The Premiumisation Conundrum

The move away from low-priced wines towards more premium wines is clearly a positive development in terms of overall revenues and profits, but the premiumisation trend has also created a series of challenges for US wineries to navigate.

picture of premium wine bottles

The shift to more premium wines, is shaking things up in the US wine market. In our view there are five interrelated areas of tension driving change in the market today that are all driven by the premiumization trend:

1. Demand for premium vs. basic wine grapes

Millennials and other consumers are eschewing value-priced jug wines and large-format box wines in favour of more premium wines in the USD 10/bottle to USD 25/bottle price segment. The consumer (and retailer) shift away from the low-priced segment would not be particularly problematic if it were not for the fact that, just prior to the shift taking hold, there were strong market signals to expand production of lower-priced wines from the San Joaquin Valley.

2. Securing long-term supply

Given the limited capacity that many premium wine regions have to expand production, the rising demand for premium wines in the US has driven an exceptional increase in wine grape prices in these regions. The scarcity of available vineyards and rising vineyard valuation means wineries are faced with difficult choices.

3. Building routes to the consumer

At the same time the US wine market is shifting to more premium wines, the wholesaler tier continues to consolidate, and wine sales are increasingly being dominated by large retail chains. This combination of factors is creating a conundrum for wineries large and small.

4. Managing relations with local communities

With growing interest in premium wines, premium wine regions have become increasingly popular tourist destinations, supporting direct-to-consumer (DTC) sales. Although the growing interest in wine-related tourism has been a boon for small wineries, it has also given rise to a NIMBY (‘not in my backyard’) movement, with an increasingly vocal group of residents in these regions who complain about traffic from tourists visiting wineries and the noise levels from winery special events.

5. Competing with increasingly savvy and motivated foreign competitors

In the US wine market, both imports and domestic wine have played important roles, but there has historically been some tension between them as they battle back and forth for the US consumer. With premiumisation, the level of competition in the premium segment of the US wine market has been intensifying—from both foreign and domestic competitors—and this is unlikely to change any time soon.