What is going to happen to the value of the U.S. dollar as the coronavirus crisis unfolds? That was the question that a couple of wine economists (I was one of them) were asked in a zoom meeting back in May.
The dollar’s going to stay strong, we both said. That’s what happens in a crisis. Investors rush to the safety and security of the dollar whenever there is uncertainty and risk. Ironically, the dollar sometimes rises even when the U.S. is the source of the uncertainty, but that’s another story.
Up and Down Economics
Zoom ahead a few weeks to the start of August. The dollar’s value unexpectedly fell dramatically in July as this chart from x-rates.com shows — the largest monthly drop in a decade. The sudden exchange rate change will affect the economy directly and indirectly in many ways — some even believe that it has contributed to the somewhat puzzling situation in the stock market, where values have risen recently despite bad economic and pandemic news. The cheaper dollar makes dollar-denominated financial assets cheaper for foreign buyers, who look for capital gains when the currency eventual rebounds.
What happened? Why? And why does it matter for the wine industry?
Some people believe that a strong dollar is good and a weak dollar is bad, but the truth is that exchange rate shifts create many positive and negative forces and the net effect depends on the economic environment at the given point in time and your particular circumstances. The strong dollar of the last few years, for example, made wine imports cheaper in dollar terms and discouraged wine exports — both big negatives for U.S. growers and producers.
But the strong dollar also tended to reduce the cost of equipment and supplies used in U.S. wine production including vineyard and cellar machinery, bottles, capsules, corks, and so on. The strong dollar also indirectly benefited the U.S. companies that import and distribute foreign wine and the on- and off-premise firms that sell it. Wine has a long supply chain and so there are complex exchange rate effects.
The falling dollar tends to reverse all this by increasing the cost of imported wine and wine production supplies and making U.S. exports relatively cheaper abroad. If you run a vineyard in California, the reduced competition from imports is good news. If you run a distributor that specializes in imports this is more bad news in a year with lots of bad news to digest.
Elementary, My Dear Watson
Although the falling dollar caught me by surprise because I focused on the crisis effect, others who watched exchange rate fundamentals might have seen it coming. That’s because there were indications that the U.S. dollar was over-valued and ripe for a fall at some point.
When we say that a currency is over-valued, we mean that the exchange value is such that the currency purchases more abroad than it does at home. If you travel to Europe, for example, and your euro purchases seem cheap in terms of their dollar equivalent, it is an indication that the dollar is over-valued (and the euro under-valued).
The Economist newspaper keeps track of how much currencies are over- or under-valued using their famous Big Mac index. As this graph shows, as of June 2020 the Economist index suggested that U.S. dollar was over-valued compared to all but three (Sweden, Lebanon, and Switzerland) of the currencies that the newspaper tracks.
The British pound was 25% under-valued relative to the dollar. Other wine country currencies: Canadian dollar (-11%), Euro (-16%), Australia (-19%), New Zealand (-23%), Argentina (-38%), Chile (-39%), and South Africa (-67%). Logically, the U.S. dollar would need to fall quite a lot to restore equilibrium between the currency’s internal and external purchasing power.
In my experience, the Big Mac index is a reasonably good predictor of long-run exchange rate tendencies, but there are many other factors that impact the exchange rate in the short term. In particular, the flight to safety that many of us expected seemed very likely to overwhelm the trade-based adjustments that the Big Max index is based on.
None of the Above
But an article in last weekend’s Financial Times suggests that there is more going on than adjustment based on “burgernomics.” Faith in the U.S. as a safe harbor in the storm has weakened, according to the article, because of what is seen as a very poor response to the pandemic. The coronavirus continues to spread, the economy remains very weak, the Federal Reserve is running short of tools, and Congress is gridlocked. And have you heard that there is an election coming up? The eurozone looks like a calmer, safer haven by comparison.
Safer yet, in some eyes, is gold, which isn’t tied to any particular country. Buying gold is a way to vote “none of the above” regarding major currencies. (There’s also Bitcoin, but that’s another story;)
The price of gold hit a record high of $1983 per troy ounce last week. The high price is the result of some investors looking for safety and others making speculative purchases. Demand for gold for use in jewelry and so forth is down because of the pandemic’s impact on sales of the finished products.
