Wine, Coronavirus, & the Falling Dollar

August 4, 2020 By Mike Veseth in coronavirus, economic crisis, recession, wine, wine markets Leave a comment

xrates What is going to happen to the value of the U.S. dollar as the coronavirus crisis unfolds? That was the question that a couple of wine economists (I was one of them) were asked in a zoom meeting back in May.

The dollar’s going to stay strong, we both said. That’s what happens in a crisis. Investors rush to the safety and security of the dollar whenever there is uncertainty and risk. Ironically, the dollar sometimes rises even when the U.S. is the source of the uncertainty, but that’s another story.

Up and Down Economics

Zoom ahead a few weeks to the start of August. The dollar’s value unexpectedly fell dramatically in July as this chart from x-rates.com shows — the largest monthly drop in a decade. The sudden exchange rate change will affect the economy directly and indirectly in many ways — some even believe that it has contributed to the somewhat puzzling situation in the stock market, where values have risen recently despite bad economic and pandemic news. The cheaper dollar makes dollar-denominated financial assets cheaper for foreign buyers, who look for capital gains when the currency eventual rebounds.

What happened? Why? And why does it matter for the wine industry?

Some people believe that a strong dollar is good and a weak dollar is bad, but the truth is that exchange rate shifts create many positive and negative forces and the net effect depends on the economic environment at the given point in time and your particular circumstances. The strong dollar of the last few years, for example, made wine imports cheaper in dollar terms and discouraged wine exports — both big negatives for U.S. growers and producers.

But the strong dollar also tended to reduce the cost of equipment and supplies used in U.S. wine production including vineyard and cellar machinery, bottles, capsules, corks, and so on. The strong dollar also indirectly benefited the U.S. companies that import and distribute foreign wine and the on- and off-premise firms that sell it. Wine has a long supply chain and so there are complex exchange rate effects.

The falling dollar tends to reverse all this by increasing the cost of imported wine and wine production supplies and making U.S. exports relatively cheaper abroad. If you run a vineyard in California, the reduced competition from imports is good news. If you run a distributor that specializes in imports this is more bad news in a year with lots of bad news to digest.

Elementary, My Dear Watson

Although the falling dollar caught me by surprise because I focused on the crisis effect, others who watched exchange rate fundamentals might have seen it coming. That’s because there were indications that the U.S. dollar was over-valued and ripe for a fall at some point.

When we say that a currency is over-valued, we mean that the exchange value is such that the currency purchases more abroad than it does at home. If you travel to Europe, for example, and your euro purchases seem cheap in terms of their dollar equivalent, it is an indication that the dollar is over-valued (and the euro under-valued).

bigmac

The Economist newspaper keeps track of how much currencies are over- or under-valued using their famous Big Mac index. As this graph shows, as of June 2020 the Economist index suggested that U.S. dollar was over-valued compared to all but three (Sweden, Lebanon, and Switzerland) of the currencies that the newspaper tracks.

The British pound was 25% under-valued relative to the dollar. Other wine country currencies: Canadian dollar (-11%), Euro (-16%), Australia (-19%), New Zealand (-23%), Argentina (-38%), Chile (-39%), and South Africa (-67%). Logically, the U.S. dollar would need to fall quite a lot to restore equilibrium between the currency’s internal and external purchasing power.

In my experience, the Big Mac index is a reasonably good predictor of long-run exchange rate tendencies, but there are many other factors that impact the exchange rate in the short term. In particular, the flight to safety that many of us expected seemed very likely to overwhelm the trade-based adjustments that the Big Max index is based on.

None of the Above

But an article in last weekend’s Financial Times suggests that there is more going on than adjustment based on “burgernomics.” Faith in the U.S. as a safe harbor in the storm has weakened, according to the article, because of what is seen as a very poor response to the pandemic. The coronavirus continues to spread, the economy remains very weak, the Federal Reserve is running short of tools, and Congress is gridlocked. And have you heard that there is an election coming up? The eurozone looks like a calmer, safer haven by comparison.

Safer yet, in some eyes, is gold, which isn’t tied to any particular country. Buying gold is a way to vote “none of the above” regarding major currencies. (There’s also Bitcoin, but that’s another story;)

The price of gold hit a record high of $1983 per troy ounce last week. The high price is the result of some investors looking for safety and others making speculative purchases. Demand for gold for use in jewelry and so forth is down because of the pandemic’s impact on sales of the finished products.

Looking ahead, it is difficult to know where the dollar will go next. Financial markets tend to over-shoot — to zoom too high when they are rising and over-state declines. So it will take a while to know whether July’s dollar decline will persist or if the currency will bounce back quickly.

So pay attention to the risks that exchange rate variability produces. Many wineries will find their exposure to exchange rate risk is small and difficult to identify. But if you have substantial foreign currency costs or revenue streams, you might think about hedging strategies to insure to some degree against unfavorable movements. And everyone ought to consider counter-party risk: are the people who owe you money exposed to increased risk? Will it affect their ability to fulfill their obligations?

Wine Economist Guide to Wine, Coronavirus Crisis & K-Shaped Recovery

August 25, 2020 By Mike Veseth in coronavirus, economic crisis, recession, wine, wine markets 4 Comments

94528e9a-5845-4871-bef5-3285eca66dd5 The Wine Economist has published a steady stream of columns on wine, coronavirus, and recession in recent months. I thought it would be useful to assemble them into a kind of guide so that readers can more easily find analysis on different topics and also see how the crisis has evolved.

