The wine industry must prepare itself for “a new normal” in the next couple of years, said Rob McMillan, founder of Silicon Valley Bank’s Wine Division and author of the annual State of the Wine Industry Report. The wine industry will continue to feel effects of the recession, “and there is no expectation that what was normal for the past decade will return in short order,” said Rob in a statement announcing the report’s preliminary results for the 2010-2011 report. With that said, he forecasts modest growth at the producer level in 2010 and positive growth in the fine wine business in 2010. Early reports for Q4 2009 sales suggest improvement over the same period in 2008. Overall, SVB expects full year sales to decline in the -2% to -8% range.
WHAT IS NORMAL? In the report, Rob questions what the wine business normally looks like. He suggests that conditions over the past 15 years are anything but normal – in fact, it was unprecedented. “What winery owners and luxury marketers have come to believe was normal was really an aberration when viewed from an historic context. The run up in U.S. consumer wealth due to growth in the market cap of the stock market between 1990 and 2000 was unprecedented and is mirrored in double-digit growth in fine wine prices, luxury goods, and the number of brands.”
Rob reiterates that a full recovery will take time due to lasting, negative economic changes in housing, consumer wealth, consumer credit, business spending and restaurant sales.
BABY BOOMERS CHANGING SPENDING HABITS. Demographic shifts in particular will likely take a toll on fine wine sales and how the industry markets to consumers as they change their spending habits and potentially leave the market altogether. Rob specifically points to Baby Boomers: “For that segment of Baby Boomers who have seen their net worth drastically reduced and who have been the prime target of wine marketing for nearly 20 years, a $50 bottle of wine is now permanently out of the question for a normal purchase,” he said.
He points out that “not all affluent consumers are created equally.” “Absolute affluent” consumers, which make up about 40% of affluent spenders, are still spending on luxury goods at pre-recession levels. However, “aspiring affluent” consumers, which are the main target of fine wine marketers, have pulled back.
Enter “young luxury buyer.” Rob says that “initial findings suggest that we have seen an accelerated demographic shift to a younger luxury buyer than what was present before the market collapse.”
HOLIDAY FORECASTS. Holiday says are expected to be better than last year but still not at “normal” levels. “Early reports from distributors and wineries for Q4 sales suggest improvement over last year’s melt-down. But those same sources suggest holiday sales will not be ‘normal’ compared to what the industry has come to expect in past years.
WILL CONSUMERS STAY THIS WAY FOREVER? The million dollar question is, will this last? Will consumers continue cutting back? Rob says no. “This isn’t a permanent change. Consumers always aspire to better products.”
“...Despite the gloom of the economic train wreck,” said Rob, “conditions aren’t quite as bad as they seem today. It’s important to remember this is the correction phase of a normal inventory cycle and the correction phase is always the worst part for producers.”
He does believe, however, that “we are in the midst of a price reset in fine wine.” Wannabe cult wine producers and other brands will likely lower pricing to below $50.
“This belief is supported by several facts: unemployment is lagging a GDP recovery, businesses have capped spending on client entertainment, restaurants are serving more frugal consumers, and plenty of uncertainty remains around financial markets, government spending, and credit availability. It’s not a permanent change, but it won’t be the same either,” said Rob.
SVB will release the full report in the spring of 2010.
TTB ISSUES STATEMENT IN SUPPORT OF FDA
The TTB issued a statement yesterday seeking to clarify the FDA’s involvement with caffeinated alcohol producers. Similar to what we reported yesterday, the TTB said it “has been working with and consulting FDA on this matter for a number of years, most recently in response to the State Attorneys General inquiry.” The agency also noted that “FDA does have jurisdiction over certain aspects of alcohol beverages.” It turns out that TTB regulates the labeling and advertising of alcohol beverages to ensure they are not deceptive to consumers; enforces provisions of the IRS Code of 1986 related to production and taxation of alcohol; and reviews the formula for alcohol to ensure it complies with the above requirements.
Meanwhile, the FDA is responsible for determining the safety of “articles used for food and drink” under under the Federal Food, Drug, and Cosmetic Act, and therefore includes alcohol, according to the release.
To put it plainly, the TTB follows a system of specific statutory and regulatory controls over alcohol beverages, while the FDA determines the safety of the food additives used to make alcohol beverages.
Interestingly, the TTB said it “consulted with FDA about the addition of caffeine to alcohol beverages during collaborations spanning many years. During that time, FDA did not raise objections to the addition of caffeine to alcohol beverages within the limitations of 200 parts per million,” which is the limit of caffeine in cola products. Then in 2008 when the State AGs raised concerns about caffeine in alcohol, the TTB asked the FDA to clarify its stance. “We look forward to resolution of this issue,” said the TTB.
If the FDA finds that caffeinated alcohol is harmful to consumers, the TTB will work with the FDA “to ensure that alcohol beverages that pose a public health or safety problem are removed from the marketplace.” In the meantime, the “TTB will continue to evaluate alcohol formulas and labels on a case-by-case basis while FDA completes its inquiry into the addition of caffeine to alcohol beverages. We will continue to apply the standards we have used in the past unless we are notified by FDA in the future that those standards are no longer appropriate. If FDA determines that caffeine is not a suitable food additive for use in alcohol beverages TTB will coordinate with FDA following the guidelines set out in the 1987 MOU to take appropriate action.”
NEW STATE LAWS MAY REQUIRE ONLINE RETAILERS TO CHARGE SALES TAX
One benefit of shopping online: no state sales tax. That may soon end, though, in what could be a devastating blow to online marketers such as Amazon. A report by the nonpartisan Center on Budget and Policy Priorities says that states are losing roughly $7 billion a year on sales taxes as consumers shop more online. As a result, more states are interested in passing a law (deemed the “Amazon” law) that would require online merchants to collect sales tax from residents within their borders. As you would imagine, Amazon.com has fought against the adoption of such legislation, arguing it places an administrative burden on online retailers. This could be a big reason why Amazon bowed out of the wine business last month.
TOURISM TO IMPROVE NEXT YEAR. Experts at the 2010 Tourism Outlook expect the travel and hospitality industry to gradually improve next year, with even more growth in 2011. Occupancy rates at hotels are expected to bottom out at roughly 65% this year, and rebound slightly next year with continued growth in 2012 and 2013.
Until tomorrow, Megan
“Whenever people agree with me I always feel I must be wrong.”
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