Wineries industry has been growing in terms of the number of wineries newly established and consumption, but individual company’s performance varies due to significant increase in competition (rising costs of wine). There is a downward trend in global market as indicated by wholesale volume of some major producers.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Generally the demand for premium and above wine products in US market has been solid and growing as indicated by performance of retail of some of typical producers of wine. However, competition seems to be increasing as costs of wine and price increased in the past two years.
• Demand seems to be slowing down globally in the past two years after fast growth in 2015/16 as indicated by sales volume of some of typical producers.
• In order to capture the strong demand for premium and above wine, offset the declining demand from their retail customers, and improve profitability, some small producers gradually shifted their focus of sales to direct sales from wholesale.

 

Causes behind the trend

• There are always three sources for the increases in alcohol products consumption:
  1. Naturally increased size of consumer pool due to natural population growth and people’s aging.
  2. Grabbed consumers from other similar products’ consumers.
  3. Increased consumption from the existing consumers.

  As what has happened in better beers -craft market, we think there are three similar fundamental drivers behind these sources mentioned above:

  1. Demographic changes

  Aging population, which is a natural result of longer life, working together with increasing young population, is the driver for constantly increasing demands for wines products.

  2. Economy factors

  Consumers whose purchasing powers are most vulnerable to the challenging economy in the past 10 years are those who usually consume below premium alcohol products. In fact, rising real estate property price driven by quantitative easing policies should have given more confidence on purchasing higher premium wines products ($20 or above) for consumers with higher income who are more likely to own houses and less impacted by challenging economy.

  3. Consumers’ preference

  Increasing awareness among consumers that red wines are healthier products may play a role in the shifting of consumers’ preference from beers to wines.

 

Industry Future

• It should be reasonable to expect that the growth in wines sector of US market will continue since most of fundamental factors behind the growth will still be existing in near future. In addition, we do not see any alternative products for replacement of current alcoholic consumption.

  Firstly, growing population will continue to add fuel in this sector. Secondly, while, as economy’s recovery speeds up and interest rate goes back to normal level the pace of rising of real estate price will slow down, the recovery of economy will bring extra power to push sales number higher. At the last, the preference for red wines products of alcohol consumers will probably be ensured as the awareness of healthy life goes deeper.

  However, we believe, unlike spirits industry where entry barriers are high for new makers and consumers are sticky on existing brands, wineries industry faces strong competition as more new enters join in.

General Financial Performance of Companies In the Sector

As cost of wine (grapes) increased in the past two years, producers in this sector have all experienced increasing pressure on selling price, which may be the major reason of a general decline in demand and thus in increasing competition and spending on marketing during this period. The decline in demand has been also indicated by declining wholesale of those producers, which means that their retail customers experienced troubles in selling their products. Some of producer turned to maintain their own retail sale by intensive marketing. However, increasing marketing costs resulted from expanding their owned retail operation also dragged down their efforts in improving profitability. However, since this is growing sector with about 3% annual growth in the past 20 years, a positive prospective future driven by stronger demand for premium wines may still be expected.

We have seen a diversified performance in terms of improvement in gross margin from producers of wine in this sector. There has been a generally increasing pressure on companies’ margin due to increasing wine costs and competition. However, as the focus of some of companies shifted to their owned retail channels by cutting off low efficient wholesale business, gross margin seems to be improved while the whole profitability was not due to increasing expenses in expanding their owned retail channels.

The typical gross margin for companies focusing on retail sales channels is about 65% with SG&A% of about 53% and operating margin of about 11%. And the gross margin of wine producers relying on wholesale is about 34% with SG&A% of 25% and operating margin of about 10%.

 

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