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:
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.
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.
Last week’s Wine Economist column was a working draft of my analysis of how the coronavirus pandemic might impact the wine industry. One focus was on the possibility of a recession in at least some parts of the world and slowing economic conditions generally.
An economic downturn would certainly impact the wine industry. Wine is, after all, a discretionary good for most consumers. I haven’t heard of anyone filling their Costco wagon with wine the way they have done with toilet paper, although I have seen reports of people stocking up for an anticipated quarantine period. People don’t stop drinking wine during times of economic uncertainty, but they do buy less and many scan the shelves more intensely looking for lower prices. The coronavirus alters the menu of wine-drinking occasions, which will have an impact, too.
Rising Recession Probability
Recessions now seem very likely in parts of the Eurozone (the three biggest economies — Italy, Germany, and France are all on the brink). A recession in Japan and perhaps Australia is also likely. Economic growth is projected to fall in China and a insiders are thinking the unthinkable — that the economy could not just slow down, but actually shrink as manufactured exports and domestic consumption both fall. Data on the first two months of the year paint a dark image.
Indicators are flashing red here in the United States, too. The stock market’s long bull run ended last week when equity prices fell by a total of more than 20% from their all-time highs. The Treasury bond market has been under intense pressure and a liquidity event cannot completely be ruled out. Corporate junk bonds are increasingly suspect as investors dump their riskiest holdings to cover loses elsewhere.
Significantly, we have seen truly historic economic interventions designed to head off economic collapse. The Fed’s $1.5 trillion liquidity injection is one example and Sunday’s announcement that it cut its benchmark interest rate target to near zero while also lowering the discount rate is another.. Yes, that’s trillion and zero. Quantitative easing is back, too, in a very big way.
President Trump’s national state of emergency declaration and the follow-up economic stimulus package are also noteworthy. The German government announced an economic stimulus “bazooka” and the end of their zero deficit policy. The list goes on. Some officials say they aren’t really worried about a recession. But it is obvious that they are.
Global financial markets opened with a thud on Monday following the Federal Reserve’s surprise announcement, dropping dramatically on the economic stimulus news and ended the trading session down more than 12 percent. Markets are forward looking for the most part and the big economic actions taken around the world seem to have used up all the ammunition to fight a recession foe. What’s left in case things get worse? I wonder where the markets will be when this column is automatically published early Tuesday morning?
Meanwhile, borders are closing, shutting down the flow of people and some services between countries while quarantine measures increasing limit activity within them. Spain has followed Italy into lockdown and other countries seem likely to adopt containment policies too.
The impacts are both global and local — a recent Financial Times article reports on the small business situation in Seattle, home of the first major U.S. outbreak.
Economic forecasters have raised the probability of a recession here in the U.S., although estimates vary and depend on many factors. If you take each sector into account, as the Wall Street Journal did over the weekend, the lost sales and incomes add up quickly. And then you have to factor in the impacts that don’t show up in the headlines. You know something’s really wrong when the NBA, NHL, Champions League, March Madness, SxSW, and Formula 1 all cancel or postpone events.
So the wine industry needs to prepare for the recession that may already be here in a practical sense (technically it takes two consecutive quarters of economic decline to meet the definition of a recession). But this recession is likely to be different from the financial crisis of 2008 or the dot com bust before that. It is important to be ready for what’s happening now and not prepare to fight the last war.
Past is Prologue?
There are too many potential impacts to attempt a comprehensive analysis here, so let me focus on just one area of concern: shifting patterns of direct-to-consumer sales.
Demand for wine fell significantly during the Great Recession and a lot of our discussion was about trading down. Consumers kept buying wine, but they moved down a shelf or two some of the time to save money. And they shopped the online discount sites where upscale wineries tried to quietly get rid of their excess inventory.
One of the main lessons that we learned from the Great Recession was the importance of direct-to-consumer sales and the power of the tasting room and wine club to generate margins when managed properly. Wine businesses made direct sales a bigger part of their strategy. Tasting rooms, wine clubs, personalized service — right down to that birthday phone call. Cooper’s Hawk, a surprisingly large wine business built around a tasting-room themed upscale casual restaurant chain, has nearly 300,000 wine club members. Amazing.
One thing that is different about today is that potential consumers seem to be shunning retail spaces as “social distancing” practices are adopted. Tasting room sales are down significantly, according to some reports, and Washington state wine leader Chateau Ste Michelle closed its facilities to visitors. In California, the government has suggested that tasting rooms and other non-essential businesses temporarily shut their doors.