Looking ahead, it is difficult to know where the dollar will go next. Financial markets tend to over-shoot — to zoom too high when they are rising and over-state declines. So it will take a while to know whether July’s dollar decline will persist or if the currency will bounce back quickly.
So pay attention to the risks that exchange rate variability produces. Many wineries will find their exposure to exchange rate risk is small and difficult to identify. But if you have substantial foreign currency costs or revenue streams, you might think about hedging strategies to insure to some degree against unfavorable movements. And everyone ought to consider counter-party risk: are the people who owe you money exposed to increased risk? Will it affect their ability to fulfill their obligations?
How long will it take for the economy to get back to normal? That’s the question I am asked most often these days, where “back to normal” is code for conditions at the start of 2020, before the coronavirus pandemic and the recession it has produced.
The answer to this question depends on how you look at it. If you are thinking about a world without concern for virus contagion, face masks, and social distancing, the answer might well be “never,” but only time will tell.
Economists often distinguish between “monetary” and “real” economic factors. If you think in monetary terms — stock market valuations, for example — we are already most of the way back. Our modest Wine Economist retirement account is pretty much back to its January 1, 2020 level thanks in part to a few trillion dollars of Federal Reserve and federal government stimulus, which has done a lot to prop up valuations.
But if you are looking at the “real” economy, where output, jobs, and incomes are what count, then the scene is not so serene. A recent report by The Economist Intelligence Unit is titled “A Q3 recovery, what Q3 recovery?” and it warns that the hoped-for big economic bounce in the third quarter of the year is no longer likely. Other business news reports that appeared over the weekend tell a similar story. Here is a link to a summary of the EIU report.
Down the Drain?
The EIU projects that when all the dust settles the U.S. economy will shrink by about 5% in 2020 compared with the previous year. That performance is roughly on par with forecasts for Japan, Canada, and Germany, The other G7 nations will envy a mere 5% decline. The EIU projects that growth rates in the UK and France will be closer to minus 10%, with Italy’s situation a bit worse.
How long will it take for these countries, which are all important wine markets, to return to their pre-pandemic levels of economic activity? The EIU projects that the U.S. will get there first, but not until Q3 of 2022 — about two years from now. Japan, Canada, and France will be next, hitting the pre-pandemic level in Q4 2022. Full recovery for the UK will wait until Q4 2023 followed by Italy (Q3 2024) and Japan (Q4 2024). Long road. Slow progress.
In general, the EIU reports, output in the G7 countries in Q3 2020 will be about the same as it was in 2016. Four years of growth down the drain.
Economic forecasting is an inexact science, or maybe a black art, so you cannot bank on these specific numbers. This is especially true right now given the unknown unknowns about global public health, economic policies, and potential election surprises. But the fact that conservative estimates now suggest a long, slow economic recovery is something we need to digest.
Wine’s Particular Challenges
There are special concerns for the wine industry. An economy isn’t like a train, where all the cars are connected and move at the same speed. Different sectors adjust at different speeds and sometimes move in different directions. While wine is influenced to a great degree by overall economic trends, some particular paths to market are especially influenced by the coronavirus pandemic.
On-trade sales and DtC sales via tasting room visits will likely be slower to recover than retail sales, which we can see now as California has closed down indoor dining and cellar door operations for the second time. And this isn’t the feared “second wave” of infections — that isn’t expected until fall. This is just the echo of the first wave.
It is also important to remember that our 2019 “normal” wasn’t a terrific situation for wine. American wine was challenged by slow growth of demand, supply that was so abundant that vines needed to be pulled, and growing competition from other countries as well as other beverage alcohol categories. Curse you White Claw! U.S. wine producers need to do more than recover volumes, they need to adapt to evolving reality, too.
So it is important and even inspiring to see how active many in the wine industry are in adjusting to what they think the new normal will be. Joana Pais, director of communications and public relations for Sogrape, the important Portuguese producer, told me in an email about the wine tourism situation in Porto and the challenges she and her colleagues face.
