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.

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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.

Wine, Recession, and Coronavirus: This Time is Different?

94528e9a-5845-4871-bef5-3285eca66dd5Last 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?

cavatappiMeanwhile, 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.

cwinePast 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.

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About that bottle of “Coronavinus” wine shown above.  Apparently it is real. I found it on a Spanish website selling for €19.

Wine & Coronavirus: Assessing the Risks

virusConcern about the health impacts and economic effects of the novel coronavirus continues to grow. Although the health impacts are obviously most important, since lives are at risk, it is natural to also be concerned about how this potential pandemic might affect the global economy in general and the wine industry in particular.

I have been following the situation closely focusing for personal reasons on the U.S. (we live about 40 miles from the coronavirus infection epicenter near Seattle) and northern Italy (we lived in Bologna when I taught at the Johns Hopkins center there).

The Italian experience so far is noteworthy: some whole towns were initially locked down to contain the virus or slow its transmission, all schools and universities closed as a precautionary measure, and scenes of empty piazzas and tourist thoroughfares in Venice and Milan. Large areas of northern Italy, including Lombardy and its capital Milan, were later put under quarantine, which has now been extended to the whole country.

Closer to home, some schools and colleges, including the University of Washington campuses, have canceled physical classes in favor of on-line instruction. Several major employers, including Amazon, are encouraging workers to tele-commute if possible. Concern is likely to rise as additional testing kits arrive and the true picture of the epidemic emerges.

I’ve also been making some notes on wine and the coronavirus in order to try to think more clearly about the potential economic risks to the industry. I thought I would share them here even though they are necessarily incomplete and change daily — just like everything else about the coronavirus.

Here is a quick analysis of several areas of concern, starting with the most general and then narrowing. Use the comments section below to point out issues I have neglected or gotten wrong.

Recession Risk

Japan, Italy, and Germany were already teetering on the edge of recessions before the coronavirus outbreak, so it is not unreasonable to think that they will be sucked into economic downturn, potentially taking other countries with them through the sort of economic contagion that face masks and hand sanitizer are powerless to control.  This is a serious problem since there are also worries about slowing economic growth in China,  the United States, and the United Kingdom. Chinese exports were down 17% due to supply-side factors for the most recent period, which bodes ill for their economic situation.

Central banks have pledged to counter the economic impacts of coronavirus although they have so far stopped short of pledging coordinated action, which would be most effective. The U.S. Federal Reserve cut its key interest rate target by a half percentage point last week, but the financial market response was weak in part because this action had already been factored into investor expectations according to some observers. In any case interest rates are a blunt tool when faced with a specific problem such as coronavirus.

With interest rates already so low (and in some cases negative), the concern is that preemptive central bank strikes against coronavirus will use up all the ammunition left to deal with recession and economic contagion. The risk of a global recession, probably smaller than the global financial crisis of a decade ago and certainly different from it, is thus magnified by coronavirus.

The possibility of a recession with its impacts on income and employment both broadly and in the wine industry is thus a very serious concern. Recession risk: medium to high and probably rising.

Supply Chain Disruption

One impact of coronavirus has been to make us more aware of the inherent risks in international and global supply chains and associated just-in-time production strategies. Bottlenecks anywhere along the chain can potentially impact final production.

Some factories in China were either closed because of the coronavirus threat or slow to re-open after the Lunar New Year holiday, which has created parts shortages and headaches in many industries as well as reducing international trade flows. International shipping schedules and container availability have both been disrupted on some routes.

Wine is certainly affected by supply chain issues related to the coronavirus, although not as much as some other industries such as automobiles and electronics. Glass imports from China are one important concern and I am sure there are others.  Wine exports, which are of growing importance because of the domestic surplus, may also be disrupted.

How have supply chain issues affected your wine business? Please leave comments below. Current events seem likely to cause many firms to reconsider their supply chain strategies, shifting closer to home in some cases and relying less on “just in time” supplies in others.

Supply chain disruption risk: significant and rising as the virus spreads.

Travel and Tourism

Travel and tourism are down dramatically in many regions as people avoid airports and crowded situations in general where contagion might take place.  Soccer matches have been cancelled or postponed in Italy, for example, and a few games played to empty stadiums.  It is unclear how this summer’s Olympic Games in Japan might be affected.

Wine tourism is likely to be a victim of the general decline in domestic and international travel, although it is too soon to guess how great the impact will be on tasting room visits and sales. Direct sales to visitors have become a very important economic factor for  many U.S. wineries, so any decrease in wine-related travel would be important.

Airlines and cruise ships are also good wine markets for those who can secure their business and the sudden decline in flying and interest in cruising will necessarily affect those sales, too, as well as threaten the financial health of the air and cruise businesses themselves.