As more and more people are tested for the coronavirus there are likely to be staff shortages, too. This isn’t just wine’s problem, but it is a problem because a revenue stream than many wineries rely upon is interrupted. What to do?
Is There an App for That?
Other retail sectors are looking to the internet to help them connect with consumers who hesitate to make physical contact and this seems to be a smart move for wine businesses, too. The cornoavirus is only going to make web-based storefronts and mobile ordering a bigger element of any wine business strategy. But web sales are different and it is not enough to simply stock your internet shelves and open the virtual door. You are going to need hooks to attract and hold customers.
Selling on the web invites quick and easy price comparisons. Price, which is always a factor, may become even more important since buyers are not in your tasting room to receive a warm welcome, personal attention, and samples of that reserve wine you keep under the counter for special guests.
Many businesses that entered the pandemic in weak shape will be victims of falling demand, supply chain interruptions, or financial collapse. We have already seen notices in Seattle of restaurants that are permanently shutting their doors.
Everyone hopes that the coronavirus pandemic will fade in a few weeks or months. Even if we are lucky and that timeline holds, a lot of economic damage will have been done and we will start to know if consumers will go back to their old patterns or if (and how much) things have really changed. What will we learn from this crisis? How will it shape longer term behaviors and strategies? Lots of questions and not yet many answers.
If you are looking for clues about what might happen in the U.S. and European markets when the coronavirus threat starts to pass, I recommend reading a recent Rabobank report about anticipated changes in the Chinese wine sector. China was hit first and hardest so far by the coronavirus and its experience might provide insights about what comes next in other regions.
About that bottle of “Coronavinus” wine shown above. Apparently it is real. I found it on a Spanish website selling for €19.
The impact of the evolving coronavirus recession on the wine industry is complicated. It seems like you get a slightly different story depending on when and where you look. One way to think about this situation is to analyze other industries where the impacts might be easier to discern. Fed-Ex, the package delivery giant, offers several potential insights.
Business is Booming, But …
How is Fed-Ex doing in this environment? A recent report from The Economist newspaper provides some clues. You’d think that business would be booming, since so many consumers have turned to on-line shopping and home delivery in the past few months. Of course there is competition to consider. United Parcel Service is a strong competitor. And Amazon.com has developed its own package delivery service. But there is plenty of delivery business to go around. So Fed-Ex must be doing well, right?
Well, yes and no. Home package delivery is booming, but bring those boxes to your front door is a high cost part of the business. And the costs of protecting the workers who process the packages have increased, too. So the business surge has put pressure on margins.
And the most profitable part of the business — which is bulk shipment to businesses — has actually fallen as overall consumer spending has decreased, reducing the pull-through effect. Higher margin deliveries to businesses and retailers have been only partly replaced by lower margin deliveries to you and me.
Fed-Ex announce quarterly earnings after market close on Tuesday of this week. The MarketWatch.com report noted that
Commercial volumes were down significantly due to worldwide business closures, but there were surges in residential deliveries for its FedEx Ground business and in transpacific and charter flights for FedEx Express, which required incremental costs to serve.
The company also incurred in about $125 million in increased operating costs related to personal protective equipment and medical and safety supplies for its employees, as well as additional security and cleaning services to protect them, it said.
Quarterly earnings were well below the level of a year ago, but much better than analyst expectations. The company’s stock rose in after-hours trading. It sounds like
Fed-Ex is managing the unavoidable big squeeze pretty well under the circumstances.
Lessons for the Wine Industry
Can you see how the Fed-Ex effect relates to wine? It isn’t a perfect parallel, but the surge in supermarket and on-line wine purchases is one side of the coin — like the boom in Fed-Ex home delivery — and if we focus just on that we end up drawing the wrong conclusions.
Higher operating costs and stagnant overall sales, when lost on-trade business is taken into account, are the rest of the story for wine. Depending on where your business is in wine’s market constellation, you might find yourself doing quite well or, like Fed-Ex and many other firms, caught in a squeeze.
What’s that gizmo in the photo above? Well, Amazon.com is experimenting with drone delivery. Fed-Ex has tested an autonomous delivery robot.
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?
The coronavirus pandemic continues to gain momentum, causing serious economic disruption around the world. The wine business has experienced a number of important impacts already and the future is uncertain.
