Concern about the health impacts and economic effects of the novel coronavirus continues to grow. Although the health impacts are obviously most important, since lives are at risk, it is natural to also be concerned about how this potential pandemic might affect the global economy in general and the wine industry in particular.
I have been following the situation closely focusing for personal reasons on the U.S. (we live about 40 miles from the coronavirus infection epicenter near Seattle) and northern Italy (we lived in Bologna when I taught at the Johns Hopkins center there).
The Italian experience so far is noteworthy: some whole towns were initially locked down to contain the virus or slow its transmission, all schools and universities closed as a precautionary measure, and scenes of empty piazzas and tourist thoroughfares in Venice and Milan. Large areas of northern Italy, including Lombardy and its capital Milan, were later put under quarantine, which has now been extended to the whole country.
Closer to home, some schools and colleges, including the University of Washington campuses, have canceled physical classes in favor of on-line instruction. Several major employers, including Amazon, are encouraging workers to tele-commute if possible. Concern is likely to rise as additional testing kits arrive and the true picture of the epidemic emerges.
I’ve also been making some notes on wine and the coronavirus in order to try to think more clearly about the potential economic risks to the industry. I thought I would share them here even though they are necessarily incomplete and change daily — just like everything else about the coronavirus.
Here is a quick analysis of several areas of concern, starting with the most general and then narrowing. Use the comments section below to point out issues I have neglected or gotten wrong.
Japan, Italy, and Germany were already teetering on the edge of recessions before the coronavirus outbreak, so it is not unreasonable to think that they will be sucked into economic downturn, potentially taking other countries with them through the sort of economic contagion that face masks and hand sanitizer are powerless to control. This is a serious problem since there are also worries about slowing economic growth in China, the United States, and the United Kingdom. Chinese exports were down 17% due to supply-side factors for the most recent period, which bodes ill for their economic situation.
Central banks have pledged to counter the economic impacts of coronavirus although they have so far stopped short of pledging coordinated action, which would be most effective. The U.S. Federal Reserve cut its key interest rate target by a half percentage point last week, but the financial market response was weak in part because this action had already been factored into investor expectations according to some observers. In any case interest rates are a blunt tool when faced with a specific problem such as coronavirus.
With interest rates already so low (and in some cases negative), the concern is that preemptive central bank strikes against coronavirus will use up all the ammunition left to deal with recession and economic contagion. The risk of a global recession, probably smaller than the global financial crisis of a decade ago and certainly different from it, is thus magnified by coronavirus.
The possibility of a recession with its impacts on income and employment both broadly and in the wine industry is thus a very serious concern. Recession risk: medium to high and probably rising.
Supply Chain Disruption
One impact of coronavirus has been to make us more aware of the inherent risks in international and global supply chains and associated just-in-time production strategies. Bottlenecks anywhere along the chain can potentially impact final production.
Some factories in China were either closed because of the coronavirus threat or slow to re-open after the Lunar New Year holiday, which has created parts shortages and headaches in many industries as well as reducing international trade flows. International shipping schedules and container availability have both been disrupted on some routes.
Wine is certainly affected by supply chain issues related to the coronavirus, although not as much as some other industries such as automobiles and electronics. Glass imports from China are one important concern and I am sure there are others. Wine exports, which are of growing importance because of the domestic surplus, may also be disrupted.
How have supply chain issues affected your wine business? Please leave comments below. Current events seem likely to cause many firms to reconsider their supply chain strategies, shifting closer to home in some cases and relying less on “just in time” supplies in others.
Supply chain disruption risk: significant and rising as the virus spreads.
Travel and Tourism
Travel and tourism are down dramatically in many regions as people avoid airports and crowded situations in general where contagion might take place. Soccer matches have been cancelled or postponed in Italy, for example, and a few games played to empty stadiums. It is unclear how this summer’s Olympic Games in Japan might be affected.
