Smiley’s statistics: The UC Davis dean reveals his findings – Brief Article
Jennifer Rofe
Each year, Robert Smiley–dean and professor at UC Davis’ Graduate School of Management–and his team of researchers complete a survey of 350 wineries, vineyards, retailers, restaurateurs, financial institutions and various industry CEOs that reveal the insiders’ reflections on the industry.
A business guru, Smiley, whose credentials are impressive–an engineering degree from UCLA, a doctorate in economics from Stanford, 16 years on faculty at Cornell, over 12 years as dean at UCD and a board of directors member at Delicato Family Winery–presented his latest findings, including those from an August survey, at the Wine Industry Symposium in September.
Smiley’s research concluded that not only is the industry considerably less optimistic than in the past, vineyardists and wineries that own vineyards are expressing concern about the economic downturn and the oversupply of grapes. “It’s a tough double-hit to take,” Smiley said.
This is troubling information, since, according to the survey, vineyards and wineries consider a good economy, along with continued research on the health benefits of drinking wine and improvements in quality, vital to the industry’s success. Industry members expressed most concern about the economy, competition from other countries and consolidation among distributors.
However, to better understand the current state of the industry, it is important to consider it as an agricultural industry.
State of the Industry
“The biggest weakness of the industry is the same facing any agricultural industry,” Smiley said. “It is your standard agricultural cycle, where shortages and high prices, like we had in the mid ’90s, leads to oversupply, which we have right now.
“You can grow good grapes virtually in dozens of places around the world, and those places are all being planted as we speak,” he added. “We have surpluses already, and vineyards are being planted in South Africa, Australia, Chile, Argentina and Eastern Europe.”
However, Smiley also specifies how the wine industry differs: “Compared to most ag businesses, wineries have responsibility for everything, from growing the product to marketing to the consumer. This is very unusual. It’s very vertically integrated.”
Smiley also noted that the wine industry attracts entry as a lifestyle option–“It’s sexy to be in the wine industry”–and that even larger entities, such as spirits and beer companies, want a presence, leading to the development of more wineries and vineyards.
“People don’t see surplus coming,” he said. “They’re not aware of the cyclical nature of prices. They think they may have a special skill or piece of land that will allow them to avoid the surplus problem.”
Smiley pointed out that the industry is in the stage of a cycle where prices are low and dropping due to the onslaught of planting in the last few years, particularly in the Central Valley.
Smiley conveyed his belief that in the Central Valley there will be price competition at the lower end due to over-planting and cheaper grapes. He also said he believes that Napa and Sonoma feel immune to the situation, a precarious sentiment. “I would caution them to be careful with price increases,” he said, adding that the Central Coast may or may not see price declines, but it will be a competitive situation. Overall, Smiley says, “There is going to be an impact. It wouldn’t surprise me if we had a year or two of this–a soft economy and an oversupply of grapes.”
Concerning growth in price categories, Smiley’s survey revealed that the industry is not optimistic about “the extremes,” expecting growth to be slowest in the $3 to $7 range, second slowest in the $25 and over range and highest between $10 to $14.
Despite the bleak forecast and imminent surplus, there is still growth.
Regarding varietals, survey respondents foresee Cabernet as having the most rapid growth, followed by Syrah and Pinot noir. Among whites, Sauvignon blanc will lead, followed by Chardonnay. However, Smiley is quick to note that Sauvignon blanc probably will not overtake that “800-pound gorilla,” Chardonnay.
A Possible Recession
But with the United States facing a possible recession, leading to weak demand and abundant supply, what will the industry do to cope with the surplus?
“There is talk of postponing capital expenditures and clearing out inventories,” Smiley said. “Most of them are in a situation where they don’t have enough room in their inventories for the crop that’s about to come in. Smiley added that distributors are not taking inventory because they’re getting hit from all sides.
According to the survey, the industry believes that should the U.S. experience a recession, consumers will trade down in price before foregoing wine or switching to other beverages. In fact, some wineries have introduced new brands that are down in the price scale.
“A problem is that a lot of wineries are new, and they’ve never seen a recession,” Smiley said. “One-third of them have been opened since 1991, when we had the last recession. A lot of these people are seeing it for the first time.”
Widening the Market
Probably the most common response to the question of how the industry can deal with the surplus is “How can wine reach a wider market?”
“It’s the 80/20 rule applied to wine,” Smiley said. “Twenty percent of consumers drink 80% of the wine. Fifty percent of consumers don’t drink wine at all, some for religious reasons and some because they haven’t tried it. This leaves 30% to 40% that are occasional drinkers. How does the industry entice consumers into regular consumption? It hasn’t done well in the last 15 years, especially when compared with coffees and mineral waters.
“John Gillespie and Wine Market Council have been attempting to convert occasional drinkers to regular-drinker status,” he added. “It’s about removing the special-occasion character of wine.”
Smiley also believes packaging is essential to attracting more consumers. “In my mind, the wine industry is the slowest industry to innovate packaging,” he said. “This leads to a lot of people who even on occasion would have wine not buying it because they don’t have a corkscrew in the house. I also think different size packages will help, such as half bottles.”
In his survey, when participants were asked what needs to be done to improve the market for wine, Smiley reported that the top three answers were a variation of the same response: Make wine simpler. Appeal to the 50% of the population that does not drink wine and the 30% that drinks wine infrequently by demystifying wine, making choosing wine less intimidating and using closures that do not require a specialized household item to undo. Suddenly, screw caps sound appealing.
In fact, Smiley believes that screw caps would make a difference. “There’s no reason why a screw cap wouldn’t be successful,” he said, adding that a winery can offer wines with screw caps or corks. “It just takes the first person to do it. At times, being first is hard. This is one of those times.”
Smiley himself believes that in the future, innovators in regard to varietal and packaging will prevail. “Wineries willing to take a risk with careful study beforehand are going to be successful.” Smiley also noted that with New World countries like Chile and Australia producing quality wines, producers in the U.S. need to keep up with and pursue higher quality. “The bar has been raised.”
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