The Structural and Transitory Changes to the Wine Industry

How to understand the two types of change that will impact the wine business

If I’m driving down the highway and I see that ahead of me there is a severe slowdown in traffic due to visibility issues associated with a layer of dense fog, I’m not going to worry about it too much. The fog will eventually lift. However, if the slowdown ahead is caused by half the highway having crumbled away during the night, I’m going to get concerned. The reduction in lanes won’t be fixed overnight or perhaps fixed at all.

This is the difference between a transitory and a structural condition. And it’s how I think about the health of the wine industry.

Structural conditions impacting the health of the American wine industry are those factors that set the guardrails for the industry and are unlikely to change without considerable effort if at all. The Three-tier system, the size of the drinking age population, and per capita consumption trends are all structural conditions that we might worry about and might attempt to change through Quixotic means but are largely very difficult to affect.

Then there are transitory conditions such as interest rates, inflationary trends, general economic growth patterns, weather-induced catastrophes, and tariff policies. All of these can impact the health wine industry negatively or positively, but they also are subject to eventual change or mitigation.

To put it another way, structural conditions are those around which businesses are built while transitory conditions are those that businesses react to with tactical or strategic responses.

What’s important to understand about the current moment is that the past five years have seen a dizzying array of transitory changes that have severely impacted the wine industry:

1. The Covid Pandemic that upended traditional consumption and purchasing patterns

2. Significant increases in the rate of inflation in the economy

3. Significant increases in the interest rates.

4. West Coast wildfires impacting wine supply

All of these transitory impacts on the wine industry will moderate or increase, but what they won’t do is stay in place as they are for the foreseeable future. This guarantee of change to these conditions is what provides both significant opportunities and significant threats and what puts a premium on “vision”…the ability to see how conditions will change and when.

Today there is a good deal of discussion around wholesalers and retailers who boosted their inventories in 2021 and 2022 in response to increased consumption associated with the COVID-related policies. It appears that many overbought and as the increased consumption and consumer purchasing associated with the pandemic waned as the impact of the pandemic and pandemic policy diminished, they were stuck with too much wine. This in turn led to their reduction in purchases, which in turn impacted sales by producers and importers.

Then there are interest rates. The difference between paying 3% and 7% for borrowed money is significant. And while we may never see the 3% or less interest rates again for a very long time, there is good reason to believe wineries, retailers, and wholesalers will see lower borrowing costs in the future. But the question is when. Those who guess correctly will see a significant impact on their bottom line.