Case For Wine Industry Innovation
There seems to be more discussion taking place within the wine industry pertaining to possible plateauing or even a pullback in U.S. wine consumption. Many propositions are offered as to why there may be a possible change in “sea state” for the wine industry. For example: baby-boomers are getting older and consuming less wine; generation Xer’s are not spending on wine; legalization of cannabis; alternative alcoholic beverages (cider, craft beer and spirits); price increases and lack of new innovations involving wine products.
Plateauing in case sales and revenues are not the only concerns. Some are pointing to other concerns such as: three-tier distribution, changes in channels of distribution (on and off-premise sales, DtC, winery clubs/tasting room and retail models); labor costs and state/regional laws.
Mr. Rob McMillan, EVP of Silicon Valley Bank wrote in his annual study, State of Wine Industry Report 2019, mentions: “The cumulative impact of negative health messaging — absent offsetting promotion of the health benefits of moderate wine consumption — is negatively influencing consumption, particularly for the millennial consumer.” I also wrote on the subject saying–it is hard to relate to the validity of any one study concerning the pros and cons of wine on one’s health. Nonetheless it is always interesting to see who wants to promote a position via a study.
“Hope” is not a strong underlying component for rethinking a business strategy as it relates to potential changes in the wine industry. Forecasting and trend analysis reports, like those prepared by Silicon Valley Bank, should prompt some planning activity at the winery and vineyard level to have a strategy when identifying new trends. Planning for the future is really a microeconomics issue. There is really no downside to good planning for most business contingency.
“To continue its growth in the years ahead, the US wine industry needs new direction and a changed focus,” says McMillan. The industry participants of today must grow and innovate or wither. Price increases alone are not a long-term solution to volume issues; growth must also come from case sales.
Wine still promotes it mysteries and heritage. Reverence toward wine started slipping in 2012. That was when Annette Alvarez-Peters, the wine buyer for Costco (the largest retailer of wine in the U.S.) said, “Wine, at the end of the day, is just a beverage.” This comment created a stir because it removed the romance and aura U.S. industry elites had spent decades creating. The casual wine consumer now understands there was no mystery to wine; find what you like and enjoy.
If there is to be any changes in consumption, it starts with changes dictated by consumers. Why do people consume wine? Most expressed reasons are: sociability, compliments food, taste/aromas and availability. In general, the list goes in all direction from here but, let’s stick to basics. Whatever the reason, many people will agree that the oldest alcoholic beverage is wine and historical records indicate wine was and is a celebratory drink across cultures.
Wine sales are obviously not immune to changes in consumer preferences. It wasn’t that long ago that White Zinfandel was a great seller. By mid-1090s, Sutter Home White Zinfandel was America’s most-popular premium wine. But it remains—consumer taste changes and when that happens, we get a new trend; change is a constant.
What can push consumers to force industry change? A very short list are such things as:
- Demographic shifts-We see this in juxtaposed changes between baby-boomers and millennials. (Rob McMillan explains this in detail.)
- Lifestyles-Part of this element can include careers, financial considerations, extended families.
- Social dictates-Peer influences, media, availability of socializing environments.
- Motivation/perception-What fits your comfort zone. What is the purpose of an alcoholic beverage in their life?
- Attitudes-Attitudes and tolerances change. Maybe consumers tire of a pattern?
Even upon a cursory look at the industry we might conclude that change is in the wind. Maybe the industry could conclude that minor tweaking in products, packaging, advertising and having a more loyalty-based consumer approach is now.
Markets and consumers change; it is a force of nature. We also know there are business tools available that can help the industry initiate changes. To “Innovate”; accept that there are changes and think about how to adapt sooner.
To the wine industry–“We are killing it with our snobbery and a refusal to listen and see what’s going on around us. We refuse to adapt, maintaining that everything is (and should be) the way it was 20, 30, 50, 100 years ago. Do you know what happens when we don’t adapt? We die,” says Leonardo Cabrini, CEO-Wild Yeast Media.
As an example, the craft brewery business continues to expand because of: variety of product styles, low cost of entry, they have a brand presence in their market, consumers can define the brewery products, and they are consumer centric. The atmosphere in my brew pubs, or breweries, are social oriented, pretensions are left at the door and you can easily taste products for free. The complete business model for craft brewing does not transfer to the wine industry, but some elements do transfer.
Note: I personally am a big proponent of consumer businesses having a bond or a personal relationship with their customer. With technology today it is easy to take a ‘human interest’ in building a brand with consumers. Let people know who is making their wine.
As an aside, within 20 minutes of my office there are 5 breweries and 2 distilleries. If I expand to a 30-minute drive radius, the brewery and distillery options increase by 75%. The all have great branding and loyalty programs.
What About Innovation- “Theintroduction of new things or methods.”
Whatever tactics a winery utilizes to innovate, they will not look anything like todays programs. There are many reasons that are forcing changes in the CA wine industry:
- Demographic shift-Importance of millennials and more focus on healthful lifestyles.
