Top 10 Trends Affecting the Wine Industry

The wine sector has been experiencing a number of twists and turns in recent years. From industry consolidation up and down the value chain, to changing consumer demographics and preferences, to the rise of ecommerce, here are 10 trends that are separating the winners from the losers.

1. The market is huge and growing steadily

U.S. consumers quaffed $32 billion worth of wine in 2017, and that figure is expected to reach $43 billion by 2022, an annual growth rate of more than 6%. Even if there was an economic downturn, evidence suggests the impact on wine sales would be minimal. During the last recession (2007-08), while the growth rate for volume consumption slowed, the trajectory was still positive, signaling low cyclicality. Concerns that legalization of recreational marijuana will adversely affect wine sales seem overblown. Early data from Colorado indicates legalization has not had an impact on wine consumption, which has remained constant at historical levels.

2. Premium is the place to be

If wine sales in general have been positive, the “fine and premium” category (over $10 a bottle) has been almost bubbly. The segment ended 2017 at around $17 billion, growing approximately 8% a year since 2012. This trajectory is expected to continue, with the segment reaching around $25 billion by 2022 (see Figure 1).

3. Millennials are making their mark

Not surprisingly, millennials comprise an increasing share of U.S. wine consumers. Between 2012 and 2016, Gen Xers and millennials drove overall wine market growth, increasing their share of consumption by about 8%, and edging out baby boomers as the biggest consumer segment. One estimate predicts that millennials will hold the largest share of U.S. wine consumption by 2026.1

Millennials differ from older consumers in a number of interesting ways. They have limited category loyalty, consuming beverages across categories (even during a single occasion). Compared with entry-level consumers in the 1960s, millennials have shown limited interest in the lowest-price wine segment, and as a result they made an outsize contribution to the growth of premium wines. At the same time, they are clearly value-focused consumers: They are looking for high quality at an acceptable price.

Millennials also demonstrate a high propensity to explore, favoring “new experiences” and varietals when making wine purchase decisions. This need to constantly discover something new has led to a continual rotation of “hot” varietals, which vary year by year. Rosé wines currently hold pride of place as the latest “it” wines: U.S. consumption of rosé grew by around 53% in the 52 weeks prior to June 2017, a significant rise from its 0.3% annual volume growth between 2011 and 2016.

4. “Drinking in” is winning out

Millennials are also having an impact on another trend: Unwilling to pay restaurant wine markups, consumers in general, led by millennials, are increasingly drinking their wine at home. Off-premises consumption now represents more than 80% of overall wine consumption — higher than off-premises consumption of beer or distilled spirits (see Figure 2).

5. Packaging packs a punch

As more and more consumers bring their wine home or to private social settings, they are increasingly embracing new forms of packaging that offer convenience and portability. For example, “bag-in-box” packaged wine is expected to see particularly high growth, given the low cost of production for suppliers. In fact, this trend is so strong that it has begun to move upmarket, with premium brands now using the format for 1.5-liter and 3-liter quantities. Boxed cabernet, chardonnay and pinot grigio grew more than 20% from 2015 to 2016.2  For example, Black Box from Constellation grew from 4 million to 6.6 million cases between 2014 and 2017, while Bota Box from Delicato doubled from 3 million to 6 million cases over the same period.

At the other end of the spectrum are smaller and single-serve packages. Tetra Paks have seen significant uptake, a result of both convenience (including the ability to reseal) and environmental friendliness compared with traditional packaging. Canned wine sales more than tripled between 2015 and 2017, albeit from a very small base (they represented less than 1% of overall wine sales in 2017).

Despite the buzz, widescale adoption of alternative packaging formats is likely to remain limited by consumer perceptions, shorter product shelf life and the difficulty of finding canning partners that focus primarily on beer.

6. The industry is consolidating, but buying opportunities remain

In 2017 the top 14 suppliers made up approximately 79% of the U.S. wine market by volume; however, a long tail of some 9,000 suppliers produced the remaining 21%. M&A activity is robust, with more than 30 deals for domestic vineyards in 2016. Acquisitions were made by producers of all sizes. Those of medium-to-large producers have been focused in the premium segment while smaller wineries were more concerned with securing supply, permits or capacity.

