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State of the US Wine Industry 2024 Videocast

Recorded January 2024

Rob McMillan, EVP and founder, Silicon Valley Bank Wine Division

Rob: Good morning, wine world. Welcome to the 23rd annual edition of the SVB State of the Wine Industry Report. I'm your host for the day, Rob McMillan, founder and EVP of Silicon Valley Bank's Wine Division. So I'd like to welcome everybody.

If you look at the bottom of your screen, there's a Q and A function that you can feel free to use. There's like 7 to 10 people in the background that will answer all your questions—in the DTC symposium forum that we did earlier this last year now. We got, I think, something like 200 questions, and we answered all but two. So feel free to ask those questions.

I always like to, I'm always surprised by the number of countries that tune in, but I always like to read this because it reminds us how important that we are in the United States as a consuming country. The first time I ever went to speak in New Zealand, I got off the plane and I asked, why do you read this report? And they said, A, because it's street-level intelligence and that's hard to find, but B, because you're the most important consuming country in the whole world. So it's important to remember that.

This year we have people from Argentina, Australia, Canada, Chile, China, France, Georgia, Germany, Greece, Israel, Italy, Lebanon, Macedonia, Mexico, Moldova, New Zealand, Portugal, Romania, Singapore, South Africa, Spain, Switzerland, Ukraine, UK and the US, and there's some others that I just left out. So the report's well covered, and we're grateful for everybody listening.

But let's start with introducing—actually, Jen, if you could just start with introducing yourself, that'd be great.

Jen Locke, CEO, Crimson Wine Group: Thanks, Rob. Thank you for having me. I'm Jen Locke. I'm the CEO of Crimson Wine Group based out of the Napa Valley, and I'm here today really more to represent my personal thoughts and reflections on wine industry trends, not necessarily—

Rob: It is a public company.

Jen: It's a public company. I'm not here to give any opinion on how I think Crimson is performing or will perform based on the trends, more of just an observation of the great work that you have put together and to talk about today.

Rob: There's our safe harbor disclosure.

[LAUGHTER]

Jen: That's right. My attorneys are now happy. Brad, you can go back to sleep now.

Rob: Ed?

Ed Thralls, SVP Professional Services, Enolytics: Yes, thanks Rob for having me. This is my first time. My name is Ed Thralls, I'm the SVP of Enolytics. I've got 15 years of experience running wineries and DTC specifically in the wine business. And so I'm kind of here to give not only a perspective on data and how data can kind of help maybe some of the things that we're seeing, but also a little bit of perspective from the wine side as well.

Rob: Good.

Paul Mabray, COO, Pour Now: And I'm Paul Mabray.

Rob: Paul, Doctor Digital.

Paul: Thanks for having me. I've always loved being here with you, Rob. So great.

Rob: Grateful to have you. Thank you once again.

Well let's just jump right in, and if we can let's go, Katrina, to slide number 5 and let's look at the annual trend of the industry. If you guys have been paying attention lately to the news, it's rather dour as far as the industry goes.

I hope to pull out some practical things that we can do with the dour data at some point, but to start to fix a problem we have to start by realizing we have one, and I do feel like the industry is moving toward that.

The 3 percent figure on the right, there's really no machine to pull where you can find out exactly what the numbers are volume or value for the wine industry. It just doesn't exist. So all the analysts try to do the best they can to try to figure out what's happening. But the analysts are pretty well lined up this year that we do have negative volume for sure.

And on the value side, it's generally between minus 4 percent to zero percent, maybe slightly in the positive. But I picked 3 percent down the right. But this will be the third year of declining value sales.

Katrina, if we can slip to the next slide, please.

This is an important one to me. Maybe it's one of the best ways to look at the way the industry is going right this second, and it's wholesale alcohol inventory value and then the bottom line is sales, the blackish line is sales, the blue line is inventory to sales.

So in May, we had turns up to 1.71, so for every one dollar 71 of inventory we were only selling $1 is what that says, which means that inventory was going up by $0.71 every single month, at least at that period.

Now since then, it's come down, but it's come down—looking at the bottom line—with flat sales. So it's not coming down because we're selling more, it's coming down because there's less going into inventory. So the wholesalers are effectively tightening up, which makes a lot of sense. You had a thought yesterday, actually last night, about what you see distributors were.

Jen: Yeah, mean I think and it's through the whole supply chain really. I mean it's the retailers, it's the restaurateurs, real-time inventory. We're even seeing it in produce and other areas for certainly grocery. And the cost of capital, as you know, the days when your wholesaler gets to be your bank, especially for smaller wine companies, I think are a thing of the past.

Rob: Well, if you look at this chart, the wholesalers are still the bank. It's just that they're full up. That's as far as they can really go, and this extends down to retail and now you start ending up in this position where wholesalers are even more picky about what they're going to carry.

When you're in a market like this, the great fear is, there's two ways to look at it. Some people say, well, we're really concerned about inventory because of higher interest rates, and I think it's more the fear of being stuck with inventory because when you have to start discounting, that discounting is far more painful than the cost of carrying inventory as far as interest rate goes. They both contribute, but you don't want to get stuck with too much inventory. And it's kind of where we are. And again, this is wholesale and this is largely—

Jen: The larger companies.

Paul: It's all alc-bev too. It's not just wine. It's important to point that out.

Rob: Yes, thank you for pointing that out.

Paul: Rob, when do you think it's gonna get to equilibrium looking at that down, I mean, do you have a guesstimate on that?

Rob: There's no way to guess. I have to start, for me personally, I have to start with demand. And let's go to the next slide.

Jen: Just before you turn that page, I do think it's fair to say, though, that the wholesaler management teams certainly are speaking to their partners about the financial imperative that they have to bring that number down pretty significantly. I think this goes back to having honest conversations with them about how quickly and what the impacts are going to be for your business on them getting a little bit more in real time.

Not everyone has a guaranteed contract or something like that that guarantees that those cases are gonna, right, they're gonna ship. At some point, for those of us that have been around long enough to know, to your point, Rob, at some point, the chickens come home to roost. The wine has to go somewhere. Especially in lower priced wines, the shelf life is not forever.

Paul: It becomes at risk inventory at that point.

Rob: Yeah.

Paul: Hello, grocery outlet.

Ed: Do you see more of a pressure for wineries actually to help, though, with the distributors, to kind of help with some of that pull in this situation?

Jen: I mean I think, if you want to be, I mean I'm not talking about the really big top five wine companies, but if you wanna be really a supplier of choice at this point, you need to be having those conversations absolutely in lock step with your whole—

Paul: Focus, focus, focus, right.

Jen: Focus, yeah, and also don't, everything cannot be a priority. If everything's a priority, nothing is.

Ed: Absolutely, 100 percent.

Paul: Very good point.

Rob: Going back to Paul's reminder, for me, this one chart that you're looking at, the wholesale inventory is that's wholesale and it's alcohol. It's all alcohol. And so as I've talked to people about this chart over time, they say, well, it's not just wine. I say, no, it's not. And as a matter of fact, I would say the larger percentage of this, whether it's 60-40 or whatever that number is, is actually spirits.

Because what's happened—well, let's go to the next

Paul: The difference between spirits and wine is they can reduce production versus wine. We have to make what we make, turn on the faucet.

Rob: Well, but the same thing has happened for both channels in terms of wine and spirits. So when we look at this on- and off-premise depletions—and again, that last slide was wholesale, so this is the wholesale side—and you can see on the bottom, the wine category has at least been negative in a modestly declining way. It's better right now than spirits.

So what's really happened over the last, say 3 years, is at first when we started to reopen businesses, this chart actually had a gigantic decline in the wine category and it just made no sense to me because we all had positive depletions at that point.

During reopening, we discovered that actually the restaurants didn't want wine as much as they had in the past. It's more difficult for them to carry big stocks of inventory. They're more focused on the way, and they're actually adjusting as well to the consumer, who's drinking across categories.

So now what you end up with is, we all had this kind of belief that, well, maybe spirits are just doing better. And what's happened since we had that flush of business reopenings and spirits looked like they were doing and they were doing better, but they've been coming off that now for quite some time. So now that is backing into that other chart of inventory because they were making, the faucet was turned on. And to Paul's point, yes, it's harder when you've got 3 years of inventory, let's just say, a premium winer in particular. You got to move that through, and it's easier perhaps for a spirits producer to turn the water off, as people say. But they've still got to make it. There's still a backlog of it, and that's what ends up flushing through the channel right now.

And fortunately, I think we're making as an alcohol-bev category, we're making progress to start getting at that. And that's going to really be I think the biggest focus in this next couple of years in particular is right sizing because let's look at these numbers.