Travel to Portugal was booming before the pandemic and wine tourism in Porto and the Douro benefited. These travel flows collapsed during the spring and are only slowly rebuilding. “It is true that tourism is scary slow,” she writes, “but let’s face it as an opportunity to rethink the purpose of hospitality and work on developing truly incredible experiences, enjoying the simple pleasures of life!”
She’s right about that and more. As I wrote in Around the World in Eighty Wines, wine’s great gift is its ability to give us pleasure. So long was we keep that front and center wine’s future is secure. But the challenges we face on the road to the future are daunting. The next two to four years will test our collective resilience, but I hope they also excite our imaginations.
I am already starting to think about what wine market situation will be in January 2021 when the next Unified Wine and Grape Symposium takes place. The conference and trade show will be virtual this time around, reflecting the reality of the pandemic and the uncertainty that must necessarily cloud plans for large gatherings. It will be different, that’s for sure, but there are opportunities, too.
The impact of the evolving coronavirus recession on the wine industry is complicated. It seems like you get a slightly different story depending on when and where you look. One way to think about this situation is to analyze other industries where the impacts might be easier to discern. Fed-Ex, the package delivery giant, offers several potential insights.
Business is Booming, But …
How is Fed-Ex doing in this environment? A recent report from The Economist newspaper provides some clues. You’d think that business would be booming, since so many consumers have turned to on-line shopping and home delivery in the past few months. Of course there is competition to consider. United Parcel Service is a strong competitor. And Amazon.com has developed its own package delivery service. But there is plenty of delivery business to go around. So Fed-Ex must be doing well, right?
Well, yes and no. Home package delivery is booming, but bring those boxes to your front door is a high cost part of the business. And the costs of protecting the workers who process the packages have increased, too. So the business surge has put pressure on margins.
And the most profitable part of the business — which is bulk shipment to businesses — has actually fallen as overall consumer spending has decreased, reducing the pull-through effect. Higher margin deliveries to businesses and retailers have been only partly replaced by lower margin deliveries to you and me.
Fed-Ex announce quarterly earnings after market close on Tuesday of this week. The MarketWatch.com report noted that
Commercial volumes were down significantly due to worldwide business closures, but there were surges in residential deliveries for its FedEx Ground business and in transpacific and charter flights for FedEx Express, which required incremental costs to serve.
The company also incurred in about $125 million in increased operating costs related to personal protective equipment and medical and safety supplies for its employees, as well as additional security and cleaning services to protect them, it said.
Quarterly earnings were well below the level of a year ago, but much better than analyst expectations. The company’s stock rose in after-hours trading. It sounds like
Fed-Ex is managing the unavoidable big squeeze pretty well under the circumstances.
Lessons for the Wine Industry
Can you see how the Fed-Ex effect relates to wine? It isn’t a perfect parallel, but the surge in supermarket and on-line wine purchases is one side of the coin — like the boom in Fed-Ex home delivery — and if we focus just on that we end up drawing the wrong conclusions.
Higher operating costs and stagnant overall sales, when lost on-trade business is taken into account, are the rest of the story for wine. Depending on where your business is in wine’s market constellation, you might find yourself doing quite well or, like Fed-Ex and many other firms, caught in a squeeze.
What’s that gizmo in the photo above? Well, Amazon.com is experimenting with drone delivery. Fed-Ex has tested an autonomous delivery robot.
These are tough times for many people in the wine industry, especially those who depend on bar and restaurant sales for much of their income. The restrictions necessary to address the coronavirus pandemic have had many unintended consequences.
The wine industry has been shut down before and took decades to recover. But the story isn’t exactly what you might expect. This special holiday week flashback column takes us back to 2015 to tell the story of how, in very different ways, the U.S. and Canadian governments almost destroyed their respective wine industries.
The U.S. government is considering imposing 100% tariffs on some wine imports from Europe, an act that would hurt both European producers and many in the U.S. wine trade, too. The unintended consequences of acts like this are serious business.
Have a happy and safe 4th of July holiday.
Unintended Consequences: How the U.S. & Canada Almost Destroyed Wine
March 17, 2015
At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:
“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”
This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.
