This is the Age of Uncertainty (to reference the title of John Kenneth Galbraith’s famous book) both in general and with respect to the wine industry. Everyone’s looking for answers as they confront a murky future. But most answers right now (especially including my own) are at best informed speculation, subject to frequent revision.
If we can’t have solid answers, maybe the next best thing is to try to refine the questions. Herewith my attempt to pin down three important questions about the near- and intermediate-term wine market and environment.
Please use the comments section below to raise other questions that need attention now
Q1: Recession Uncertainties
It is clear that the conoravirus pandemic and its health and economic effects have produced a global recession of historic proportions. Income and wealth have declined and unemployment increased. There is no way that wine cannot be affected by such an economic downturn. Many questions about the recession beg for answers. How deep? How long? The Great Depression made a indelible mark on the people who lived through it. Will the coronoavirus recession do the same?
There are pluses and minus to consider. Monetary and fiscal stimulus packages have been huge by historical standards — much larger than during the Great Recession of a dozen years ago. And we’ve seen some bright spots in the data. The May employment numbers in the U.S. surprised nearly everyone with a strong net increase in jobs and decrease in unemployment. A short, sharp V-shaped recession, while still unlikely, may not be as impossible as most of us believed.
But there are problems starting with the jobs report figures themselves, which may result in under-estimates of unemployment by several percentage points because of unusual data collection and classification problems created in part by the deep churning of the labor market. I am also very concerned about changes in state-local government employment. Budget deficits in the second half of the year may lead to big lay-offs in local governments just as economic re-opening brings others back to the workplace. Programs to stabilize employment have so far focused on private sector jobs and left public sector employment pretty much alone. This will be a problem, but how big is unclear.
Bottom Line: I think it is all going to come down to the question of consumer spending. Governments have already gone all-in — they may not have much more to contribute to a recovery. Business investment — the real kind, not the stock market — will probably lag consumers, not lead them. And trade has fallen taking potential net export gains down, too. It’s going to be up to consumers to get the economy moving.
Consumers have surprised many analysts by saving an amazingly high proportion (about 30%) of their incomes in recent weeks, which may be good for their individual financial security but unhelpful in terms of increasing aggregate demand. It is easy to say that they didn’t spend because the shops were closed, but there is more going on. It is that age of uncertainty thing.
Consumers will continue to hold back on spending so long as they lack confidence in economic recovery. Until that confidence switch is flipped, economic growth is uncertain and consumers are right to be cautious. Is that a Catch 22 problem? Yes.
Q2: Wine’s New Normal?
Consumers are also at the center of questions about how the wine market will look when the recession and pandemic fogs start to clear. In the short run, the situation is a bit like the person who was swept over a waterfall. Half-way down things seem to be going just fine, but there’s a big splash ahead and it is hard to know who’s going to sink or swim away.
As noted in recent Wine Economist columns, there has been much turbulence in the wine market so far this year. Wine sales volumes are up overall but revenues not so much as high-margin restaurant sales have been replaced by lower-margin retail. On-line sales have risen dramatically, albeit from a relatively small base. Wine hasn’t done as well as spirits, which seem to fly off the shelves, but better than beer.
As Rabobank’s Stephen Rannekleiv noted in a recent Ciatti market update webcast, the wine industry is going to need to rethink the route to market and how on-trade, off-trade, on-line, cellar door, phone sales (!), and other strategies fit together and what products work best in each channel. Consumers are changing their buying behavior for other products and wine shouldn’t think it is different in this regard. On-premise sales, in particular, are likely to be slow to recover as bars and restaurants struggle to both safely and profitably serve customers.
Bottom Line: They say that generals are always preparing to fight the last war and so are often unprepared for new battle lines when they emerge. The same might be said for many wine businesses. The lesson that many small and medium-sized wineries learned in the last war (the Great Recession) was the importance of direct-to-consumer cellar door sales.
This strategy is problematic in a socially-distanced world. Shifting on-line now seems like the obvious reaction, but does that change the nature of consumer relationships and perhaps the nature of wine itself? Remember that Jeff Bezos picked books for his Amazon.com start up because they could easily be commodified. If that’s where wine is going, there will be implications. Fortunately (see last week’s Wine Economist column), many wineries are finding ways to keep wine personal even in the virtual space. How is wine going to evolve to succeed in an increasingly on-line market place?
Q3: Global Wine Market Threats
The global wine market environment is most directly defined by the big exporting wine economies. Italy, Spain, and France are the Big Three that together producer more than half the world’s wine. Argentina, Chile, and Australia are much smaller, but very important. New Zealand is tiny but punches above its weight. China, like the U.S. is currently most important in terms of global dynamics as an importer.
Wine sector conditions are unfavorable in all the largest wine-exporting countries. On-trade sales are much more important in Europe than the U.S., accounting for more than half of wine purchases. The closures of bars and restaurants during the pandemic lock down period has therefore produced a huge unsold inventory of wine. Some of this will disappear through emergency distillation schemes, which promise to dispose of between 750 million and one billion liters of excess wine. The rest will be looking for export market sales.
The bad old days of the EU wine lake depended on distillation to eliminate subsidized unmarketable wine. The policy changed several years ago to focus subsidies on modernization and marketing to encourage producers to make wines that the market would absorb. But no amount of marketing euro is going to help this year, so surplus wine will head off to the distillery. Maybe it will end up as hand sanitizer?
A billion liters is a lot of wine taken off the market. But I don’t think it will be enough to prevent a short term worldwide wine glut, especially when you consider the troubles that Southern Hemisphere producers are experiencing (despite short harvests in many regions). Australia and Chile depend on China to buy much of their wine and China’s growth has slowed dramatically. New Zealand looks especially to the UK and US markets, which are in recession. Argentina and South Africa have large domestic markets, but there are complicated economic and political problems in both countries that have affected sales.
Bottom line: A lot of wine is going to be looking for a home in the next year. Who in the world is going to buy it?
Galbraith’s Age of Uncertainty was both a book and a 1977 television series. Here is the first episode.