Paul: Before you jump off that, think there's also a misperception on-premise and I was talking with Chris Mariski from CK Mondavi that spirits are more profitable than wine, but they're not accounting for the labor costs of making the drink, preparing for the drink and we can have a very good argument with restaurants that a bottle of wine is more profitable for the time to open it, and I don't think we're having those conversations appropriately.

Rob: The restaurateurs make their choices.

Paul: I know they do, but we need to have that ROI conversation with them because it's restaurant math, as Jen has said.

Rob: Well, I can actually go further than that. We were at dinner last night at a—you know, it's an expensive place to live down here in Silicon Valley—but we had a wine. I'm not going to say which one. It was a Sauvignon Blanc out of California. It was California Appalachian, and it couldn't be more on the shelf than $25 to $30, and it was $120 on this restaurant list. And, you know, that's a little bit of a turn-off.

Paul: Yeah, well if you try to buy wine in an airport right now, like anywhere from $19 to $30 a glass, that's absurd on its face, right? It's crazy.

Jen: Well, I mean, they're trying, the restaurateurs, though, I mean, the cost of everything, food, labor. I mean, they're getting just absolutely beat up.

Paul: For sure.

Jen: It's interesting. I grew up in the restaurant business, and I was saying last night, it used to always be, we had a couple specialty cocktails, but people called drinks. They knew what they wanted. It was like, I'll have a Tangueray and tonic. I'm dating myself perhaps, but it was always, the focus was wine by the glass. Wine by the glass.

Rob: A vodka gimlet.

Jen: A vodka Gimlet. Harvey Wallbanger. Let's go all the way back.

Rob: Tequila sunrise.

Jen: But people had their drink and they had their call, and that's that changed because of restaurant math. I mean, that's the reality of it. And although they've got dollars back, obviously, invested in the back bar, we saw post-pandemic why those restaurants wine list shrunk. I mean, significantly. Wines by the glass shrunk significantly. So there's less choice. And I also think restaurants are really taxed with meaningful training, the idea of having a sommelier on the floor and all those things are kind of nice to haves, even in the past where now I just don't think it's—it's prohibitive.

And so the wine category on-premise I think does have some serious opportunity in figuring out how we, to your point, Paul, get back thinking about how we really—I know last year you talked about it a little bit at this event. It is a gatekeeping market.

Paul: How do we help them get juice on lips?

Jen: How do we help them get liquid on lips on-premise?

Paul: Yeah, I like that better.

Ed: That's the price points you were just talking about, Paul, it's very challenging.

Jen: I mean for $30 a glass, the world opens up pretty—

Rob: I'll have a beer.

Jen: I'll have beer. You can have two.

[LAUGHTER]

Ed: Yeah, exactly.

Rob: Which is, you know, again one of the issues that we're dealing with is people drink across categories. Up until, I don't know, 10 years ago, I was a wine drinker. Pretty much that's it. And I drink across categories.

Paul: Yeah, now you do hard kombucha all the time.

Rob: Yeah. So this is—I was starting to go toward one point.

Jen: You're the problem, actually. It's the hard kombucha.

Rob: I'm one of the problems. Yeah, so I was going to drive, I think the next couple of years, one of the things that we have to just recognize it, you know recognition is the beginning of change. You've got to recognize the situation we're in, and as I mentioned this in the report but I'll do it here too, we have a situation right now where you have vineyards like this. And they're able to produce this. And then you've got wineries that are able to make this much wine. And then you've got wholesalers that are willing to take this much on. And then you've got retailers that are willing to sell this.

Now, we're structurally set up for oversupply, and that's what you see in the data. We're in oversupply, but this can get worse, and so just imagine if you will for a moment, you're all sitting around a sales room, and you have a guy in the or a person I should say in front of the room saying, hey team, what are we going to do this next year for goals? What's our growth goal? And people that have seen this telecast, they look at it and say, well a volume minus 3 percent and maybe zero on value, and they say you're fired.

Okay, the rest of you, what are we going to do? And take that exercise and repeat it across all of the sales teams. And that's why you have this situation where you have to recognize where we are. And so everybody thinks that they're better than the next person, and that's good. I mean, we all should think that we're special and unique and carve out our differentiation, but the worst thing you can do right now is be stuck with inventory that's not going to move. What's the next thing after that?

Well, it's discounting. Now we start to see prices drop, your return drops and oftentimes that cuts through all the margins that you do have. It's a very margin-thin business, as everybody realizes. So taking stock of that, recognizing where we are, means that we're in period of correction, we just are as an industry.

Now, I think it's important also to point out that there really are increasingly two industries. There's the wholesale industry, and then there's the other side, the direct-to-consumer side, the premium side. And premium side is going, you know, okay. Let me see.

Paul: Before you jump off that, Rob, I mean, you started this whole deck this year about Darwinism, and I think you made a really good point last night.

Rob: Thank you.

Paul: So I wanna bring it back, please.

Rob: Yeah. Yeah. So in the report, you'll look into it. And we talk about survival of the fittest. People say, oh, you know, it's horrible. Survival of the fittest, whoever is the strongest, whoever is the meanest, those are the ones that survive. It's not really what Darwin was talking about. When you read through that theory of natural selection, it actually has more to do with populations that collaborate are the ones that actually adapt.

For the next however long this period is, and I would say the next decade, our success really depends on who we consider us. So Dale Stratton, Danny Brager, myself and MJ Dale tried to put a USDA marketing order together 3 years ago, and it was accepted for a while and at the last minute, it got kind of shot down, which I thought was incredibly unfortunate because you've got four analysts that are all seeing the same thing and this is where we are now.

And so now we have a choice. Do we rebuild demand? How do you do that? Well, something's got to have to happen in marketing, sales, advertising, know across the board—by the way, price is included in that, value is included, there's a lot of different things that are included in that—but you have to start with, okay, if what we're doing now isn't working the way we want, we have to do something different. It's pretty straight. And now we have a choice. We do it by ourselves, which if we do it by ourselves, that means it's just about efficiency. Now you're going to have to look into efficiencies anyway, and I'm not talking about price cuts. I'm talking about finding more effective ways to use the money that you have to be more effective, whether that's in sales and marketing, whether it's in production.

You may see a correction in your grape prices, perhaps. I hate to say that, but we have too much, especially in Oregon—pardon me, in Washington and California—too many grapes planted for wine that's intended below, let's just say, 12. Grapes that are intended for $12 or below. And so as others have said, we're going to have to adjust.

Paul: And I think you brought up a really good point about Darwinism which is, if we do Darwinism as individuals, we'll succeed and we're just taking from our own market share. But if we do Darwinism as a species, meaning us as a wine category, we'll be able to gain back the market share from spirits and beer and hard kombucha that you drink all the time.

Rob: Yeah, but—

Jen: It's a race to the bottom.

Ed: But unlike evolution where it takes millions of years, this is something that we kinda need to do pretty quickly, right? You've got to really rethink and rewrite the narrative.

Rob: I do think the opportunity for success is there for anybody that wants to adapt. But if you, going back to that example I was giving, I think everybody can kind of sit there and understand when somebody in the back of the room says, I think zero percent growth, 3 percent minus volume, that doesn't feel right.

And I'm not suggesting that everybody has to do that, but when you get into your sales goals, think about what that means for what you're taking on, because if you can't move that inventory, it doesn't work very good for your bottom line.

Paul: I was just going to say that.

Jen: I worked for someone who wisely informed me that two things that will kill you in the wine business faster than anything are bad wine and too much of it.

Paul: Yeah.

Rob: Fortunately, we make pretty good wine.

Jen: And, right, was going say now it's good wine, but there's a lot of good wine and too much of it, so I think that that's absolutely correct.

Paul: You also made a good point about us. I think we segment our market too much, that we're better than big wine or commercial wine. Us is a big tent. Whether it's strawberry-infused wine, which I don't care if you like it or not, that's part of the category. There's a big us. And the more we denigrate those categories, the more we alienate consumers onboarding into the system.

Rob: And then go back to that one slide where we were looking at how spirits, the spirits category has dropped into negative-growth territory. It looks slightly better if you throw in the RTDs. So the RTDs are, actually for spirits, they would actually put growth just slightly positive. Otherwise, it doesn't matter where you look now in the channel, whether it's retail, wholesale, I mean, any place you look right now, it's all in the red. It's all, you know, not good thing.

So it's not just the wine industry that's struggling, it's the alcohol-bev industry that is in a period of change. Now this is something that we've talked about in this show and this report now for since, well, at least the last 7 years, about the change that we were seeing, this rotation of consumers out and rotation of consumers in, and the issues with that are being underscored by the WHO and the changes that they're making.

And the reasons have been apparent now for a while, and I think that we're, like I said earlier, to the point of accepting now. So then what do we do about it?

