerage
Record yields continue on the U.S. West Coastcontinued
42
Bottle pricing: Highs move higher and lows trend down
4
State of the Wine Industry 2015
43
44
State of the Wine Industry 2015 | Bottle pricing: Highs move higher and lows trend down
After a thorough search for Chuck, covering the area where his plane was believed to have gone down,
everyone was left with the only reasonable conclusion: Chuck had been lost at sea. Turns out, they didn’t have all the information. In reality, Chuck’s plane had veered hundreds of miles off course.
Whenyouaddupallthedatapointswiththewinebusinessasweknowandasdiscussedabove,manypeoplewillsaytothemselves:heavyinventoryloadsequallowerbottleprices.Thatisareasonablethoughtprocess,becauseinastaticenvironmentholdingdemandconstant,anincreaseinvolumeshoulddecreaseprice.But,thatsimplisticviewignoresafewfactors.
WhenweaskedparticipantsinSVB’sannualWineConditionsSurveyabouttheirexpectationsregardingbottlepricein2015,wedrewsomeinterestingconclusions(Figure18).Theexpectationofpricedecreasesin2015isminimal,butmoreprevalentinthelower-pricedsegments.Thatseemstoflyinthefaceofeconomictheory,sincewehavethreeyearsofgreatyields.Buttheblacktrendlineinthechartgivesonecluewhythewineriesmightberightinthisquestionthisyear.23Theshapeoftheinventorycurveistiltedup,withwineriessellingthelowest-pricedwineslesslikelytoexpecttheycandrivepriceincreases.That’sconsistentwiththeinformationpresentedabove,whichshowsthe
lower-pricedsegmentsarelongandthehighest-pricedwinesareshort,particularlyinredwine.It’salsoconsistentwithwhatweknowaboutcohortpurchasingbehavior,withtheyoungestconsumerspreferringlower-pricedwines,butlackingthefinancialresourcestomovetheneedle.
2015willallowsomeincreasesinbottlepricesabovethe$20pricepointandperhapsslightlybelowthatinredwinebecauseofanimprovingeconomyandwinesthatareclosertobeinginbalance.Thelowerendofthemarket—below$8retail—isalreadytrendingdown.Somethingwillhavetohappentomakethattrendreversecourse,andwecan’tseeanythingatthispointthatwouldreversethetrend.Infact,astrengtheningdollarcouldincreasebulkimports,sothelowestendofthemarketfromapriceperspectivewillprobablyseepricediscountingandperhapsvolumedeclinesaswellin2015.
45
Figure 18
Pricing expectations among wineries
<$15 $15-$19 $20-$29 $30-$39 $40-$69 >$69
Bottle prices
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Decrease ên Moderate to strong
decrease
n Small decrease
n Hold prices
Increase én Strong increase
n Moderate increase
n Small increase
2 columns (6.3”w)
Source: Silicon Valley Bank 2014 Wine Conditions Survey
Atthelowestendofthemarket,weexpecttoseepricingdeclinesgiventhereisabundantsupplyandtradingup,whichisn’tagoodrecipeforsuccessinthissegment.Inthe$10–$20partofthemarket,thereisalotofwineavailabletobesold.Négociantsandbrandedwineswillsoakupsomeofthat,suchthatweexpecttoseevolumeincreasesandsomediscounting.Winespricedfrom$15–$18willhavebetterluckmaintainingtheirprice.Despitethehighervolumes,webelievewemayseemodestpriceincreasesinbottlepricesgreaterthan$20.
The shape of the inventory curve is tilted up, with wineries selling the lowest-priced wines less likely to expect they can drive price increases.
46
State of the Wine Industry 2015 | Financial performance: 2015 looks like a breakout year
47
Financial performance: 2015 looks like a breakout year
5
Anunderstandingofwhathappenedinthepastandaninformedviewofwhat’scomingnextiscritical.AsChuckNolandsaid,“Weliveanddiebytime,andwemustnotcommitthesinofturningourbackontime.”