Business travel is affected along with vacation trips. Several large international wine gatherings have been canceled or postponed including ProWien in Germany, for example, and Taste Washington here in the U.S. Many people are asking themselves “is this trip really necessary?” when health risks are involved. The cancelled meetings are expensive both in terms of direct costs and potential lost business. The impacts continue to spread.

Travel- and tourism-related risks: High.

On-Trade and Off-Trade Impacts

China is one of the most important wine markets, especially for French and Australian wineries, and its wine demand has fallen significantly in recent weeks according to early reports as consumers have hesitated to gather in restaurants and other venues out of concern for the coronavirus. How long this situation will last and how much wine demand will rebound when the health scare has passed are open questions.

Restaurant wine sales are important outside China, too, of course, and so this is an important market to watch. News reports suggest that those who are concerned about contagion sometimes turn to home delivery of meals or groceries in order to avoid crowds. This is not advantageous for wine sales in many areas, including the U.S., where wine under-performs in home delivery sales relative to other products.

Wine market risks: Significant with a good deal of uncertainty.

The Bottom Line

The bottom line so far is that the coronavirus has many effects that are detrimental to the economy in general and the economy of wine in particular. Anyone in the wine business would be wise to ask themselves a series of questions that starts with “how well prepared is my company for a recession?” and continues down the list to supply chain disruptions, swings in consumer demand, altered trade patterns, tasting room strategies and policies, and so on. It is already too late to anticipate some impacts, but not too soon to think through others.

That said, the most important questions are probably the ones I haven’t asked here. The research I did in my other life as an international economics professor probing financial crises suggests that contagion doesn’t always stay in its lane.

We saw this on Monday when coronavirus-driven falling demand for petroleum sparked a price war that drove oil prices down dramatically. Some oil investors dumped equity holdings to cover their oil losses, sparking a global sell-off there, too. Corporate junk bonds — and there is a mountain of them out there — could be next in line. If they start to fall central banks will need all the resources they can muster to keep liquidity flowing.

Book Review: What Can Wine and Coffee Learn from Each Other?

51wdqn2bcpyl._sx324_bo1204203200_Morten Scholer, Coffee and Wine: Two Worlds Compared. Matador/Troubador, 2018.

What can the coffee industry learn from wine (and vice versa)? That’s the question that Morten Scholer wanted to examine when he set out to write Coffee and Wine: Two Worlds Compared. It is the kind of question that gets attention here at The Wine Economist, where we search for lessons about the future of wine by looking at all sorts of other products ranging from craft beer to almond milk and beyond.

Coffee and wine are an interesting pairing. Both are global consumer goods, traded around the world for centuries. But, as Scholer points out, they differ in a hundred ways. Coffee, for example, is relatively young as an international commodity — 800 years compared to maybe 8000 years for wine.

North-North versus North-South

The most important markets for both coffee and wine are in the advanced industrialized world, as you might guess, but while a lot of wine is also produced there (Italy, France, Spain, Germany, the U.S.), coffee comes mainly from the developing world. Wine trade is thus mainly north-north (with important exceptions such as Argentina and South Africa), while coffee trade tends to be north-south.

So what can wine and coffee learn from each other? Scholer probably knows, but he wants his readers to find their own answers, which is both frustrating and engaging.  It is frustrating because it is natural to seek out an over-arching narrative to help organize and guide the reader through the dozens and dozens of topics covered. You won’t find that here.

Serious Fun

Some of the comparisons are just plain fun, as in the chapter on quality and quality control when the wine aroma wheel is set alongside a coffee tasters flavor wheel. Who knew that flavors and aromas could be so complicated and that coffee and wine could have so many sensory qualities in common?

Other comparisons are seriously revealing. I found the comparative analysis of the development of sustainability movements in coffee and wine very interesting.  Sustainability in coffee began as a top-down movement initially focused on assuring that growers received a fair return on their efforts, although a wider range of concerns are now addressed. Sustainability in wine, on the other hand, was a bottom-up movement based on grower concerns about environmental issues that has also broadened.

There are three main global sustainability programs for coffee, Scholer tells us, and almost half of world production meets these standards, although only about a third is marketed that way. In wine there are many different sustainability standards and programs reflecting the localized bottom-up origins of the movement. It is a complicated situation, Scholer argues, and he believes that sustainability standards for coffee are more complex than for wine in part because coffee has a long and complex value chain and meaningful sustainability must extend across the entire chain. Market structure really matters.

Everything You Ever Wanted to Know?