I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways. Here’s what I learned.
How U.S. Prohibition Crippled the Wine Industry
The great experiment in Prohibition in the United States started in 1920 and lasted until 1933. The 18th Amendment outlawed the manufacture, sale or transport of intoxicating beverages, including wine. Most people assume that the wine industry collapsed as legal wine sales and consumption fell and this is partly true but not the complete story. Commercial wine production almost disappeared, but wine consumption actually boomed.
How is this possible? There were three loopholes in the wine regulations outlined in the Volstead Act. Wine could still be produced and sold for medical purposes (prescription wine?) and also for use in religious services (sacramental wine). This kept a few wineries in business but does not account for the consumption boom, which is due to the third loophole: households were allowed to make up to 200 gallons of wine per year for “non-intoxicating” family consumption.
Demand for wine grapes exploded as home winemaking increased (but not always for strictly non-intoxicating purposes). Total U.S. vineyard area just about doubled between 1919 and 1926! But the new plantings were not delicate varieties that commercial producers might have chosen but rather grapes chosen for their high yields, strong markets.
Thus did Prohibition increase wine consumption in the U.S. but it also corrupted the product by turning over wine-making from trained professionals to enthusiastic amateurs working in often unsanitary conditions. The home-produced wine sometimes had little in common with pre-Prohibition commercial products except its alcoholic content.
Americans drank more wine during Prohibition, but it was an inferior product. No wonder they dropped wine like a hot stone when Prohibition ended. That’s when the real wine bust occurred and it took decades to fully recover. Do you see the unintended consequence in this story? But wait, there’s more …
How Canadian Prohibition Crippled Its Wine Industry
Prohibition started earlier (1916) and ended earlier (1927) in Canada and took a different fundamental form. With support from temperance groups, consumption of beer and spirits (Canada’s first choice alcoholic drinks) was banned as part of war policy with the stated intent of preserving grain supplies for vital military uses. Consumption was forbidden, but production of beer and spirits was still allowed for export, which accounts for the boom in bootleg Canadian whiskey in the U.S. in the 1920s.
Neither production nor consumption of wine was included in Canada’s ban on alcohol, although wine sales were limited to the cellar door. What made wine different? Maybe grapes were not as vital to the war effort as grains, although John Schreiner cites the political influence of the United Farmer’s Party in his account of this period in The Wines of Canada. Wine became the legal alcoholic beverage of choice for Canadian consumers and production boomed. By the end of Canadian Prohibition there were 57 licensed wineries in Ontario (up from just 12) to serve the big Toronto market.
Wine sales increased 100-fold, according to Schreiner, but “It would be charitable to describe the quality of the wines being made in Ontario during this period as variable,” he writes. The market wanted alcohol and set a low standard of quality, which many producers pragmatically stooped to satisfy. No wonder wine production collapsed at the end of Prohibition as consumers went back to spirits and beer.
Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.
Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.
No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.
This is the Age of Uncertainty (to reference the title of John Kenneth Galbraith’s famous book) both in general and with respect to the wine industry. Everyone’s looking for answers as they confront a murky future. But most answers right now (especially including my own) are at best informed speculation, subject to frequent revision.
If we can’t have solid answers, maybe the next best thing is to try to refine the questions. Herewith my attempt to pin down three important questions about the near- and intermediate-term wine market and environment.
Please use the comments section below to raise other questions that need attention now
Q1: Recession Uncertainties
It is clear that the conoravirus pandemic and its health and economic effects have produced a global recession of historic proportions. Income and wealth have declined and unemployment increased. There is no way that wine cannot be affected by such an economic downturn. Many questions about the recession beg for answers. How deep? How long? The Great Depression made a indelible mark on the people who lived through it. Will the coronoavirus recession do the same?
There are pluses and minus to consider. Monetary and fiscal stimulus packages have been huge by historical standards — much larger than during the Great Recession of a dozen years ago. And we’ve seen some bright spots in the data. The May employment numbers in the U.S. surprised nearly everyone with a strong net increase in jobs and decrease in unemployment. A short, sharp V-shaped recession, while still unlikely, may not be as impossible as most of us believed.