Jen: The irony of course, for me anyway, is that taking, if you look at what the incoming trends are for consumers—refreshing, better for you, all of these buzz words that—

Paul: Health and wellness.

Jen: Health and wellness and all these things, it's the great opportunity I think for the wine business is that we don't actually have to reinvent what we're making. We just have to tell the story.

We are an organic, we are made of grapes. Most of the wines, not all, your strawberry Kool-Aid wine maybe aside, but certainly for premium wine, if the consumer was really educated on how most of us farm, how most of us vinify and make those wines, we would actually fit nicely into that need state, but we're not telling that story. And we're certainly not telling it as a collective.

Paul: Agreed.

Jen: And individually, I think as wineries, it's hard because our P&Ls are under pressure. And so for us to look at our boards or our owners and say, okay, we want to increase our advertising and promotion dollars by X, Y, Z percent. What are we not going to do to do that? And Paul and Ed, you have a lot of thoughts on that.

Smaller wineries in particular, they don't have the ability to have a fleet of data engineers and high-tech systems and really understand marketing analytics and all the things that allow their dollars to work harder to grow at least awareness for those individual brands. And I think that that needs to, at least in the short term, I think smaller wineries in particular need to figure out how to activate and get into that pool of potential consumers, certainly in the digital space.

Paul: Yeah, technology is just a multiplier. It allows one person to do the work of 100 people sometimes, whether it's an email or social media, and I think that we forget that as a small winery. That's what we're gonna be able to do to scale and be more efficient to your point, Rob. Otherwise, you can't throw bodies at it. It's too expensive, especially with labor costs, especially with inflation.

Ed: Yeah, but this is, we can look down at other industries that are already doing things like this. Competitive environments exist, so we don't have to recreate the wheel, right? And I looked at a Deloitte survey last year, and they asked some of the top CMOs across multiple industries, and what are they doing? Well, we know there's going be a little bit of cost cutting, there's some things to do there, but you can't just pull back everything. You have to invest.

Where you're investing, what you just mentioned, Jen, in marketing. Data systems, new markets, digital platforms, those all are available. So you have to think about investing in your marketing to grow your business. It's not just a marketing expense anymore, and those systems and that data's easier to use now. And it brings some parity, actually. We talk about some of the larger wineries versus some of the smaller wineries. Oh, larger wineries have the bigger budgets, they've got the team and the resources, but now there's systems and platforms out there that kind of level the playing field.

Jen: Give you a shot.

Paul: I mean when I started in wine tech, you'd launch a website for half a million dollars. I think you can do it for a thousand bucks, right, or less, right, on that piece. But to be fair, digital transformation is really challenging. It takes a lot of energy and effort and focus from the leadership. Otherwise, it's slow to move and it takes a lot of dedicated thinking and that's hard to do. With everything coming at you, with the confluence of challenges, with markets receding, with less people visiting, there's so much happening. It's a perfect storm for small wineries to have challenges.

Ed: Right, and it's not—but what's the alternative, I think?

Jen: Right. Yeah. Well that's, and I think one of the things too is getting the leadership teams together, and even in smaller wineries, the whole company together, and just having a really honest conversation. I mean, the idea now that the winemakers and the vineyard managers live in a silo that's outside of what has to happen to actually sell through the supply chain.

I mean, I grew up in sales so it's easy for me to say that, but I've had some very humbling conversations with a few winemakers I've worked with over the years now that are like, oh, I get it. It's not as easy. And the reality is, and I hate to say this because it's unfortunate, but the passion projects, the fun wines, the things that some of the times that we allow to happen right now, they need to take a backseat, and the entire organization, I think, needs to shift to basically being relevant for the end consumer, and that means redeploying resources. It's time and dollars into, at least in the short term, brand awareness.

Rob: Efficiency isn't cost cutting. If you do the quick thing, can say, okay. Cost cutting, layoffs, and that's doesn't fix the problem. What is the problem? Is the problem that we have low margins? Is the problem that we have expensive grapes? Inflation? What is the problem? Those are all problems. The problem is demand.

Jen: Right.

Rob: And so what do we do with demand? And there's two ways to go about it. As I said, we can collaborate or you can go it alone. And if you're going to go it alone, you still have to whether we do it either way, you still are yourself and you've got to figure out how you're going to adapt and move your own company. And we can just for one second, Paul, look at slide 28. I think this is a really, since we're talking about data and such.

So this is questions that we asked this year. How important will advanced analytics and AI become? I don't like to use AI and regenerative machine learning. It makes some people maybe think they're smarter. But for me personally, I'm still trying to figure it out, and I think most people are and we have another slide that actually supports that in the report for sure.

But if you look at this, what you see is this one bar, the dark bar, this is the one where wineries are saying it's going to be a defining characteristic of success over the next decade. And so if you go to the smallest, that's way down on the list. For that group, it's meaningful analytics. Let's just leave it at analytics, advanced analytics, forget the AI and everything else, but it's going to be more important.

But look at the guys with money, the people with money that are out to the right side in the size category, they're saying it's a defining characteristic.

Paul: Correct.

Rob: So if you're still sitting there, thinking that you're just going to open your tasting room and you're going to increase the way you sell wine, you're going to change it. You've gotta follow the metrics, you've still gotta do all your business strategies, but we have to be more efficient. If you're more efficient, then you can actually figure out, you have a better chance of controlling your price in the market, right? You can raise price a little bit maybe or drop price a little bit and still keep your margins, but that's got to come out of efficiency.

Let's go back to slide—give me one second here, Katrina, slide yes, 26, if we can for a second—so another question that we asked is which business areas of your business do you use active data management? And not surprising, this is a group of winders responding that are not in the largely, there are some that are in there, but largely not in the top 25. And if you look at what they're saying is, hey, we use data management for DTC sales. Okay, that's good. And I'm going to say in 2010, Silicon Valley Bank started DTC metrics because we didn't have anything. And over the years, the industry has continued to evolve using metrics. I'm sorry, today is the DTC wine symposium in Concord, and so we're double-booked here for everybody. We try to figure out how to put it all together so we can do both. That's an excellent conference.

But they're going talk a lot about these metrics. And so as you look across here, where do people use it now? DTC sales, production and winemaking, finance, vineyard management, look where marketing is, look how far marketing down is.

If you look at large companies right now, they actually have data analytics teams assigned to marketing. And so it's one more of these places that we've been behind. And we were talking about this a little bit last night, if you look back and you think about the flow and transition of things from the 80s, 90s, et cetera, we started off saying, where do we plant varieties? Should I plant Riesling in a hot zone? I mean, we really didn't know where to plant things in the United States. We were really struggling with that, and people are still moving on the edges of that.

But after that, it was like then it became all about winemaking because not everybody made good wine, even in in the 90s. You'd open, I'm sure other people agree with me, that back there in the 90s. You'd open a bottle and it was corked or it had some other flaws, you know, VA, whatever.

Jen: Or it was just bad.

Rob: Or it could have just been bad. I can't think of a flawed bottle of wine that I've opened actually in quite some time. So the quality of wine is actually much better. And so that investment has paid off, but we've been incredibly cheap in the back shop, whether that's been finance—as a banker, when I see people say, well, I'm only making these financial statements for the bank. I say, well, what do you run your business with? And, this gets back to the passion project, so and the changing of our mental concept of what we're doing. When you have growth that was exceptional, actually if you look back—

Paul: Before you go, I'd like to ask question.

Rob: Yeah, okay. I'll just start moving through everything.

Paul: So obviously DTC sales has a large component but like, pulling back those DTC, how real is that? What are they analyzing? What is missing?

Ed: Well I think some of it also is a little bit of terminology education of maybe what, when they were looking at your survey, what everybody thought data management is or was.

Rob: Are you picking at the survey?

Ed: No, no I'm seeing there's an opportunity out there.

Rob: There's plenty of picking at.

Ed: You were just talking about the evolution a little bit of the wine business, right? And I would portend that—you like that word? I don't know what it means, but it sounds good. So yesterday at the DTC symposium I did a presentation, but I saw the opening keynote. They had the photo of the guy and the dog and the truck in the vineyard. So to your point, where we're all making good wine, everybody's got 90-plus points, I would say that now there's opportunities in the back office or in the back shop to become more efficient and create differentiation and competitive advantage in there.

So back to your question, there's people who think they're doing reporting, I mean I think these are all positive steps. There's better reporting now, there's dashboarding, there's benchmarking all over.

Paul: It's, you gotta understand the data.

Ed: It's not all data management.

Paul: Yeah, we talked last night how homogenizing lifetime value across your total customer footprint is, it just waters down the effectiveness of your data analytics. Looking at your AOV, average order value, across a whole category of segments.

