Columnist, Food

Elissa Garza, left, of Boston and Gabi Parsons of San Francisco sip wine during a class in Boston in May offered by the Society of Grownups. The financial education firm uses a coffee shop and dinner club atmosphere to help attract millennials. (Josh Reynolds/for The Washington Post)

A new year always prompts crystal-ball gazing, and the Silicon Valley Bank has obliged with its annual assessment and predictions for the U.S. wine industry. The outlook isn’t all good.

Last year, the bank predicted a “breakout year” for U.S. wineries, with a resurgent economy and consumer optimism. This year’s report, written by Rob McMillan, executive vice president and founder of SVB’s wine division, notes generational shifts among the U.S. consumer base and inexpensive imports as threats to the industry’s well-being.

Cheaper imported wines, fueled by the strength of the dollar, are a boon for consumers. We’ll see not only more French, Italian and Spanish wines at favorable prices, but also fascinating wines from South Africa, southeastern Europe, Turkey and Georgia. But these imports are competing with domestic wines for a somewhat tighter market. Younger consumers, the millennials and Generation X’ers, are proving to be adventurous in their tastes for alcohol; they spread their affection (and money) among wines, craft beers, meads, ciders and artisanal cocktails. That led to a sharp decline in the growth of wine sales in restaurants last year.

“The drop in restaurant sales took place in all price points,” McMillan writes. “We believe [this is] explained by more at-home consumption and a behavior change of our frugal millennial consumers, who are more likely to satisfy their restaurant consumption needs by starting with a beer or cocktail, then having a glass of wine rather than a bottle of wine with dinner.”

The rising competition from craft beers, ciders and cocktails is becoming known as “the new normal” for wine producers. It will be the focus of the annual USBevX trade industry conference here in Washington in mid-February.

In last year’s report, McMillan wrote that millennials were having a negligible impact on the wine market. This year, however, millennials — which the report defines as those 21 to 37 years old — accounted for 16 percent of wine sales, overtaking the oldest generation, which McMillan calls “matures” (68 and older), who accounted for 11 percent. Baby boomers (50 to 67) are still the largest consumer bloc, at 41 percent, but that number is declining as they march toward retirement. Generation X (38 to 49) will probably surpass the boomers as wine consumers by 2021, but the millennials will become the most influential group by 2035, if not earlier, the report predicts.

As a result of those shifts, the cheapest wines (under $8 per bottle, favored by older consumers) will continue to decline in sales, and hundreds of acres of vineyards in California’s Central Valley will be uprooted and planted to other crops, the report predicts. Consumers will favor the $11-to-$15-per-bottle level, still lower than the $20-plus enthusiasm SVB predicted last year. And that will again help imports, which typically offer better quality in that price range than California wines. (That’s my opinion, as most California wines under $15 taste as though they were made according to a recipe or a marketing plan.)

Higher-end wines from smaller producers will continue to be in demand, with Virginia, Oregon, Washington and the Paso Robles area of California recording the largest price increases over volume sales in 2015. (This is apparently the first time Virginia merited significant mention in the SVB report, and it was the only non-West Coast region highlighted.)

The SVB report notes other trends. Consolidation continues, as the larger wine producers gobble up smaller brands and the wholesale network constricts with mergers and acquisitions. The top three wine companies produce about half of this nation’s wines, and the top four wholesalers cover 60 percent of the market. The report doesn’t quite make the connection, but that concentration in production and distribution probably favors larger retailers with national reach, such as Total Wine & More, BevMo and supermarket chains such as Safeway.

“The stranglehold wholesale distribution has on the movement of wine into national accounts makes the larger wineries critical partners,” the report says. “Those wholesalers prefer to deliver consistent brands across all of the retailer’s nationwide sites. The smaller wine companies don’t produce sufficient product volume to fill those stores, hotels and restaurants so big wineries still dominate.”

So those smaller wineries will continue to rely on tourism and direct-to-consumer sales, from the tasting room or through mail order. And there will still be room for small distributors and local retail stores to bring these distinctive wines to the market. We’ll find them somehow.