It's The Economy, s$#%^&!!! (Wine Demand)

When life leaves us blind...

"Just too many articles...makes no sense...why continue to blame younger generations for shifting wine demand when it is clearly economic (which only amplifies any short position after the "loss" of both VWE and DUCK)"??

This was the gist of a recent meeting discussing wine finance, investing and trends (and the associated issues and trends we assumed were obvious). We have previously briefly outlined our utter disagreement with the general observations of solely "younger generation 'taste preference' problem" in favor of a much larger economic problem manifesting throughout the wine industry (and leading to both public and private overvaluations). Here we will examine the issues in detail and outline some manifestations.

The US wine industry has experienced a surprising decline in sales since its peak in the early 2010s. Meanwhile, consumer credit in the US has grown at an unprecedented pace, fueled by low interest rates, financial innovation and changing consumer behavior. While these phenomena may seem unrelated at first glance, a closer examination reveals how the rise in consumer credit indirectly contributes to the stagnation of wine consumption. This interplay sheds light on broader economic and social dynamics shaping modern consumer markets.

US Wine Consumption

Wine consumption in the United States grew steadily throughout the late 20th and early 21st centuries, driven by changing cultural attitudes and the growing perception of wine as a marker of sophistication and health (and available "purchasing power"). However, since 2010, the trajectory has faltered. According to data from industry reports, wine sales volume plateaued and declined markedly over the past 15 years.

The decline is not merely a matter of preference but reflects broader economic and cultural shifts. One significant factor is the increasing financial strain on consumers, who face higher living costs, stagnant wages, and mounting debt burdens. This is where the rapid growth of consumer credit enters the picture.

The Explosion Of Consumer Credit

Since the aftermath of the 2008 financial crisis, consumer credit in the US has expanded rapidly. As of 2023, outstanding consumer credit reached over $5 trillion, a historic high. This surge has been driven by several factors:

1. Low Interest Rates: In the decade following the financial crisis, the Federal Reserve maintained historically low interest rates, making borrowing more accessible in volume and extended repayment time frames.

2. Financial Innovation: The rise of fintech platforms and digital lending has made it easier than ever for consumers to access credit. From buy-now-pay-later (BNPL) schemes to peer-to-peer lending, consumers have a plethora of options to finance their lifestyles.

3. Cultural Shift Toward Debt Normalization: In an environment where debt is ubiquitous, from student loans to credit card balances. Debt-financed consumption has become a normalized part of everyday life.

While consumer credit has provided short-term liquidity and facilitated spending, it has also created long-term financial vulnerabilities. This reliance on credit reshapes spending priorities, with significant implications for industries like wine.

Connecting the Dots: Consumer Credit and Wine Sales

The rise in consumer credit and the decline in wine sales intersect through several mechanisms:

1. Shifting Spending Priorities: With limited disposable income and high debt obligations, consumers are more strategic about their spending. As consumer credit levels rise, households allocate a larger share of income to servicing debt (e.g., credit cards, auto loans, personal loans). This reduces discretionary spending power. The rise of BNPL platforms, which are frequently used for electronics, fashion, and travel, further diverts funds from traditional "indulgences" like wine.

2. Erosion of Disposable Income: Escalating costs (inflation) of essentials like housing, healthcare, and food strain household budgets, leaving less room for indulgent expenditures like wine.

3. Reduced Purchasing Power: Wages failing to keep pace with inflation result in declining real incomes, exacerbating the affordability challenges for non-essential items (and especially premium items such as wine).

4. Experience-Driven Consumption (over taste preference): Prioritizing experiences over material goods. While wine consumption can be experiential, it often competes poorly with more dynamic alternatives in terms of perceived value and excitement (the "experiences over things" movement).

5. Health and Wellness Trends: The health-conscious mindset also played a role. Wine, despite its occasional health-related marketing, is still an alcoholic beverage. The availability of healthier alternatives also aligns better with the budget constraints imposed by high consumer debt.

Broader Economic Implications

The relationship between consumer credit and wine sales highlights how macroeconomic factors ripple through specific industries. The wine industry’s challenges underscore the vulnerability of markets reliant on discretionary spending (please also examine the trends in Consumer Discretionary spending as well as Maslow's Hierarchy of Needs and the associated assumptions about wine) in an era of rising debt and shifting consumer preferences. For policymakers and industry stakeholders, this dynamic raises important questions about the sustainability of debt-fueled consumption and its impact on economic growth.

Manifestations

As noted above, Constellation Brands developed a prominent footnote discussing it was "more likely than not the fair value of the Wine and Spirits reporting unit might be below it's carrying value". Translation...the prices paid for acquisitions were WAY too high (which has serious implications for both historical AND future transactions in the industry).

This resulted in a write off of over $2.2 billion and potentially more if the market and industry continues on the path we predict over the next decade. Needless to say, the market was not happy:

As the economic conditions continue to deteriorate, we would fully expect more cautionary verbiage, associated write-downs as well as discontinuations of segments and bankruptcies.

Conclusion

The decline in U.S. wine sales since 2010 and the rapid increase in consumer credit are emblematic of a broader transformation in consumer behavior. Rising debt burdens, changing cultural values, and evolving preferences have reshaped the landscape for industries once considered staples of American culture. For the wine industry, the path forward lies in understanding and addressing these underlying shifts—whether through targeted marketing, product innovation, or strategies to make wine more accessible and appealing to younger consumers. At the same time, the growing reliance on consumer credit calls for a broader societal conversation about financial sustainability and the long-term implications of debt-driven consumption on economic and cultural life.