Although there was concern about the pandemic early in the year (there were hand sanitizer stations everywhere at the Unified Wine & Grape Symposium in early February, for example), it took a few weeks for the real magnitude of the crisis to become clear.

The first Wine Economist column on the crisis appeared on March 10, 2020 and I remember being worried that my analysis was too dark and my projections too pessimistic. It took just a few weeks for the clouds to clear enough for me to realize that I had been much too optimistic instead!

Since then I have tried to analyze the situation from different angles and report and interpret economic news that might otherwise be overlooked within the wine industry.

Brought to You by the Letter K

A column in early April examined prospects for economic recovery. What shape would the recession take. V — a short, sharp shock and quick recover? Or W — double dip? U shapes are typical, but these aren’t typical times. The greatest fear was an L-shape, the macroeconomic equivalent of “I’ve fallen and I can’t get up.” Each shape presents different problems for the wine industry, so there is much at stake in this alphabet soup.

Recent articles in the Washington Post, Wall Street Journal and Financial Times suggest that another shape will affect at least some business sectors: the K-shaped recession. The initial sharp economic decline isn’t followed either a rising tide that raises all boats or an ebb tide that leaves them stranded on the beach . Both rise and fall take place in the K-scenario, just in different parts of the economy and in different ways.

It is easy to see the K-shaped scenario in recent business reports. Some parts of the economy have recovered very quickly. The S&P 500 stock market index, for example, soared to new highs. But large scale corporate bankruptcies are soaring, too. Winners are winning big time and losers are drowning in a sea of red ink. That’s how a K-shape recession works. In fact the bull market rally is really K-shaped — look closely and you’ll find both highs and lows.

Some retailers like Walmart have reported higher revenues and earnings — they are part of the K’s upward stroke. But other important sectors such as travel and hospitality slope down. I know of one integrated hospitality company that is experiencing both parts of the K. Their city-based conference and convention operations are suffering, but their rural properties are doing well as families flee to the countryside.

K Sera Sera?

The K shows up in income distribution, too, as higher incomes are cushioned by investment returns while many lower income workers are more vulnerable to joblessness and lower pay. The current Congressional stalemate regarding supplemental unemployment benefits promises to exacerbate this divide.

I think you can see how the K effect applies to the wine industry. There has been a stark division between booming off-premise sales and a bust in on-premise accounts. It makes a big difference which market segment you are swimming in and, of course, many have feet in both ponds.

And while there is evidence of trading up — the Nielsen figures show that off-premise sales growth is high in the $20+ price segments — the impact of falling incomes and rising unemployment among some wine drinkers is impossible to ignore. Sources suggest that buyers for spot grape and bulk wine are concentrating on the value end of the market and that prices reflect this, with some coastal lots selling at California appellation prices.

One of the many important questions this analysis raises is how does the K-recovery (which is only a recovery for some sectors) resolve itself? What is the bottom line going to be? I am not yet ready to hazard a guess. Please use the comments section below for your thoughts and predictions.

A Guide to Wine Economist columns

Here are links to Wine Economist columns on wine, coronavirus, and recession. The most recent columns appear first. I hope you find the analysis helpful as you navigate these turbulent waters.

Wine & Coronavirus Recession: Three Questions

June 16, 2020 By Mike Veseth in coronavirus, economic crisis, new normal, wine, wine markets 2 Comments

51ufhc3glvl._sx361_bo1204203200_ 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?

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Galbraith’s Age of Uncertainty was both a book and a 1977 television series. Here is the first episode.

Wine, Coronavirus & Recession Podcast

May 5, 2020 By Mike Veseth in coronavirus, recession, Shameless Self-Promotion, wine Leave a comment

covid19 COVID-19: Commonsense conversations on the Coronavirus Pandemic is a series of informative podcasts that help listeners understand the medical, public health, and social, political, and economic elements of the current coronavirus pandemic.

Hosted by Dr. Ted O’Connell, they are required listening if you want to broaden and deepen your understanding of the coronavirus crisis. I encourage you to click on the link above and sample the growing list of podcast topics.

I was flattered to be asked to join Dr. O’Connell on April 15 to discuss how the coronavirus impacts the economy in general and the wine economy in particular. The podcast was released a few days ago. Listen here:

INDUSTRY: Recovery from a Recession, Supply Chains, The State of the Hospitality and Wine Industries | Mike Veseth, PhD

Here’s a summary of the podcast:

In this episode, Dr. Ted O’Connell and Mike Veseth discuss various economic aspects of the COVID-19 pandemic. Some of the questions covered include:

Is the United States currently in a recession?
What can we learn about the economic effects of the virus from Italy and China?
How has the pandemic affected the economics of the wine industry?
What industries related to wine have been affected by the pandemic?

Thanks to Ted O’Connell and his associates for the opportunity to speak to the podcast audience. They are doing a great service by helping those of us outside the medical and public health professions better understand the forces that are shaping our lives. Special thanks to Pedro Fernandes for facilitating this project.

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Are you listening to more podcasts and audio books while you shelter in place? I am guessing that people might especially appreciate the sound of a voice these days. I started thinking out this when I noticed the sales trends of my book Around the World in Eighty Wines. I think we expected that e-book sales would rise when everyone went into semi-isolation, but it looks like the audio book is the most popular format, followed by the hard back and then e-book. Paperback due next month.

Wine & Coronavirus: Assessing the Risks

March 10, 2020 By Mike Veseth in China wine, coronavirus, health, recession, wine, wine markets 14 Comments

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.

Recession Risk

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.

