The Rising Tide Hasn't Lifted all Boats in Washington State
I’m a firm believer that rigorous market intelligence leads to better informed decisions and superior outcomes and one of the primary goals of Vintage Economics is to provide insightful intelligence on the Pacific Northwest wine industry. To that end, I’ve developed detailed production and shipment metrics by volume for Washington State wineries based on information collected by the Washington Liquor and Cannabis Board (LCB) for taxation purposes. I’m producing several reports from these data, but will also share insights from time to time in this blog. This inaugural entry provides observations on the performance dynamics of Washington wineries over the last several years.
My analysis of the LCB data confirms that times have been very good for the Washington wine industry as it continued to gain stature and market share both within and outside the state. Total shipments of bottled wine (excluding cider) grew by more than 2.1 million cases between 2013 and 2016, a 20% increase.
However, the rising tide has not lifted all boats. Before delving deeper into this, it is first important to note that aggregate totals do not provide a very nuanced view of the performance of Washington wineries due to the industry's extreme concentration. Figure 1 illustrates this point. Ste. Michelle Wine Estates dominates the Washington wine industry to an extraordinary extent, as it accounted for nearly two-thirds of State’s wine shipments by volume in 2016. Including the five other wineries that shipped more than 200,000 cases, the total increases to 85%. On the other hand, more than three-quarters of the 684 wineries that recorded shipment activity in 2016 shipped fewer than 2,000 cases, but represented less than 2% of total shipments.
Based on a comparison of total shipments in 2013 and 2016 for the 321 Washington wineries that shipped at least 500 cases in 2013, nearly as many suffered declines in case volume (146) as saw increases (175). As Figure 1 demonstrates, many of the State’s wineries have been hitting it out of the park, while others have struggled to generate growth in a hyper-competitive and rapidly evolving market environment.
The new market realities have played out differently at different levels in the Washington winery hierarchy. The metrics in Figure 2, which classify wineries based on their size in 2013, show that the evolving market has generally been more favorable to larger wineries, as their scale proved to be an asset in a period of intense retail and distributor consolidation. In fact, Washington’s 12 largest wineries accounted for 96% of the growth in out of state shipments, and the three largest alone captured 92% of the increase in instate wholesale sales. As a group, the state’s 273 small and very small wineries recorded essentially no growth in shipments through distribution channels. Although they did perform slightly better than their larger counterparts in terms of DTC sales, the median change in their total shipments was only slightly above 2%.
Yet, as Figure 4 indicates, this pattern is far from universal as there have been winners and losers at every level in the hierarchy. For example, 5 of the 12 largest wineries experienced declines in shipment volume, as those focused on lower price points or lacking fresh and compelling brands lost ground in the distribution battle. And while a third of small and very small wineries saw their distribution-channel shipments cut by half or more as distributors culled smaller accounts, 31 saw gains of 100% or greater. This suggests that wineries who can demonstrate a compelling value proposition can achieve growth regardless of their scale.
In sum, the Washington wine industry has performed very well in recent years and many of its wineries have experienced spectacular success. It is also apparent that a substantial number of Washington wineries have had difficulty in adapting to the changing market environment, as nearly a quarter saw their shipment volume decline by 30% or more over the past three years. While declining case volume does not necessarily imply declining revenue or profits, anecdotal evidence suggests that many Washington wineries are struggling to achieve acceptable financial returns even in a period of relatively strong growth for the industry. Given recent signs of a slowdown in both Washington and the broader US wine market, a strategic approach to the market will be even more important going forward.