But there are problems starting with the jobs report figures themselves, which may result in under-estimates of unemployment by several percentage points because of unusual data collection and classification problems created in part by the deep churning of the labor market. I am also very concerned about changes in state-local government employment. Budget deficits in the second half of the year may lead to big lay-offs in local governments just as economic re-opening brings others back to the workplace. Programs to stabilize employment have so far focused on private sector jobs and left public sector employment pretty much alone. This will be a problem, but how big is unclear.
Bottom Line: I think it is all going to come down to the question of consumer spending. Governments have already gone all-in — they may not have much more to contribute to a recovery. Business investment — the real kind, not the stock market — will probably lag consumers, not lead them. And trade has fallen taking potential net export gains down, too. It’s going to be up to consumers to get the economy moving.
Consumers have surprised many analysts by saving an amazingly high proportion (about 30%) of their incomes in recent weeks, which may be good for their individual financial security but unhelpful in terms of increasing aggregate demand. It is easy to say that they didn’t spend because the shops were closed, but there is more going on. It is that age of uncertainty thing.
Consumers will continue to hold back on spending so long as they lack confidence in economic recovery. Until that confidence switch is flipped, economic growth is uncertain and consumers are right to be cautious. Is that a Catch 22 problem? Yes.
Q2: Wine’s New Normal?
Consumers are also at the center of questions about how the wine market will look when the recession and pandemic fogs start to clear. In the short run, the situation is a bit like the person who was swept over a waterfall. Half-way down things seem to be going just fine, but there’s a big splash ahead and it is hard to know who’s going to sink or swim away.
As noted in recent Wine Economist columns, there has been much turbulence in the wine market so far this year. Wine sales volumes are up overall but revenues not so much as high-margin restaurant sales have been replaced by lower-margin retail. On-line sales have risen dramatically, albeit from a relatively small base. Wine hasn’t done as well as spirits, which seem to fly off the shelves, but better than beer.
As Rabobank’s Stephen Rannekleiv noted in a recent Ciatti market update webcast, the wine industry is going to need to rethink the route to market and how on-trade, off-trade, on-line, cellar door, phone sales (!), and other strategies fit together and what products work best in each channel. Consumers are changing their buying behavior for other products and wine shouldn’t think it is different in this regard. On-premise sales, in particular, are likely to be slow to recover as bars and restaurants struggle to both safely and profitably serve customers.
Bottom Line: They say that generals are always preparing to fight the last war and so are often unprepared for new battle lines when they emerge. The same might be said for many wine businesses. The lesson that many small and medium-sized wineries learned in the last war (the Great Recession) was the importance of direct-to-consumer cellar door sales.
This strategy is problematic in a socially-distanced world. Shifting on-line now seems like the obvious reaction, but does that change the nature of consumer relationships and perhaps the nature of wine itself? Remember that Jeff Bezos picked books for his Amazon.com start up because they could easily be commodified. If that’s where wine is going, there will be implications. Fortunately (see last week’s Wine Economist column), many wineries are finding ways to keep wine personal even in the virtual space. How is wine going to evolve to succeed in an increasingly on-line market place?
Q3: Global Wine Market Threats
The global wine market environment is most directly defined by the big exporting wine economies. Italy, Spain, and France are the Big Three that together producer more than half the world’s wine. Argentina, Chile, and Australia are much smaller, but very important. New Zealand is tiny but punches above its weight. China, like the U.S. is currently most important in terms of global dynamics as an importer.
Wine sector conditions are unfavorable in all the largest wine-exporting countries. On-trade sales are much more important in Europe than the U.S., accounting for more than half of wine purchases. The closures of bars and restaurants during the pandemic lock down period has therefore produced a huge unsold inventory of wine. Some of this will disappear through emergency distillation schemes, which promise to dispose of between 750 million and one billion liters of excess wine. The rest will be looking for export market sales.
The bad old days of the EU wine lake depended on distillation to eliminate subsidized unmarketable wine. The policy changed several years ago to focus subsidies on modernization and marketing to encourage producers to make wines that the market would absorb. But no amount of marketing euro is going to help this year, so surplus wine will head off to the distillery. Maybe it will end up as hand sanitizer?