Coronavirus & Wine: Market Impacts Beyond the Recession

March 31, 2020 By Mike Veseth in coronavirus, economic crisis, Economic impact, recession, wine, wine markets 6 Comments

Most of the G-20 economies around the world have effectively entered (or soon will do) the red zone of recession, violently pushed there by the coronavirus pandemic. Recent Wine Economist columns (click here) have accordingly focused on the direct economic impacts of this crisis on the wine industry.

I hope you have found the analysis helpful in thinking through the current situation. Events have moved so fast that it is difficult (impossible?) to keep up!

Today’s column steps back and looks at important side-effects — economic contagion — that need to be considered. Here are brief surveys of the wine impacts of three forces: exchange rates, online activity, and travel and tourism.

The Greenback Also Rises

The shock of the coronavirus’s worldwide spread produced a rush to safety — or anything that remotely resembles safety — in the financial markets. As in past crises, this means a demand for U.S. dollars and dollar-denominated assets driven by a combination of confidence in the U.S. economy and policies, a lack of confidence in other economic actors, or a simple desire for maximum liquidity. The liquidity factor is huge right now.

The dollar’s value therefore has risen dramatically. The Federal Reserve’s wise decision to expand dollar swap line operations with foreign central banks has helped reduce the dollar shortage and increase liquidity, but the fundamental problem remains.

A strong dollar makes imports cheaper for buyers here in the United States and this fact will become important if the exchange value persists. Imported wine will be relatively more cost competitive once the smoke clears. That’s good news for consumers, but cold comfort for domestic growers and producers. And U.S. wine exports — which have become even more important because of the domestic wine surplus — will become a harder sell due to the strong dollar.

Bulk wine from Argentina is incredibly cheap for U.S. buyers and the strong dollar is part of the story. The Argentina peso was trading at over 64 pesos per dollar late last week, for example, compared with about 42 pesos one year earlier, which is a dramatic change. Several factors besides the coronavirus, which accounted for perhaps 25% of the currency depreciation, are at work here.

The rising dollar has eroded the exchange value of the Euro and British Pound, but its biggest impacts have been on emerging market currencies. This is especially important because these countries borrow in U.S. dollars, so the local currency cost of foreign debt is magnified when the dollar strengthens.

Fragile is the word I would use to describe the emerging markets today. Mexico, for example, faces a potential health crisis, an economic crisis because they rely upon petroleum exports, which have fallen in value dramatically, and possible issues with both domestic and international debt because of the strong dollar. Argentina faces the same problems, minus the issue of oil exports, but at heightened levels.

Even if the developed countries are able to stabilize their economies, as they are trying to do with truly heroic monetary and fiscal policies, the fragile nature of the emerging markets represents a risk to the global economic stability.

The textbook says that a rising dollar isn’t bad or good … it is a package of economic benefits and costs, opportunities and risks. The risks get my special attention these days, because we have all the economic risk we can use right now!

Is There an App for That?

I call it the Magnification Effect. When we look back on the coronavirus crisis in a few years I suspect that one thing that we will notice is that, while new trends emerged in business and society, the biggest effect was to magnify and accelerate certain patterns that were already there.

Screens and online interactions were already an important factor, especially with younger people who can’t remember a world without them. The further substitution of online for in-person experiences has been strongly encouraged by coronavirus isolation practices.

Will film viewers go back to crowded theaters in the same numbers when the clouds clear? Or will they decide, even more than in the past, that small screens are just fine? I suspect that everyone in the sports and entertainment industries will be watching closely to see what happens next.

Many consumers will have placed their very first online grocery or take-away meal delivery orders during the coronavirus period. Some will never do it again, but others will decide that it is a worthwhile convenience and continue these expenditures.

Do supermarket shoppers buy the same amount of wine when they shop in person versus online ordering? I haven’t seen statistics on this question, but I suspect that the online share is lower. Regulatory issues are to blame in some areas. And the difficulty of bringing the “wine wall experience” online is another.

What happens to wine when a served restaurant meal moves to home delivery? The diner may still drink wine, but it is likely to be a different wine and probably a less expensive one. Maybe its a glass from the box in the fridge? Some wineries depend a great deal on restaurant sales and this will be a particular problem for them and of course the restaurants face lost margins and sales.

No one is surprised that Amazon.com home delivery sales have surged during the coronavirus period. If the Magnification Effect hypothesis is correct, that’s just the tip of the iceberg and wine sales will be affected.

[Not] On the Road Again

Some of the most serious economic impacts of the coronavirus crisis have been on the travel and hospitality sectors. At least one international airline has already been pushed to bankruptcy and no one will be surprised if there are more business failures. The situation grows even darker when you consider the supply chain: grounded flights, canceled aircraft orders, parts and equipment suppliers both big and small squeezed tight, and so on. The impacts will be broad and deep.

Restaurants and hotels are shuttered or just barely keeping the lights on and of course this sector also has supply chain effects that start with direct employees and extend down into all the businesses (including wine, of course) that supply the goods and services that they need to run successfully.

And then there is the cruise ship industry.

What will happen to the planes, trains, ships, hotels, resorts, restaurants, convention centers, and so on once the health crisis has passed and the recession run its course? Certainly the pipeline will refill, but will it be the same? Or will people decide that they don’t really need to move around so much and so far and spend a lot of time exposed to large crowds.

How strong will the movement be to go local instead of global and online versus in person? Those practices were already here, albeit unevenly adopted in different sectors.

Viewing the situation from my perch as a recovering university professor, I sense that this may be a critical moment in some sectors. Many colleges and university, for example, have substituted online classes for in-person teaching for the rest of the current academic year. It is supposed to be a temporary shift — just until the coronavirus crisis has ended. Then it’s back to normal.