Booming Sales … for Now
In the immediate run, retail wine sales are booming in many regions and through on-line vectors as consumers stock up on wine along with toilet paper in anticipation of possible store closures and enforced isolation. How much this will turn out to be an increase in wine consumption versus a change in the timing of purchases is unclear. But retailers are happy for the business in either case.
It has been inspiring to see the wine industry rising to the challenging of consumers who suddenly find their usual wine purchasing patterns disrupted. Like you, we have received many offers of discounted shipping and home delivery. Tasting rooms have responded in many ways including virtual wine tastings. These direct sales are especially important for wineries that need to replace lost on-premise accounts as bars and restaurants shut their doors for now.
The learning curve is steep in this new environment and not everyone is equally successful, but we are making progress. Which is a good thing, since the need to adapt to new consumption patterns will not end when the “all clear” alarm sounds. Many buyers will revert to their old patterns, but some won’t, at least not immediately, and the current period is a good time to learn more about what that uncertain future might look like.
A number of significant economic surveys of the direct and indirect economic impacts of coronavirus on the wine industry have appeared. Rabobank released two reports late last week (here are links to the first and second reports) that I find especially useful and recommend to you.
What’s Ahead for the Wine Economy?
What’s ahead for the wine economy? One way to think of the problem is in terms of Donald Rumsfeld’s famous taxonomy of knowledge (see video above) which divided the world into known knowns, unknown knowns, known unknowns, and unknown unknowns. It sounds crazy when you hear it the first time, but it kinda makes sense.
There are a lot of economic known unknows (things we know we don’t know) for the wine economy (and the economy in general) right now, which explains why financial markets are so jittery. Three important factors are wealth effects, income effects, and attenuated wine consumption occasions.
We know that wine will be affected by the vast decrease in wealth that the plunging financial markets have produced. Some investment portfolios have lost 20 to 30 percent or more of their value since the start of the year. If that is what happened to your retirement account and you are at or nearing retirement age, it is not an easily-dismissed problem. Luxury purchases are likely to be put on hold and for many consumers wine is a luxury. Holding on to wine club members is going to be a challenge and that’s just the tip of the iceberg.
The wealth effect is especially critical because it is likely to disproportionately impact baby boomers, who have been the bedrock of the wine economy for many years.
Helicopters and Bazookas
We know that wine demand will be affected by falling incomes and rising unemployment. New unemployment claims are surging as parts of the economy slow or come to a halt. Some sectors are expanding — this is a good time to find a job at Amazon.com, Walmart, and — at least in Washington state — at the unemployment benefits office itself, which is staffing up to meet the rising need.
A wide range of estimates of the broad economic effects have been published. Most suggest that first-quarter GDP in the United States will be slightly negative when the dust clears and that the second quarter will be much worse — somewhere between a 10% and 20% decline. That would be the biggest one-quarter fall ever. Job losses could be as high as 5 million in the U.S. Incredible.
Estimates for other countries are also negative, reflecting the global nature of the coronavirus pandemic and the economic collapse it has induced. Economic conditions in Italy are much worse than in the United States and will strain the ability of both Italian and European policy-makers to respond effectively, especially as the crisis grows in Spain as well and the contagion continues.
There is some good news in that government stimulus packages are on the way in the U.S. and elsewhere to try to offset falling demand. But much damage can be done in the short run and it is difficult to effectively target aid, hence the resort to Europe’s “bazooka” the American “helicopter money.” Thus far, it must be said, the financial markets seem to believe that the crisis is bigger than the responses proposed.
Finally, we know that, since wine demand is conditioned by the occasions people have to consume it, the sudden decrease in available occasions (bar and restaurant closures, regulations limiting private gatherings, etc.) will have a big impact irrespective of wealth and income effects.
The travel sector is one of the hardest hit by the coronavirus and that will impact wine, too. A lot of alcohol is consumed at airports and on cruise ships. That’s not going to happen very soon. New York Times wine columnist Eric Asimov did his best to address the occasion deficit last week in a column that told readers it is OK to drink alone if you are forced to self-isolate. Virtual cheers!
The Cost of Uncertainty
We know that these forces will hit the wine economy, but we don’t know exactly how, how much, when, and when things will turn around. That’s a lot to not know, so it is no surprise that the uncertainty alone is having an impact. It is hard to make confident decisions when the risks can’t be calculated.