Eachyearinthisreport,wetakealookatthefinancialconditionofwineries,reviewhistoricaltrendsandforecastasalesgrowthbandforthefinewinesegment,whichwedefineaswinessoldover$20retail.In2014,wepredictedsalesgrowthof6–10percentandexpecttoendintheupperendofthatrange,ifnotapercentagepointortwoaboveit.Consistentwithourinformation,SymphonyIRIGroupdatafrommarketingconsultantsWines&Vinesfor12monthsinoff-premiseaccountsshowpositiverevenuegrowthof6percentfortheperiodendinginNovember2014,with13percentgrowthindirect-to-consumersales.
TheeconomyhadaroughQ1in2014duetoweather,butsalesofhigher-endwinesmadeastrongcomebackinthebackhalfoftheyear.Salesoflower-pricedwines,however,droppedoffinvolumeandwerediscounted.
Overallwineconsumptionincreasedforthe20thstraightyear.Overturnedbluelaws,betteremployment,relaxedrestrictionsondirectshipmentsandcustomerstradinguptomorepremium-pricedwinesallledtotheindustry’simprovedyear-over-yearsuccessin2014.
Wineries report a solid 2014Gettingfinancialinformationaboutthewinebusinessisalittlemoredifficultthangettingtop-linesalesnumbers.Thewinebusinessisafamily-runindustry,andfinancialstatementsandreturnsaren’tjustwashinguponthebeach.Asbankers,wehavetheinformation,andforyearswe’vecondensedthatdataintostatisticsthatwegivetoourclientsforfree.Asaresult,peoplefromSpokanetoSanDiegocontactusaboutgettinghelpinfinancialmodeling.IalwaysdisappointthemwhenIsaytheinformationisreservedforclientsonly,butIcanofferthedatainFigure19,shownhere.
You have to watch your business, identify issues and potential problems, then take early action. That means
planning and using financial statements and other business metrics to quantify your performance.
48
State of the Wine Industry 2015 | Financial performance: 2015 looks like a breakout year
58%
57%
56%
55%
54%
53%
52%
51%
50%
49%
48%
47%
46%
45%
60%
50%
40%
30%
20%
10%
0%
-10%
2 columns (6.3”w)
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Sept 2013 Sept 2014
57.1% 55.3% 52.4% 53.7% 53.2% 53.4% 53.1% 52.64% 54.42%
22.3% 2.0% -3.8% 10.8% 12.2% 7.7% 9.2% 6.3% 8.22%
16.3% 9.5% 2.2% 6.7% 6.1% 6.9% 3.9% 5.4% 5.72%
Figure 19
Financial performance of premium wineriesn Sales growth
n Pretax pro¬ t
n Gross margin
Source: Silicon Valley Bank Peer Group Database
Aswelookatthefinancialpositionofwineriesthispastyear,startingwithdatadevelopedfromSVB’sPeerGroupDatabase,24revenuegrowththroughtheninemonthsendingSeptember30,2014,wasabout8percent,thecenterofourpredictedrange.Ourdataarenotseasonalized,andweexpecttoseetheimpactofastrongOctober-November-December(OND)2014sellingseason25rampupend-of-yearsalesafteraweakONDperiodattheendof2013.For2015,weareforecastingabreakoutsalesyearinfinewine,withayear-over-yearincreaseof14–18percent.
49
Overturned blue laws, better employment, relaxed restrictions on direct shipments and customers trading up to more premium-priced wines all led to the industry’s improved year-over-year success in 2014.
Keepingthegoodnewscoming,whilewehaven’tseenbottlepriceincreasesin2014,wehaveseenanimprovementinthecostofgoodssoldonaverage,duetothefrontedgeofthelargervintagesenteringthesalesstream.
Harvestcostsinthelargervintagesarespreadovermoretons,loweringcostofsalesandyieldingimprovedgrossmargin.Direct-to-consumersales,whichareasmallerpartofoverallsalesbutcarryhighermargins,alsocontributedtoimprovedmargins.Highergeneralandadministrativecostsduetoaheavierinvestmentneededfordirectsaleswashedoutthegainsfromimprovedcostofgoodssold,leadingtoflatprofitability.
