U.S. 2014 wine forecast: Supply up, prices flat

It’s meant to let the U.S. wine industry know what market conditions will look like in the coming year and beyond. But the 2014 edition of Silicon Valley Bank’s Annual State of the Wine Industry Report also gives restaurant operators a heads-up on the immediate future of wine pricing and availability and, perhaps more importantly, outlines the forces driving fundamental change in consumer wine-purchasing patterns.

From the restaurant operator’s point of view, the short-term outlook is highly favorable. 2014 is looking like a better year to be a buyer of wine than a producer of it.

“Despite news to the contrary in recent months, wine supply is in balance heading into 2014 and we expect the highest rate of sales growth since the recession, despite a tough economy,” says Rob McMillan, founder of Silicon Valley Bank’s Wine Division. “News is good for the consumer: demand is up, supply is in good shape and pricing is stable. For the winery, however, grape costs and flat consumer pricing means lower profitability.”

For example, the report predicts that final numbers on the 2013 California wine grape harvest will show it to be the second-largest on record, just .06 million tons short of 2012’s four-million-ton crop. An abundant supply is one reason sales of fine wines are forecast to grow six to 10 percent—the first increase in three years.

The upshot: If you want to boost revenue from your restaurant’s wine program, 2014 should provide a favorable environment in which to do so. The prices restaurants pay for bottled wines are forecast to remain stable. Cost for grapes and bulk wine will be up, but producers won’t be able to pass the increase along.

That’s one reason why, short-term, people will be drinking more wine. In particular, the report notes, the greatest growth in demand in 2014 will be found in luxury wines and in bottles that cost between $10 and $18. Keep these consumer-level pricing preferences in mind as you fine-tune your wine program’s offerings. As for varieties, the forecast calls for particularly favorable pricing on bottles of Merlot, Zinfandel and Chardonnay due to high inventory levels of these varieties at the producer level.

But the longer-term outlook for restaurant wine programs could be problematic. It’s not clear who will be buying all this West Coast wine in the future, the report notes.

“While this year is ultimately expected to be a healthy one for U.S. wineries, if we peer into the future five to seven years, we believe the headwinds will increase significantly as more Baby Boomers retire,” McMillan says. “Fifty and 60-somethings purchase about half of fine wine in the U.S. As they retire, and their purchasing power declines, the younger generation can’t pick up the slack immediately, due to lower income, and access and the proclivity to purchase more foreign wine. Astute fine wine producers will be adjusting their strategies accordingly.”

Restaurant operators might want to do some longer-term strategizing, too. The Silicon Valley Bank report indicates that your millennial customers will embrace less-expensive labels from less-traditional regions and countries. If your wine-drinking clientele skews younger, be prepared to adjust your offerings accordingly.

The Silicon Valley Bank describes its methodology used to compile its report this way: “Based on a survey of nearly 650 West Coast wineries, in-house expertise and ongoing research, the report covers trends and addresses current issues facing the U.S. wine industry. The report offers unique data and observations that help wine business owners and managers think critically about their business strategies.”