I recently received an email from Anthony Bozzano of Bozzano & Co., a San Luis Obispo- based company focused on sales and sourcing of bulk wine (similar to traditional bulk wine brokers), as well as custom brand development for national retail. Anthony writes that
A couple of our larger winery clients, who consistently buy and sell in multiple truckload volumes, are putting all bulk wine purchasing and sales on hold until they understand the full effects of the current situation.
Due to market uncertainty, some boutique wineries are pulling back from active bulk wine negotiations. One such customer from Santa Barbara County told me that their already past-due distributors have informed them that, due to the frightening rate at which restaurants are closing their doors, they do not know when, or if, they will be able to pay their bills.
Uncertainty about the future and concern about counter-party risk are not limited to the bulk wine trade and not completely unexpected in turbulent times. The existence of so many known unknowns increases risks and makes actors up and down the supply chain hesitant to commit to future endeavors.
The wine business is particularly susceptible to these problems because it is so much dependent on time. Grape vines are not annual crops that you can switch back and forth easily from season to season. Wine is made just once a year and you have to live with what and how much you’ve produced. When current decisions are necessarily locked in for an extended period of time, it compounds the risk and these are risky times.
The Curse of the Unknown Unknowns
What next? The global coronavirus pandemic has pushed us into the real of unknown unknows — factors that we don’t really know that we don’t know. They say that what you don’t know can’t hurt you. But they are wrong.
So it is no wonder that the stock market’s “fear index” set a new record last week. With a highly interconnected global economy subject to uncertainty on so many levels, it is impossible to really know what could happen next and how severe its impact might be. No wonder investors sold off stocks, bonds, and commodities last week and rushed to cash and Treasury bills, sending short term interest rates below zero.
Many analysts and policy-makers under-estimated both the public health and economic impacts of the coronavirus crisis in its early days. A few are still in denial. For the rest of us, it is important to accept the risks, unknowns, and knowledge that many forces are beyond our control. And then, cautiously, to move ahead.
As recent Wine Economist columns have reported, it’s very clear now that the world economy has fallen into a recession, with some countries and regions affected more than others. The depth of recession is hard to gauge. A few weeks ago I thought that things would be very bad here in the United States, with as many as 5 million unemployed. But by late last week almost 10 million had applied for unemployment benefits in just two weeks and the shoes are still falling. Incredible. What will things look like two weeks from now?
Silver lining predictions based on the current wine sales surge aside, it is pretty clear that the wine industry will be negatively impacted by the slowdown in spending. How much depends in part on what “shape” the recession takes, which is to say what factors dominate the decline and how long it takes to recover.
Recessions are like stomachs — they come in lots of different shapes (see the classic 1960s Alka-Seltzer tv commercial above for humorous examples). Will it be a V-shaped recession? Or will we be dealing with a W, U, or maybe an L? The shape matters for the global economy and for the wine economy, too. Herewith a brief survey of the economic landscape.
Best Case Scenario: The Deep V
Initial projections (and many current ones, too) forecast a deep V-shaped recession. The economy will shrink rapidly for two quarters and then rebound just as quickly, so that by this time next year we will be safely back to square one. The logic behind this is simple — everyone goes home to hide out from the coronavirus and, when the danger is passed, the Reset button is pressed everyone goes back to their old jobs and habits.
This scenario makes sense if you think of the coronavirus crisis as just an exaggerated version of the annual seasonal flu season with minimal permanent impacts. But not many hold that view any more from a medical standpoint and there are big doubts about it in terms of the economy. Not all the businesses that shut down as we entered the crisis will be coming back, even with historic levels of economic stimulus.
Consumers will find it hard to recover, too. A 2019 Federal Reserve survey found that about 40% of American households did not have the ready cash or credit to weather an unexpected $400 economic emergency. Those 10 million (and growing) unemployed workers are facing a lot more than $400 worth of problems. The crisis will badly undermine the foundations of their economic security.
But a deep V is not out of the question if the massive bazooka blasts of government aid and helicopter drops of interest-free money are effective. If they work and work fast, then the Reset button will engage a speedy recover. I hope that’s what happens.
I’m worried that the problems are deeper and that you can hit the Reset button until you are blue in the face, but the economy won’t spring back so quickly. If I am right, it is bad news for the wine trade, which might have hoped that consumers would stock up on wine now, drink it all up while sheltering in place, and come back for more in the fall.
Double Dip W
A second fairly optimistic theory currently making the rounds is that the economy rebounds as described above, but then a second coronavirus pandemic wave appears in the fall or early next year. The necessarily closures and quarantines would trigger a second recession, but it would be smaller and shorter because the world would be better prepared.
