Wine Industry Analysis Essay
Wine Industry Analysis
The US winery industry had a growth rate of 4. 7% between 2006 and 2011, and is expected to grow by a rate of 4. 9% over the next five years [ (IBISWorld) ]. In California alone an average of 175 wineries have opened every year since 2000 [ (Richard Green) ]. The states of New York and Virginia have been major players in the US wine industry. The data shows that the demand for wine has been increasing at an exponential rate over the past 5 years. Average annual revenue for the wine industry is expected to be estimated at $20. 2 billion through 2016 [ (IBISWorld) ].
The growth of the wine industry, particularly over the past 10 years, can be attributed to a few key drivers in the market. Per capita consumption of alcohol has increased consistently and is expected to grow. Wine and spirits in particular have surpassed beer, due to the growing trend in the US towards living a healthy lifestyle. Beer contains high levels of carbohydrates, which explains the drop in popularity in the market. The recent trend in the diet and food industry has revolved around cutting carbohydrates out of the diet. Wine and spirits in small amounts has been proven to actually improve the health of the consumer.
The price of grapes over the past five years has dropped making it more attractive for winemakers to increase their supply and stimulate new entrants into the market. As of recently the price of grapes has been on the rise, which is expected to cut into the profits of wineries. The price of grapes is determined by how successful the harvest is, which weather and pests can affect. Typically, the winery will have a contract for a set price on the grapes in order to help stabilize the price, thus preventing unexpected swings in cost. The demand from beer, wine and liquor stores has been on the rise.
These stores account for a high percentage of the wine sold in the US. The demand from bars and clubs has also been on the rise. The consumer sentiment index has increased, meaning consumers feel more confident about the future, and as a result spend more on luxury items such as wine. The strengthening of the dollar compared with the euro has cut the amount of wine being exported out of the US. Because of the exchange rate, US citizens have been able to purchase European wine at a cheaper price, thus having a negative effect in the marketplace on domestic producers.
The industry is changing from having a few key players such as E. & J. Gallo Winery, Constellation Brands Inc. , and The Wine Group, Inc. , to being more fragmented across the United States. The large US wineries benefited during the recession by being able to sell a lower price wine due to economies of scale. With the consolidation of suppliers, smaller wineries have struggled over the past few years. Despite the challenges faced by the smaller wineries, this segment of the market is expected to increase by 5. 5% annually on average [ (IBISWorld) ].
During the recession the sale of wine in restaurants was on the decline as people ate out less, although small wineries were experiencing increases in direct to consumer and tasting room sales. Wine sold in restaurants is typically marked up considerably, which would explain the trend. Sales over the internet have also been on the rise due to changes in the laws. Many wineries have tapped into social media networks such as Facebook and Twitter in order to market their product. The gradual strengthening of the US economy has had a positive effect on the US wine industry.
The higher priced wines, which have a higher profit margin for the winery, have been increasing in demand among US consumers. The increase in demand has created more competition within the wine industry. In 2010, the US surpassed France as the world’s largest wine-consuming nation, purchasing nearly 330 million cases [ (IBISWorld) ]. Exports of wine were up 26. 6% from 2009, because of the decline in value of the US dollar [ (IBISWorld) ]. Exports are predicted to represent 8. 8% of industry revenue in 2011. During the recession, many of the larger wineries began to outsource production to countries like France, Italy and Spain.
These wineries would import large amounts of wine in bulk, and then bottle the wine in the US. This allowed the larger wineries to sell their wine at a considerably cheaper price, hurting the smaller domestic wineries. In 2011, the import market share in wine was roughly 26. 5% [ (IBISWorld) ]. The amount of foreign wine entering the US has been on the rise ever since it was named the largest consumer of wine in the world. Foreign producers, who are experiencing a decline in business in their home country, are looking for new markets to sell their product.
Countries such as Argentina, Chile, Australia and New Zealand are able to produce their wine at a lower cost than the US. The import of these wines has heated up the competition in the US creating benefits for the US wine consumer. The superior quality of the imported wines has also changed consumers thinking as far as how much should be spent on a good wine. The immediate future looks promising for the wine industry. In 2012, the industry is expected to grow by 4. 4%, and will only increase through 2016 [ (IBISWorld) ]. The wine industry relies on a three-tier distribution system.
