Wine as an economic indicator

Wine GlassLee Ann Pearce, Wells Fargo Sector Manager, Specialty Crops

You’ve likely never stopped to think about how the quality and price point of the wine in your wine glass reflects the consumer’s current perception of the economy. So, you might be surprised to learn that, historically, wine consumption has been a pretty good indicator of how confident the American consumer is feeling about the economy.

Since the 1990s, wine consumption in America has steadily increased as the health benefits of red wine have been touted, and the Mediterranean diet, one stressing proportionally high consumption of olive oil, legumes, unrefined cereals, fruits, and vegetables; moderate consumption of fish, dairy products, and wine, and low consumption of non-fish meat products, has gained notice.

Historically, new wine drinkers have entered the market selecting lower priced wines. And, as their age and income have increased, so has their appetite for higher quality and higher priced wines. Small variations in the economy have not disrupted this natural progression in the wine value chain, and, over time, the United States has become the number one per capita consumer of wine.

Total wine consumed per us resident

Source: Wine Institute, DOC, BW166/Gomberg, Fredikson & Associates estimates. Preliminary. History Revised based on all wine types including sparkling wine, dessert wine, vermouth, other special natural and table wine, using Bureau of the Census resident population. Per capita consumption will be higher if based on legal drinking Age population. Includes all still wines not over 14% alcohol, excluding cider. Revised July 8, 2016.

 
However, the economic downturn of 2008 shook the economy and rocked the natural order of progression in the wine world. Ostentatious consumption was viewed as passé when many were struggling financially, and the change in attitude was reflected in wine consumption. During this time, the best-selling wines carried a price point of less than $10 per bottle, and many producers were forced to shift their focus to producing more wines in this lower price point.

But, the story doesn’t end here. As the economy began to show a slow, but stable recovery, the consumer began to favor more upscale wine selections carrying higher price points. Over the last two years, wines priced at greater than $10 per bottle have been the fastest growing segment for the wine market. And, wineries that moved production to lower price points during the downturn are now actively producing higher end wines, demonstrating that as the economy improves, so does the demand for more expensive wines.

Consumer wine purchases in U.S. food stores

Source: The Nielsen Co. and Wine Institute

 
So, is this a simple analogy? Lower priced, lower quality wine in my glass means an economic downturn? Higher priced, higher quality wine in my glass means an economic recovery? Unfortunately, economics is never this simple.

The wine industry is currently facing some competitive challenges at the low end where new consumers typically enter the market. Craft beer, hard cider, and imported wines are winning over new consumers. Over the last five years, craft beer production and consumption has increased steadily, particularly in the consumer population aged 21 – 34 years old.

Age distribution of wine and craft beer consumers

Source: The Beverage Information Group Wine Handbook 2015, Wine Institute, Forbes Magazine, August, 2014 Brewers Association

 
This raises the question as to whether this large millennial consumer population will move from craft beers to higher priced wines as they age and earn higher income.

The wine industry is holding out hope that it will be able to attract these millennial consumers to wine. The industry is investing money to improve visibility and relevancy via online and social media, creating virtual wine tastings and improving labeling. Wineries are also expanding direct-to-consumer programs to feature more experiential events in order to appeal to this millennial demographic (envision zip lining concluding with wine tasting).

The true conclusion remains years down the road, but, in the meantime, distributor feedback, grocery scan data, and point of sale systems will be vital in assisting wineries to develop new strategies as baby boomers move out of the market and millennials age into consumption.

Leanne PearceLee Ann Pearce is a sector manager with Wells Fargo’s Food and Agribusiness Industry Advisors group. She focuses on wineries, grapes, and tree nuts and collaborates with various Wells Fargo lines of business to monitor and manage risks associated with lending within these industry segments. Lee Ann also plays a role in marketing efforts within these industry sectors and makes recommendations to loan supervision on the national outlook for companies that derive their primary income from the sale of wine, grapes, or tree nuts.

Lee Ann joined Wells Fargo in April 2016 after a 30-year career in commercial banking working within the Farm Credit System. Lee Ann served 14 years as lender and manager of the Winery Specialty Group for Farm Credit West, and also spent a year as RVP of Capital Markets covering 13 offices in California. Prior, Lee Ann worked in Commercial Banking in the Central Valley of California as a lender with Wells Fargo in the Bakersfield regional commercial banking office.

Lee Ann holds a bachelor’s degree in agribusiness management from California Polytechnic State University. She lives on the Central Coast of California with her family where they have a small vineyard and grow grapes for premium wine production. Lee Ann is also a board member of the Templeton Instrumental Music Boosters Association.