But if the online classroom works reasonably well, will it be possible to completely return to the old practices? Or will the nature of higher education change? Many graduate degree programs I’ve seen had significant online components before coronavirus struck. More will embrace the technology now and it is likely to spread throughout the higher education environment.

This Changes Everything?

Wine may not be the most important sector that will be impacted by local/online trends, but it will need to adjust to them. Wine tourism has emerged as an important industry, especially in the decade since the start of the Great Recession. The United Nations World Tourism Organization (UNWTO) sponsors annual global wine tourism meetings (the 2020 meeting is scheduled for Alentejo, Portugal later this year) that focuses on wine tourism as an economic development tool as well as a profitable business area.

How much will wine tourism and associated industries be affected if global/in-person is replaced significantly by local/online? Too soon to tell, like most things about this crisis. But important to monitor.

Wine and the Dry January Syndrome

December 22, 2020 By Mike Veseth in alcohol, coronavirus, popular culture, wine, wine markets Leave a comment

January is just around the corner and that means Dry January, the month when many people pause to assess their alcohol consumption. If a lot of people have been indulging as much during the covid pandemic as their social media feeds suggest, Dry January could be particularly traumatic this time around.

Not Just January Any More

But it is a mistake to think of the interest in low- and no-alcohol beverages as being strictly seasonal. The marketing gurus at Heineken beer haven’t invested a fortune promoting Heineken 0.0 because they are looking for a short-term January sales bump. There are lots of reasons for consumers to seek out alcohol-free alternatives and the beer industry, always on the lookout for growing market niches in a fairly stagnant category, has responded with gusto.

If you don’t believe this, take a trip to the beer aisle of your local upscale supermarket. You might be surprised by the number of low/no abv products you find there and the range of styles. When I first explored this question in a Wine Economist column earlier this year I was impressed by a number of German products that had real beer flavor without the abv that usually goes with it.

My favorite among the half-dozen products I tried was Dry Hopped Clausthaler. It ticked the boxes for me: single serving container, affordable price, and it tasted so authentic that I didn’t miss the alcohol. Very impressive. I’ve got some in the fridge now.

Another appealing product that I stumbled upon is All Out non-alcoholic stout by Athletic Brewing Company. It’s an oatmeal stout and it tastes like an oatmeal stout — very satisfying. Because it is non-alcoholic, the usual nutritional information is provided on the can. Ingredients: Water, malt, oats, wheat, hops, yeast. 90 calories per can. If you like oatmeal stout, you’ll like this, too.

Beer makers have an advantage over wine producers in that they can produce many different batches of beer over the course of the year. Winemakers generally have one shot and that’s it. So seasonal beer products are available and for the winter months Clausthauler made a non-alcoholic holiday beer, Santa Clausthaler (Santa Claus-thaler — get it?) shown above dressed in miniature Santa hats. It is a 50-50 blend of their non-alcoholic beer with a cranberry cinnamon drink. Interesting! Kinda reminds me of mulled wine.

Fear of Missing Out

My earlier column on Dry January worried that wine was missing out on the low/no abv beverage trend. I know there are good wine products out there, but I don’t see the same investment in this category that the beer industry has made. Every bar or restaurant that I visited (when such visits were possible) had a non-alcoholic beer option available. None had non-alcoholic wine.

So what I am looking for? Single serving container is important. Affordability is important, too. And a non-alcoholic wine needs to remind me of wine as much as the best of these non-alcoholic beers remind me of beer.

A new product that seems like a step in the right direction is called H2/Heart Sonoma Soft Seltzer, which comes in Sauvignon Blanc, Pinot Noir, and Rosé flavors. Although the target is non-alcoholic seltzer, not wine, these carbonated drinks contain de-alcoholized wine and grape juice, too.

Sue and I received samples of the sparkling Pinot and Rosé flavors. Sue thought that the Pinot tasted like Black Cherry soda and didn’t see it as a wine substitute at all. The Rosé tasted like sparkling raspberry lemonade to me and, while I can’t say it especially reminded me of Rosé wine, I think I would be happy with this sparkler in my glass at some future post-covid holiday party. Festive, refreshing, enjoyable.

So clearly some people are hard at work bringing wine to the low/no abv party and that’s a good thing because I think this market niche is only going to grow. I’d like to think that wine can play in this arena because I suspect there are many people like me who sometimes want a high-quality low/no abv option, but would like to stick with wine.

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That’s it for 2020. The Wine Economist will be back in 2021. Happy Holidays to all.

Wine Goes Up the Down Staircase (Coronavirus Recession Edition)

May 27, 2020 By Mike Veseth in Aldi, coronavirus, economic crisis, recession, wine, wine price 2 Comments

41f8v8blzal._sx301_bo1204203200_ Wine consumers today seem to be going “up the down staircase” (to evoke the clever title of Bel Kafuman’s best-selling 1964 book). They are buying more expensive wine at lower prices. That sounds crazy! Read on for analysis and a look back to what happened in 2009.

The COVID-19 Wine Boom

Recent consumer trend data from Nielsen and Wines & Vines Analytics present a complicated picture of off-premise wine consumer behavior for March and April 2020. Wine sales at supermarkets and other retail outlets have boomed, as you know. The initial pantry stocking frenzy was followed by a growth plateau, but high growth rates have returned in recent weeks.

The dollar value of off-premise wine sales in the Nielsen-measured channels has risen at a 30% rate since the COVID-19 crisis began compared to the same period last year. Wine sales in the week ending March 21 surged to 66% more than the previous, year which is amazing.

