The Return of Mateus Rosé 

 

This column’s title is a bit misleading. Mateus Rosé never really went away, so how can it return? But the brand is rebooting, changing with the times, which gives us an an excuse to consider this iconic Portuguese wine and the Rosé wine category it helped create.

Wine Discovery Mode

Let’s zoom back five decades to an era when U.S. consumers were in Wine Discovery mode. What were they looking for? Well, many things, but as the 1971 Mateus Rosé commercial above suggest, one side of wine’s appeal was its exotic nature. Could wine really transport you to romantic places? Of course!

Mateus Rosé is an important part of the evolution of the wine world — so important that it has its own entry in the Oxford Companion to Wine. I included this humble wine in my book Around the World in Eighty Wines.  Pink, sweetish, slightly fizzy, Mateus was created by Fernando van Zeller Guedes in 1942, aimed initially at the Brazilian market, but its export domain soon reached around the world, including especially the U.S. and Great Britain.

Chilled in its distinctive dark bottle (shaped, it is said, like a WWI army flask), with the image of the Palace of Mateus prominently displayed, it was a a post-war phenomenon. I’ve read that it was a favorite of Queen Elizabeth. A quick internet search yields photos of rock legend Jimi Hendrix chugging a half-bottle of Mateus. It was at one point the best-selling imported wine in the U.S. market.

Still Crazy After All These Years

Mateus sold 3.5 million cases in 1978, accounting for an incredible 40% of Portuguese wine exports. Mateus dominated the market of that day the way that Yellow Tail ruled in the 2000s. Even now, when the global wine market Mateus helped create is crowded with big brands, it sells 20 million bottles a year in 120 markets. Still crazy popular after all these years.

for-new-prods-copyToday we are told that consumers want Rosé wines that are dry dry dry and pale pale pale. Classic Mateus didn’t fit that profile at all and yet the style still found an enthusiastic following. Maybe wine drinkers are more diverse in their tastes than popular opinion has it? A Portuguese friend tells me that he sneaks Mateus into blind tastings, where it surprises even professionals with its appeal.

Mars and Venus

The rebooted Mateus, branded Mateus Dry Rosé in the U.S., introduces this iconic wine to a new audience without ignoring consumers looking for a nostalgic experience. The label is silver now, with the Palace of Mateus much smaller. The packaging shows off the pink color. The bottle is clear with an elongated neck, which makes it a bit more elegant. If the old bottle was from Mars (think WWI army flask) the new bottle is from Venus, don’t you think?

Mateus Dry Rosé is made from Baga and Shiraz grapes (Baga is an indigenous Portuguese variety). It is dry according to the tech sheet — just 4 g/l of residual sugar — but fruity, so that first sip tasted sweeter to us than the rest of the glass. Sweetness is subjective, so you may find it drier or sweeter than we did.

50 Shades of Pink?

Will Mateus Dry Rosé dominate the marketplace the way the original did? No, that’s simply not possible. Too much competition — thousands and thousands of SKUs in the market these days. But it has the qualities that can make it a very successful wine brand.   The color may not be the pale pale pink we are told is best, but have you looked at the Rosé section of the wine wall recently?  As this photo (below) from a tasting of Loire Rosé wines suggests, there are many shades of pink on offer and different buyers will seek out different hues.

Rosé was a hot wine category going into the coronavirus crisis and if it is still hot as we exit lock down then the rebooted Mateus Dry Rosé is ready to take its place on the wine wall and in the hearts of pink wine drinkers.

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Sue notes that one of the great things about Mateus back in the day was that the empty bottle made an attractive candle-holder. Hey Boomers, what did you do with your empty Mateus bottles? Just FYI you can buy vintage bottles on EBay!

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Ten Under $10 Shelter-in-Place Wine Challenge

taber“American wine drinkers seem much less cost-conscious ” (than their British cousins) according to a recent column by Jancis Robinson on good wines for coronavirus lock down era.  There is truth in this, but it isn’t simply that Americans don’t care about cost. British supermarkets trained their customers to look for “3 for £10” bargains for wine and many other things. That’s something they now regret.

Many American wine drinkers learned the opposite lesson. Unsure why seemingly similar products are sold for wildly different prices, they act as if guided by the idea that higher price always means better quality. Many dismiss value wines as a category and stubbornly purchase more expensive bottles that they might not like as much.