Ed: What about segmenting?

Paul: Yeah, segmenting them and saying my top customers have an AOV of this and their lifetime value. That's smart.

Ed: So that's the advanced analytics that you're talking about, right? It's really how you take the ability to mine your own data. That's really where the gold is. This is the fishing-in-your-own-pond opportunity. But you can also learn the preferences and what your ideal consumers look like that's gonna help you on the demand side.

Paul: We're targeting more marketing too.

Jen: But you also have to give the people—listen, running a winery is, I mean, it's interesting talking to people outside of the wine business, especially in the premium space, where it's like, wait a minute. You own your own vineyard. You grow the grapes. You vinify the grapes. You make the wine, and then you sell the wine, whether that's in three tier or in your cellar door in DTC.

And it's like, there's a lot of core competencies, quite honestly, that you need to be pretty exceptional at to be a thriving winery business owner. And Rob, you're right. The category is shrinking, but there is bifurcation. There are people who are winning right now. And so not everybody is seeing decline. And I think that's where, quite honestly, the word adapt means so much. It's like, as leaders in the industry, we have to—it's not that we don't need to pay attention to wine quality, and it's not that we don't need to pay attention to where we grow our grapes. Of course we do, but we've spent that time, and now we need to shift our energy pretty significantly—similarly to what we did back then—into, okay, what are the resources out there that I can afford companies like yours and-or, and then quite honestly, empower our teams and make it a priority organizationally to say we are spending a disproportionate amount of time and money.

Ed: You probably have people in your organization who are, I would call, the data leader or a data role, right? Taking that on. I would think you would wanna look for the people like that.

Jen: It's also the bandwidth to do something with it. Like I can't believe how many meetings I've been in. It's like, here's what the data says.

Ed: But I hear that a lot. I don't have the bandwidth to do that. I don't know if that can be an excuse.

Jen: Well, that's my point. You can't.

Ed: And then when you do these things, the efficiency, you no longer have that experience.

Jen: I'm guilty as charged too. There's days where the system fails and your credit card readers aren't working and your batch has gone down.

Ed: That's real life.

Jen: Yeah, you're operating a business in real time. But it's on all of us. We're gonna have to walk and chew gum. The reality is hopefully as an industry, we can decide that all boats rise with high tides and that the people that really are the industry leaders actually lead. And meanwhile, we all still have businesses to run.

Paul: Well here's the tactical thing that we're—go on.

Jen: No, I'm saying we have to do both.

Paul: It's hard to do digital transformation. I said it earlier, even data transformation. I like what Justin Nolan from Treasury did. He had his team working on ChatGPT trying to learn AI, and they use it for an hour a week.

So the whole team dedicated an hour of their total workload for a week, and the competency got better to where they designed that site completely built by AI, marketing plan by AI, images by AI, auto-responses, content by AI. And I think that's a demonstration of like, small bite-sized pieces to get to the large success. How to eat an elephant? One bite at a time.

Ed: Yeah, that's the next level. If you can get and embed a data-driven mentality first and foremost, then when you get to the AI

Paul: But I'm not saying AI, I am saying like data, an hour a week. You know, I'm saying whatever that bite-size piece is that you're gonna do to get that competency, we need to dedicate those resources. That's what I'm saying.

Rob: I was gonna say the same thing, you know. The solution isn't AI. You know, that's not the solution. It's a help. And actually, most people aren't going to go to the store and buy AI. I'm going to buy an AI or machine learning. It's going to be, you know, embedded into products that you use. I mean, if you look at Microsoft Word as an example, right, there's an AI component in it already.

Paul: I shouldn't have used the word AI because it that's a flashy lure, but like learning your e-commerce system better, shopping your own site and seeing how it works, shopping competitive sites that are outside the wine industry to learn how to do a better shopping cart.

Jen: That's so funny that you say that. My grandmother always used to say that you need to sleep in your guest bedroom one night a year so that you know that your pillows are terrible and that your shower is, the shampoo has been in there for 15 years or whatever. It's the same, right? The cost of acquisition for every consumer is so high, and they're so precious that some of the good old-fashioned block and tackle also has to be at the forefront of what we're doing, right?

Paul: I think that has to be, that's the most important. We have to get the block and tackling down before those silly buzzwords that I threw out. We gotta start at the foundation level and do it or sleep in our guest bedroom. Yeah. I love that.

Rob: When it comes to the data management component of it and people say, oh my god, we don't have the money, we can't spend money, but go back to where we were, like I said, in 2010 when DTC was really where we were headed.

We were just a little bit past—and everybody was trying to figure out, it was just you would talk to each other, you know, what's happening in your world, and that's the way information was passed. Then we started with getting better with the survey stuff and running metrics. We started to discover actually it had better sales with seated tastings rather than at-the-bar tastings. You start finding ways that actually improve your success, right? Now, that investment in data ends up being more of a, you know, it has that return. Now it's, you know, what's the ROI of social media? I don't know.

Paul: What's the ROI of talking to your customer? That's the answer.

Jen: But it's also capability alignment.

Rob: But there is a return, is my point. And so in the same way that we were, you know, where we were in the 2010 era saying the same exact things, which is we don't have the money to invest in that, you really don't have a choice. You're going to have to be more efficient, and the ROI will be how you manage that kind of the process, particularly in my mind in sales.

Jen: But I think also it's a capability alignment. As someone who's led DTC businesses, I have core competencies that, quite frankly now, to run a DTC business may or may not be applicable for all channels. I mean, hospitality, we were talking about this last night. Running a dynamic hospitality physical space, a lot of people are doing satellite tasting rooms. You're in the hospitality business. You're in facilities management. You're in all of those things. It's a huge human resource job.

Paul: Overhead. Human resources.

Jen: I think that historically, that's just DTC over there. Some of them even roll up into marketing, whereas maybe now and some people are doing this, where they're thinking actually the digital marketing space needs a different set of core competencies, and we need to think about potentially separating the way that we approach the DTC business completely.

Paul: And Jen, you bring up a really good point. We are a very unique business unlike anyone else. So we are hospitality, we are subscription business and we are DTC through e-commerce on that. And then we have wholesale. So you've got four different core businesses that we want to translate across. You can't name another industry that has, I can't go into Nordstrom's and they said, I know what pants I have and I got a subscription of pants. They don't know any of that stuff.

Jen: Right. Well they're not making the wool to then make the pants.

Paul: Yeah, exactly.

Jen: To then sell the pants.

Paul: And recommend that, hey, you only get this kind of pants because you're inthis tier of the, you know, the pants club, right?

Ed: We did talk about this last night, Jen, a bit about DTC and wholesale too, and kind of their own silos a lot of time. But how can we be thinking little bit more outside the box and overlay the information to help each other.

Jen: Well, the consumer is a consumer, especially in asset-heavy businesses, and Rob, you probably see this more than anybody, it's really, really hard when you have—you were alluding to this on like the wine's coming, ready or not—the discipline around choosing not to pick, the discipline around following land, the discipline around saying just because we have it planned, it doesn't mean that we should make it. I mean, that's tough, especially when the bulk market isn't on your side, but those are the types of decisions that people really need to be having. There's a lot of estate-based wineries that, again, really quite honestly, the production side of the business leads the commercial strategy. We have a single vineyard portfolio, we have our state wines, we have all this, and basically mother nature decides and the winemaker decides how much we get or we don't get without having thought through actually the end consumer. And when the category's in growth, you can do that.

Rob: It's easy.

Jen: When the category's in decline, you can't do that anymore. That's where the focus goes back to being pretty ruthless, I think, on your SKUs and knowing who's going to buy the wine, where are they going to buy the wine, how much are they going to pay for it.

Rob: It's back to efficiencies. And again, you're talking about strategies. And we all kind of know, I think, the issue of how much to pick, when to pick. If you look at California, for example, we've had, I think, 4 years now below 4 million tons. And some of that's been because of fires or different events, but some of it's just it's not being picked. So maybe the industry isn't going to, so that's one of the corrections that we see. And that's kind of a new thing, not necessarily about thinking, but it's about the change you see and the change management that's required.

There's another thing that you see is it's been a typical—and people may disagree with this, and you're welcome to—but the acquisition strategy used to be, you know what, I'm going to buy I used to call it the Ravenswood Rosenblum thing. You go take and buy one of those companies and instead of selling a price up here, you sell it price down here and you grow the volume. Well, how does that work for you if you're making acquisitions and trying to grow volume in a declining pond, right?

So just because you buy it, make an acquisition now and put forecasts on there, if you're putting growth on there, you're exceeding the market and maybe you're special and maybe you can. But that's an area that you have to start thinking harder on. What are the returns I can make on by doing an acquisition?

