Indulgence Gap Could Be A Factor In The Future Of The Wine Industry

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When it comes to the wine drinkers of tomorrow, what will a looming demographic switch mean for those who make Napa's staple drink today?

A panel of analysts broached the question at the California Association of Winegrape Growers' summer conference in Napa this week at Silverado Resort and Spa.

To give a possible picture of the future, Rob McMillan, founder of Silicon Valley Bank's wine division, offered results from his group's State of the Wine Industry report, a much-watched annual status update on the industry that was released earlier this year, and a newly coined phrase: the "indulgence gap."

The term is McMillan's prediction for how the shifting demographics of wine buyers and drinkers might shape up, with two key age groups poised to push consumption levels and sales down in coming years.

According to Silicon Valley Bank's annual survey results, millennials represent around 20 percent of wine consumption today. Drinkers belonging to Generation X, those born between the baby boomers and millennials, make up about 36 percent, while the boomers continue to barely hold the lead at 38 percent. McMillan predicts those stats will change by 2021.

The peak of the millennial group is around 24 years old, he said, while the median boomer approaches retirement within the next few years. In five years, boomers and the young consumers will meet up proportionally, he posits, and five years later, the younger consumer will dominate the market as the median boomer hits the 70-year mark.

At the root of the 'gap' is a dilemma of needs versus wants. "When we look at the market, you've got to have both the desire to buy wine and the capacity," McMillan said. "You've got to have both the money and the desire."

Since the Great Recession, the world's central banks have worked to stimulate the global economy, he recounted, eventually reflating housing and stock prices to the thankfulness of boomers.

"But, you end up with this break in time where these younger consumers are just getting out of school," he said, as a still recovering job market in the wake of the Great Recession left "two or three or four vintages of graduates" coming up short on gainful employment.

Today, tides are beginning to turn, he says, and younger consumers are finally landing jobs.

The "indulgence gap" emerges however, as millennials begin to make the opening moves of their careers, while on the other end, the median boomer will begin to reach retirement age in about five years. In retirement, McMillan said, "They're going to be living on a fixed income. That's going to change the way they spend."

Add to that, boomers' consumption levels will begin to drop with age. Imbibing drops off dramatically around age 70, McMillan said, partly due to mortality and health. Meanwhile, younger consumers are replacing boomers in roughly equal numbers. But, he noted, "their predisposition to consume is a little bit less than the boomers and their ability to pay up is also less."

As the now-mid-20s millennial moves into "their prime of spending," instead of marrying, having children or buying homes, McMillan said, "that stuff is all put off." If millennials do decide to get married, have children or buy homes, he continued, "then they end up with this 'needs versus wants'. Because are you going to buy diapers or wine?"

Those needs pitted against wants, in turn, form his new phrase. "We have this 'indulgence gap' that's forming and that for us puts pressure on price."

When coupled with the specter of less boomer spending and consumption, millennials' inability to spend on wine, "changes the dynamics greatly," McMillan said of the future market.

So, he asked the room, "What can you do?"

One component for growers to consider going forward, he offered, are four categories of producers based on brand strength and the rate of their sales growth.

Producers with low brand strength and a low sales growth rate? McMillan urged growers to avoid them. "Even if you get offered a lot of money for those guys . Just say 'no' and move on."

On the opposite end of the spectrum is the obvious winner - good brand strength and good growth rate in sales. "You'd love to be selling to those guys," McMillan said. But he cautioned, "They have all the pricing power."

The trade-off for growers in those cases would be having a consistent buyer in such producers, but having to sell fruit at a lower price.

Then there are the producers with less brand strength, but higher sales growth rates. "Maybe it's a future star," he suggested of the hypothetical wine, "and that's where you want to take those risks. You can afford to take some of these risks with some of these guys that are coming in trying to make a change, trying to be different, trying to engage and differentiate themselves in the market. That's a place where you want to be."

The fourth and final category will be composed of what McMillan dubs the "has beens."

"You're going to find I think in the next decade there's a lot of has beens," he said, referring to producers with good brand strength, but lesser growth in sales.

Such producers aren't necessarily to be avoided, McMillan said. "But they are the ones you want to monitor.

Overall through the next decade, in his view, producers' success will be determined by whether or not they can discover how to "hard-target market" their potential customers.

"When you think about contracts and higher pricing and where you sit, this is just another component that you can think of to be successful. The idea is to not just be average; you want to be above average."

By Henry Lutz 
July 20, 2018
Source: Napavalleyregister.com