I don’t have a strong opinion about the double dip recession scenario except to note that (1) there is no reason to think that the current pandemic will be the last we will see and (2) I sure hope we learn from our mistakes this time around.
The double dip W complicates things for wine because it makes it even harder to predict when a sustained economic recover would power higher wine sales. Instability and uncertainty — is this the new normal?
The Classic U-Shaped Recession
The U-shaped scenario is a third possibility. The U-shape recession is longer in duration but less deep than the V or the W. Full recover might take 3 to 5 years, not a few months. This is the classic recession shape and it sometimes works this way. Demand falls for any number of reasons, so that inventory builds up and production slows down and unemployment rises (which further depresses demand). Excess inventories are eventually drawn down and new orders placed, which stimulates production creates incomes and jobs, and encourages a rebound in demand.
The U shape would be a problem for wine because several years of depressed demand would exacerbate the structural wine surpluses that plague the industry both in the U.S. and in many other wine-producing countries. Supply-side vineyard adjustments, which are already recommended in order to reduce capacity, would be critical.
There is reason to doubt the U-shape scenario, however. First, the coronavirus recession is more than just falling demand, so a demand-based theory doesn’t seem to fit all that well. And, second, it would seem like the bazookas and helicopters would shorten the cycle if this scenario holds, so the U would become a V. That’s a bit of good news, which I supply at this point because things are about to get very dark.
L is for Liquidity Trap
The worst case scenario, from a strictly economic standpoint would be an L-shaped recovery. The global economy plunges and then … does not recover for a very long time. An extended recession is of course very bad for the wine industry as it would undercut the economic foundations of wine buyers of all generations.
There are a couple of realistic scenarios that could lead to such an outcome.
The first is a financial crisis. The coronavirus recession may have started with health issues, but there is a high probability that a financial crisis will follow. Not necessarily a banking crisis this time, because banks are better capitalized than a decade ago, although banks and non-bank lenders are still vulnerable The worry focuses on weakness in and liquidity of corporate junk bond debt and emerging market debt and the contagion that collapses in these markets can cause. You might add state and local debt problems to the mix if the crisis persists for more than a year.
We have already seen several instances of financial markets freezing up, or nearly so, in a panic for liquidity. This could create the conditions for a liquidity trap, which is a situation where financial actors are so concerned about liquidity that they soak up any new funds that are injected into the financial system, not spending, investing, or lending. Monetary policy, even maybe helicopter money, is impotent because the new funds just disappear into reserves with no real economy impact.
You can call the second scenario the Zombie Economy and it goes like this. Many firms collapse during the coronavirus crisis, but are kept alive — just barely — by aggressive government support. They don’t die, but they aren’t really alive enough to actually recover either. They continue on for years soaking up trillions of dollars of (debt-financed) resources and preventing an economic shake-out that would free up resources for self-sustained growth.
Is the Zombie L-curve possible? It seems hard to believe … until you call it by its other name: post-bubble Japan.
What’s going to happen? What will the recession look like? I really don’t know, but I hope that the coronavirus health crisis and the economic dislocation it causes are both milder than seems likely at this point and that we return to health quickly. Fingers crossed that the massive economic stimulus that is being unleashed around the world is effective.
In my other life as an economics professor I studied financial crises and their implications (one of my academic books, which seems eerily relevant today, was called Mountains of Debt). One thing that I learned about the financial sector is that crises are generally followed by periods of consolidation.
Smaller, more fragile banks and investment firms fail or fall into the hands of larger firms (sometimes the big ones fail too as the Washington Mutual collapse of a few years ago reminds us). Eventually new community banks appear to fill the gaps that the bulked-up big banks leave behind.
Banks and Wine: No Joke
How are banking cycles related to the wine industry in the current coronavirus crisis? Well there is a joke that the only person crazier than a winery owner is her banker. But no one is laughing at jokes like that these days.
There is a serious connection. A recent Wine Business Monthly report suggests that the American wine industry looks a lot like the American finance industry and that a coronavirus recession shake-out is likely to lead to a wave of consolidation.
Only 56 out of the more than 10,000 U.S. wineries are really really large, producing more than 500,000 cases per year. These are the JP Morgan Chase and Goldman Sachs of the American wine scene. Another 246 wineries are very large, producing between 50,000 and 500,000 cases annually. Taken together, this small number of wine producers accounts for most of the wine produced and consumed.