Private equity (PE) has also taken a few tentative sips, closing a number of U.S. winery deals in 2016. While wineries may not be an ideal fit for PE firms — there is a need to hold inventory over multiple years, and land and weather are also concerns — a significant opportunity exists to improve margins through better management, operations and commercialization.

It is also likely that buying opportunities will continue to arise as smaller wineries, grappling with a range of challenges, decide to sell. According to one recent survey of winery owners by Silicon Valley Bank, half say they may consider selling within the next five years (see Figure 3).

7. Labor shortages have begun to take their toll

Labor is a primary concern for the U.S. wine industry, and right now there is not enough of it. Producers rely heavily on migrant labor, and recent immigration policy reforms appear to be exacerbating the shortage. Seasonal workers, many of whom come from Mexico, are finding that crossing the border has become too expensive and too dangerous. In addition, producers are facing increased competition from alternative crops, including newly legalized marijuana, where the pay is better and the work less physically taxing.

A shortage of available temporary housing in areas affected by recent fires may further reduce the labor supply. The Northern California fires in late 2017 displaced nearly 100,000 people, including both documented and undocumented migrant farm workers. The resulting rise in the cost of accommodation may force workers to leave the area, especially undocumented farm workers who have no access to federal assistance. With no one to harvest their grapes, wineries may need to scale back production.

8. Distributor consolidation is limiting market access for all but the biggest

The top 10 U.S. wine wholesalers now hold a full 80% of the market (see Figure 4). The largest distributors are reportedly streamlining supplier relationships, seeking partnerships with strong, well-known brands with consistent and predictable sales. The numbers reflect this trend: In 2016, 95% of sales for wineries producing more than 250,000 cases were through distributors, an increase of 6% since 2014. For those producing fewer than 10,000 cases, distributors were responsible for only 33% of sales in 2016, a 6% decrease over the same period.

9. Wine shipping laws are evolving, but it’s a slow process

Ever since the 1933 repeal of Prohibition, the regulatory environment for alcohol has been slow to change. While wine shipping laws are starting to evolve, a big challenge for producers is navigating a confusing labyrinth of state regulations. For example, some states allow retail intrastate shipping while others do not. Some allow winery interstate and intrastate shipping while others do not (see Figure 5).

In 2005, the Granholm v. Heald Supreme Court decision ruled that laws permitting in-state wineries to ship to consumers but prohibiting out-of-state wineries from doing so are unconstitutional. As a result, wine shipping regulations have relaxed: Forty-four states now allow out-of-state direct-to-consumer (DTC) shipments from wineries and 14 allow out-of-state DTC shipments from retailers. Today only three states — Alabama, Oklahoma and Utah — directly prohibit DTC wine shipments. This less restrictive environment could provide an important opportunity for smaller wineries that are not represented by distributors and are struggling to reach.

10. Direct-to-consumer sales are on the rise

In fact, wineries are already jumping on the DTC bandwagon. The DTC channel hit nearly $3.1 billion in 2017 and is forecast to grow around 11% a year, reaching $5.2 billion by 2022 (see Figure 6). Not surprisingly, much of the growth in DTC is driven by smaller wineries, which often are not represented by distributors. The largest wineries are pulling back on DTC sales, with this channel representing only 6% of 2016 sales for wineries producing more than 250,000 cases, compared with 12% just two years earlier. Meanwhile, DTC accounted for more than two-thirds (68%) of 2016 sales for wineries producing fewer than 10,000 cases, a 6% jump over 2014.

While DTC has shown strong growth, it is from a relatively small base, and regulatory, logistical and consumer adoption barriers may limit the upside of this channel. These include continued prohibitions on interstate shipping in some states, challenges with shipping a heavy product that can spoil when exposed to high temperatures, and consumer preference for knowledgeable sales support when making wine purchases. In response to these obstacles, wineries are employing a number of different strategies to reach consumers directly, from on-site tours and tastings to wine clubs to selling through third-party ecommerce platforms.