A billion liters is a lot of wine taken off the market. But I don’t think it will be enough to prevent a short term worldwide wine glut, especially when you consider the troubles that Southern Hemisphere producers are experiencing (despite short harvests in many regions). Australia and Chile depend on China to buy much of their wine and China’s growth has slowed dramatically. New Zealand looks especially to the UK and US markets, which are in recession. Argentina and South Africa have large domestic markets, but there are complicated economic and political problems in both countries that have affected sales.
Bottom line: A lot of wine is going to be looking for a home in the next year. Who in the world is going to buy it?
The recent pivot to on-line and virtual programs, events, and communication presents challenges and opportunities. How well has the wine industry responded? What does the future hold? Join me on a trip down the virtual rabbit hole to find out.
Can’t Un-Ring a Bell
It has been fascinating to see how quickly we and our wine industry friends and colleagues have adapted to using technology to overcome necessary distancing and business and travel restrictions. There are costs, for sure, in terms of lost personal interactions, but gains, too. They say that you can’t un-ring a bell, and I don’t think we can (or should) completely un-do the recent pivot towards virtual communications.
So Sue and I have decided to embrace the opportunities of virtual wine for the time being and to appreciate the many creative ways that wineries are using online platforms to get their messages out and connect with customers. Herewith several examples from our personal explorations. There is still a steep learning curve, but as you will see below, lots of progress, too. Please use the comments section below to give more examples of successful virtual programs and events from your personal experience.
People, Places, Things
Let me start with an example of a simple idea well done. Promotional videos are not a new thing and, with the rapid advance of technology, they are easier to make and to distribute via the web. But they seem to be very difficult to do well. Videos are the perfect opportunity to tell first-person stories, but so many winery videos seem to forget what their story is once the camera light comes on and default to generic “four seasons in the vineyard” images.
So we celebrate when someone gets it right and tells the story of the people, the places, and the wines and how they are all connected, as the video above from Andrew Will Winery does. Andrew Will is located on Vashon Island, just a short ferry ride from our home base, sourcing grapes from some of the best sites in the Columbia Valley, including the Two Blondes estate vineyard. The wines are elegant, distinctive, delicious — we are big fans.
The video is very effective in introducing the people, Chris Camarda and his winemaker son Will, their views and values, the role of terroir, and the nature of the wines. You will know if you would like the wines after seeing the video and why they are special. And the winery is using the video effectively just now to maintain connections with customers during the current crisis.
BDX In the Rocks
The virtual space can be as interactive as you want it to be (up to a point!) so many wineries are experimenting with virtual tastings. Our friends at Reynvaan Family Vineyards in Walla Walla show one effective approach. Winemaker Matt Reynvaan went live on Instagram several Friday afternoons in April and May, talking about his work and tasting interesting pairs of Reynvann wines.
One thing that made these tastings especially appealing was that wine-list members were invited to taste along with Matt by purchasing the library wines at their original release prices, a terrific and unexpected opportunity.
We focused on the May 1 tasting of Cabernet Sauvignon and BDX blend wines from the Reynvaan’s In the Rocks vineyard. These are very special wines that surprise many people because Reynvaan and that region are best known for their outstanding Syrah. Sue and I tasted the Cab wines when we visited the Reynvaan family last year and they are really memorable. Honestly, I couldn’t wait to relive that tasting via the internet.
If you watch the video (even if you aren’t able to taste the wines) I think you will get a sense of Matt and his family and what drives and inspires them. Toward the end of the tasting Matt opened up the conversation to questions from his on-line audience, adding a small but important interactive element.
The Reynvaan tastings achieved many goals. It got scarce wines into the hands of people who enjoy them and probably replaced to some extent lost sales to restaurants. Most of all, however, it created and nurtured personal relationships, which everyone believes are at the heart of the wine business, and allowed Matt and family to tell their story in the most natural way.
Virtual Release Party
Mike and Karen Wade, the proprietors of Fielding Hills Winery in Chelan, Washington, had planned to host a big release party this spring for their new line of white wines. Mike, the founding winemaker of the family operation, is famous for his distinctive red wines, but as the winery grew and winemaker Tyler Armour joined the team, it was clear that white wines and maybe a Rosé needed to be added to the mix.