Scholer’s eleven chapters take pretty much every aspect of wine and coffee and then breaks them down into comparative elements. Thus the reader moves from history to botany and agronomy, processing and quality control, patterns of trade, packaging and logistics, consumption patterns, sustainability issues, organizations and competitiions, cultural values, and finally a country-by-country side-by-side snapshort. An appendix briefly expands the book’s domain, adding cocoa, tea, and beer to the comparative mix.

Each section is peppered by boxes, charts and tables and illuminated with maps. If you are just looking for interesting tidbits, they are there on every page. Hard to put the book down.

Back to the Big Picture

But if you are looking for the answer to that big question about what wine and coffee have to say to each other, more effort is required. Scholer’s method is a bit like pointilist painting, where the image only becomes clear when you stand back a ways. What’s the big picture? Honestly, I am still working on it. Maybe one big macro answer doesn’t exist and that the insights are best appreciated at the micro level.

But I think it’s worth the effort to think about coffee and wine seriously. I tried to do that in a pair of Wine Economist columns back in 2009. My focus then was on the question of why the price difference between the cheapest and most expensive wines was so much greater than for the cheapest and costliest coffees. Wine does better than coffee in spanning the space from everyday commodity to luxury product. But, I wrote then, coffee will try to catch up and I think that’s happening today.

Scholer’s Coffee and Wine is an intriguing book. You can try to solve its riddle or just enjoy learning all about these two global industries. Either way, there’s food (and drink) for thought.

Sometimes the Best Wine is a (Non-Alcoholic) Beer

win“Sometimes the best wine is a beer” is the title of a chapter in my book Money, Taste, and Wine: It’s Complicated. The chapter begins with a situtation that most wine drinkers have experienced. Stranded at a charity reception with only tasteless donated wine to drink, I long for the craft beer that others seem to be enjoying so much.

At really low price points (and sometimes at higher price levels, too), I am afraid that the best wine probably is a beer, at least if you care what you’re drinking.

Recently I’ve had an opportunity to explore another situation where wine fares poorly compared to beer: when you need to avoid alcohol for one reason or another.

Non-alcoholic wines are available but they are not really much of a thing here in the U.S. — at least not yet — although they are getting more attention in Europe. Sue and I learned about Matarromera Group’s innovative “Win” alcohol-free wines during our visit to Spain, for example. Matarrommera sees potential in the non-alcohlic wine market and has made significant investment in production and marketing.

Non-alcoholic wine is a narrow category here in the U.S. I am not sure I would even think to ask for non-alcoholic wine at a bar or restaurant. On-trade people — what is your experience? Do customers request non-alcoholic wine?

Non-Alcoholic Choices Everywhere

But beer is another matter. Every bar and restaurant I surveyed during my dry week offered a non-alcoholic beer option — most at the 0.5 % abv level that qualifies as non-alcoholic (that’s about the same abv as orange juice, for example). And some had 0.0 % options, too. A Whole Foods store we visited had seven different choices, including two 0.0% options.

What did they taste like? Well, the first non-alcoholic beer I tried was an old school O’Douls and it was just like I remembered it. No offense, but I’d rather drink warm tap water.

But at dinner at a French restaurant one night and then an Italian place the next night I was introduced to a couple of German import brands and they were terrific, with the aroma, body and flavor of real beer.  I guess the Germans take beer seriously and that attention extends to non-alcholic products.

beer

I really didn’t miss the alcohol and I appreciated the fact that, because they were priced like bottles of beer, these products were considerably less expensive than many of the by-the-glass wine offerings.

Hey Gallo!

I’d still rather have the wine, but I didn’t suffer with the non-alcoholic beers. It is clear that that the non-alcohol  beverage market is growing and that some producers are making significant investments in both product development and marketing.

Is there space for a decent non-alcoholic wine in a single-serve container? Yes, I think so. But someone’s going to have to make the investment to establish the market. Hey, Gallo — why don’t you give this a try? You are already expanding your Barefoot brand to include hard selzer in cans.  Why not take the next step with a non-alcoholic wine in a single serve can? Barefoot 0.0!

As the week was ending I found an affordable six-pack of Clausthaler Dry Hopped non-alcholic beer imported from Germany. Complex with a rich nose, amber-colored, made with Cascade hops, it seems ideal for a craft beer consumer who wants or needs to avoid alcohol.

And the perfect choice for those times when the best wine is an alcohol-free beer.

Liquid Assets Podcast: Can U.S. Wine Win Back Its Mojo?

268x0w“Can U.S. Wine Win Back Its Mojo?” That’s the title of the lastest Rabobank Liquid Assets podcast, which I recorded along with  Rabobank’s Global Strategist Stephen Rannekleiv and Analyst Bourcard Nesin in Sacramento during the annual Unified Wine & Grape Symposium meetings earlier this month.

