US wineries bearish about business prospects this year, according to Silicon Valley Bank survey

The U.S. wine industry is grappling with an oversupply of grapes amid flat retail wine sales, forcing vintners to adapt to a difficult marketplace, according to an influential survey of wine executives.

The report from Silicon Valley Bank was blunt in its assessment that the $71 billion U.S. retail wine market is undergoing significant change beyond cyclical supply and weakening demand for wine, particularly because wineries have failed to woo enough millennial drinkers to replace loyal baby boomers.

“Millennials aren’t engaging with wine as hoped. They lack financial capacity, having been slow to get into their careers after the financial crisis. They have a current preference for premium spirits and craft beers,” according to Rob McMillan, executive vice president of Silicon Valley, who has conducted the annual survey since 2001.

The survey asked 628 winery executives and managers on their industry views. Most of the survey responses came from the West Coast from winemakers working in an average price category of $20 to $29 a bottle.

Roughly a quarter of the wineries experienced their best sales year ever in 2019, while an increasing number of wineries reported poor financial results. Overall, the sentiment from respondents reflected a more bearish view of the market, as 49% of wine executives have a pessimistic outlook for their businesses in 2020.

“With an oversupply and the fact that price increases are nearly impossible against the backdrop of slowing sales, the trend and mantra of premiumization that pushed volume and price higher for the past 25 years is nearing an end,” according to the report.

Most wineries will have to retool their operating strategy in a low-growth era for them, though certain premium wine areas of Oregon and Washington are expected to continue double-digit annual sales growth, McMillan said in an interview.

There is an opportunity with younger consumers - age 22 to 37 - that haven’t yet embraced wine. “We have to move off the gravy train of the baby boomer,” he said. “We have to create an on-ramp for that younger consumer.”

On a per-serving basis, wine is more expensive than beer and spirits, but McMillan said he doesn’t think cost alone is the major impediment for millennials - who are more cash-strapped than older generations.

Instead, he said craft beer and spirits producers have innovated more with their marketing and new products than the traditionally more conservative wine sector. For example, he cited the skyrocketing sales of alcohol-based hard seltzers that have taken the entire beverages category by surprise. Those popular drinks are low in calories and gluten free. Consulting firm IWSR predicts the hard seltzer category will triple in sales volume by 2023.

“It’s not that we have to be cheaper, but we have to reinvent our values for the younger consumer,” McMillan said of the wine industry.