Are Wine Prices Really Going Lower This Year?

Enophiles rejoice, wine prices will be dropping to the lowest levels in more than 5 years. We can toast to that!

California grapes are the backbone to one of the largest regional production platforms in the world, and now, with an unusually high yield of grapes this year, that surplus is going to have a positive impact for consumers on what they pay at the cash register. Trickledown economics redefined.

Industry experts even speculate the price drops could extend past the next couple of years, thanks to the massive yields and the high number of producers that need to produce cash flow from yearly vintages. Furthermore, the conglomerate buyers of grapes and the growing divide between growers and producers (that is, the high number of producers versus the actual number of growing operations) have challenged price pre-sets that have been in place globally for more than a decade. The biggest evidence is this massive drop in pricing.

Interestingly, the secondary markets for excess northern California grapes is not very robust. A lot of the yield from the hundreds of thousands of acres that have been newly planted and cultivated since about 2016 will wither on the vine because the demand, while strong, may not be enough outside of the normal channels of distribution to force makers into ramping up production. Production costs are fixed in some regards, and the expense may not make sense in most mainstream channels because the profit margins are waning.

Some of the grapes will go to brandy production and as grape concentrate. The raisin market and the juice market for mainstream juices don’t coincide as harmoniously as one might think, as an outsider looking in at the market.

This is a result of not just larger harvests and more effective technologies and harvest procedures and tooling, but also because of a global slow down in the growth of the wine segment.

In 2015 and 2016, when wine was one of the fastest-growing segments in the broader marketplace, bets were made and the agricultural segment of the wine industry is realizing now that it simply missed the mark. It’s not entirely their fault, however. The integration cycle for supply in the wine industry has a long tail, with about 4-6 years typically being the time frame to realize new investments into infrastructure and raw material production. Here we are 5 years later, and pre-packaged mixed drinks and liquor/cocktails have become the new hot market trend.

That means that while wine drinkers are still drinking wine, the market growth with regards to new drinkers simply isn’t there, while the largest realization of new material supply investments since the early years of the Napa Valley, finally begins to mature. That glut makes it an interesting field for the power players and the small producers alike.

You’ll likely see new offerings and potentially whole new drink subcategories that use wine as the focal point. While risk is low and raw material supply is high, the landscape for new concepts is open.

The market that needs to be tapped into though, is the millennial market, and the holdovers from post-Baby-Boomer generations. They are most specifically not as “into wine” as Boomers and the generations before. The marketing, the culture, and probably the price point is yet to seem appealing to the millennials thus far. This improvement in bottom-line pricing and the potential for more new category offerings may be just what the market needed to make the shift from catering only to legacy drinkers to attracting new converts in larger concentrations.

What is good for consumers, on the surface may not seem like it’s good for the companies that produce your favorite wines, but it might not be all that bad. Sure there will be a dip in profits, but with good margins already enjoyed by the winemakers, the top-line profitability of the company is the only thing that should be negatively affected, it’s unlikely any of the regional or even local producers will hurt to the point where they are losing money that might threaten them operationally. The wine industry is too robust, and the companies are operating under great margins and with plenty of marketing heft.

Combine that with a new breed of industry marketers and you may see millennials trickling into the market.

So this may be a win-win for everyone. A lot of supply; steady employment spurred on by at least break-even performance, and probably some easier inroads to companies who want to diversify their winemaking capabilities. In a few years’ time, the larger profit margins will re-emerge and more of the world will have been able to access great varietals from California, further cementing the region as a powerhouse production area.

If nothing else, you will begin to see an unparalleled market value for the wine segment. In the end, despite marketing challenges and an under-pressure profit margin, it seems like a very good time to be in wine, or just in love with wine.