Another one is just tasting rooms. How much farther can we drill into that tasting room strategy? So something I've said now for, I don't know

Paul: 5 years ago.

Rob: At least. We have to take the experience on the road. We have to move it away from this just being from the premium side. People come into the tasting room, they sign up for the club, you keep them for 3 years, 3.8 years, whatever the number is, and you make $4,000 of the average lifetime value and then you repeat and rinse.

Well, last year, we were talking about last night, actual club numbers dropped in terms of actual size. It dropped. And I don't know where it is yet. We'll see when we do the DTC survey where it is. But we've had two summers of lower than expected, lower than hoped for anyways, visitation, which I do, by the way, I think will be better and maybe we'll get into that.

Paul: Rob, I want clarify what you mean because I think that sometimes it's misinterpreted. When you say take the wine on the road, that doesn't literally mean take the taster and go to the market. It means how do I touch customers in different markets. That's what you mean.

Rob: Thank you because I didn't finish the thought. So now you can actually find analytics that will go out and show you where all of your accounts are, whether it's restaurant, whether it's retail. You can figure out who your club members are, where they are. You can start to put these circles, this is just one example, around regions, and you can start to decide how you're going to call it.

And this is by the way, this is being done. I know it's being done by a very large company by the way, where the salespeople are now going across channels and doing more than just making call-arounds with distributor. They're actually looking at, they're going down and looking at some of the bigger buyers and investing in those buyers while they're out there.

And it doesn't have to be that we're on the road. There are digital solutions. But using analytics in your sales process, that's one example of the kind of help. I think within the next easily 10 years, we'll be able to look at a region like that and say, here's all of our customers. Here are the opportunity in the individuals because these individuals, they go to these schools, they do these kind of things that skew across all of our customers, whether it's sailing or tennis, we're right at the precipice of that where we can look and we can say this is the customer that we ought to go after, this person lives in this address with this email address and cell phone number. We're really close to that.

Ed: We actually do a lot of that today. Where we're overlapping that, you can get down to individual metro areas, can get down to a square 1 mile little area, overlap your DTT to see where your club. We can know the affluence at least of those folks. It would be good to get further data that we can get I think with some of the AI stuff outside, but you can overlay that right now to do some of these events and things that you're talking about.

And you can click on that can buy and say, okay, based on the account attributes that you may already have and you see what club members you have buying what wines then who else you can go after in those new markets and that's a part the experience.

Rob: And the smaller premium side of the business has tendency to lag at times, and that's why we see the larger wineries say that this kind of advanced analytics, that's going to be a defining characteristic of success because they're already doing that. They're already digging into the data and, you know, yeah, they've got more money and, yeah, they're going be more robust in the way they approach it. They have greater financial means.

But we can take that directional approach as an industry. There's things that we can do. We have to change. We can't just expect that the customers are going to come every year to the tasting room and they're going to go in the wine club. We've got to evolve.

Jen: Well, and especially on the West Coast in particular, I would say. I mean, the West Coast, unfortunately, until the West Coast cities quite honestly come back, the idea that you come to the Bay Area and spend 2 days in the city and then 2 days in Napa and Sonoma, at least from what we're seeing, people are coming to Napa and leaving. There's headwinds even outside of Europe.

Paul: When you say you say macro headwinds, can we pull up slide 14? I think that's an important one. You're right, Jen. The macro headwinds are—and sometimes it's costs, sometimes it's just different things, but we have so many macro headwinds coming at the category, and this is one that I think is really important. Rob, can you lead into this one on 14?

Rob: Yeah, this is actually one that the WineRamp, the group that Danny Brager, Dale Stratton, myself and MJ Dale tried to put together. We had The Harris Poll run this survey, and the question was kind of simple, what would you bring to a party? I kind of redid the way that I represented this in the prior year. I took out the numbers that said they didn't know or NA, and so the numbers have changed a little bit. But what you see is on the left, yeah, your right side, I'm sorry, of the screen, that's the 65-plus category. And almost 60 percent of that 65-plus say that they would bring wine.

So I look at this as mindshare. This is their mindshare. And it doesn't necessarily mean purchase, but this is their mindshare. And if you go down just below 65, anything else, 64 on down the list, all the way down to 35, the second group to your left, you can see that that mindshare drops from 60 percent to 30 percent. It gets cut in half.

And so if you feel like things are changing, think about the rotation to consumers right now. That 65-plus category is getting older. Are they drinking better? Sure. We have data that support that. But they're getting smaller. They're having less impact.

And again, changing the way you think, we've talked about this forever, unless we engage the younger consumer in a way that produces a product that suits their needs, their values and what they want, we'll actually continue to be left with this 30 percent split between beer, spirits and wine.

Paul: But younger is 64 and below. I mean, let's talk younger. It's a pretty wide

Jen: It's good news to hear, actually.

Paul: Exactly. People say younger and we attribute it to like young people. It's everyone, Gen X, millennial, older millennials, younger millennials, Gen Z, whatever. And I think that we're feeling that pressure from the neo-prohibition, which is causing it down, know, and that wealthness. And on the other side, we're losing this mindshare. That's where the pressure really is being—

Jen: The squeeze. What we were talking about last night. The point that you made last night that I want to make sure people realize is that these actually account for the different size of the demographic groups. I mean, obviously there are, the boomers were a large cohort and the millennials are larger than this and the X were fewer and more precious dollars to be spent.

But I remember listening to you years ago thinking, oh, well, that's okay. Just got to wait for the Xs and the older millennials to come. Everything will be fine.

Rob: And I mention that in the report. If you are waiting for a fictive, I used that word, I had to discover what it meant, actually. But if you're waiting for a fictive cohort to come and save you, you're making a mistake. You're going to be a statistic. Without evolution, without adaptation, you'll be a statistic. So that's how critical this is.

Let's go to page 10 for a second. And this is, just to be clear, this is the premium wineries. So this is the growth rate from 2000 to 2023. And you can see the recession-based changes, those big dips, always been around the recession.

Right now, if we ended up in a negative sales territory for premium wineries in terms of growth, that would be the first negative that we've ever had without a recession that bounced back the next year.

So just pointing out the change that we're seeing now. Personally, I think that Q4, some data that I've seen has shown that Q4 looks pretty good for the premium industry.

Paul: Fingers crossed.

Rob: But I'm hoping it turns out that way. And as I like to say, hope is not a strategy. But I do think that there is probably a little bit more lift that we'll see in Q4 and actually through 2024 with the premium side. Let's go—

Jen: I think what's interesting in that, though, is that the winners are still really, I think for the most part, like the middle isn't, from what I hear directionally, I'm just reading the data that you put together and others, is that there are brands that are quite honestly sailing through this a little bit and there are others that are really dragging down. I mean, I think that there are going to be sooner than most people realize winners and losers that come out on the on the reader boards.

Rob: Yeah, there's no question. Averages are average. That doesn't mean that you are going to be average. Like we were saying, if think that your growth rate ought to be at 12 percent, maybe it is. I'm not trying to say it shouldn't be, but you've got to look at reality, be sober about that.

Let's go to page 21 if we can for a second. I think this is another important slide. As you work around the premium wine industry as I do every day, especially the last 2 years, there's been disappointment with the level of visitation and tasting rooms. And this again, if you look at the direct side for the premium wineries, roughly 70 percent of total sales come through some level of direct.

So tasting room is a critical component of this. And when you look at this slide, you say, oh my god, look at that blue thing, that's visitors. It's just falling off the cliff. But you've also got to recognize that that's coming off of, the comp is 2021. And 2021 was a really, really great, it was the best year of the decade for the premium wine industry. And it would be really hard to expect that that would continue. That was an aberration, it was Covid aberration, it was a Covid echo.

And so we're still dealing with in many, many places we like to think Covid's gone but it's still in the background of a lot of business circumstances that we see. We're still seeing some supply chain issues, but if you look at inflation as an example, inflation is coming down, it's coming down to something that's becoming now quite reasonable. You don't see the same kind of backups that you did before. And so that pricing has changed. But that's still an echo.

And then you look at this chart and you say oh gosh, look at the drop. But just look the two summers, I mean the actual drop is not, it's kind of flattish more than anything else, but if you look at the numbers, yes there is percentage growth declines in visitation the last two summers and in some places I see it carried through into Q4 as well.

I believe personally that this next year is going to be better because when I look at the reasons for the decline, it's one, coming off of Covid, people had a chance in 2021 to go to tasting rooms when you didn't have the chance to go do much of anything else. But the wine business was open. So that part of entertainment was great. And so the comp off of that is really hard, but that was travel, a lot of travel.