The rise in off-premise sales is partially offset by the collapse of the on-premise (bars, restaurants) channel. Net sales are up, but not by as much as you might imagine. Nielsen estimates that off-premise sales need to rise by roughly 22% (by volume) to offset the falling on-premise sales. Wine volumes are up 27.7% since March 7, so that’s a 5% net volume gain.

Less is More? Or is More Less?

Since sales volume is up 27% and sales value has risen 30%, it is clear that unit sale price has increased and this is true because of the distribution of purchases in different price points.. While sales have increased in all price categories, the fastest growth is for wines $11 and higher. Interestingly, the highest percent growth rate is in the $20 to $24.99 price category.

Some speculate that this rise is driven in part by consumers who are substituting retail wines for the ones they would otherwise have purchased at a restaurant. A $25 wine purchased at retail and consumed at home (perhaps with a home-delivery restaurant meal) might seem like a bargain compared to a similar wine with a higher mark-up on a restaurant wine list. Bottom line: consumers are moving up the wine wall, but paying less at the same time.

Online wine purchases are booming, too, but the reported pattern is different according to shipment numbers for April 2020 from Nielsen’s partnership with Wines Vines Analytics in collaboration with Sovos ShipCompliant. Sales volume increased by 45% compared to the previous year. But sales value rose by only 15%, which means that average unit price has fallen.

Indeed, the average bottle price in this sales channel fell from $42 to $33. Some of this might be due to changes in the commodity composition on online purchases, but readers of this column probably guess that discounting also plays a part. Here at Wine Economist world headquarters our email inbox is filled with sales offers that start with free shipping and continue with increasing levels of discounts.

Napa Discounts

Significantly, according to the Nielsen data, Napa Valley wines, which are the Big Dog in the DtC market, had the largest average price reduction. Our friend Allan found a Napa winery in obvious financial difficulty that offered full cases of their California- and Napa-appellation wines for the price of one or two bottles. Some of the deals like this are shared with club members, but some are kept quiet indeed to avoid reputation erosion.

So it is up the down staircase. DtC buyers are snapping up expensive wines at discount prices. Many thanks to Nielsen’s Danny Brager, Senior Vine President Beverage Alcohol Practice, for sharing data and insights.

Up and Down in 2009

Consumers also looked for ways to go up the down staircase during the global financial crisis a few years ago. Here are two Wine Economist columns from 2009, when internet sales were less of a factor, that examine how wine consumers were shifting their buying strategies during the global financial crisis: Wine, Recessaion, and the Aldi Effect and Extreme Value Wine Goes Mainstream.

Significantly the bargain-seeking changes we saw then didn’t really disappear when the economy improved. Wine buyers continued to search out bargains, at both low and high price points even as “premiumization” swept through the market. Hey, that’s up the down staircase again! wine_awards_factsheet_thumb_9.13.17

Wine , Recession and the Aldi Effect

January 13, 2009

Aldi stores are about to expand in the United States, drawn here by the recession according to an article in today’s Wall Street Journal ( “Aldi Looks to US for Growth” ). I wonder how this will affect the wine market?

A Tough Nut to Crack

Aldi is a German “hard discount” store chain. A “hard discounter” sells a limited selection of house-brand goods at very low prices in small, bare-bones outlets.

Hard discounters are a niche, albeit a growing one, in the U.S. Wal-Mart is a successful discounter, of course, but not a hard discounter because it still features many mainstream branded products, its prices are higher and its stores a bit more plush. Aldi and other hard discount stores drove Wal-Mart out of Germany, according to the WSJ article, but the U.S. market has been a tough nut for the hard discounters to crack. American consumers are primed to buy brand-named products and they like lots of choice, marketing experts say, and so tend to resist the house brands that hard discounters feature, which has limited their penetration here.

Germans are more willing to sacrifice brand names for low prices, apparently. Aldi and other hard discounters are dominant powers in German retailing. The WSJ reports that 90% of German households shop at Aldi stores and 40% of all grocery purchases are made in hard discount outlets.

Divide and Conquer

Interestingly, there are actually two Aldi store chains in Germany. Aldi is short for Albrecht DIscount. The Albrecht brothers who founded the company after World War II fell out over the issue of tobacco sales in their stores. They divided the German market between them (Aldi Nord and Aldi Süd) and then, eventually, split up the world market too. Here are links to Aldi USA and Aldi International websites if you want to learn more about this retailer’s local presence and international reach.

Wine is an important product in Aldi’s German stores, as you can see from the wine selections featured on their website. I believe that Aldi is the largest single retailer of wine in Germany.

Since Germans are rich and Germany makes great wines, you would think that Aldi must sell mainly fine wines, but you would be wrong. Aldi’s median German wine sale is red not white, imported from a low cost producer, sold under a house-brand name, packaged in a box or TetraPak and priced at around one euro per liter.

You could say that it is Two Buck Chuck (TBC) wine, but in fact TBC is more expensive. TBC is to Aldi wine as Wal-mart is to Aldi itself. (Note: Wal-Mart now has its own brand of two dollar wine, which makes this comparison even more appropriate. It is called Oak Leaf Vineyards and is made for Wal-Mart by The Wine Group.)

The Aldi Effect

Aldi figures that the recession is its moment to press more vigorously for U.S. market share. Data indicate that consumers are much more cautious now, so perhaps they won’t be so picky about brand names and will, like their German cousins, be willing to trade down for a lower price. The Financial Times reports that Aldi sales in Great Britain are up 25 percent! Aldi plans to speed up store openings in the U.S. and to expand into New York City. New York! If you can make it there … well, you know.