This seems like a good time to challenge the myth that the only good wines are the expensive ones. Last month the Wine Economist opened the “Ten Under $10 Challenge.” Readers were invited to nominate widely-distributed wines retailing for less than $10 that they would recommend to others for shelter-in-place enjoyment.

The Challenge is inspired by New York Times wine columnist Eric Asimov’s column on “15 Wines under $15: Inexpensive Bottles for Stay-at-Home Drinking.”  Fifteen bucks is a good target, but given the dire economic news, many readers will want to step down a shelf on the wine wall. What can you do for $10?

Bargain Wine Resources

The search for really good $10 wine is not new and the undisputed expert on the topic is Jeff Siegel, who for many years has published the Wine Curmudgeon $10 Hall of Fame. Each year Jeff reviews the list, adding a few new wines and dropping a few off the list, often because of availability issues. You might want to consult the Hall of Fame the next time you go shopping for good wine at a good price.

George Taber’s 2011 book A Toast to Bargain Wine is an another good resource even if the passage of time necessarily leaves it a bit dated. I like that Taber includes two recommendation lists for each wine type: $10 and less ($15 for sparklers) and then “splurge” selections that are just a bit more. Taber drank a lot of mediocre wine so that you won’t have to. Take advantage of his sacrifice.

You can see the complete list of nominated wines by consulting the Comments list on the original column. You will find an amended list below. I added a few nominations that came in via email and social media and I deleted a couple of wines that, while clearly good value, seemed either to be limited distribution or the result of special discounts and therefore not what we were looking for here.

Who, What, Where?

There are several interesting things about the wines on the list. Many readers reported both what they paid for the wines and where they bought them. Does it surprise you to know that Trader Joe’s, Total Wine, and Costco were frequently cited? These are retailers that make an effort to provide moderate cost wines and so they attract shoppers looking for good value. Supply (of good value wine) creates its own demand, as Gresham would probably say.

Imports account for about a third of the wine sold in the U.S. market, but they make up a larger share of the reader list. Why? A complicated question, but one factor is that many of these value wines are made to be competitively priced in the domestic markets of the producers. And prices abroad, as travelers frequently observe, can be much lower than prices here in the U.S. As a result, many foreign producers have become experts at hitting the low price target.

Take the Casa Santos Lima Red Blend Portugal that I nominated last month. It sells for just $5.99 in my local Costco and has a very large and enthusiastic following. How can they do it? Well, the fact that Costco has a lower wine mark up than most other stores is one factor — Costco can afford to do this because their customers pay membership fees.

How Do They Do It?

But maybe a bigger factor is this. The supermarket wine space in Portugal is intensely competitive and very low prices — two or three euro per bottle! — are common.  Portuguese producers in these markets learn must keep costs down or they will quickly fail. Costs add up quickly when foreign producers navigate their way to U.S. retail shelves, so this very low initial cost base is important.

Can American wineries make good, inexpensive wine? Yes, of course. There are lots of examples both on the list and on your store shelves. I held my breath waiting for a Bogle nomination to come in, for example. They are one of the California producers that is known for a good quality-price proposition.

Same with the Chateau Ste Michelle Dry Riesling. I can sometimes buy this wine for less than $6 a bottle at the supermarket. A steal! I was at a Riesling Rendezvous blind tasting a few years ago that brought together Riesling producers from all over the map. When this wine and its price were revealed, the Ste Michelle winemaker received a standing ovation. The Chateau, as we call it hereabouts, is the world’s largest producer of Riesling wines.

The U.S. is in the value wine game, for sure, but there is no denying that the domestic market center of gravity has shifted up a shelf on the wine wall. So more attention is given to upscale wines. That said, don’t ignore the fact that the portfolio of winery assets that Gallo is in the process of purchasing from Constellation includes a number of value brands. Gallo has done very well indeed with Barefoot. It will be interesting to see what they do with these new brands once the M&A dust settles.

Finally, I was pleased to see some overlap between the reader nominations, Jeff Siegel’s Hall of Fame, and George Taber’s list.  It demonstrates both that consumers know what they are looking for in good value wine, but also that this is a vast space with thousands of choices. Something for everyone? Almost. Everyone has a friend of two or won’t consider drinking a lower cost wine. That leaves more for the rest of us!