When we think about our customers, especially in the premium side, they're more higher-net-worth, they're higher-income earners, higher savings rates. They spend discretionary income a little bit different and so they're the ones that go to Europe. They're the ones that get on planes and go to Europe. So last summer, now the summer before last, that was the explanation when you got to 2022, is some business people I've heard call it revenge travel and we get to this next period this last summer and people were thinking well, we should go back up because revenge travel is done. It wasn't.

We're right now getting back to TSA numbers that are just starting to be the same as where they were in 2019. So I fully expect that this next year for many, many reasons we're going to have that kind of revenge travel start to drop off and we'll start to find what normal really is again. So it's a long story, but I actually am kind of optimistic that we'll see some improvement in 2024 for the premium side. But I want to underscore, if you look at the trends on that last slide, that's since 2020 and not the last slide, slide before on sales, it's decades-long trend of declining sales growth. So what's going to change that sales growth? Is it just going to change just because?

Jen: Well, visitation is just one indicator. I think the bigger question is when they come to visit are they buying wine? Are they signing up for your club? I think different brands have different DNAs. I think that's going to be another area that business owners need to think about.

The expectation around you have a tasting room and historically let's say your average club conversion is XYZ and your lifetime values, all the metrics that most wineries use, I think that those assumptions going into 2024, probably assuming that that part of the consumer behavior will continue regardless if you have more cars in your parking lot, will continue is probably worth double-clicking on. Because I don't think that, based on the consumer data too, the idea of the collectors coming in and loading up with their years allocation and I mean, not that people still don't do that, but it just isn't the same because everything's on demand.

Paul: Well, and the dynamics are different. I mean, this underlying this is the more winers are here, so visitation's down, wallet's share of the experiences are down. I think fundamentally what you're saying also is when you're evaluating our clubs, we're not evolving our clubs as fast as the consumer's changing. So if you look at Netflix, that's a subscription model. They create their own content to keep customers coming back to that subscription. We haven't adapted the same way I think with clubs.

Jen: Well and trial. I mean, trial is a big part of it. I mean, the nice thing about a tasting room is you get trial.

Paul: For sure.

Jen: But if you don't come to the tasting room, how do you participate in trial?

Rob: We get in-depth with wine wrap because I call the on ramp. What are we doing to on ramp new consumers?

Paul: What's the value exchange too?

Rob: I think by the way it's one critical thing to note here. There's a little bit of a nuanced issue that I have when I see people say and I slip into it too, we need to attract the new consumer. And looking at that other slide, that's 65 and below. Those are the consumers who are trying to. Guess what? They've tried wine. They've tried wine. And if you look at other Wine Market Council data, it shows that they've made decisions, and in many cases the decisions were abstinence and drinking across other channels. That's just more of the headwinds that we face to get through that.

And if you think that we can, again, attack that as individuals, that kind of, you know, the WHO, I can get really salty talking about this.

Paul: You do get salty.

Rob: I almost said the BS word. But, you know, it's co-opted science. It's marketing, not science is what it is. If you really dig into the numbers, I'm not a research scientist, the data that I've seen shows that there's plenty of stuff wrong with it and we've just got to address it. I do think that the industry is waking up at least to that, and I'd love to see cooperation across the total alc-bev category.

Jen: Well, I mean in some ways the best news for that is the fact that spirits are finally feeling it. Because let's be honest, I mean, they've got the money and the muscle. And I think when they start to feel the pinch on that as well, hopefully that, you know, alc-bev as a category comes together.

I do think, though, that fine wine, premium wine, around the tasting room and all of that, there is something about the lifestyle and the occasion. And regardless of age, a lot of the research that I've read and talking to Mike from wine.com in particular, out of most people in e-com, they have a lower age cohort, but they also have a higher percentage of import wines now coming in and trial.

They're really engaging and having this conversation because they figured out how to have this conversation around occasion and lifestyle and trial that's curated. And I think that's the other thing for high-end wines. We've got to think about how we add intrinsic value to those relationships that isn't just this, you know, swiping of your credit card and sending you a 20 percent off birthday.

Ed: Agreed. That's part of that change in thinking. It'll be, you kinda hit on it. It's about experience and what you stand for and who you are and a little bit of entertainment perhaps, less about that product.

Paul: The occasion thing's really important. I mean, that was the occasion, who are you bringing to a party? That's the occasion, and we need to win that mindshare back around that thing. They may have tried wine before but we've lost track of, hey, we're the right thing to bring to an occasion.

Jen: Yeah, it's like everything's old is new again. It's like dining, like family, at the table, a shared table, right? Like maybe it doesn't happen every night like it did when we were growing up, but I do think that they're—

Rob: I never grew up, by the way.

Jen: Good for you. A lot of people that are into that are actually, they cook as an occasion. We're going to the farmers market, it's an occasion. They're preparing a meal, they're having their friends over, it's an occasion. They're going out to eat, it's an occasion. It isn't just like, well, it's Tuesday, we need to eat something, let's pop a cork. Certainly not for a bottle of wine that's $65.

Rob: Well and talking about the cycles, everybody says, well, it's just a cycle, it'll fix itself. No, it won't, because the things that have permeated past cycles, those facts aren't in evidence anymore. It's totally different.

Jen: Well, people also don't have the money that they've had before.

Rob: There's all sorts of reasons why. It's just very different, and if you don't look at it that way, you're crazy. That's one example of a cycle.

Jen: What do you think of satellite tasting rooms? That's a question I wanted to ask you on the panel because they're popping up everywhere. Downtown Napa now is basically a satellite tasting room. It's a whole satellite tasting room. Walt Woodenville has been for quite while.

Rob: Actually, I do love going into downtown Napa, more because of the diversity, the kind of diversity you see down there.

Jen: Which is another topic altogether.

Rob: But the yeah, I mean, at first I was wondering what satellite tasting rooms could do because they were just all jammed into like this narrow thing, and I used to, it was like a pub crawl.

So it turns out that it's the way that you handle that, not just opening. You have to have a strategy for opening. And I think what we've kind of come around to thinking is that the experience that you have in the winery is obviously very different than the experience that you have in the tasting room. Somebody might decide to go taste a few different wines in a downtown area where there is this agglomeration of those kind of rooms.

And here's the part that I think that if you're not doing it, you're missing is that that's an opportunity to actually collect maybe people that are on the fringes of the wine movement, if you want to call it that, and get their names, get their address. Maybe it's a place where you sell a lower-priced white that's more approachable for a beginning consumer, let's say. Not everybody that comes there is a beginner. You've gotta have a bunch of stuff to offer.

And therein lies the problems with everything we do, is that we've got to keep the boomers because they're paying the bills, but we've really got to shift our strategy off. And in this case, what I'm talking about is making that downtown tasting room something different. I was talking to a person up in Washington and they were wondering about maybe we should sell bubbles in a tasting room. What do you think? And I said yeah, absolutely, because if you do that, play music that people younger than 65, like not Frank Sinatra or something else, maybe you can actually create a venue. Maybe you can create an experience. Maybe you can think about ways to have free tastings at 2 o'clock in the afternoon on Sunday. Now you can start to play with the ingredients that might help drive new consumers to your brand. It shouldn't just be about selling.

Paul: So Jen, it's the metrics are different fundamentally. That's a different business. And we can't apply the same customer acquisition, the same wine club sign. We have to think of it as a hospitality business.

Jen: A wine bar.

Paul: It's a wine bar. It's a hospitality business. And what are the metrics that are associated with that for sustainability? That's my philosophy. I think you get some lucky curves, but we're putting liquid on lips, like you said. When they're going to the home market, they'll remember that they had that wine. What do you think, Ed?

Ed: So I don't have any direct experience. I haven't run one, but what I've seen in Healdsburg is just kind of some tasting rooms coming and going. There's a handful that's kind of stick around, and some good friends of mine have tasting rooms up there, but I can only imagine they're trying to go there, get the foot traffic, and then my guess it would probably be lower AOVs, but are you getting the liquid on the lips like you're saying, bringing them in.

I know wineries who have a winery place, but then they also have place from down somewhere and I think those are entry points.

Paul: So you can see the difference in downtown Napa. The full ones like Alpha Omega who has outside sitting tables, it's truly an experience. And other ones are just empty right next door. They are looking at it as a tasting room than a winerym where people are not going there for that hospitality.

Jen: Right, which is once again, then add to the other things that you need to do as a winery owner. Now you gotta figure out how to run a wine bar.

Paul: Yeah, it's terribly hard.

Jen: Which I think is interesting. I think the only other point that I would make, Rob, about bringing the live music and the champagne and things like that is that I—

Rob: Sparkling.

Jen: Sparkling. Oh, right. Sparkling is, unless you're Corbel. You have to I think now more than ever, you've got to know what you stand for and what you don't stand for.