1State of the Wine Industry 2018, Silicon Valley Bank
2Nielsen Consumer Insights, Interpak, Beverage Daily

Top 10 Trends Affecting the Wine Industry was written by Rob Wilson, Managing Director in L.E.K. Consulting’s Food & Beverage practice. Rob is based in Chicago.
For more information, contact consumerproducts@lek.com.
 

2018 Brand Owner Packaging Survey

L.E.K. Consulting recently surveyed more than 200 U.S. brand managers and packaging stakeholders at consumer packaged goods companies to understand their packaging needs and views on trends driving demand.

The survey focused on topics that include:

  • Brand trends and their effect on packaging demand
  • Shifts within packaging (e.g., new materials, packaging innovations)
  • Perspectives on packaging demand (including forecast spend on packaging for their brands)

This Executive Insights analyzes key findings from this proprietary research
 

Assessing the Health of the Nutrition Retail Sector

Consumer interest in maintaining a healthy lifestyle has remained strong over the past decade, buoying retail categories that focus on health and fitness. This includes nutritional supplements, which have enjoyed steady 6% growth since 2005 in the U.S. And after years at the same level, the number of U.S. adults taking supplements has begun to rise, reaching 76% in 2017. 

While nutritional supplements appear to be an attractive category with room for growth, they have been subject to the same seismic shifts as the broader retail market. Specifically, the rising importance of all things digital is placing pressure on some players while simultaneously paving the way for others. 

In this Executive Insights, we examine the four trends that are reshaping the nutritionals landscape. We also discuss which key players stand to win and which ones will be at a disadvantage over the next several years – and the steps these key players can take to shape successful outcomes during this period of industry upheaval.

Sample Visuals

The Strong Winds Driving Packaging Demand

An uptick in new product launches, along with increased private-label/Tier 2 brand participation, is among the key trends driving brand-mix shifts in the consumer packaged goods (CPG) segment. In addition to boosting packaging demand (even through periods of lower economic growth), the rise in product updates resulting from increased SKU proliferation has in turn led to shorter run lengths across numerous categories, while also emphasizing the need for more innovative product packaging. 

In this Executive Insights, L.E.K. Consulting outlines the key trends that are driving demand for higher-value packaging products. To succeed, packaging converters must be cognizant of shifts in CPG trends and their likely impact on different product categories; further, they must be nimble enough to develop innovative packaging solutions on behalf of CPGs as they strive to meet consumer demands. For investors, understanding how these trends are driving mix shifts in packaging substrates and formats, as well as where higher value-add products are being developed, is key to identifying opportunities in the making. 

Sample Visuals

Plant-Based Products — Not Just for Vegans Anymore

The grocery aisle is getting greener. Consumers — fueled by a host of concerns, including health and wellness, food safety, environmental sustainability and animal welfare, and adopting restrictive diets due to food sensitivity worries and more general lifestyle choices — are increasingly choosing plant-based food products. 

But while the appetite for plant-based products is vast and the sector is already experiencing notable growth, it’s still early days. The market remains difficult to size, and there are a number of challenges that need to be addressed before its value can be fully unlocked. 

In this Executive Insights, we examine why more and more consumers are moving toward plant-based food products. We also discuss how manufacturers, retailers, distributors and investors can drive even greater adoption through increased investment in product development and innovation.
 

Sample Visuals

Crossing the Digital Divide: No Brand Left Behind

When news broke last spring about Amazon’s courtship of some of the world’s biggest consumer packaged goods (CPG) brands, it touched off a wave of speculation. Did the ecommerce giant simply see an untapped opportunity for its fulfillment solution? Or was it engaged in a longer game to alter the relationships between consumer goods makers and their brick-and-mortar retail partners?

However it plays out, Amazon’s outreach exposed a digital divide in the consumer products world. On one side is the growing interest of brands in direct-to-consumer (D2C) models. On the other side are persistent worries about conflict — not just with traditional distribution channels but also with retailers carrying the brand. To bridge this gap, we identified seven dimensions along which a variety of pioneering brands have arrived at an effective digital strategy.

Understand how digital serves different consumer segments. That way, brands can deepen engagement by bringing people together for shared experiences. Kimberly-Clark, for example, specifically designed its Huggies rewards club to attract and educate new parents. Luxury brand Burberry maintains microsites where customers share snapshots of themselves in their own Burberry coats, and streams exclusive fashion shows for younger users of its mobile app. And on Twitter, fast casual restaurant chain Denny’s replicates the sort of fun, laid-back quips one might overhear from one of its booths.