Nominated Wine List

Ok, here’s the Ten under $10 reader list (apologies if I accidentally left off your nomination or had to edit it for the reasons cited above).

  • Angeline California Chardonnay
  • Barnard Griffin Rose of Sangiovese
  • Bellini Frascati
  • Bogle varietal wines
  • Caleo Salice Salentino
  • Cantine Colosi Biano Grillo Sicily Italy
  • Casa Santos Lima Red Blend Portugal
  • Chateau Ste Michelle Dry Riesling
  • Chopo Jumilla Monastrell
  • Clean Slate Mosel Riesling Germany
  • Danzante Red Blend (Tuscany)
  • Domaine du Mistral Plan de Dieu Rhone Rouge
  • Domaine St. George. (California)
  • Castilla Syrah 2018 Spain
  • Hedges CMS red blend, Columbia Valley
  • Jules Larose Blanc de Blancs Brut Sparkling Wine France
  • Kia Ora Marlborough Sauvignon Blanc
  • Kirkland Signature Malbec
  • Kirkland Signature Marlborough Sauvignon Blanc
  • La Nervera Blanco 3L BIB
  • Les Parcelles Marc Dupas Loire Sauvignon Blanc
  • Lindeman’s Bin series
  • Magic Box Red Blend Spain
  • Mascota Vineyards Rose
  • Martin’s Pick Up Australia Cabernet Sauvignon
  • Mas Fi Cava
  • Matua Sauvignon Blanc, Marlborough
  • McManis Family Vineyards Petite Sirah
  • Monte Antico Toscana Rosso
  • Mont Gravet Carignon Vieilles Vigne France
  • Mont Gravet Cotes de Gascogne Rose France
  • Quinta do Gradil, Mula Velha Riserva (Portugal)
  • Oxford Landing, Australia.
  • Penfolds Koonunga Hill Shiraz-Cabernet
  • Saladini Pilastri Pecorino from Offida DOC
  • San Gregorio Single Vineyard Las Martas Garnacha
  • Sauvignon Republic Sauvignon Blanc, New Zealand
  • Trader Joe’s Pinot Grigio 3L BIB
  • Trader Joe’s reserve Cabernet Sauvignon Columbia Valley
  • Trapiche Broquel Malbec
  • Upper Left Cabernet, Columbia Valley
  • Vaga del Oragon gran reserva
  • Vina Falernia Pedro Ximenez Elqui Valley, Chile
  • Yalumba Y-series Viognier

The Envelope, Please …

So what wines are on the Ten under $10 list? Well, wine is very personal, so I think each of us will have our own list based on individual tastes and local distribution and pricing limitations. I invite you to name your own winners. In this spirit, here is The Wine Economist personal list to get the ball rolling.

  • Barnard Griffin Rose of Sangiovese
  • Casa Santos Lima Red Blend Portugal
  • Chateau Ste Michelle Dry Riesling
  • Clean Slate Mosel Riesling Germany
  • Kirkland Signature Marlborough Sauvignon Blanc
  • Matua Sauvignon Blanc, Marlborough
  • McManis Family Vineyards Petite Sirah (or the Viognier!)
  • Monte Antico Toscana Rosso
  • Yalumba Y-series Viognier
  • TBA

Wait, that’s only nine wines. I thought this was Ten under $10. Well, to be honest, I just can’t make up my mind. I guess I’ll just have to open a few more bottles — and the list gives me lots of options to explore and I think that’s the point. I hope you will experiment, too, and that you have found this exercise informative and that it will inspire you to enjoy the good values that the wine world offers us all.

The Origins of the California Cabernet Bubble

Jeff Bitter emoji urging grapes growers to pull out vinesCalifornia’s Cabernet Glut Deepens” is the title of W. Blake Gray’s recent Wine-Searcher column, reporting on the Vineyard Economics Symposium discussion of current market trends. It makes good reading, with its useful mixture of threatening dark clouds and potential silver linings.