If you're not really clear on your brand proposition, regardless of age cohort, you were talking about are you going go attract the tennis players, are you attracting the golfers or whatever. Well guess what, I play tennis. I play tennis with people that are 18 years old. I play tennis with 85-year-olds. But it is a food and wine culture, and it's a luxury culture and all of those things, and it's like the need states or the brand ethos is, I think these times it's easy to say, well actually I'm just going to throw spaghetti at the walls and I'm going to make canned wine or I'm going to try a—

Rob: I sell a $65 Cabernet, I'm going make a $10 wine.

Jen: Yeah, or whatever. I'm not saying that you shouldn't adapt, but you need to know what your core, and if you haven't done that work, if you don't know what your core, what you really stand for, and what your purpose is, like why do you exist and why does anybody care, I mean I think we've all gone through that exercise in the past, but through the lens of the current environment could be a pretty humbling experience. Also, I think the older the brands, quite honestly, are the estates. It's tougher. Some of that, it's tougher and it gets lost in translation. If, in some cases the patriarch or the founder is no longer around and it's just now—

Paul: The cult of personality's gone, yeah.

Jen: Right, who are you and what do you stand for? I think that bringing that into the satellite market, the digital space, making sure that your brand standards and that you're really thoughtful about all of that is difficult but paramount.

Paul: It's absolutely fundamental. We can't just stand for good wine, because we all make good wine. Right. That's the problem.

Ed: That just gets you to the table now.

Jen: I joke about the tasting rooms. Delicious wine and a beautiful tasting room and grounds is just the ticket to entry. Just gets you to the table.

Paul: Exactly.

Rob: What do you guys think about price? Can we just get around this by raising our bottle price again?

Ed: I mean, that's been happening already the last couple of years.

Jen: Wine has not proven to be really brilliant at that. We're in over supply now.

Paul: I go back to that big point that if we're gonna attract, we still need some on-ramping brands. The responsibility for getting young consumers is not Napa wineries, Sonoma wineries. You can't make a bottle of wine under $20 out of Napa. I don't think cost structure, that's the responsibility of the large companies to do that and attract the new audiences, whether it's Hispanics or African-Americans or younger cohorts—all those is their responsibility. And we denigrate them because they've got strawberry-infused wine or they're making wine with Dracula on the label, when we should be celebrating that because it's making the category bigger.

Rob: But the wine consumers that are 64, maybe that's not the—this is one of the points I was making earlier—is that it's not just about attracting new customers because most consumers actually after you get over say age 30 have made a decision on wine, and that's what the data show. And then they go into either abstinence or into spirits or something else.

So the value proposition has to be explored by all of us.

Paul: Agreed.

Rob: And it's confusing. This on ramp is confusing because you have to be able to find something for people that have been maybe stuck in a $15 category if you're trying to sell into a $25, $35, $45 category. You've to take those people that have been stuck.

You all can name them. When you go to Thanksgiving, they're still drinking whatever. They haven't evolved. And so it's understanding, again, the segmentation, where the opportunities are.

And that's the benefit of having advanced analytics right now is that you can get down and you hear all the time is, the marketing of the individual, you have custom marketing to the individual. And when I first heard that, I don't know, 15 years ago, I thought, well, that's impossible. How do you do that? I mean, what's the cost of that? And the cost of that is horrible. But with some of the data systems that are out there now, it's coming down rapidly, which is, again, why we have to make those steps.

Paul: We can't take price forever, to your point.

Rob: We can't take price further. You know, there's no question that—and I get these questions all the time from reporters that just want to talk about Napa prices—they say, well, Napa prices are going to come down. And I think that's a—let's turn to page 24 if we can for a second. I think that that's just a mistaken thought. These are different price changes. This comes from customer vineyards work on the data. And the dotted line is average. And you could see that on average prices go up at a reasonable pace. It's over a 14-year period, somewhere between 1 and 6 percent in this data.

And whether it's Napa or any other place, look at the pink bar, look at the green bar, prices have gone up. They've been able to catch price in a market especially recently where we've needed to catch price. I wouldn't draw a trend line there, though, because we're under a fair amount of price pressure right now.

Jen: And these are direct-to-consumer bottle prices, by the way. If you were to run this to include wholesale prices for those ABA or those regions, those states, it'd be a very, very different picture.

Paul: That's true.

Rob: That's a fair point.

Jen: Which is where 99.9 percent by the way of the on ramp occurs is in not in direct-to-consumer.

Rob: That's correct. No, a fair point. And so, yeah, excellent point. This is direct-to-consumer, but I think it's a good indication whether you're in direct-to-consumer, another channel, whether it's restaurants or something else, they're going have a different price structure. And so I think relatively speaking, it's still worthwhile looking at.

Let's go back once to 23, if we can. And this is expected direct-to-consumer bottle price changes. When we ask in the survey, what do wineries expect to do by different price points? And you can see what it looks like. It looks like the ones that are making less expensive wine are going to struggle more to find increases, and the wineries that are at higher price points, they expect—and I put an asterisk by that—they expect to be able to charge higher prices. And I think some of that expectation is maybe, I don't know what the word is, optimistic, I guess?

Jen: Well, I mean I think it goes back to your brand health and understanding, at least in the current market, what your pricing elasticity can be. If you're at $75 and above and you take a $5 to $10 increase, it usually flows through. Those are pretty rarefied consumers, loyal consumers anyway. I think that is you've got to know your brand.

Ed: I was going to ask that question. I would want to know how is everybody taking price? We have offerings that allow you to look at price elasticity, and that differs across your portfolio. What are your margins? What are the right channels? Where's the right place to do that?

But the data is also showing is that most of that AOV increase over the last couple of years has a combination of increased pricing and also I'm seeing some decreased discounting. And now we're talking to more and more folks who wanna take a look at that shipping cost again.

Jen: Yeah, well I mean think it's net increase. We're shipping, you know like, Basically share a wallet, regardless of how that transacts. I do think the other thing coming off of the 2020 vintage that there's a little bit of noise in the numbers around premiumization, especially for those that were impacted by the fires and then in 2021 for the drought. In this year's report but also next year's report, we should see—I just want to make sure that people don't get lulled to sleep on the fact that it seems like premiumization is still kicking in.

Rob: A little bit.

Jen: Part of it is that wines are back that we just didn't have. So your net club may be smaller, but you're like, Oh, value's up. It's like, great. Your most iconic wines are back, and you still do have a loyal consumer base that's been excited to see those wines.

Rob: And the premium side of the industry, in the report there's metrics in there. You have what we call peer group analysis database that Silicon Valley Bank has its own set of information. And you can see what inventory turns look like. You can see what's happened, and inventory turns have grown a little bit, not like that gigantic chart that had the growth up to 1.71 in total inventory volumes. That's the larger wineries, generally. But the smaller wineries are more balanced when it comes to inventory.

Jen: Because we were out of wine.

Rob: We were out of wine.

Jen: That's a false, dangerous place, I think, to live if you're thinking that, I mean, let's just say 2020 didn't happen and 2021 didn't happen, you wouldn't be saying that today.

Paul: Correct.

Rob: Yeah, well, think about the harvest too.

Jen: That's what I'm referring to.

Rob: Yeah, the harvest in the West Coast.

Paul: The fires plus the lower harvest.

Rob: And now we're running, like I said earlier, into this cause and effect, where because you can't sell your grapes, the amount that you're crushing that shows up on the crush pad is actually lower. And you say, oh, it's a light harvest. Well, partly, but it's also demand-based in certain segments.

Let's look at slide 20 if we can, Katrina. Go back to that for a second. Ed, I think you were talking about this. We asked about inflation strategies. Were you able to recapture costs?

These are premium winders generally, and it says about 70 percent we were only able to partially recover inflation costs. The people that were able to recover everything, I think that was the 11 percent one, higher costs were fully recovered with the price increases and expense management, 4 percent recaptured without expense management, they captured it with just bottle price increases. So that kind of gives you the, I guess the metric for how easy it is. Can you increase your costs? At least this last year, the survey says yes.

Ed: But I think it's been harder and harder, and how much of it did they really plan to see and know what their costs are to do that, right? And that's where price elasticity can help, what that impact is on the sales side. But then thinking about balancing the inventory too, there's fixed costs inherent in the production side.

Jen: Let's not fool ourselves. An empty winery is an extremely expensive proposition.

Ed: It's got to operate at an optimal level, right?

Jen: I wanted to talk about slide—

Rob: So is the overly full wholesaler, by the way.

Jen: Yeah, well, just depending on what part of the—

Paul: Which slide you have?

Jen: Slide 12.

Rob: I see where you're going, yeah, because I was looking for that too.

Paul: Think of old slide 12 up there.