Wine tourism is likely to be a victim of the general decline in domestic and international travel, although it is too soon to guess how great the impact will be on tasting room visits and sales. Direct sales to visitors have become a very important economic factor for many U.S. wineries, so any decrease in wine-related travel would be important.
Airlines and cruise ships are also good wine markets for those who can secure their business and the sudden decline in flying and interest in cruising will necessarily affect those sales, too, as well as threaten the financial health of the air and cruise businesses themselves.
Business travel is affected along with vacation trips. Several large international wine gatherings have been canceled or postponed including ProWien in Germany, for example, and Taste Washington here in the U.S. Many people are asking themselves “is this trip really necessary?” when health risks are involved. The cancelled meetings are expensive both in terms of direct costs and potential lost business. The impacts continue to spread.
Travel- and tourism-related risks: High.
On-Trade and Off-Trade Impacts
China is one of the most important wine markets, especially for French and Australian wineries, and its wine demand has fallen significantly in recent weeks according to early reports as consumers have hesitated to gather in restaurants and other venues out of concern for the coronavirus. How long this situation will last and how much wine demand will rebound when the health scare has passed are open questions.
Restaurant wine sales are important outside China, too, of course, and so this is an important market to watch. News reports suggest that those who are concerned about contagion sometimes turn to home delivery of meals or groceries in order to avoid crowds. This is not advantageous for wine sales in many areas, including the U.S., where wine under-performs in home delivery sales relative to other products.
Wine market risks: Significant with a good deal of uncertainty.
The Bottom Line
The bottom line so far is that the coronavirus has many effects that are detrimental to the economy in general and the economy of wine in particular. Anyone in the wine business would be wise to ask themselves a series of questions that starts with “how well prepared is my company for a recession?” and continues down the list to supply chain disruptions, swings in consumer demand, altered trade patterns, tasting room strategies and policies, and so on. It is already too late to anticipate some impacts, but not too soon to think through others.
That said, the most important questions are probably the ones I haven’t asked here. The research I did in my other life as an international economics professor probing financial crises suggests that contagion doesn’t always stay in its lane.
We saw this on Monday when coronavirus-driven falling demand for petroleum sparked a price war that drove oil prices down dramatically. Some oil investors dumped equity holdings to cover their oil losses, sparking a global sell-off there, too. Corporate junk bonds — and there is a mountain of them out there — could be next in line. If they start to fall central banks will need all the resources they can muster to keep liquidity flowing.
Mike — A great column as always. Thank you for your lucid and insightful analysis. By the way, I suggested you as a speaker on this topic at an early December conference in Sonoma. I have no idea if they’ll accept my idea, but wanted to give you a heads-up. All the best, Jim Trezise, President, WineAmerica
Thanks, Jim. I appreciate your support! Things should be much different by December — hopefully for the better.
In my opinion, the wine renaissance in Sicily is responsible for the burgeoning tourism of the recent few years. The revelation about wine quality and refreshing news, brought people to the island. Word of mouth spread and people began to visit in numbers. Sicily, which has had almost no active involvement in the Coronavirus situation is nonetheless part of Italy and therefore presently on its knees from aborted tours, closures and cancellations. The banner year this was to be is a faded dream and that will translate to fewer direct sales, less exposure, fewer visits that translate into media attention. Tabulations for the economic consequences to small producers, and workers in general has not begun, and is yet difficult to assess. Sicily, and much of southern Italy, has always struggled more than the north. For people under 35 the unemployment rate hovers around 40% and this is before the current situation. I am confident that the storm will pass and the waves of fear and uncertainty will recede, but my fear is that the fallout from all of this is past the point of a meaningful recuperation any time soon.
Mike, it’s already happening! We are a 4,000 case/year producer relying upon DTC/tourism for 90% of our sales and in the last 10 days almost all of our advance reservations have cancelled. We fear many months of impact ahead, right up to when the fire risk begins anew. I’m starting to look for locusts!!
I believe the locusts are already here, too — in Africa!
The next few months are going to be challenging.
Mike. always appreciate your tremendous insight!