The mojo question was at the front of our minds because earlier that day the speakers at the State of the Industry session had painted a complicated picture of American wine’s prospects. There are still opportunties in the U.S. market (the rumors of wine’s death are exaggerated, I said in my presentaiton, paraphrasing Mark Twain), but there are undeniable problems, too.

The best guess is that 200,000 tons of wine grapes were left on the vines in California in 2019 for lack of buyers. Perhaps 30,000 acres of wine grapes need to be taken out of production to balance demand and supply. So it is no surprise that our discussion centered on ways to boost demand and therefore lesson the supply-side pain.

The podcast is fast-paced and raises interesting points about the potential for wine exports (my contribution to the discussion), the need for increased attention to e-commerce sales (Bourcard’s point) and Stephen’s analysis of the challenges of building brands for a changing market environment.

Interested? Follow this link to “Can U.S. Wine Win Back Its Mojo?”

Wine Book Review: Adventures on the China Wine Trail

chinaCynthia Howson & Pierre Ly, Adventures on the China Wine Trail: How Farmers, Local Governments, Teachers, and Entrepreneurs Are Rocking the Wine World. (Rowman & Littlefield, 2020).

I remember my first taste of Chinese wine very well. My university student Brian brought a bottle of 1999 Changyu Cabernet Sauvignon back from his study abroad semester in Beijing. It didn’t really taste much like Cabernet, but it was the smell that really got me. “Ashtray, coffee grounds, urinal crust” was the tasting note I found on the internet. Exactly. Quite an experience.

The second taste was not much better. Matt, another student, found a case of Dragon’s Hollow Riesling in a Grocery Outlet store in McMinneville, Oregon. He gave me a couple of bottles that I tried (but failed) to serve at a student tasting. The smell (something rotten?) got in the way of tasting and the wine went down the drain.

I learned two things from these tastings. First, maybe my students were out to kill me! And second, Chinese wine had a long way to go.

And a long way it has come, too, in only a few years. That’s one of the messages of Cynthia Howson’s and Pierre Ly’s fast-paced new book, Adventures on the China Wine Trail. Howson and Ly, partners in life as well as wine research, might have been initially attracted to Chinese wine by its peculiar taste and unexpected existence. But as they have immersed (I nearly said marinated) themselves in the wine, the people, the geography, and the culture they have discovered so much more, which they enthusiastically share with their readers.

Adventures on the China Wine Trail works on many levels. It is in part the record of the authors’ personal journeys and it is interesting to travel with them as they lug their seemingly-bottomless wine suitcase from place to place. The authors have an amazing mastery of the detail of the people and places, food and wine. It’s almost like being there.

In fact, the book works as a travel guide as well wine journey account, providing information of where to go, what to do, where to stay, and so on. But beware: Howson and Ly aren’t your typical tourists, so while they do take us on a walk along part of the Great Wall, this is only because they took part in a wine conference quite close by. They still haven’t seen the famous Terracotta soldiers despite spending time in that region.  They couldn’t pull themselves away from the wineries. Maybe next time, they sigh.

More practical advice appears in the closing chapters. Where should you go to buy or drink excellent Chinese wine if you visit China? They have recommendations for you. And when will you be able to enjoy Chinese wines (good ones, not the drain-cleaner stuff) at home? Sooner than you think, they say.

Some of the wines are already here, including the $300 Ao Yun that Pierre bought at a Total Wine in Washington State. But that is just the iceberg’s tip and if you are reading this in London or Paris you may know that Chinese wines are no longer the shocking discovery that they were just a few years ago.

And how are the wines? They vary in quality, just like wines from any place else. But many of them (more each year) are excellent and even distinctive. I know this both because Howson and Ly tell us about the wines and also because Sue and I have been fortunate to share some of their Chinese finds — including that luxury Ao Yun.

There’s a final layer to the story that I can’t forget. Howson and Ly are both professors and serious scholars. Although the book doesn’t read like an academic treatise, it has a serious purpose. The authors began their study of the Chinese wine industry wondering where it might lead? Could wine possibly be the basis of sustainable rural economic development? Or was it an alcoholic dead end in terms of a greater purpose?

Chinese wine’s journey has been anything but simple or smooth and continues today. It will be a long time, I suspect, before we know for sure how the story will end. But as for economic development, Howson and Ly have overcome their doubts. Wine in China is the real deal, whatever specific shape it takes in the future. All the hard work of the farmers, government officials, teachers and entrepreneurs we meet in the book has succceeded in building a viable industry.

So here’s my tasting note:  Adventures on the China Wine Trail is a fast-paced journey through the world of Chinese wines that will appeal to readers who love wine, China,  travel, or who just looking a good adventure yarn. Highly recommended.