Quarterly Reports • April 2023

Cloudy With a Chance of Rain

Chris Bitter
3 min read

Even in the simplest of times, it can be challenging to get a clear read on the wine market. The market is multifaceted and relevant data are fragmented, incomplete and often conflicting.

These are not simple times. First the pandemic and ensuing channel shifting distorted the image. Now we are facing the most ambiguous economic environment that I have seen in my lifetime. Thus, the picture is even foggier than usual.

Nonetheless, wine demand is clearly softening. SipSource data indicates that distributor depletions for the three-month period ending in February are down relative to last year in all price tiers except for $50 and up. And NielsenIQ figures suggest that domestic wine sales are falling in both value and volume terms.

Pricing power in the off-premises channel continues to be weak: the Consumer Price Index for “wine at home” is rising at about half the rate of headline inflation. So, margins are continuing to be pressured.

The direct-to-consumer channel seems to be coming back down to earth following the pandemic-induced surge. Direct-to-consumer shipment volumes, as measured by Wines Vines Analytics & Sovos/Shipcompliant, are declining, though they remain well above pre-pandemic levels. On the positive side, shipments are holding steady in dollar terms as a rising average bottle price is offsetting the decline in volume.

The outlook for the wine market is even murkier. On the one hand, the economy is still growing, jobs are plentiful and wages are rising. Moreover, consumers are still on a reasonably firm financial footing, and spending is up.

But inflation, rising interest rates, falling asset prices and the uncertain economy are taking a toll on consumer psyches. While consumers still feel good about their current situation, assessments of future economic conditions are very low. This holds true even for higher-income consumers, as those in the top third of the distribution are just as pessimistic as those in the bottom. Recent turmoil in the banking sector will undoubtedly add to the nervousness.

While it is possible that the Fed will be able to tame inflation without inducing a recession, this would take time and economists are currently placing the odds of a recession at better than even. Thus, wine sales are likely to continue to be soft, at best, in the months ahead, particularly in the lower-and-middle tiers of the market.

The grape and bulk-wine markets are relatively balanced in an overall sense, due to three consecutive short crops. Bonded wine inventories have held steady over the past 18 months despite the shortfall in grape supply, according to Alcohol and Tobacco Tax and Trade Bureau data (shown in Figure 1).

Grape sales in the interior have been slow, as buyers are hesitant to commit amid declining sales of lower-shelf wines. Activity in the north coast region has been stronger, but narrowly focused on the hottest appellations and varietals. The central coast market sits between these extremes. Margin preservation is of foremost importance to both buyers and sellers, which is leading to a disconnect in pricing expectations and compelling some producers to source fruit from lower-cost appellations.

Both sides are eagerly awaiting clues about the size of the 2023 crop. It is too early to discern much at this point as bud break is just beginning. But soils are moist, and water is more plentiful than it has been in recent years, which bodes well for a potential rebound. Given the weak trajectory of wine sales, a large crop would almost certainly tip the balance toward oversupply, though as always, some varietals (e.g. Sauvignon Blanc) and appellations (e.g. Napa) are more favorably positioned than others.  

Chris Bitter

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