The good news for the wine business? Premium wine sales increased 21 percent in 2021, and another strong year will follow in 2022.
The bad news? Wineries may well need those two banner years to offset the aging of the industry’s Baby Boomer base, the continued decline in on-premise sales, and the beginning of climate change-related water shortages and restrictions.
Those were among the conclusions from the 2022 Silicon Valley Bank State of the Wine Industry report, released Wednesday, January 19 in a live webcast.
“Last year, 2020, was one of the most difficult years for the wine business since Prohibition,” said Rob McMillian, the SVB executive vice president and founder of the wine division and the annual report’s author. “But there was lots of good news.”
How good was business in 2021? The survey found that 53 percent of the wineries who submitted data—630 U.S. producers in all; 60 percent from California—said business in 2021 was “very good,” up from 13 percent a year ago. And almost one-third called 2021 their best year ever—results that McMillan called “remarkable.”
In addition, e-commerce—which saved 2020 from being worse than it was—didn’t decline in 2021, holding steady at about 9 percent of winery revenue. Paul Mabray, one of the webcast panelists and a leading wine DtC expert, told the audience that he had expected e-commerce sales to decline in 2021. The fact that they didn’t, he said, spoke to the industry’s skill in learning from the changes the pandemic forced on wineries.
In particular, the ability to quickly adapt to the way consumers switched channels was impressive. Many winery owners and operators took just six months to understand how and why consumers bought online instead of from closed restaurants during lockdowns, and were able to adjust their business models accordingly. In this, wine—for all of its other sales woes in the past couple of years—accounts for two-thirds of all e-commerce dollars.
Interestingly, the biggest growth in DtC in 2021, according to the report, came from the biggest wineries. Sales as a percentage of revenue for producers between 100,000 and 250,000 cases almost tripled, while it was about 2 ½ times for those larger than 250,000 cases. This, said Mabray, was a powerful example of how larger companies can extract value from their companies.
Which was the good news. The bad news focused on the continued slump in the on-premise and the failure to see a significant rebound there as the pandemic eased. Dale Stratton, the president of the Wine Market Council, and Danny Brager, the long-time Nielsen wine guru, both noted that on-premise sales in 2021 were nowhere near where they were before the pandemic. The study found that winery sales to the on-premise almost doubled from 2020 to 2021 as a percentage of revenue, but that wasn’t enough to make up the shortfall.
Meanwhile, at least 10 percent of the restaurants that were closed in February 2021 likely never reopened, and Brager said that percentage was almost certainly higher for the fine dining locations that play such a crucial role in wine sales.
In this, noted the report, there was little prospect for improvement any time soon. “Excessive markups have reduced the volume of wine sold through on-premise, as prohibitive costs meet up with younger frugal consumers who drink across categories,” wrote McMillan. “Restaurants will find that wine is not in demand at the prices charged and that maintaining deep stocks of wine is not worth the cost.”
Which, given the mindset of those younger consumers, ties into the idea that wine is becoming increasingly the drink of the old. The report noted that a Harris poll found that Baby Boomers were the only age group that overwhelmingly endorsed wine as something to bring to a party—a 20 percent gap between it and the next age group. Unfortunately Boomers, says the report, will eventually be replaced by those who aren’t wine lovers and will opt to bring something else to a party.
Finally, climate change and water use, as California and the West Coast continue to deal with persistent drought, will bring more pressure on the industry. Grapes, though not as water intensive as other crops, will still face many of the same problems. More than 40 percent of those surveyed said they are very concerned about their water supply, and that they could face serious shortages. Only 2 percent said they were confident they had enough water.
For more information, download the full 2022 Silicon Valley Bank State of the Wine Industry report.
Jeff Siegel is an award-winning wine writer, as well as the co-founder and former president of Drink Local Wine, the first locavore wine movement. He has taught wine, beer, spirits, and beverage management at El Centro College and the Cordon Bleu in Dallas. He has written seven books, including “The Wine Curmudgeon’s Guide to Cheap Wine.”