The Bottom of the Pyramid
At the other end of the scale are 2773 wineries that make between 1000 and 5000 cases a year and an incredible 6420 wineries that produce less than a thousand cases. These are the community banks of the wine world and they are the most dependent on direct sales including especially tasting room sales. They are, therefore, the most vulnerable today. About half the estimated $5.94 billion wine industry loss due to the crisis comes from lost cellar door sales.
And they are the most likely to experience severe economic distress that might result in sale or closure. Even before the crisis a surprisingly large number of wineries were quietly on the market for the right price. The recession will push that trend to the fore.
The WBM report notes that
Ninety-seven percent (97%) of all U.S. wineries produce less than 50,000 cases and are estimated to experience annual revenue losses of between 36% to 66% with smaller wineries most impacted. Projected losses increase as winery size decreases with wineries producing 1,000 to 5,000 cases expected to see lost revenue of 47.5% and wineries producing under 1,000 cases or less expected to lose 66% of revenue.
Just as some community banks manage to come out of a financial crisis in a stronger competitive position, some smaller wineries will emerge in relatively better shape, too. It is inspiring to see the effort that is going into customer relations and marketing to make up for the lack on in-person contact. I am sure that there are lessons learned now that we be valuable when the tasting rooms open again somewhere down the road.
3-Tier versus Two Speed
Some states have relaxed their direct-to-consumer shipping regulations, which benefits all wineries but will be especially important to small ones. Wine Curmudgeon speculates that this might be the start of important changes to the three tier distribution system that would open up the wine market. That would be a big benefit for the bottom of the wine pyramid.
But at the same time it seems likely that consolidation in the wine sector will be accompanied by similar trends in distribution and for the same basic reasons. Although much is lost in generalization, there is a tendency for larger distributors to focus their value chain on bigger retailers and larger wine producers. Scale matches scale matches scale. This pattern magnifies an on-going movement to a two-speed wine market with those in the middle range (both domestic and imports) squeezed in the process.
Here is a link to the Wine Economist’s coverage of the coronavirus recession. All of the most important factors affecting the wine economy remain unknown: how deep will the recession be, how long will it last, when will the economy be open, how soon (if at all) will consumers return to previous patterns? Add to the list the question of how long will it take people to drink up all that wine and spirits they piled into their shopping carts in March? Gosh, I hope they didn’t drink it all at once!
Big “W” Recession Threat
There is so much uncertainty at present that prediction is impossible, but these are some directions that seem likely given current trade winds. It appears increasingly likely, for example, that the “shape” of the coronavirus recession will be W (a very big W in this case) and not V or U (see this previous Wine Economist column about recession shapes).
Many forecasts assume a V-shaped recession, with a short sharp economic fall followed by a quick and decisive recovery. That would be the best case scenario and there are some early indications that that might be what’s happening in China.
But there is a significant threat that a second recession will strike just as the economy is recovering from the first. The second dip could come if another wave of coronavirus strikes and large parts of the economy need to be locked down again — this is the concern being expressed about China at the moment. Many experts seem to assume a second virus wave, but are uncertain about its impact.
But coronavirus 2 isn’t the only threat. Economists are increasingly concerned that the first virus recession will be followed by a financial crisis as all the missed payments and bad loans come due. There is a lot of credit risk right now, especially counter-party risk, which is the possibility that the trustworthy firm that owes you money might fail, bringing you down, because the people who owe it money can’t pay.
In wine terms, that’s what happens when your distributor can’t pay because its restaurant clients can’t pay. A credit collapse would likely speed consolidation in both the winery and distribution sectors.
Many state and local governments have played constructive roles in the current crisis, but they might unintentionally end up contributing to the W recession scenario. Many state-locals are constitutionally restricted from running budget deficits or borrowing except for capital projects like roads, bridges, and school buildings. The first recession wave will drive down their revenues, forcing them to cut back on spending and employment. That would make the second recession wave even worse.
None of this is set in stone. Truly heroic economic stimulus (helicopter money drops, fiscal bazooka blasts) has been deployed with more to come. This would be more than enough to deal with economic problems in normal times. But these times are not normal and the head of the IMF said last week that she’s concerned the global recession will be even worse than currently envisioned. Buckle up.
Do you recognize the big W in the photo above? It is the from the classic 1963 Stanley Kramer film “It’s a Mad, Mad, Mad, Mad World.”
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 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.
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 , 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. TheFinancial Timesreports 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
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.
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?
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.
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.
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.