Use the right digital channels. A D2C initiative can involve one platform or many, depending on things like image, objectives, target audience and what’s feasible in a given market. Longchamp, for one, bases its D2C efforts in China on the blockbuster WeChat app. Whirlpool differentiates its brands — including WP, Maytag and KitchenAid — by conveying each unique brand voice across a mix of landing sites, social media and YouTube channels.

Add value to the consumer. This includes making decisions about whether to sell online and what assortment to feature. Either way, consumers need a reason to tune in, and mass-offered discount coupons are increasingly insufficient. Instead, Patagonia secures customer loyalty through its “Worn Wear” website, where environmentally conscious consumers can purchase secondhand clothing at a discount and trade their own used duds for gift certificates. Meanwhile, Subaru extends well-matched offerings at the right time in the consumer life cycle, from prepurchase targeting to end-of-lease management and loyalty incentives to repurchase.

Look for measures that matter. CPG manufacturers in particular can use analytics to make all of their digital direct-to-consumer channels better. At Procter & Gamble, for instance, technology says it’s time to remind parents about Pampers while analytics says that direct marketing is the best way to do it. Then there’s L’Oréal, which, through its work with Google, discovered that ombre hair color was trending. The cosmetic company’s response? A new product, backed up with a dedicated consumer marketing plan.

Make room for new technologies. They’re increasingly important to marketing, customer engagement and sales — in any sector. For instance, as a technology company, it makes sense that Samsung uses virtual reality to help consumers visualize space for its TVs. But what about Rebecca Minkoff? The accessories and apparel designer uses in-store radiofrequency identification to send clothing items to dressing rooms, helps customers choose different styles and sizes, and shows stock availabilities in stores and online. There’s also MATCHCo, which uses an app to scan the customer’s skin tone and deliver the perfect foundation. Finally, consider home goods seller Wayfair’s augmented-reality app. It lets customers evaluate virtual, full-scale 3-D models of furniture and décor amid their own day-to-day surroundings.

Keep the online conversation going. If brands don’t create a social media presence themselves, customers will create one for them. Fast-food purveyor Wendy’s famously took command of social media with its clapbacks, showing how wit can gain consumer attention in the Twittersphere. But for brands with a more conservative sensibility, alternative social media strategies can work as well. For instance, L’Oréal signed on 15 social media influencers to review the company’s offerings, record video tutorials and cover behind-the-scenes beauty events. 

Find a way to work with Amazon. Despite concerns about losing the customer relationship, high-profile multibranded websites are worth consideration, if for no other reason than the online traffic they bring in. Nike agreed to sell its athletic gear through Amazon and Instagram, for example. Brands participating in Amazon’s Prime Wardrobe — where members can order clothes without paying and get discounts on the pieces they keep — include Levi’s, Kate Spade and Theory. For its part, Prada sells its ready-to-wear outfits via third-party websites in Europe, with plans to replicate its ecommerce success in Asia.

Bringing it all together, brands tread a narrow path with digital. Retailer relationships can impose varying levels of constraint in D2C selling — less for apparel, perhaps, and more for CPG. On top of that, the online world is tough for brands to influence. But brick-and-mortar retail doors are closing, especially for apparel, as shoppers take their business online. In this environment, a failure to think digitally may have the most severe consequences of all.

So someday soon, digital agility will be as important to consumer brands as traditional capabilities like brand-building, new product development and distribution. What that digital response looks like will vary from brand to brand. For now, product makers can look to retailers and innovative brands for lessons in ways to balance universal best practices with choices that are authentic to the brand, the evolving consumer purchase process and the specific channel environment.

Crossing the Digital Divide: No Brand Left Behind was written by Robert Haslehurst and Chris Randall, Managing Directors, and Noor Abdel-Samed, Principal, in L.E.K. Consulting’s Consumer Products practice. Robert, Chris and Noor are based in Boston.

For more information, contact consumerproducts@lek.com.

Subscribe to Food & Beverage