The good news here is that Aldi’s U.S. push may also help drive wine deeper into the U.S. consumer mainstream. You can say all you like about the quality of Two Buck Chuck but it sure did help expand the wine culture in the U.S. and some (but not all) my TBC-drinking friends have moved upmarket for at least some of their purchases. The wine may not be to everyone’s taste, but its market impact has not been all bad.

Will Aldi Succeed?

Will Aldi’s drive be successful? There is reason to think it will be. They seem committed to tailoring their hard discount operations to local market conditions, which is important because markets have terroir as much as wine.

But there is a more important reason. Both German Aldi chains are present in the U.S. now, although you are probably not aware of them. Aldi Süd operates on under the Aldi name, of course, with the same logo as in Germany. The owners of Aldi Nord invested years ago in a different chain, based in California and intentionally tailored for thrifty but upwardly mobile U.S. consumers. It’s an upscale Aldi Nord and it has been very successful here.

Perhaps you’ve heard of them. They have limited selection, smaller stores, lots of house brands, and low prices. They even sell a lot of wine. The name?

Oh, yes. Trader Joe’s!

Extreme Value Wine Goes Mainstream

November 1, 2009

groc_receipt Our friend Jerry doesn’t seem like the kind of guy who would go digging around in the closeout bin or shopping for wine at Aldi — too classy for that — but there he was at Joyce and Barry’s house on Friday showing off his latest finds: cheap wine from a Grocery Outlet store.

The wine wasn’t so much good or bad as simply intriguing — is it really possible for a sophisticated wine enthusiast like Jerry to be satisfied shopping for wine at an “extreme value” store? Only one way to find out, so we got in the car the next day and headed for the strip mall.

Searching for Extreme Values

Headquartered in low-rent Berkeley, California, Grocery Outlet bargain market is America’s largest extreme value grocery chain with more than 130 independently owned stores in six western states. It has been in business since 1946. Prices are low, low, low.

Grocery Outlet stores here in the Pacific Northwest are supermarket sized spaces filled with off brand and closeout products along with a wide enough selection of fresh goods to allow families to do all their grocery shopping in one place. They are nice if not especially fancy stores. I can see why budget-minded families shop there.

Mystery Wine

The wine corner at the nearest store was large and well-stocked. Most of the brands were mysteries (one was even named “Mystery” as in “Mystery Creek” or something like that), although a few third and fourth tier products from recognized mass-market makers were available. Mainly, I think, these were leftover wines closed out by distributors to raise cash or make room for incoming shipments along with no-name brands “dumped” under a bogus label.

The wines came from all over — California, naturally, Australia, France, Italy, Chile. There was even a $3.99 “Champagne” from Argentina. Honest — it said “Champagne.”

Prices were suitably low — most of the wines sold for $2.99 to $5.99. It isn’t hard to make money selling extreme value wine when you can buy up surplus bulk wine for just pennies a liter and package it up for quick sale. Extreme value retailers are the perfect distribution channel for wines like these.

As you can see from my receipt, I walked out with three bottles of wine for a total of $13.97 plus tax. “By shopping with us you saved $28.00.” That would mean an average of 67% off the retail price.

Unexplained Tales from Down Under

I wasn’t really surprised at what I saw as I surveyed the wine wall. Then, slowly, a different kind of wine mystery began to unfold.

Sue must have sharp eyes because she picked out the first surprise. Sam’s Creek Marlborough Sauvignon Blanc 2008 for $3.99. That’s awfully cheap for a New Zealand wine here in the U.S. I’ve read about heavily discounted NZ wines in Great Britain but not here in the U.S. — until now.

New Zealand is a high cost wine producer that has succeeded in charging a premium price for its wine. Indeed, NZ earns the highest average export price of any country in the world despite surging production that threatens to create unmarketable surpluses. Everyone worries that one day the export limit will be hit and prices will start to tumble from $12-$20 down to, well, $3.99. Is that what this Sam’s Creek wine really means? The end of NZ wine’s premium price?

Frighteningly, Sam’s Creek isn’t a no-name closeout wine. The label says that it is made and bottled by Babich, one of the famous names in New Zealand wine, and the internet tells me that Waitrose sells it for about $10 in Britain. I wonder if the unsold British inventory has somehow made its way here?

Prestige Wine at Extreme Value Prices

Two more bottles raised more questions about New Zealand wines. I paid a whopping $5.99 for a 2008 Isabel Estate Marlborough Sauvignon Blanc. I almost overlooked it, but the label caught my eye. Isabel Estate is one of the most famous Marlborough quality producers, exceedingly well-known in Great Britain where this wine sells for about £10, but not so widely distributed here in the U.S., I think.

How did it get here and who among the Grocery Outlet clientele would recognize its quality sitting there surrounded by cheap and cheerful closeouts?

The third wine makes the puzzle more complicated. It is a 2004 Te Awa Merlot from the Gimblett Gravels of Hawkes Bay. Te Awa Farm is another famous NZ producer and, while this wine — a estate product from a distinguished producer in a famous region — may be slightly past its prime and therefore a typical closeout risk, it is still very surprising to see it sold at a place like Grocery Outlet for $3.99 rather than the $16-$20 retail price.

These three New Zealand wines may be random surplus wines found in the sort of place where random wines go to be sold. Or they may be indicators of important changes in the world of wine. Kinda makes you wonder, doesn’t it?

Wine markets are all about supply and demand. It is pretty clear that a supply of interesting wines has appeared along with the rock-bottom remainders at extreme value stores like Grocery Outlet, pushed along, no doubt, by the slump in fine wine sales.