California (and Washington, too) was over-supplied with wine in tanks and vines in the ground before the coronavirus crisis hit. The lock-down booze-buying surge in March and April made a dent in the wine lake (a net increase in U.S. sales after considering lost on-trade sales). But there is concern that overall sales will fall once the second shoe drops and the impact of the recession is fully felt despite the eventual return of bar and restaurant activity.

Cabernet was the focus of a boom because it is the most popular red wine variety and can sell for a premium, especially in the Napa Valley.  It seemed like it was impossible to go wrong planting a few more acres of Cabernet, so plant we did. Economists see moral hazard in situations like this. Moral hazard is the notion that if you don’t think that an otherwise risky bet can fail, you will take more risk and make bigger bets.

Gray reports that there are rising bulk wine surpluses and falling prices. That sure thing turned out to be a fallacy of composition. What was true for an individual grower (profitable to plant more acres of Cab so long as everyone else holds steady) was not true when everyone planted more Cab. No wonder Allied Grape Growers President Jeff Bitter (that’s Jeff in the cartoon image above) told growers at this year’s Unified Wine & Grape Symposium meetings that it is time to pull out marginal vines.

But the fallacy of composition can apply to grubbing up, too. If everyone else is going to pull out Cab vines, the logic goes, then I’m better off keeping mine in the ground. But if no one pulls vines, the bust gets deeper. Fortunately there is evidence that some vines are coming out. But, as Gray’s report suggests, the problem persists.

Agricultural markets (and sometimes financial markets, too) go through cycles of boom and bust. The Turrentine Wine Wheel of Fortune captures very well the cycles in wine. People are often surprised  by the cycles because moral hazard or the fallacy of composition blinds them to the evidence that was always hidden in plain sight.

With this is mind we re-print below two Wine Economist columns,  a nervous report on the emerging Cabernet boom (August 2018)  and suggestions (some a bit tongue-in-cheek) about what to do with surplus Cabernet grapes (July 2019).

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The Cabernet Boom and Its Discontents

August 2018

What winegrape variety comes to mind when I say “Napa Valley …”? There are lots of possibilities. Chardonnay. Merlot. Sauvignon Blanc, of course! Hey, Larkmead makes a tasty Tocai Friuliano.

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But I’ll bet that your “fill in the blank” answer was Cabernet Sauvignon and there are several good reasons for this. Cabernet is a noble grape and many of the world’s great wines are made from it or with it. American consumers are in love with this winegrape variety. Cabernet Sauvignon has recently overtaken Chardonnay as America’s #1 favorite.

Cabernet is #1

According to recent Nielsen data taken from the August 2018 issue of Wine Business Monthly, sales of Cab wines totaled more than $201 million in the most recent 4-week period, up 3.9% from the previous year. That compares with $190 million and 0.5% growth for Chardonnay, which has for years topped the league table.  Next in line but far behind, is Pinot Gris/Grigio ($96 million / 1.3% growth) and Pinot Noir ($82 million / 2.6%). The fastest-growing category is Rosé, as you might have guessed, with 67% growth on a relatively small $22 million sales base.

Consumers love Cabernet Sauvignon and growers love it, too, because they see it as a potential solution to the their financial squeeze. The costs of land, labor, equipment, and supplies keep rising, but the prices of many grape varieties have been stagnant, putting pressure on profits and, in some cases, generating rivers of red ink.

The Cabernet grape price premium can be substantial according to the 2017 California Grape Crush Report. Cabernet grapes fetched $700 per ton on average in Lodi, for example, compared with $552 for Merlot and Chardonnay. A ton of Cabernet sold for $2209 on average in Mendocino county, $2352 in Lake Country, and about $3000 in Sonoma County.

Premium Prices

Napa county topped the list with an average Cab price of $7,421 per ton. That average translates into a $70+ bottle price using the one-percent rule of thumb. And that’s the average. The very best Napa Cab grapes from exceptional sites sold for $10,000 per ton and more. Lesser Cab grapes sold for less, of course, but still generally for more than other grape varieties. Cab Rules.

And it’s not just a California thing. Cabernet is now the most-planted winegrape variety in Washington state, too, with 62,200 tons harvested in 2017 compated with #2 Chardonnay’s 39,300 tons.  The overall average price of Washington winegrapes was $1200 per ton, with Cabernet selling at a significant premium at $1500-$1600 per ton.