The Rosé and a Chenin Blanc from the estate Riverbend Vineyard on the Wahluke Slope came first and this year they are joined by a Chardonnay and Roussanne. It’s a big deal for the winery. But the coronavirus crisis made an in-person celebration impossible. With daughter Megan’s help they organized a Zoom-fest instead and brought together friends of Fielding Hills from across the country to taste the wines and learn about them from Mike, Karen, and Tyler.
Because of the Zoom platform’s flexibility there was the opportunity for more interaction with the audience. Tyler also gave a mini-tour of the wine-making facility and Mike used Google maps to take us to the vineyards, which Sue especially appreciated. I think everyone enjoyed the delicious wines and appreciated the opportunity to taste them together and learn about them.
Will virtual release parties like this replace in-person events after the crisis is over. I hope not! But I hope the virtual is retained because it can reach a different and broader audience in a different way, expanding the local to the regional, national, or even global.
The Virtual Tasting Room
By far the most personal virtual experience that Sue and I have had happened last Tuesday, when we Zoomed to Portland to talk wine with Stewart Boedecker and a couple of other wine friends. Stewart and Athena Pappas run Boedecker Cellars, an urban winery that sources grapes from some of Oregon’s best sites. They have been trying many initiatives to connect with customers and supply them with wine while the tasting room was shut down.
One of the clever offers was a trio of “Happiness on a Tuesday” wine packages — six-packs and cases of wine put together from small quantities of interesting products Stewart rescued from the warehouse. Sue picked out an all-Pinot six-pack for us (plus another 6 bottles of her favorite Pinot Blanc) and we will be working our way through them in June and July. Our affordable six-pack included a 2014 Pinot Noir from the famous Stoller Vineyard, so there is no chance of coming away disappointed.
We like the idea of Tuesday night wines and so we couldn’t resist Stewart’s invitation to attend a Tuesday evening virtual tasting. The group was small enough that Stewart just opened up the microphones and we all chatted and learned about the wines just as if we were sitting at the tasting room bar with the winemaker. It was great and reminded us of how much we have missed such previously normal moments during the pandemic crisis.
Virtual Trade Events
It is easy to think about virtual wine events just in terms of consumers and direct sales opportunities, but the coronavirus pandemic has done much more than just shutter cellar doors. Wine fairs and trade events around the world have been canceled or postponed, depriving many producers of the opportunity to present their wares to potential importers, distributors, restaurants, and retailers.
It isn’t the same, but virtual pitches can at least partially replace the wine fair booth and give wineries an opportunity to get their messages out. That’s what I found at the On-Wine Fair, where 45 Italian wineries were each given twenty minutes to tell stories to a virtual U.S. trade audience.
I attended the webinar of Tenuta Montemagno, a producer in Monferrato (Piemonte) that specializes in wines made from local indigenous grape varieties. The brief and well organized presentation was very effective. Place, personality, emotion. These characteristics came through clearly. This won’t replace the traditional wine fair — the opportunity to taste and talk in person is very important — but it goes a way toward filling the gap in the current crisis and expanding opportunities in the future.
Vinarium Becomes TeleVinarium
The virtual world really is a rabbit hole. One you dive down there’s no telling where you might end up. The only limit (besides bandwidth, I guess) is imagination. So when the Romanian organizers of Vinarium, the International Wine Competition Bucharest realized that it might be possible to shift on-line for their annual wine competition, they took the fateful first step. First time anyone has tried to organize a virtual wine competition, but changing conditions provoke innovation.
A typical wine competition is a coronavirus nightmare. Five jurors sit close together around a table, spitting and dumping repeatedly while sommeliers fill glasses from masked bottles in a specified secret order. There’s a certain close-quarters logistical choreography here that, when done well, would make Balanchine smile but earn a frown from Dr. Fauci today.
Virtual Vinarium aimed to get the results, but without the risk, and on-line platforms meant that jury members could be safely isolated.