What about demand? And what does Grocery Outlet tell us about the wine market more generally?

Anatomy of Georgia’s Wine Export Surge

December 8, 2020 By Mike Veseth in coronavirus, recession, wine, wine exports, wine history 1 Comment

Exports of wines from Georgia (the country — the cradle of wine — not the U.S. state — the cradle of Coca Cola) have surged in recently years, a fact that is both well-deserved and timely. Georgia deserves the increased recognition of its wine sector both because it really is the cradle of wine, with literally thousands of years of history, and because the wine industry and government have invested heavily in recently years to raise standards and promote products in key markets.

Ticking All the Boxes

Georgia wine’s success in 2020 is especially timely because travel and tourism — another important Georgian industry — has been hard hit by the global coronavirus pandemic. Ideally the wine and the tourism industries work together to generate needed income, especially in rural areas. Georgia is sort of running on one cylinder this year, so wine’s boost is especially appreciated.

Sue and I visited Georgia in 2016 and we were impressed by the friendly people. beautiful scenery, striking crafts and culture, delicious food, and excellent wine. We recently re-immersed ourselves in virtual experiences of Georgia through the third annual Ghvino Forum and a “Georgian Wines 101” trade tasting of six Georgian wines expertly led by Taylor Parsons with special guest winemaker Iago Bitarishvili of the iconic Iago’s Wines.

My particular focus for the Ghvino Forum was a presentation by Tornike Kodrzaia, Head of Research at TBC Capital on the economics of Georgian wine. Wine is important culturally in Georgia (a fact that a recent film Our Blood is Wine makes very clear), but it is also a key element of the economy.

A Complicated Situation

Kodrzaia presented data that showed the Georgian wine sector to be a complex mosaic. A survey of large- to medium-size wineries, for example, revealed high financial returns — about twice the average for Georgian businesses in general, he said. That is incredible. It would be interesting to dive deeper here, to see if the same is true about smaller wineries and if the returns to growers are also positive.

Georgian wine is not a single thing, so it is important to understand its components. Home production was very high during the Soviet era and is still large, especially compared to other countries we have visited. The foundation of Georgia’s high per capita wine consumption is wine made at home or by friends or family, although Kodrzaia noted that commercial wine sales have increased in the domestic market.

Georgian’s prefer white wine — and it is easy to see why if you sample a fine Chinuri, for example. But traditional export markets prefer red wine, so that is a production focus. Russia and the CIS markets demand semi-sweet red wines, which Georgia produces in abundance. Uncertain political relations, however, are behind a movement to diversity export markets and reduce dependence on Russia.

China has emerged as an important market for Georgian wines, but the Chinese prefer dry red wines over the semi-sweet products. Chinese consumers are drawn to the story of Georgian wine — its long history and Silk Road associations– as well as its quality. Many Georgian Wine Houses have opened in Chinese cities to tell the cultural story and promote the wines.

Rising Tide in the U.S. Market

The United States export market is growing quickly from a small base, with above-average prices. Over 800,000 bottles were exported to the U.S. through October 2020, for example, a substantial increase from 678,000 in 2019 and less than 200,000 in 2014, when the current surge began. The average ex-cellar price of exports to the U.S. was $5.11, according to Georgian statistics, more than double the export price for China and CIS countries. So you can see why the U.S. market is a focus.

Georgian wine is exceptionally diverse, so it will be interesting to see which of its many facets shines brightest in the U.S. market. Natural wine is a growing market niche and many Georgian products can fly that flag proudly. But many of the traditional producers are quite small, so critical mass is an issue. Iago Bitarishvili is an immensely important producer, for example, but only 5000 bottles of his amber Chinuri were made in 2019 according to the data we received.

Georgia is home to literally hundreds of native grape varieties, which creates a kaleidoscope of interesting choices for some consumers and a confusing blur to others. (Sue suggests an initial focus on red Saperavi and perhaps also white Chinuri — excellent wines that buyers will not be afraid to try to pronounce.) Many of the wines are hand-sells, however, which makes Covid closures of restaurants and wine bars in many areas an additional challenge. The six wines that were included in the Georgian Wine 101 tasting were made from these grape varieties: Tsitska-Tsolikouri, Kisi, Chinuri, Tsolikouri-Otskhanuri, Tavkveri, and Saperavi.

But Georgia, Georgians, and Georgian wine have survived these thousands of years because of their determination, commitment, and resilience, so they are unlikely to be defeated by these temporary challenges. We look forward to learning more and Georgia and its wines and to witnessing their continued export growth.

Georgia’s Lost Eden

Just as I was putting the final touches on this column a friend wrote to tell me about a new Georgian wine he sampled over Thanksgiving and really enjoyed. The project is called Lost Eden Red Blend and it ticks many of the boxes needed to break through in the crowded marketplace. It is a blend of 100% Saperavi from several vineyards — I’m guessing the marketing folks thought “red blend” would be more approachable that Saperavi. The wine is made by an 11th-generation (!) winemaker. The packaging is unique, don’t you think? You will remember this wine if you try it and like it.

The wine is “semi-dry” with 15.4 g/l residual sugar and 13% alcohol. 4500 cases made. Suggested retail $18.99. It is a type of wine we tasted and enjoyed in Georgia and that is popular here in the U.S. where many consumers talk dry and drink sweeter. The wine is modern in style, according to on-line documents, but pays its respects to tradition by blending in a portion of wine made in the traditional qvevri method of clay vessels buried in the ground.

