Watch out, wine drinkers. According to a recent report, we are in the midst of a shortage of the libation. Most of California's premium grape regions posted low inventories, thereby making wine more expensive. While wineries are feverishly planting new grapevines, these efforts won't yield grapes into production for at least five years. What are oenophiles and savvy investors to do?
Wine shortage? Say it isn't so.
The Silicon Valley Bank's annual state of the wine industry report said last month that, for both high-volume wineries and boutique fine wine businesses, demand is expected to grow at a slightly slower pace while supply is stretched. The report goes on to predict that, coupled with a strong U.S. dollar relative to the weak euro, this will help imported wines steal market share.
For those of us who enjoy an Italian Barolo, this is good news. But just how detrimental will this be to domestic wine producers, and which ones will feel the pain? Ultimately, consumers will be forced to pay higher prices for their favorite domestic wine, drink lesser-quality domestic wine, switch to cheaper imported wine, or abandon wine entirely in favor of lower-priced beverages.
I see a few ways an investor can play this. For starters, an investor can look either to companies that derive a large portion of sales from imported European wines, or the importers themselves. Alternatively, an investor can steer clear of companies with extensive domestic wine portfolios, or look to companies that focus on alternative beverages such as beer and liquor.
In my opinion, Diageo
Similarly, I also don't expect Beam
Because of its weighty domestic wine exposure, I think Constellation Brands
Jolly good news
But I see two bits of good news for domestic wine producers. First, a bumper crop of grapes is expected this harvest. Even though this will just stall the inevitable, it'll give domestic producers time to strategize. Second, the people buying the most wine are likely to afford higher prices -- the baby boomers and Gen X-ers (ages 35 to 46). The average net worth and income of these groups is greater than that of Gen Y-ers (ages 21 to 34), who were once seen as the industry's growth engine.
In the event that U.S. wine consumers aren't willing to pay up for domestic wine or try a less expensive import, then look for a company like Boston Beer
I'll drink to that
As an investor, I'd steer clear of Constellation. It is the most vulnerable company because of its huge exposure in the domestic wine market. I don't feel that Diageo or Beam will miss a beat.
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Fool contributor Nicole Seghetti does not own any of the stocks mentioned. However, she's known to enjoy sampling their products on occasion. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Beam, Diageo, and Boston Beer. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.