Rob: You had a lot of questions about this one last night, or at least thoughts.

Paul: I see the little markings there.

Jen: You probably spent the most time on this slide.

Rob: Let me get the people that are in the audience, studio audience, raise your hands back there, studio audience. So Winery Sentiment Index, we use the Michigan Consumer Sentiment Index methodology. You can go look it up if you want to figure out that data, that piece of it. But this is a reading of the way, generally speaking, the wine industry is feeling.

And probably the most significant one to look at is the one on the right side, the far right side. And so this is by far the gloomiest that the industry has felt. And then categories are to the left. One of the difficult things is to compare year over year. I look at more of the, okay, well, where is the greatest concern? And if you look, it's been economy. It's do you want to say it's a little less now? Okay, why is that? Maybe people are less afraid of maybe a recession at this point. I don't know. I can't look into that.

But I can say when I look at this slide, people are most concerned about the economy, most concerned about labor and most concerned about substitutes. And substitutes cuts across not just spirits but cannabis. That's another component of it that's kind of a wild herring, if you want to.

Ed: You have some data in your report. It's interesting, we've been talking about cannabis for a while but we weren't really sure a long time ago what that real impact is. So maybe if we get to that a little later, unless you want to jump to it.

Rob: Let's go to, do you have anything you wanted to talk about?

Jen: I mean, guess I found it surprising that the consumer demand concern, obviously still in the negative and people are concerned about it, but not as concerned as they were previously. Maybe that's linked to the economics of it, but I think if you go back and look at how you answered last year versus this year, if I was filling out this survey I would be probably towards the more concerned.

And then also sales channels. I found that fascinating, that people are less concerned about how they're actually going to execute and sell the wine.

Rob: I think that has a tendency to fall into the because it's always worked.

Jen: Yeah, but I read this as, oh gosh, let's not go back to fooling ourselves again. We've been given a gift. Also, I said this last night, one of my mentors has helped me through Covid and a lot of these things, it's like never waste a crisis. There is opportunity in disruption. And what I was worried about when I read this was, let's not go backwards in understanding the data and what is actually happening and go back to convincing ourselves for another couple years that we don't have a problem.

Paul: Well, juxtapose it against slide 18 with the channels. It's a good question. We're down in quite a few of those channels and some are moderately up, which is in dissonance with the consumer visitation. We're looking at profit in the tasting room. We're looking at better profit in the wine club. E-commerce is at an all-time low since we started. We lost 4 points in 2 years, which is a lot.

Jen: It's crazy.

Paul: Yeah. We were at 3 percent, and then we went from 3 to 10, and now we're down to 6.

Jen: And we all thought, I mean, I don't know about you, I mean, the pandemic was like, finally, people figured out how to buy wine online.

Rob: That was, Paul and I had a disagreement. He said he said, think it's gonna go up from here. I said, I think it's gonna go down. But I didn't think it would go down like this.

Ed: Yeah. I'm surprised how our customers are. I'm starting to see, like, maybe there's a little bit of a flattening, but keep in mind, we're probably 40, 50 percent ahead of where we were in 2019.

Paul: We're just fishing from the same pond. We're fishing from our wine club members. We're fishing from people that fell onto our website accidentally or came to the tasting room. We're not acquiring new customers using those tools, which is a very basic tenant of e-commerce.

Ed: Well, back to efficiencies and using your resources effectively, would you agree that maybe as we came out of the pandemic, people were coming back to the tasting, all resources kind of went to that and kind of pulled off of e-commerce, right?

Rob: Still the same consumers, just getting it through a different channel.

Paul: Right. Exactly. I agree 100 percent with that.

Jen: I think the other interesting thing is, which I would agree, is that the climate and water—

Rob: This is slide 12.

Jen: Yeah. And those concerns around climate, and it all links. Thankfully, yes, there's capital. Some about being more climate-sensitive is capital-intensive, but certainly in packaging, being thoughtful in climate, at least we've seen, has a double benefit between not only being better for the climate but also lowering our net

Paul: You guys did an amazing job. You guys are kind of leading that. You're one of the two big winers really pushing it.

Jen: Bottle weight, our COO, Nicholas, has been a huge advocate of it, I appreciate him opening my eyes to really the impact that we've got to, and also people are voting with their pocketbooks, right? There's cause-related purchase. And another area they think we're just doing a very poor job of explaining to consumers, there are a lot of wineries that are doing right by the impacts of climate.

Paul: And we also have to look at the carbon footprint, not just in the bottle but transportation. We have this philosophy about right weighting versus light weighting. You know, instead of buying a bottle that's lighter but getting it from China, you could get it from Oregon or Gallo's Glass Factory, you know, a little heavier, maybe it's a medium bottle.

Rob: There are just a ton of topics that we could have covered. One is, you know, back-bottle labeling, you know, putting what's in the bottle.

Paul: I'm really scared of that. I'm super scared of that.

Rob: I've been an advocate of it because—

Jen: I mean, it's coming. I think we could debate how we feel about it, but I think whether or not it's coming is a moot point.

Paul: It's definitely coming.

Rob: Obviously, it's ahead of us in that, and it is coming. It's going to be something we'll see. Actually, to your point, Wine Market Council has kind of come out with a belief that's maybe not as dominant of an issue as others think like me. I think if a consumer, a younger consumer in particular, wants to know where their food comes from, what's in their food, that's why organics kind of have done so well, I think, largely.

Jen: It will help the premium side of the category, I think.

Rob: It will help the premium side, for sure.

Paul: Neo-prohibitionists are going to weaponize it against us. I think that's the fundamentals, right? Sulfites. Using these words where people don't understand the chemical components in wine. I mean, how negative is I mean, mega-purple is, like, the worst chemical ever. It's just grapes as well, right? So the usage of—

Jen: Concentrate.

Paul: Yeah. It's grape concentrate. But the usage of that is it's a terrible thing. And the natural wine versus unnatural wine. These are problems that we're gonna face with this labeling and especially—

Jen: And even more reason that we need to galvanize as an industry to, I mean, it's an education opportunity.

Paul: I agree. All of these are opportunities, I think all of this, to me this is not a negative report. This says we have a chance to adapt and have opportunity. That's where I see.

Rob: Yeah, it's, I think, probably maybe a good wrapping point. But the purpose of the report is not to scare people, it's not to be negative, it's to be pragmatic about what we have in front of us. And it's also recognized average is just an average.

But if we really want to be successful in my mind, the Darwinian thing isn't survival of the fittest as individuals, it's survival of the fittest when you collaborate. If you're outside the herd, you're probably going to get picked off by the lion. So more than likely, if we can find a way to do it—we were trying to pull together with WineRamp a few years ago—if we can do something to collaborate as an industry and try to fight back against some of these things, California Wine Institute does a wonderful job in certain places, but marketing is not what they really do.

I think that when you look back at, as an example, Oregon Wine, I mean, Napa Valley Vintners and Sonoma Vintners, there are marketing organizations that are incredibly helpful. I think that we're in this period of time where you'll find those constituents saying, well, what are we paying for, right? They start getting more sticky about it. And I think that the marketing associations have to think harder about how they spend.

But you just can't say that that's an expense you want to cut. We've got to find ways to collaborate, and I'd like to see it across the alcohol-bev category or if not that the wine category, but regions can also help this. So the collaboration has to continue. Those AVA associations are incredibly useful, and I hope you guys continue to grow those and use that as support for change.

So I think success is available for people that want to adapt, for the wineries who choose to adapt, I think success is there. How we adapt is the question that I hope we've raised, and I hope that can be part of the discussion.

So with that, a couple of closing things. First, thanks to all my panelists. I'm grateful. Jen, Ed, Dr. Digital, Paul. You. Grateful to have you. The report you can access, it's online right now, 2024 State of the Wine Industry report's online, and a replay of this event will come if you signed up. Obviously you signed up because you're listening. So that'll come out next week, you'll be able to watch the replay.

If you really want to help the industry and help yourself a little bit, we do two surveys a year, and it's always difficult for us to get a good participation. We had a very good participation for this report. We were able to do this report only because we get these surveys. Without the surveys, we leave a gigantic hole in our analytics. So I'm grateful for all of the people that say this is important. I to spend this 15, 20 minutes, whatever, to get this information out there. But you will get, for participation, you'll get a deck of 100 slides, something like that, and analysis that's not included in the report, that's not included in this slide deck. But next week, if you've done this, you'll get links to that deck as well.

So with that, thanks for tuning in. I'm grateful for your participation. I'm grateful for the audience out there today and the studio audience as well.

But with that, we'll wrap up this year's 2024 State of the US Wine Industry Report, Silicon Valley Bank, and I look forward to seeing you at our bank next time.

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