Long, Slow Road to Recovery for U.S. Wine

23-sep-2How long will it take for the economy to get back to normal? That’s the question I am asked most often these days, where “back to normal” is code for conditions at the start of 2020, before the coronavirus pandemic and the recession it has produced.

Try to Keep It Real (Compared to What?)

The answer to this question depends on how you look at it. If you are thinking about a world without concern for virus contagion, face masks, and social distancing, the answer might well be “never,” but only time will tell.

Economists often distinguish between “monetary” and “real” economic factors. If you think in monetary terms — stock market valuations, for example — we are already most of the way back. Our modest Wine Economist retirement account is pretty much back to its January 1, 2020 level thanks in part to a few trillion dollars of Federal Reserve and federal government stimulus, which has done a lot to prop up valuations.

But if you are looking at the “real” economy, where output, jobs, and incomes are what count, then the scene is not so serene. A recent report by The Economist Intelligence Unit is titled “A Q3 recovery, what Q3 recovery?” and it warns that the hoped-for big economic bounce in the third quarter of the year is no longer likely. Other business news reports that appeared over the weekend tell a similar story. Here is a link to a summary of the EIU report.

Down the Drain?

The EIU projects that when all the dust settles the U.S. economy will shrink by about 5% in 2020 compared with the previous year. That performance is roughly on par with forecasts for Japan, Canada, and Germany, The other G7 nations will envy a mere 5% decline. The EIU projects that growth rates in the UK and France will be closer to minus 10%, with Italy’s situation a bit worse.

How long will it take for these countries, which are all important wine markets, to return to their pre-pandemic levels of economic activity?  The EIU projects that the U.S. will get there first, but not until Q3 of 2022 — about two years from now. Japan, Canada, and France will be next, hitting the pre-pandemic level in Q4 2022.  Full recovery for the UK will wait until Q4 2023 followed by Italy (Q3 2024) and Japan (Q4 2024). Long road. Slow progress.

In general, the EIU reports, output in the G7 countries in Q3 2020 will be about the same as it was in 2016. Four  years of growth down the drain.

Economic forecasting is an inexact science, or maybe a black art, so you cannot bank on these specific numbers. This is especially true right now given the unknown unknowns about global public health, economic policies, and potential election surprises. But the fact that conservative estimates now suggest a long, slow economic recovery is something we need to digest.

Wine’s Particular Challenges

There are special concerns for the wine industry. An economy isn’t like a train, where all the cars are connected and move at the same speed. Different sectors adjust at different speeds and sometimes move in different directions. While wine is influenced to a great degree by overall economic trends, some particular paths to market are especially influenced by the coronavirus pandemic.

On-trade sales and DtC sales via tasting room visits will likely be slower to recover than retail sales, which we can see now as California has closed down indoor dining and cellar door operations for the second time. And this isn’t the feared “second wave” of infections — that isn’t expected until fall. This is just the echo of the first wave.

It is also important to remember that our 2019 “normal” wasn’t a terrific situation for wine. American wine was challenged by slow growth of demand, supply that was so abundant that vines needed to be pulled, and growing competition from other countries as well as other beverage alcohol categories. Curse you White Claw! U.S. wine producers need to do more than recover volumes, they need to adapt to evolving reality, too.

Simple Pleasures

So it is important and even inspiring to see how active many in the wine industry are in adjusting to what they think the new normal will be. Joana Pais, director of communications and public relations for Sogrape, the important Portuguese producer, told me in an email about the wine tourism situation in Porto and the challenges she and her colleagues face.

Travel to Portugal was booming before the pandemic and wine tourism in Porto and the Douro benefited.  These travel flows collapsed during the spring and are only slowly rebuilding. “It is true that tourism is scary slow,” she writes, “but let’s face it as an opportunity to rethink the purpose of hospitality and work on developing truly incredible experiences, enjoying the simple pleasures of life!”

