The Premium Wine Market Today: “The Perfect Storm”
Weak U.S. economy; slower premium wine demand
Continuing oversupply of high quality grapes
Highly competitive, price-driven environment
Challenging new wholesale/retail dynamics
Negative financial impact in Fiscal 2003
Notes:
- “Perfect Storm” is used to describe a lot of challenging situations these days. It certainly captures the turbulent environment in today’s premium wine market.
- Consumer demand has slowed, especially for high-end wines and, from a channel perspective, in white table cloth restaurants – as the economy has slowed.
- There is a global oversupply of high quality grapes – especially red grapes – planted in the 90’s for a 10% CAGR market.
- Competition is intense as a result of recent consolidation in the sector; from Australian brands with low cost structures; and from new entrants including “supervalue” brands created from inexpensive surplus wines.
- Price competition at the producer level has at least temporarily given more power to retailers. This impact of this trend on producers has been magnified by ongoing consolidation at the wholesale level. In 1975 there were 450 wholesalers in the US; today there are 170. That means it is very difficult to get attention from the trade. To succeed in this environment, brand and distribution strength are absolutely critical.
- The impact in the near-term has been a compression of revenue growth and margins for the industry. Smaller producers are being shaken out while larger producers, like Robert Mondavi, are surviving but not thriving, as you will see in our FY2003 results. We believe that several of “The Perfect Storm” factors are structural and to succeed and thrive in the future premium wine market, we are changing our business model.
On the positive side, per capita consumption continues to rise and demographic trends are favorable while the USD weakens (which helps US exports)