No wonder more and more Cabernet is being planted wherever it might possibly grow successfully. Jeff Bitter, recently appointed President of Allied Grape Growers, presented the results of the 2017 California Nursery Report at the Unified Wine & Grape Symposium meetings in January. Bottom line: Cabernet is big and getting bigger.

The Nursery Report provides insights about what grape varieties are being planted or grafted, which foretells shifts in winegrape production a few years from now when the vines are productive. The 2017 report showed that 72% of new vines were red varieties with only 28% white. Cabernet vines accounted for an incredible 37.4% of all new vines followed by 19.5% for Pinot Noir and 16.7% for Chardonnay.

Cab Pipeline is Full

If you combine Cabernet with other varieties that are often blended with it (such as Merlot, Malbec, Cabernet Franc, and Petit Verdot), they account for over 42 percent of all new California vines. I am not sure what the composition is of the vines they may have replaced, but I suspect the disproportionate emphasis on Cab and Cab blending grapes represents a significant net increase in future production.

Cabernet’s dominance is noteworthy, but the upward trend in Cab plantings is part of the long term trend that Benjamin Lewin MW described in his 2013 book Claret & Cabs: The Story of Cabernet Sauvignon. Zinfandel, not Cabernet, was the most-planted winegrape variety in the Napa Valley in the decades following Prohibition.

Zin was thought to  make the best Claret, according to Lewin, which of course is interesting because Claret is the name the British gave to Cab- and Merlot-based Bordeaux wines. Ridge made a “Claret”  in 1981, for example, from Zinfandel, Petite Sirah and Carignan and I’ll bet it was delicious!claret

Cabernet Sauvignon was a minor player on Napa’s wine scene, Lewin notes, although it made some historic wines including the great Beringer Cabs of the 1930s and the Beaulieu Georges de Latour Private Reserve wines that André Tchelistcheff made between 1938 and 1973.

The Napa Cab boom really picked up speed in the 1970s as new quality-driven wineries (think Robert Mondavi) focused on Cabernet. The Judgement of Paris in 1976 put Napa Cab firmly on the wine world’s radar.

No wonder new investment flooded into Napa Valley and Cabernet plantings expanded rapidly, both in Napa and California generally. Now the steady rise has accelerated, taking on some boom-time characteristics. The cycle of higher Cab prices, higher vineyard valuations, and increased Cabernet plantings continues.

Stein’s Law

Cycles and booms are a common characteristic of agricultural and financial markets, both of which I have studied. There are two things I have learned about the booms. First, they are driven by internal logic that seems bullet-proof from inside the cycle.  People (like me) who try to call turns often end up looking like Chicken Little fools. So don’t expect me to forecast a Cabernet bust!

The other thing I have learned is that Stein’s Law always applies in the long run. Named for the famous economist Herb Stein, Stein’s Law is says that if something cannot go on forever … it will end. And I think that Cabernet prices cannot go on going up forever (especially with new plantings on the rise) any more than housing prices could defy gravity forever a dozen years ago, no matter how how much rising prices might seem baked in the cake at any particular moment.

That doesn’t mean that the boom must inevitably be followed by a bust — there are many possible adjustment patterns as Kym Anderson’s analysis of Australia’s winegrape cycles shows. In the meantime, Cabernet is crowding out other grape varieties, including those Zinfandel vines that were once the pride of Napa Valley winemakers. That’s where we are going in the next column.

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The Boom Varietal image above comes from a 2011 Sky Pinnick documentary of the same name about Malbec, which is sort of the Cabernet Sauvignon of Argentina. I was pleased to be part of the cast for this award-winning film. The film talks about the rise of Malbec in Argentina and the understandable concern that the boom could go bust (Argentina has a history of boom and bust).

 

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Six Things to Do with Surplus Cabernet Sauvignon Grapes

July 2019

The wine grape harvest is just around the corner in California and Washington State and, while that’s a great time of the year, it will present economic challenges to some winegrowers. There’s going to be an awful lot of Cabernet Sauvignon harvested this year. Most of these grapes are contracted, but some will be looking for buyers and it might not be so easy.

