Steps to make wine profitable again

Failure to tackle the health lobby, disengaged consumers and poor management skills are all contributing to problems in the US wine industry, according to Rob McMillan, the author of the Silicon Valley Bank's State of the Wine Industry report. But he thinks there are ways to turn things around.

Rob McMillan/Robert McClenahan
Rob McMillan/Robert McClenahan

The annual release of the State of the Wine Industry report from Rob McMillan, the executive vice president and founder of the Silicon Valley Bank’s Wine Division, is hotly anticipated. McMillan is not only a highly regarded analyst and banker, but his approachable writing style makes his conclusions easy to grasp.

The 2020 report, released on Tuesday, made for unsettling reading, showing difficult times ahead for the US wine industry – and when there’s trouble in the lucrative US wine market, wine producers around the world will feel it. Rob McMillan spoke to Meininger’s the day after the report was released.

One of the things you say in the report is that wine producers haven’t met the needs of consumers. Can you elaborate on that?

Maybe I should say “perceived needs”. The reality is wine sold to boomers was sold on the pretext of boomer values. They were about wearing your wealth on your sleeve. You drove a BMW and like to consume conspicuously. That’s not the way of the young consumer, but the wine industry that has come up since 1975 has grown up with the idea of catering to the values and lifestyles of the rich and famous. The industry has struggled with this transition to the new consumer, who doesn’t carry the same values.

They are put off by displays of wealth for instance.

What’s become clear to me is that what’s working for spirits and other companies is the notion of wellness and wellbeing.

The wine industry, going back to the middle 90s, had an advantage over other alcohol beverage categories because of the French Paradox and the Mediterranean Diet and showing that moderate consumptions leads to healthier outcomes. This was difficult for the anti-alcohol movement to deal with and we’ve been riding high for a long time. The “better for you” discussions went by the wayside because we were selling everything we had to sell. We didn’t even have to export. At a minimum that makes you blind to the reality of the consumer changes we’ve seen. The new consumers don’t just not like the lifestyles of the rich and famous, they want to understand food – the calories and how much sugar is in it. And yet we’re still talking about long days and cool nights and about the people who own the label. 

We have a lot of work to do to get the consumer to recognise that wine is on the side of the angels. We can’t be more plant-based than wine – you put it in a tub and squish it and it turns into something else. Yet we’ve got to this point where spiked seltzers are seen as a more healthful choice because of the clarity and transparency of the ingredients.

Another striking observation you make in the report is that the successful wine companies have good management in place. Formal management training, particularly in small and medium-sized European wine companies in Europe, is often overlooked. Can you talk further about this issue?

One of the problems in trying to understand the industry is that it’s a family industry, so they don’t publish their financial results. As a banker who banks about 450 wineries in the US, I do get to see the statements and we can look at macro level trends. What I was able to do this year was take the data we have and break it into quartiles. What I noticed straight away is the lowest quartile in terms of sales showed about -7%. I expected to find some sort of trend – maybe it was all small wineries, or wineries from second-tier regions. What I found was the opposite. We had wineries [that were small or from second-tier regions] that had sales growth of 20%. Every quartile had a mixture of wineries by size and location. 

Since I know these wineries, I can look at it from a qualitative standpoint. What was obvious was the winners had sales and marketing teams that were focused on results, using metrics. They were running their family businesses like businesses. 

Demand has been so strong for wine that selling became quite easy. Now it’s not and the winners are the ones who can adjust and hire outside the industry or develop their people.

Direct-to-consumer wine selling is most advanced in the US and is only just getting started elsewhere. What problems do you see in the US that others could learn from?

I’d say the main one is to recognise that the US model of people coming to the winery and the tasting room and selling in the tasting room or converting people to the club is a choke point. You’re limited by the number of people who can flow through that winery. There is no other industry that makes you go to the production facility to pick up your product. It’s backwards in a world that is digital in a world that is moving to online sales.

Given the difficulty of getting distribution and the low margins in retail, what alternatives do wineries have?

Even though the average winery now sells about 60% DtC, the growth rate is less than 5%. What I have been talking about is a bracket I call “taking the experience on the road”. As an example, I suggest people go to second-tier markets where perhaps you have a family member living and spend some time investing in that local scene. Be the dominant winery in that second-tier city. You don’t have to go to Tokyo and London to be seen in the best restaurants. You have to build a brand and one way is to have people come to the winery, but the other way is to put feet on the street. You can do it digitally. The next evolution is a digital platform. 

Do you think the wine industry is going to contract?

We are contracting. We are declining in volume sales. 

We’ve reached a point where Seltzers are viewed as more healthy than wine. Health is the Rubicon we have to cross, because if spirits can grow, then wine should grow.

Turning to the fraught subject of the proposed 100% tariffs on European wines. If they go ahead, what do you think their impact will be on the US wine market?

That’s a question I have gotten at least a dozen times. I wrote the report in November before tariffs were a talking point. My view is there is a potential small gain that domestic producers might have; if you want to eliminate all sales from Europe, a wine drinker is going to look at something else.

In the end, I don’t think the tariffs as presented are good for anybody. For Europe, you lose your export market. For all the small importers and distributors in the United States, it means the loss of jobs and maybe your business and life savings. It’s capital destruction.

Have you seen that the Wine Institute of California has joined with the Comité Européen des Entreprises Vin to ask that all tariffs be eliminated?

Even before these tariffs the EU and the US were not on an equal footing with tariffs, and so there is a possibility we could come out of this with exactly what the announcement asked for – zero tariffs. Let’s get rid of them and just talk about the wine quality and serve wine to people who want it.

Interview by Felicity Carter
 

A summary of the SIlicon Valley Bank's State of the Wine Industry report can be found here.

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