- Consumer preferences for alcoholic beverages-Craft beer and spirits, especially relative to taste.
- Impact of Three-Tier Distribution-A post-prohibition federally mandated middleman system wineries must use to sell wine via on and off-premise.
- Channels of Distribution shift-On-line, DtC, tasting room, on-premise, retail
- Regional and market segmentation
If there is or could be a stagnant market phase approaching, here are some areas that could have more immediate impact on volume sales. For sure the Three-Tier System is so entangled in politics it is not subject to much innovation. This is a fact that puts small wineries at a disadvantage as they do not have a strong market presence to get distributors with premier market presence. This forces some medium and small producers to use guerrilla marketing for branding and to get creative with DtC. According to Creative Guerilla Marketing, “guerrilla marketing” campaigns aim to strike the consumer at a more personal and memorable level.” DtC, an approach that is growing a 11% per year and generates more than $3 billion in sales.”
Tom Pellechia writes in Forbes in 2017, “few wineries have maximized the DtC opportunity, and the lack of skilled professionals is often cited as the main reason for not capitalizing on the additional revenue and profit potential it represents.”
I ask Mike Veseth, Editor of The Wine Economist to comment about innovations he sees in the wine industry. Here are two points he made. “At this point the innovation is in packaging (especially cans) and trying to develop new consumer opportunities through packaging. Once cans gain more traction, I think they might be the place where further innovation occurs. First it is putting wine in cans, then it is experimenting with the wine in cans. But some research is needed?”
Secondly, “the global wine market is certainly stagnant and has been so for some time. But I try not to generalize from that too much because the flat overall market contains segments and regions that are expanding and others that are contracting and some that are doing both. So, to a certain extent it is a matter of which segment a winery wants to be in and what strategy is appropriate.
Mike’s comments are spot-on. If one thinks innovation is not needed in traditional beverage products just consider the road taken by Pepsi, Coca Cola, and even bottled water. For example, Perrier’s successes are due to innovation. Perrier’s pure natural sparkling water was first bottled in the late 1800’s. The product, color and shape of the bottle from France became the innovation that is still with us. They are still innovating today with cans, flavors and mixology.
Staying with packaging for a moment, consumer groups are actively lobbying the TTB for more product information being added to the label; no doubt labels will be changing. Why not take this opportunity to launch a new sales campaign utilizing a Near Frequency Communications application. This, along with QR codes, can give any winery the ability to economically communicate with consumers with tailored messages and messages that validate buying decisions-immediately.
Communicating through winery newsletters directly to the consumer with-creative messages, video’s, announcements, etc. can build loyalty with consumers. They do not even need to visit the winery; however, communications must be consumer centric.
Packaging innovations beyond labels and technology are already underway and are being accepted. For example: wine in cans, increase in wine in paper boxes, use of pouches and container sizes.
Another trend that seems to have a disturbing message; the diminution in traffic to tasting rooms. This should be the most important activity in the sales process and building brand. Here the winery has the customer captive, in a friendly environment and has control of the message.
There are many reasons average visitation trends are dropping, the leading one may be changing consumer preferences in beverages. The visit to wine country now includes craft brewery visits, dining and hospitality considerations. Wineries have lost the appeal of uniqueness and the value of snob appeal; it is no longer about the aura of wine.
Technology can help level the playing field for most any size winery. From Near Field Communications technology to podcasting, the world of technologies offers a winery an effective way to address changes in consumer buying habits and building brand. At a Wise panel discussion, McMillan said, “technology can transform consumer behavior and expectations.”
How will the industry adapt to changes in consumer trends with appropriate innovations?
- Changes are being noticed in beverage taste preferences, even wine. Many categories are being impacted by carbonated and infused waters and ciders. The bottle water industry is now experimenting with cannabis infused water.
- Government regulations at federal and regional levels continue to be pushed by consumer demands. Currently, labeling changes are being discussed by the TTB.
- Opportunities utilizing new technologies offer new innovations in reaching the consumer with new product messages and responses to trends. Think about streaming, YouTube, etc.
- What is the best way to address new millennial concerns about health issues arising from alcohol consumption and organic labels? Issues must be addressed directly with the consumer.
- Developing packaging that positions existing and new products that sell and demonstrates a strong value proposition.
- Wine must address the brand appeals inherent in craft beers and spirits industry. This may also include cannabis.
- It is important that Direct to Consumer distribution channels be a top priority. DtC can be effective. Kevin Diffly, writing in March 1, 2019 Ship Compliant Newsletter notes, “While the overall DtC channel saw 11.6 percent and 8.9 percent increases in volume and value, Sonoma wineries jumped up 19 percent and 18 percent in those categories. Those are impressive increases year-over-year.”
After thousands of years, wine will always be part of most peoples lives. The goal is to keep it growing, being prosperous and relevant to the consumer. An important tool for that is INNOVATION.