Cabernet has been the top choice for new plantings for the last several years and it is easy to understand why. It is a noble grape and can make terrific wine. Consumers love it, so growers have responded enthusiastically. The problem, as has been noted here before, is that wine demand generally has slackened just as new supply is reaching the market. For a few years at least there is likely to be a surplus of Cabernet Sauvignon in many regions.

In fact, the surplus is already here, or at least that’s how I read the recent reports from Turrentine Brokerage. Turrentine data show the highest level of Cabernet on the bulk market for many years. Add the 2019 harvest to the current market and you have a problem — not for everyone, but for those who are left with unsold grapes or wine.

Econ 101 Meets Yao Ming

What do you do when you have too much Cabernet? Econ 101 suggests price adjustment — cheaper grapes, cheaper wine, and so on. But there are limits to this strategy, especially since the lower price tiers of the retail market are in decline.

Export sales are another Econ 101 solution and certainly there is an opportunity here, especially if President Trump succeeds in talking the dollar’s exchange value down. But the president’s trade wars have had an offsetting impact on wine exports.

Countries that compete with us in the export markets, notably Australia and Chile, have aggressively sought out free trade agreements to boost sales. The U.S. has recently taken the opposite strategy. U.S. wines are therefore a tough sale today in many export markets including especially China, where Australian and Chilean wines find great success.

Yao Ming, the Chinese basketball legend, has trouble selling his signature Napa Cab back home because of 93% tariffs imposed in response to the Trump administration’s policies. If Yao can’t sell Cab in China, there is not much hope for the rest of us. Export markets are unlikely to absorb very much of the surplus Cab. Other options?

Searching for alternatives, I consulted the most recent Nielsen market figures in the current issue of Wine Business Monthly and found a few ideas to consider if you find yourself holding excess Cabernet this year.

#6 Two Words: Red Blends

Red blends are a useful market category because you can blend away unfashionable or surplus grape varieties without consumers necessarily noticing what’s up. Syrah and Merlot are not as popular as they once were as varietal wines, for example, but blend them together, call the result a Red Blend, and consumers snap them up. Cabernet blends would be very competitive at the right price. This market segment is fairly large but, unfortunately according to the Nielsen data, its growth has stalled a bit this year. That means we need to think about …

#5 Three Words: Sweet Red Blends

See “Red Blends” above but add some residual sugar.  I don’t have a lot of personal experience with these wines, but I see them everywhere. 19 Crimes, which tastes sweet to me, has a successful varietal Cabernet Sauvignon, so this is not uncharted territory. Even better, why not try …

#4 Rosé of Cabernet

Rosé is the fastest growing market segment in the Nielsen table. A lot of that Rosé comes from France, to be sure, but the market is large and fluid.  Picked at the right time, Cabernet makes a nice Rosé and in fact there are a great many produced both here in the U.S. and around the world.

As I noted here earlier this year, there are tricks to the Rosé trade to consider. Rosé is not that easy to make, since color is a concern, and can be tricky to sell because consumers prefer the most recent vintage and demand seasonality is a factor, too. If you like the idea of Rosé of Cabernet, then I think you will also like …

#3 Sparkling Rosé of Cabernet 

Take two fast-growing categories — sparkling and Rosé — make the wines from Cabernet  and you are ready to go. The only thing that could be better is …

#2 Canned Sparkling Rosé of Cabernet 

… because canned wine is also a thing (watch for a report here in the near future) and it is growing fast. Have you seen all the new canned wine displays in the supermarkets? Don’t dismiss canned wine too quickly.

Canned sparkling Rosé of Cabernet leverages three hot trends to use up your excess Cab. It is a perfect storm of wine. What could be better? And while you have the mobile canning equipment hooked up, you might consider …

#1 Canned Sparkling Cabernet + Black Currant Spritz

Seriously!

I am paying more attention to the canned wine displays and one thing I note is that canned wine spritz is generally right beside the other canned wines. These seem generally to be mixtures of wine, fruit flavors, and carbonated water. They sound refreshing and they have less than half the alcohol of regular wine. A Cabernet and Black Currant spritz sounds drinkable to me on a hot day, but you might prefer blackberry or some other fruit flavor.

Since the consumer segment that is interested in low alcohol products is growing, I can see how this trend might persist.  Something to consider.

Seems Like a Stretch?