Some of my friends will be disappointed that a wine like Lost Eden gets attention. They would like Georgia to be known in the U.S. exclusively for its traditional qvervi wines. But Georgia is a small country that punches above its weight in the wine world by leveraging all of its many advantages, including some high quality sweeter red wines.

We haven’t tasted the wine, but we have sampled the story told on the website, which draws on the people and country, their culture and history, and of course the food, too, including the iconic supra feast. Georgian wine is complicated, as noted above. This is only one side of Georgian wine, but one that seems likely to spark greater interest in the wine and the country in general.

Georgian wine is on the move. Let’s see where it goes next!

Global Wine Impacts of Coronavirus Crisis & Recession: OIV Update

April 28, 2020 By Mike Veseth in coronavirus, economic crisis, Economic impact, recession, wine, wine exports, wine markets Leave a comment

pau The OIV released their annual “State of the World” wine sector report last week (via social-distancing video conference, of course) and it is noteworthy both for its view of the recent past and its tentative analysis of present conditions and future trends. (Here are links to the report summary, the press release in pdf, and the presentation in pdf, and the report in pdf.)

Under normal circumstances, my focus here would be on the annual report itself and the recently-released special study of the sparkling wine boom, both of which are packed full of data and sound analysis. But, as OIV Director General Pau Roca would note, these are rear-view mirror reports that document a world that does not exist in the same way anymore. They are useful for sure (see below), but don’t directly address today’s most pressing questions about the future of the global wine sector.

So we must move from quantitative measure to qualitative assessments and informed speculation, and that’s what Pau Roca provided in the press conference and resultant video report (see YouTube video below). Herewith some of the OIV highlights with my commentary.

An Inconvenient Truth

It is an inconvenient truth that the countries that rank highest for total wine consumption (the United States, UK, Spain, Italy, France, etc.) are also the countries that have experienced the most severe impacts of the coronavirus pandemic. And they will likely to be among the hardest hit by the recession. The global impact on the wine sector will thus be much more serious than if any one or two of these markets were affected.

Globally, we are looking at two important changes: a shift in sales channels and a fall in demand, immediately in some regions and eventually in others (see below). Wine sales via bars, restaurants, and travel and tourism-related vectors (think cruise ships and duty free shops) have collapsed and it is unclear how quickly these market will recover even when the green light is given to re-open.

Supermarket and e-commerce sales have risen. In some regions there is a net gain in sales at least in the short run, but this is not true everywhere. In the U.S., for example, off-premise sales have surged enough recently to produce a net gain in wine revenues in the short run.

Net decreases in both volumes and sales values are projected for parts of Europe where bar and restaurant sales are especially important and travel and tourism are big factors, however, with a resultant rising surplus of wine. Crisis distillation, which we think of as an artifact of the bad old days of the EU wine lake, seems likely to return, and in a big way, in order to stabilize wine producer and grower incomes. Maybe the industrial alcohol that will result can be used for hand sanitizer?

The shift to e-commerce will be welcomed by many small and medium-sized producers who have lost on-trade accounts and cannot compete effectively for high-volume supermarket sales. The crisis is an accelerant in this regard, speeding up an existing trend. Taken together, these impacts present many challenges and some opportunities, creating losers and some winners.

Recession Effects

The emerging economic crisis has been compared with the Great Depression here in the U.S. and with the severe economic dislocations following World War II in Europe, but in truth we don’t yet know how deep the decline will be or how long it will last. That will only be clear somewhere down the road when the rear-view mirror image comes into focus.

sparkling

But the mirror can reveal trends to look for on the road ahead. Here are OIV charts for global sparkling wine consumption. The top chart shows volume and value trends indexed to 2002 = 100. The lower chart shows average bottle price. Focus on the the shift in sparkling wine volumes before and after the 2008-2009 global financial crisis to see how an economic crisis can alter consumption trends.

In terms of volume of sales, sparkling wine took a big dip in 2008-2009 and then returned to its rising trend, but from the lower base. It never caught up to where it would have been without the crisis. That recession dip resulted in a persistently lower volumes against the previous trend.

And — and this is an important point — this is true even though the later years included the global Prosecco boom, which raised sparkling wine volumes even as it lowered average bottle price. Without the Prosecco boom (and the lower average sparkling wine prices it produced), the sustained recessionary impact would be even more pronounced.

Now sparkling wine isn’t all wine and the past isn’t necessarily the future — your mileage may vary, as they say — but this figure shows that recessions can have enduring impacts on global wine markets.

How Not to Waste a Crisis

They say that it is important not to waste a crisis because sometimes important changes can happen in turbulent times that would otherwise be impossible. As suggested above, many wine firms are taking the crisis as an opportunity to shift to e-commerce channels or to diversify their revenue streams. They might never have gotten around to this without the crisis. Now there is little choice.

There are good uses of this crisis, as Pau Roca noted in his comments. This global public health emergency, for example, shows us the importance of scientific expertise and collective action when faced with a global issue. It would be good if coronavirus caused us to think and act more seriously in this way about other global threats, especially the global climate change emergency, which will not go away when the coronavirus crisis is resolved.

On the other hand, Pau Roca notes, it is a wrong use of the crisis to either cynically promote alcohol consumption at this time or to do the opposite, to take this as an opportunity to advance a prohibitionist agenda. It is easy for wine to get caught in the crossfire in this crisis, as in South Africa where, for several weeks, it was forbidden to sell wine in the domestic market (because of concerns about alcohol abuse) and illegal to export it either, because of a ban on non-essential transport. Yikes!

Thanks to Pau Roca and the OIV for their work on these issues. Here’s a video of Pau’s report.