Wine Consumption

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Katerina Semida

Stephen Lihn

Remember in college when you'd drink yourself stupid on Milwaukee's "Beast" with your buddies? Us, too. But now you're classy - you've outgrown that. You're more likely to uncork a bottle of Pinot Noir when friends come over.

You're not alone. The entire country is moving in the same direction, to the consternation and panic of beer manufacturers, who face slowing sales of their flagship brands as consumers turn to wine and other spirits. While international sales are still growing, beer sales in the US (which represents 2/3rd of Anheuser-Busch's sales) have been flat since 2003.

At the same time, grain prices and aluminum prices have risen, making it more expensive to produce and package beer in cans, squeezing beer manufacturers' margins even as domestic sales have stagnated.

Wine consumption in the United States has risen 30% in the past decade, and the nation has overtaken Italy as the #2 consumer of wine, second only to France.^[1] 304 million gallons of wine were sold in 2007, reflecting strong growth despite weak economic conditions in the second half of the year.

A larger part of the US population is drinking wine, too - 57% in 2007, compared to 43% in 2000. Unlike previous generations, which generally did not drink wine regularly until they reached their 40s, younger consumers are discovering wine in their 20s and 30s. The proportion of consumers of wine who drink wine at least once a week has also risen, reaching 55%.^[2]

Drivers of Wine Consumption

• Grape harvests determine each year's wine supply and prices: The global wine industry has been oversupplied with grapes in recent years, after record harvests in 2005 and 2006. Oversupplies of grapes deflate prices, increasing competition between wine producers, which was made even more intense by new American entrants to the market. In 2007, however, wine production fell drastically due to especially weak harvests in Europe and Australia. France's production fell by 5%, Spain's by 12%, Italy's by 9% and Australia's by 25% on a year-on-year basis. Forecasts for 2008 predict another weak crop. Unpredictable temperatures and climate conditions have created this production decline, which has led to lower wine supplies and higher prices for consumers.^[3]

• New smaller wineries make a larger variety of wines available to consumers: Despite industry consolidation that has affected the number of large wine producers in the last three years, new independent wineries are opening almost every day. There were 5,364 wineries in the United States as of 2005, up from 4,740 in 2004. These small, artisan wineries provide the increasing variety of wines that consumers demand.^[4]

• U.S. Economic Cycles can depress demand: As a discretionary consumer product, wine is at risk of suffering decreases in demand during period of weakness in the US economy. The elasticity of demand for premium wines in particular has been a concern for producers, since these higher-priced products can be easily replaced with cheaper wines or other beverages.^[5] However, so far, wine demand has stayed strong despite recessionary conditions in the second half of 2007. The US wine market rose 8% in value to reach about $30 billion in 2007, with a 4% rise in imports by volume. Premium wines have also remained in demand, perhaps because the wealthier consumers who purchase them have not seen their budgets trimmed as significantly by economic weakness.^[6]

• Reports on health benefits of wine raise demand: A variety of studies have found significant health benefits from moderate consumption of red wine. For instance, red wine has been shown to have antioxidant, anti-allergic, antihistamine and antiviral properties. ^[7] Over the past few years, wine producers and industry organizations have been lobbying for government research and sponsoring private studies in this area. At the same time, they have publicized the results widely. For instance, the Wine Institute, an association of California wineries, has created a Code of Advertising Standards to promote the dissemination of information about wine's health benefits in an unbiased, easily accessible manner. This increased publicity has raised demand for wine.^[8]

• Restrictions on direct-to-consumer shipping limit market for many producers: For a long time, small wineries, which make up the majority of wine producers, were prohibited from shipping wines directly to out of state consumers by a complex web of state laws and regulations. In 2005, the Supreme Court struck down state laws prohibiting such direct-to-consumer shipping, making it possible for producers, who previously could only sell wine from their locations, to reach a significantly larger base of consumers nationwide. This change has the potential to greatly increase wine consumption the the United States; however, 16 states still have significant barriers to direct shipping, and many of the rest inhibit shipping with various restrictions and regulatory procedures (see chart below - all states in light brown currently do not permit direct shipping).^[9]

^[10]

Budgetary and personnel shortages in many of the regulatory agencies involved suggest that the continuing uncertainty and inconsistency in the regulatory environment will persist.

Companies Benefiting from Growth in Wine Consumption

• Wine producers: Constellation Brands (STZ), Diageo (DEO), LVMH Moet Hennessy L.V. (LVMUY), Willamette Valley Vineyards (WVVI), and others in this highly fragmented industry (Constellation is the largest global company, with less than 5% market share) are seeing demand for their product rise steadily. The varieties most demanded by consumers include cabernet sauvignon, pinot grigio, pinot noir and riesling, so producers of these wines stand to benefit even more. Both domestic and foreign producers are affected by this rise in demand - around half of regular wine drinkers have purchased wine from Italy, France, or Australia, three of the biggest wine-producing countries.

• Online wine sellers: 18% of consumers that drink wine at least once a week have purchased wine over the internet, a proportion that has risen in the last few years. Two thirds of online wine sales are completed on winery websites; retailers, however, account for the remaining third. As more and more Americans, especially Internet-savvy younger generations, increase their demand for wine, traffic on these sites is growing rapidly.^[11]

• Spirits (liquor) companies: Brown-Forman (BF), Fortune Brands (FO), and other large producers of spirits are to some extent also benefiting from the same general trends that are increasing wine consumption - a demand for more unique and higher quality alcoholic beverages. Spirits sales in the US were up 3.2% in 2007, not far behind wine's 4% rise. However, the demand for wine is growing faster than demand for spirits and poaching some potential consumers of spirits.^[12]

Companies Hurt by Growth in Wine Consumption

• Beer companies: Anheuser-Busch Companies (BUD), Molson Coors Brewing Company (TAP), SABMiller plc (SBMRY), Boston Beer Company (SAM) and other producers of beer are facing flat demand in the United States, a key market for most of these firms. As beer and wine are largely substitute products, an increase in the demand for one directly impacts the demand for the other.

• Aluminum Can Manufacturers:Aluminum can manufacturer Ball (BLL) controls 31% of the US market for aluminum beverage cans, and 37% of its revenues come from these products. A shift to wine, which is packaged in glass bottles, undermines demand for Ball's core product.

Wine Consumption by Country

The most important factor that has influenced the levels of beer, wine and spirits consumption is the real GDP of the region or country. The other factor is the population of drinking age, that affects the levels of wine and spirits consumption and to a lesser extent beer consumption.^[13]

The world wine consumption has been increasing by about 4.5% every year. The following table shows the top 10 wine consuming countries by volume:^[14]

References

1. ↑ Tasker, Fred. "Wine attracts more customers." The Miami Herald. February 18th, 2008.
2. ↑ Heeger, Jack. "US Wine Consumption Up." Napa Valley Register
3. ↑ Wine Production Sinks While Demand Soars
4. ↑ Top 30 US Wine Companies 2005
5. ↑ What Wine Goes with Recession?
6. ↑ US wine purchases soar despite looming recession
7. ↑ Red Wine Consumption Proven to Have Many Benefits
8. ↑ The many faces of "truth." (effects of moderate wine consumption)
9. ↑ The Perfect Storm, Revisited
10. ↑ Direct to Consumer Shipping - Not Quite the Green Light for Every State
11. ↑ Wineries Must Compete with Retailers for Online Sales
12. ↑ Spirits, Wine and Beer Continue to Grow, but Industry Boom has Slowed
13. ↑ EU Taxation Custom Study
14. ↑ WineInstitute.org