Isolated Road Sign: Changes

I recently attended an excellent conference held by a number of combined Farm Credit Associations.  At the conference, I listened to some great economists who tried their best to prognosticate the future.  I took home three messages:  1. the recession is over; 2. the government stimulus package is helping to mitigate the effects of the recession; 3. growth in the future is going to be positive, but slower than it was prior to the recession.  I thought I’d pass on some of the details of these findings and then give my best shot at predicting future wine sales trends.

The recession is over!

A recession is deemed over when the economy has reached the end of its contraction (or the bottom of the trough).  I think a better way to phrase this is “things have stopped crashing.”  And just because the economy has stopped crashing, it doesn’t mean things will get better right away.  Personally, I think it is too soon to tell if our economic troubles are completely over—mostly because the government stimulus package had such an effect on our economy in the third quarter.  The graphs that the economists were showing clearly demonstrated that it is entirely possible that economic improvement in the third quarter was due almost completely to government spending.    

Unsteady growth going forward

The billions of dollars spent propping up the economy are going to disappear eventually.  And as one of the speakers put it, “What happens after the training wheels come off?”  The consensus seemed to be slow economic growth through 2010 and into 2011.  However, there is the possibility of a ‘double-dip’ (a short period of growth followed by another decline), depending on events in the next six months.  The key factors to watch going forward will be: 

  1. The unemployment rate (always lags a bit, but for how long?)
  2. Consumer savings (reduces consumer spending)
  3. First-time homeowner mortgage foreclosures (we’re not in the clear yet)
  4. Housing values and commercial real estate values (have we hit bottom yet?)
  5. The amount of small bank troubles due to bad commercial real estate and first- time mortgage holdings (they aren’t too big to fail).
  6. Government spending, taxation policies, and health care reform (this is a very critical time for our politicians to make the right choices)
  7. Possible risk-premium demands from foreign debt holders which can affect the Federal Reserve federal funds rate (which will then passed down in higher bank interest rates).

What does this mean for wine sales? 

Wine sales are fairly dependent on personal income (or people feeling like they have more money to spend).  Wine sales continued to rise through September 2009, but which wines were selling?  A lot of the discussion in the wine periodicals is about what price points are selling and if there has been a fundamental shift downward in wine price points. 

I would argue that the buying down phenomenon is due to the way we typically market wine—in tiers.  Low to moderate priced wines are normal or inferior goods and high-end wines are luxury goods.  So as income (or perception of income) rises, demand for inferior goods falls.  Demand for normal goods rises, and demand for luxury goods increases faster than demand for normal goods.  So when personal income falls, you get the picture of the wine industry today. 

Will this change?  My bet is on people’s perception of their personal income and how the seven factors above effect this perception (also, don’t forget how the local economy can affect things in your state).  To add to this discussion, let me summarize what news tidbits I have read recently:

  • Wholesale markets have suffered due to wholesalers reducing inventories and restaurants going out of business.  The decline in restaurant sales may have already bottomed out.
  • Wineries planning on high growth levels got stuck with excess inventory when the growth rate in wine consumption slowed.  High-end wine sales slowed a lot faster than wines in the lower price points.
  • Grape growers are experiencing the most pain from the inventory problems.  The downward price pressure is showing up here the most. 
  • Imports haven’t kept up with domestic wine sales growth, thanks to the weak dollar and the growing buy-local trend (Australia has really suffered, but I’d still watch out for South American wines).
  • Consumer buying behavior has changed, but the $9.99, $14.99, and $19.99 price points are still good (and have always been good).  Now they are better for those producers who were producing in this segment before the recession. 
  • Just like the housing market, there was a bubble of sorts in the wine market that is now being corrected.  After fifteen straight years of wine sales growth (and corresponding income growth—with a hiccup in 2001), things were bound to slow down a little.    

My view on what trends to expect in the future: 

  • High-end wine consumption will come back (to a degree) if there is not a ‘double-dip’ in the economy or a problem with the stock market.  My leading indicator will be the unemployment rate.  Also, keep your eye on income growth for households.
  • People are paying more attention—if you charge more money, you’ll have to pay close attention to your product quality and differentiation. 
  • The media has made it cool to save money.  In fact, it has been somewhat cool to be ‘cheap’ with other products for years (thanks to big box stores and other factors), now it is headed toward the wine industry.  Try to buck this trend.  This doesn’t mean that all wineries should try to compete at low price points.  It just means there is less room at the top. 
  • Our next big wine drinking generation, the millennial generation, is more product savvy—mostly due to their incredible ability to quickly access information.  Don’t try to fool them.
  • There will be winery and vineyard consolidation.  As with any industry that is forced to produce products at lower prices, there must be efficiency gains through increasing the scale of operations and driving down overhead costs.  Similar to any industry in flux, the pressure will be on the middle-sized operation.

National trends are eventually reflected in the local economy.  What trends are you seeing in your state?  Please comment.  Winery Benchmark participants are encouraged to check out the trend report that is available on the Winery Benchmark Participants password-protected page (due in November, after the harvest reports are all in).  If are not currently a participant in the Winery Benchmark, check out the Winery Benchmark page for details on how you can join.