Thanks, Danny. I say the same about your analysis.
Thanks for the timely post, Mike, I was hoping an economist would weigh in on this. We are in uncharted waters, but some predecessors for Coronavirus impact include:
—the 1-2 months immediately post 9/11 for on-premise impact (mainly psychological, but with spending effects)
—impacts of the last 2 fire seasons on tourism to counties in the fire zone.
—the 2008-9 recession.
Both post-9/11 and the 2008-9 recession saw a significant decrease in on-premise channel sales across many markets. Coronavirus looks uniquely grim for specialty channels such as cruise ships, airlines, banquet departments.
The fires and to a lesser extent 2008-9 recession resulted in cancellations and decreased traffic in wine country.
Purchasing by distributors froze or was reduced to minimal restocking right after 9/11 and for several months during the 2008-9 recession.
Off-premise is harder to read; there’s fear of shopping on one hand vs. cocooning with wine on the other. Off-premise sales were up in volume (not revenue) soon after 9/11 and during the 2008-9 recession. Drop-off delivery services may boom; but then there’s the issue of in-person signing for alc bev.
Looking to what’s happening to wine and retail generally in places like Milan and Hong Kong (worst cases?) or UK/France/Spain might provide a preview of what will happen here. Of course up in Seattle, you’re past the preview stage! Good luck and good health, we’ll all need it.
Hello from the Okanagan Valley, British Columbia. Very good and timely post! All aspects of the coronavirus impacts on the wine and hospitality industries are sobering indeed (in all seriousness, no pun intended.)
Although quantitative scenarios are fraught with danger given the rate of change in facts on the ground, I wonder if the recent (March 2) Brookings Economics piece sketching out macroeconomic scenarios for potential impacts on a number of countries – including Canada and the US – could be used to estimate a range of possible effects (on a percentage basis?) on the wine industry in terms of supply chain disruption, labour interruptions and reduced consumer demand. Food for thought.
I too am worried that there is little room for maneuver in terms of monetary policy relief, but I shudder at the limited expertise (in both our countries) among those who would deploy fiscal policy…
Thanks very much, and take good care.
Too soon for numerical estimates for wine in my opinion. The higher level estimates are changing from day to day at this point.
Thank you for this information, Mike. I am thankful you and Sue are doing well.
Mike – I appreciate your post. I’ve been considering doing that too, but frankly – there is so much in the way of fear of the unknown being displayed with people on edge, that I’m paradoxically afraid to post! But I have come to some conclusions.
Top-level, we have that wine is recession-resistant. It’s not recession-proof. Why is that? Because wine consumers are going to still drink wine in trying times. So I don’t see this virus leading to abstinence, but I do see behavioral and supply induced shocks to demand.
The places with negative impact are restaurants, hotels, corporate events, conventions, concerts, cruises, airline flights, airports, and sporting events. In most cases that’s three-tier sales.
On the other hand, current evidence suggests that grocery stores are experiencing increasing sales as consumers eat at home more often, and early signs are indicating some increasing on-line sales from wineries, and I suspect we might see the same from wine retailers. While that’s probably not enough to offset – if we go back to the premise that wine is recession and virus-resistant, we should come back around to some level of normalizing sales after flu season ends, but left with lower overall sales for the year.
Jim Cargill – House Family Vineyards and President of the Santa Cruz Mountains Winegrowers Association
Mike – great insights to think about.
Rob McMillan – I agree that wine has some recession resistance. People will not abstain. Those in the industry should realize that all of the people NOT travelling and working from home will eventually want to venture out in the world. We should be prepared for some uncertain sales trends for the near term but put out forward messaging that we provide wholesome retreats from potentially high risk crowded areas of the community. We have an opportunity to attract more local clientele in the near term. Some that may not have known we were here.
People will not stay away forever. They may be guarded upon their return, but they will return. We need to be ready to navigate those waters.
That’s the sort of strategic thinking we all need to do, Jim. Thanks.