Takenasawhole,thefinancialperformanceofwineriesin2014wasprettygoodandendedonanuptick.26Lookingatreportedfinancialhealthfromoursurveyshowsthatwineriesaremakingprogress,witheachbreakpointshowingyear-over-yearimprovement(Figure20).27
WhilethereisahighchancewecouldmissthedegreeandtimingoftheU.S.currencyimprovement,dropinoilprices,Fedactions,impactofadeceleratingworldontheU.S.economy,orthenegativeimpactofhigherinterestratesontheeconomy,wearecommittedtoourbeliefandpathandthinkthedirectionalimprovementweareseeingisrealandsustainable.
LikeChuckNolandinthefinalsceneinCast Away,wecan’tbecertainwhatthefutureholds,butgivenwhatwe’vebeenthrough,we’reoptimistic.Ashestandsatacrossroads,he’sasked:“Where’reyouheaded?”Chuck’sanswer:“Well,Iwasjustabouttofigurethatout.”
30%
25%
20%
15%
10%
5%
0%Dead On life support Very weak Slightly weak Good Strong Very strong Rock solid
Figure 20
Financial health: year-over-year comparisonn 2013 n 2014
Source: Silicon Valley Bank 2014 Wine Conditions Survey
50
State of the Wine Industry 2015 | Financial performance: 2015 looks like a breakout year
Financial performance: 2015 looks like a breakout yearcontinued
Taken as a whole, the financial performance of wineries in 2014 was pretty good and ended on an uptick.
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1. Q:WhatdotheauthorRobMcMillanandTomHankshaveincommon?A:Bothwerebornin1956inMt.DiabloHospitalinConcord.BothattendedCaliforniaStateUniversity,Sacramento.Bothareextraordinarilywealthy.…Well,maybenotthelastone.
2. Thelaborforceasapercentoftheciviliannoninstitutionalpopulation.
3. U.S.BureauofEconomicAnalysisdataattradingeconomics.com.
4. Thereisnoagreed-uponreferencepointfortheterm“finewine”intheindustry.Weuse$20abottleasadefinition,becausewehaveaccesstoseveraldatabasesthathaveabreakpointat$20ormore.
5. www.winesandvines.com/template.cfm?section=news&content=142644.
6. Shalefracking:en.wikipedia.org/wiki/Hydraulic_fracturing.
7. www.washingtonpost.com/opinions/robert-samuelson-key-facts-about-the-great-oil-crash-of-2014/2014/12/03/a1e2fd94-7b0f-11e4-b821-503cc7efed9e_story.html.
8. TheSouthwestEconomyFirstQuarter2011,FederalReserveBankofDallas,p34.
9. Here’salittleeconomictriviaforyou.ThePlazaAccordwasanagreementsignedtoweakentheU.S.currencyandwasthefirstpublicsuccessfulcoordinatedactmadebyCentralBankerstostabilizeworldcurrencymarkets:en.wikipedia.org/wiki/Plaza_Accord.
10. OKgoaheadandsayit:Rob?You’reafool.Nowgobacktodoingsomethinguseful.
11. IknowthisstuffbecauseIactuallyamabankerinthewinebusinesshandlingclientneeds,andIworkforaliving.ThiswritingstuffiswhatIdoinmycopiousfreetime.
12. Rob,you’restillafool.
13. Bloombergsurveyofeconomists,October2014.
14. www.gallup.com/poll/179810/economic-confidence-index-month-high.aspx.
15. UnemploymentRateU3:data.bls.gov/timeseries/LNS14000000.
16. BureauofLaborStatistics:www.bls.gov.
17. Formoreontheseconsumers,seemyblogpost:bit.svb.com/1y0uIK9.
Endnotes
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State of the Wine Industry 2015
18. SiliconValleyBankconductsaWineConditionsSurveyeachyearinconjunctionwithAVA’sthroughouttheWestCoast.In2014,wesentthesurveyouttoabout4,000wineries,andnearly500responded.Ifyouwouldliketobeincludedinthesurveyinthefutureandreceivegratisresultsandanalysis,pleasecontactPennyNorthropandrequestthatyoubeaddedtooursurveylist:pnorthrop@svb.com.