The producers sell to the wholesalers, who then sell to the retailers. The national sales tier consists of suppliers who sell to a wholesale distributor [ (Tincknell & Tincknell) ]. As suppliers continue to consolidate, the larger producers will have the upper hand due to larger marketing budgets, as compared to the smaller wineries. The smaller wineries will continue to exploit alternative sources of distribution such as the internet and tasting rooms. A majority of wine is sold via the wholesale channel, except for a few of the larger producers who offer direct sales to consumers via the internet and tasting rooms.
Sales through tasting rooms and tours represent a very small portion of the US wine industry. As a recent trend, convenience stores have begun carrying a small selection of wine. The convenience store is a fast and convenient way for consumers to pick up a bottle of wine. Wine sales to bars, restaurants and hotels represent around one-third of the market for the industry. Millennials (ages 15 to 32) are expected to become the largest wine consumers in the next five years. Currently wine accounts for 20% of all alcohol drinks consumed by millennials [ (IBISWorld) ].
Baby boomers are increasingly retiring and ultimately cutting back their wine consumption. This is due in part to having less or a fixed income, which decreases the amount of disposable income they have to spend on wine and other luxury items. The millennial generation has contributed more to the growth of the wine industry then their baby boomer parents in recent years. This generation has also on average purchased higher priced wines than the baby boomers. Wine producers will have to target marketing campaigns and taste preferences to this up demographic of wine drinkers.
As of 2010, the per capita consumption of wine drinkers in the US was 2. 54 gallons per year [ (IBISWorld) ]. Although the US is the largest consumer of wine, the per capita consumption is far less than places like France and Italy, which represents a significant amount of possible growth in the industry. The demand for US wine has also increased overseas as the reputation of US wine has consistently improved since the 1970’s [ (IBISWorld) ]. Direct shipments to consumers via the internet and wine clubs is expected to represent a large portion of revenue earned by the wine industry.
Each state sets its own laws regulating the mailing of wine in the US. California has seen an increase in tasting rooms located in urban areas away from the actual winery. This is a way for wineries to earn additional revenue and market to customers who may not otherwise visit wine country. Wineries have also taken advantage of cheaper land in California and expanded their tasting and bottling rooms. The US wine industry is considered cyclical, and is not expected to fully reach maturity for another 10 years [ (IBISWorld) ].
Research has shown that Merlot has the largest consumer base of any type of wine sold in the US [ (IBISWorld) ]. Merlot generally has the reputation of being high quality and affordably priced, which attributes to its popularity. Despite Merlot’s popularity, it is the second bestselling wine behind Cabernet Savignon. Nielsen Company analysis indicates that 9. 5% 0f US households purchase at least one bottle of Merlot compared to 9. 3% for Chardonnay, making it the highest household penetration of all wine varieties [ (IBISWorld) ].
Riesling, Pinot Noir, Sangiovese and Sauvignon Blanc make up the fastest growing wines in popularity in the US. Chardonnay is currently the best selling white wine in the US. The red wine varieties are becoming more popular due to the associated positive health benefits. Wine in the US is categorized into nine price brackets based on age, grape, quality and region. The most popular category in the US is termed premium ($7-$10), and mid-premium ($10-$14). Wineries are able to increase sales considerably by reducing the price, and marketing to a new category of consumers. Cutting the price can have negative consequences for the winery.
Many wine consumers get accustomed to spending a particular amount, and if the price is reduced, they may view the wine as being less desirable and choose a different brand. Interestingly, wineries have nothing to do with setting the retail price once the product reaches the retailer. The winery can suggest a selling price to the retailer, but it is up to the retailer to set the final sales price. The sales price is usually calculated by doubling the winery’s freight-on-board (FOB) price [ (IBISWorld) ]. Economic conditions and taste preferences dictate the demand for wine in the US.
As the economy strengthens, people have higher levels of disposable income that can be spend on products like wine. Increased income also allows current wine drinkers to purchase higher priced wines, and consume more wine in general. This is part of the reason for the increase in wine consumption per capita gains in the US in recent years. During the recession, the higher priced wines took the biggest hit as consumers looked for ways to reduce spending. As disposable income increases people tend to eat out more often increasing the demand for wine at restaurants.