Bottom line. The U.S. industry is going to need to find uses for its  excess Cabernet Sauvignon if the potential surplus materializes. These examples are ways to take advantage of the small number of growing wine market segments. If it seems like getting Cab products into these segments is a stretch, then it shows how much more pressure there will be on the traditional product markets.

I hope the market can absorb all the Cabernet that’s coming its way. Fingers crossed.

Wine, Coronavirus & Recession Podcast

covid19COVID-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.

Global Wine Impacts of Coronavirus Crisis & Recession: OIV Update

pauThe 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.

oivAn 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.

 

Wine Industry Consolidation & the Big “W” Recession Threat

bigw-9In 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.

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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.”

 

Wine Economist 10 Under $10 Challenge: Nominations Open

redblendLast week New York Times wine columnist Eric Asimov published a list of “15 Wines under $15: Inexpensive Bottles for Stay-at-Home Drinking.”  It’s always fun and interesting to go through Asimov’s price-constrained wine lists (he often features 20 under $20 wines) and this one got me thinking about wine and coronavirus recession drinking.

Fifteen dollars is a good limit to consider — some wine critics have suggested that $15-$20 is the current “sweet spot” for everyday wines. But, in the spirit of hard times, why not step down just a little more in price and see what we can find?

Good Wines at Good Prices

And so I am soliciting nominations (use the comments section below) for a list of 10 wines under $10. Do you have a favorite wine in this price range? If so, tell us what it is, how much it costs, where you bought it, and why you like it. Sue and I will use some of our shelter-in-place time to vet the list to be published in an upcoming column. Nominations (one per reader) close at the end of April, so you have a couple of weeks to work on this. Drink up!

There are only two rules. First, the wine must be generally available here in the US market, which means basically we are looking at supermarket wines or their equivalent.  And, second, the regular price needs to be $9.99 or less. Close-out prices are sweet, but that’s a different story. Unfortunately, I think this rules out Grocery Outlet purchases from the final list, although I don’t object to hearing from you if you have a close-out favorite you’d like to share.

A Tuesday Night Wine

Just to get the ball rolling, I will nominate  Red Blend Portugal by Casa Santos Lima, which we bought at Costco for $5.99 a bottle. It is a juicy red blend that’s dry with just enough tannin. We drank up a case of it lightly chilled with barbecue over the summer  last year and we recently had it again during lock down with hearty ham and bean soup from the freezer.  It is a simple wine meant to drink, not something to philosophize over or lay down for the future — an example of what Sue calls a Tuesday night wine.

data

There’s another reason to think seriously about less expensive wines right now. As recent Wine Economist columns have explained, the global economy has slipped into a recession that is likely to be more severe than the global financial crisis of a dozen years ago. Short term growth forecasts (see table) released last week by the Economist Intelligence Unit paint a dismal picture of global economic conditions through the middle of 2020.

Income and wealth have already fallen dramatically in many parts of the world and unemployment has surged. More than 17 million ex-workers have applied for unemployment benefits in the U.S. in the last three weeks alone. Trading down to good wine at a lower price is not a ridiculous thing to consider in these circumstances.

We will be interested to see your nominations and perhaps to compare them with Asimov’s slightly more upmarket list. There’s a big difference between $10 and $15 in today’s wine market. Sales of wines in the $12 – $15 price range have been growing strong over the last couple of years (and not just during the recent stock-up surge) while sales of bottled wines in every segment below $10 have been falling.

The Big Squeeze

Why are cheaper wines in a slump? There are lots of explanations, but some of my industry friends privately tell me they think  that quality is a factor. Production costs keep increasing, they say, but consumers resist attempts to raise price. Something has to give in the cost-price squeeze and, in some cases corners are cut to preserve margins.

I don’t know how generally this is true, but the 10 under $10 challenge is an opportunity to see how much quality there is at this price point. And it will be kinda fun to see what wines people suggest.

Thanks in advance for nominating wines for the Wine Economist 10 under $10 challenge. Stay well. Be safe.

Wine & the Coronavirus Recession: Shaping Up the Prospects for Recovery

 

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?

20200404_cuk1280Silver 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.

Coronavirus & Wine: Market Impacts Beyond the Recession

recessionMost 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, Recession & the Curse of the Unknown Unknowns

 

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.20200321_cuk1280

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.