19. Customerrelationshipmanagementisamust-haveforwineriessellingdirect:en.wikipedia.org/wiki/Customer_relationship_management.
20.L'OrganisationInternationaledelaVigneetduVin(OIV)statisticalreleases.
21. CiattiGlobalMarketUpdate,November2014:www.ciatti.com/sites/default/files/november_2014_ciatti_world_report.pdf.
22. Ifyouwouldliketoreadalittlemoreaboutmy“footinmouth”experienceofthisprediction,seemyblogpost“IsCaliforniaWineataPricingInflectionPoint,”atSVBonWine:http://svbwine.blogspot.com/2012/07/is-california-wine-at-pricing.html.
23. Onquestionsofexpectations,weavoidthecommonsurveymistakeofaskingsomethingrespondentshavelimitedcontrolover.Whilepriceincreasesfallintothatcategory,wedon’talwaysacceptthegeneralbeliefaswasthecaselastyear.Wetestthetheorytoseehowitholdsup.Weknowwinerieswanttopassonhighercoststoconsumers,andthisyearincertainpricepoints,webelievetheycan.
24. TheSVBPeerGroupDatabaseisaproprietarydatabaseofbothclientandnon-clientfinancialstatementsgoingbacktotheearly1990s.Withit,SVBisabletobenchmarkaclient’sfinancialinformationagainstahighlyrelevantpeergroupandreviewindustry-leveltrends.
25. Inthewinebusiness,themonthsofOctober,NovemberandDecemberrepresentabout40percentofannualsales.
26. “Prettygood”isdefinedingenerallyacceptedaccounting15principlesasfinancialperformancethatisonestepbetterthan“good.”
27. Reportedfinancialhealth,whileimprovinginallcategories,didhaveonenotablereportednegativechangeyearoveryear,andthatwasinthe“dead”category.Wehavetocallthereportingintoquestion,sincereportingwhenoneisdeadisonlypermissibleinChicagoelections.
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About Silicon Valley Bank
Formorethan30years,SiliconValleyBank(SVB)hashelpedinnovators,enterprisesandinvestorsmoveboldideasforward,fast.SVBprovidesarangeoftargetedfinancialservicestobusinessesofallstagesandsizes,withspecializedexpertiseinthetechnology,lifesciences,energyandresourceinnovation,venturecapital,privateequity,andpremiumwineindustries.ThroughofficesacrosstheUnitedStatesandaroundtheworld,SVBofferscommercial,internationalandprivatebankingservicesthataddresstheuniquechallengesandopportunitiesinnovatorsface.(Nasdaq:SIVB)
Learn more at www.svb.com.
Silicon Valley Bank’s Wine DivisionFoundedin1994,SVB’sWineDivisionoffersfinancialservicesandstrategicadvicetopremiumvineyardsandwineriesintheUnitedStates.Withoneofthelargestbankingteamsinthecountrydedicatedtothewineindustry,SVB’sWineDivisionhasofficesinNapaandSonomacountiesandservesclientsinthefinewineproducingregionsofCalifornia,OregonandWashington.
Learn more at www.svb.com/winedivision.
Silicon Valley Bank’s proprietary Peer Group metricsSVB’sPeerGroupAnalysisprogramtracksandcomparesavarietyoffinancialmeasuresamongpremiumwineries.Withfinancialinformationcollectedfrommorethan100premiumwineriesoverseveralyears,SVBgivesclientsexclusivebenchmarkinginformationandinsightsintotrendsshapingtheindustry.
Contact usFormoreinformationaboutthisreportorSiliconValleyBank’sWineDivision,pleasecalloremail:
Rob McMillanExecutiveVicePresidentandFounder707.967.1367rmcmillan@svb.com
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State of the Wine Industry 2015
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©2015SVBFinancialGroup.Allrightsreserved.SiliconValleyBankisamemberofFDICandFederalReserveSystem.SVB>,SVB>Findaway,SVBFinancialGroup,andSiliconValleyBankareregisteredtrademarks.
B_WD-14-13762.Rev.1-15-2015
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