This is positive for the wine industry since a good portion of their sales are from restaurants. Economic conditions of other countries also dictate the demand for US wine. As wine from international producers becomes more expensive, increasingly consumers will turn to US wine, thus increasing exports and decreasing imports. In the US, wine consumption generally declines in direct relation with the consumer’s age. The highest demographic of US wine consumers consists of white, educated, married males, who typically earn a high income [ (IBISWorld) ].
Of all wine consumers, approximately 75% are married, 87% are homeowners, more than half are between the ages of 35 and 55 years, and 64% have a household income over $100,000 [ (IBISWorld) ]. Additionally, 47% of wine consumers have graduated from college, and 34% have completed graduate school [ (IBISWorld) ]. The US wine industry has a medium level of market share concentration, as the top four producers account for approximately 41% of the industries market share [ (IBISWorld) ]. The level of concentration has increased over the past 10 years due to mergers and acquisitions within the industry.
Recently the trend of larger corporations purchasing smaller wineries has slowed, but is expected to increase in the coming years as the economy improves. Banks generally have been hesitant to lend money to wineries for the purpose of acquiring an existing venture. The US market is attractive to producers who wish to gain considerable market share, due to barriers to entry and the growing consumer demand. The three tiered distribution system and complicated regulatory framework helps to protect the large-scale wine producer who has a distribution system in place, but tends to hurt the smaller scale start-up winery.
Larger wine producing operations tend to be more profitable, although smaller wineries who manage their costs can still prosper. The industry as a whole has remained profitable despite the economic downturn and increased competition domestically and from abroad. Many wineries have chosen to outsource the grape production to save costs regarding operations and management. The grapes are the largest expense of the winery and account for approximately 44. 5% of revenue [ (IBISWorld) ]. Labor expenses makes up the second highest cost to the winery, with depreciation and other various expenses accounting for the rest.
A growing trend over the past few years has been urban wineries. An urban winery has the grapes delivered to the location and they proceed to make and bottle the wine. Urban wineries are located all over the US and many provide a chance for the customer to tour the facilities and learn more about the process. The Infinite Monkey Theorem winey opened in 2008 in downtown Denver, Colorado [ (Mariani) ]. The owner Ben Parsons is an Australian born enologist who has a passion for wine. Ben offers tours and samples to visitors who visit his business.
We like the simple irony of comparing such an endeavor to the incredibly controlled process of premier winemaking”, says Ben [ (Mariani) ]. The business produced 4,500 cases in 2010, with a majority of the grapes grown in Colorado. The business is centrally located and sells to local restaurants and tourists alike. Ben likes to give back to the community and has donated $25,000 to the University of Colorado Cancer Prevention Center. Ben produces his wine following the traditional methods. The grapes originate from an area in Colorado that has a similar growing season to France’s Rhone Valley.
The business hopes to open a restaurant in the future. “Sommeliers come in and help us bottle,” says Ben. “Some of the city’s best chefs have come by and seen what we do. They help rack wines. They taste from the barrels. And when someone sees Infinite Monkey Theorem on the wine list and asks about it, they can tell the story because they’ve been here. ” [ (Schoenfeld) ] Given the current trends in the wine industry, I feel that urban wineries could be a successful venture to open in the US.
A growing number of wine consumers mean that there will be demand for the product. A city is going to have a large population of millennials that make up the largest segment of the wine drinking market. The overhead for running an urban winery would be much less that actually running a vineyard. The business would not need an extensive amount of land or people to carry out the daily operations. There would be no limit as far as the region of grapes used to make the wine, so the owner could offer a wide variety of styles to suit anyone’s taste.
You do not get the total aesthetic feel of going to an actually winery, but there are a number of things you could do to decorate the space and provide an interesting atmosphere. The potential increase in the price of grapes would be one risk that would have to be managed when opening an urban winery. The laws change from state to state and would have to be addressed before deciding to start the venture. The laws could relate to marketing restrictions and obtaining the proper operating licenses.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 30 December 2016
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