She’s right about that and more. As I wrote in Around the World in Eighty Wines, wine’s great gift is its ability to give us pleasure. So long was we keep that front and center wine’s future is secure. But the challenges we face on the road to the future are daunting.  The next two to four years will test our collective resilience, but I hope they also excite our imaginations.

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I am already starting to think about what wine market situation will be in January 2021 when the next Unified Wine and Grape Symposium takes place. The conference and trade show will be virtual this time around, reflecting the reality of the pandemic and the uncertainty that must necessarily cloud plans for large gatherings. It will be different, that’s for sure, but there are opportunities, too.

 

4 responses

  1. In my humble opinion as a lover of wine (who is becoming disinterested ) to compete with White Claw, IPA, the popularity of Bourbon by example wine has to adjust price and wine ratings. So many people and companies offer wine ratings that mean nothing. I buy in price ranges of $15 to $150. The last few bottles I bought were $25 and received 90 points. My wife and I did not finish either bottle and switched to beer. I’m getting more skeptical to try anything new especially when I can’t trust my wine store or the Experts/critics to steer me to something at least tolerable. I’m very tired of hearing about wine I can’t afford , drink regularly or is not even in a sensible price range. Greed has dominated the wine industry opening the door to all the other alcoholic choices. Why buy a disappointing bottle of wine when I can buy 6 IPAs for $10.

  2. Mike thanks for the outlook and good perspective from an economic as well as marketing and social aspect. As I have talked to others in the industry and friends outside the industry we have been in our own recession for a couple of years.

    Dino speaks to a lot of the issues we are suffering from and if I was to sum them up I would say it was and to an extent still is complacency. I agree that this is a great time to reevaluate where we are at as an industry and explore knew concepts in marketing and inclusion. No matter what we say or believe, wine is intimidating to many in our country. My own experiences behind our tasting room bar with the many different customers ranged from people who were afraid to ask for a certain wine because they couldn’t pronounce it properly to the people that wanted to know what clone and soils a vintage came from….those that liked our everyday pinot vs our reserve but thought they should like the reserve bc it was more expensive.

    What I have always told any customer is the true beauty in wine is that it is simply what you like! If you like it sweeter great! If you like it dry and more complex great! Just enjoy it and don’t judge yourself or palate…there truly is no wrong answer.

    What we have done well over the last 25 years is plant wine grapes and varieties in the right places that garner the best quality. Wineries have figured out how to source and blend wines from different regions to make some great wine from $8-15 a bottle. Overall the winner has been the consumer…while the trip to a wine store or down the alley of a grocery store can be intimidating…getting a bad bottle on wine is pretty hard to do.

    As you mentioned the wine industry is global. California specifically is burdened with much higher regulation and expenses than other states or countries. From our plantings in the mid 1990s to today our expenses have increased 100% but our price we sell grapes for has maybe only increased 10-20%. We had planting contracts for chardonnay in Monterey County in 1996 for $1350/ton and today I am hoping to get $1000/ton as our district average sits at $1250/ton. As we have pushed out 1000 acres over the past 2 years and sit on land that is prime grapes ground…it isn’t making economic sense to replant for the next 25 years with the certainty of rising costs and the uncertainty of price to sell to wineries and don’t forget about farming in general and our good friend Mother Nature.

    With all of that said I do believe there are opportunities. Our product is great, it’s a healthy, natural choice as far as an alcohol choice, many vineyards and wineries are certified sustainable and working hard to keep our environment and people vibrant. But we lack on vision and marketing. We continue to do the same thing over and over and expect a different result. I am not completely sure what the answer is or if some of our trade organization like CAWG and Wine Institute can come together with their membership and work on a solution that promotes wine and wine grapes in a different light. I believe there is a market to be had and that if we promote health, environment, employees and make wine less intimidating and more inclusionary we could literally create our own demand.

    As always appreciate your thoughtful posts and hopefully we in the industry can work together to turn this around!

  3. Great read. Thank you. Do you know if direct shipments to homes are on the increase in other countries? We have been getting more”free shipping” or $10 shipping” offers. That has spurred us to buy direct from small producers.

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