The 36 international judges from 12 countries (including 4 Masters of Wine) were divided into juries of 5 or 6 persons. Getting them zoomed-up and their OIV judging software connected was probably the easy part (although I am glad I didn’t have to figure it out). Bringing the physical world along for the journey came next. That meant taking each of the 853 entered wines and decanting them into small coded sample bottles that could be shipped away to wherever the judges were. Then, of course, they needed to be tasted in the correct order and all the usual protocols followed.
I have only judged a couple of wine competitions and I’ve always been impressed with the complexity of the logistics involved. TeleVinarium went to the next level. Outrageously ambitious!
These are just a few of the hundreds of virtual events and projects. They begin as supplements to real world activities, sometimes replace them, and have the potential to transform them. Where will it all lead? Only one possible answer. Ask Alice!
One way that wine differs from beer is that whereas beer can be produced pretty much continuously throughout the year, there is only one opportunity to make wine. A crisis that comes at harvest time is therefore especially disruptive and unwelcome. And that”s exactly what happened to wine producers in the Southern Hemisphere this year.
The International Organization of Vine and Wine (OIV) recently organized an important webinar on the experience of Southern Hemisphere wine producers harvesting their 2020 vintage just as the coronavirus pandemic threat became clear and lock down policies initiated. View a recording of the webinar by clicking on the image above.
Presenters (see list below) from Australia, New Zealand, South Africa, Chile, and Argentina each highlighted the particular problems that they faced and how they managed these challenges. The stories are very different with many lessons to learn and puzzles to ponder.
After the five presentations (at about 1:11 on the video) moderator António Graça asks each presenter to summarize the most important lessons in the form of a tweet. The discussion that follows focuses on practical problems and the search for solutions. The analysis of successes and failures is worth your attention.
One of the clear lessons cited by several speakers is that communications must be clear, transparent, and omni-directional. Everyone needs to be on the same page. One of the failures cited by two speakers was the inability to convince government regulators of the importance of the wine sector in the national economy and therefore the need for more favorable treatment and accommodating protocols. In part it’s that “we only get one chance” thing — at some point harvest delayed is harvest wasted.
The webinar is required viewing for winery businesses and organizations everywhere — in the Northern Hemisphere because we should learn from our colleagues south of the equator and for Southern Hemisphere producers because this may not be the last time such a crisis is experienced.
Tony Battaglene, Australia / Chief Executive of Australian Grape and Wine Incorporated
Jeffrey Clarke, New Zealand / General Manager Advocacy & General Counsel of New Zealand Winegrowers
Yvette Van Der Merwe, South Africa / Executive Manager, South Africa Wine Industry Information and Systems (SAWIS)
Aurelio Montes, Chile / President, Wines of Chile
Daniel Rada, Argentina / Director, Argentine Wine Observatory / Professor of International Economics, National University of Cuyo, Argentina
António Graça, Head of Research and Development at Sogrape Vinhos SA, Secretary of Sustainable Development and Climate Change experts group – OIV
Wine consumers today seem to be going “up the down staircase” (to evoke the clever title of Bel Kafuman’s best-selling 1964 book). They are buying more expensive wine at lower prices. That sounds crazy! Read on for analysis and a look back to what happened in 2009.
The COVID-19 Wine Boom
Recent consumer trend data from Nielsen and Wines & Vines Analytics present a complicated picture of off-premise wine consumer behavior for March and April 2020. Wine sales at supermarkets and other retail outlets have boomed, as you know. The initial pantry stocking frenzy was followed by a growth plateau, but high growth rates have returned in recent weeks.
The dollar value of off-premise wine sales in the Nielsen-measured channels has risen at a 30% rate since the COVID-19 crisis began compared to the same period last year. Wine sales in the week ending March 21 surged to 66% more than the previous, year which is amazing.
The rise in off-premise sales is partially offset by the collapse of the on-premise (bars, restaurants) channel. Net sales are up, but not by as much as you might imagine. Nielsen estimates that off-premise sales need to rise by roughly 22% (by volume) to offset the falling on-premise sales. Wine volumes are up 27.7% since March 7, so that’s a 5% net volume gain.
Less is More? Or is More Less?
Since sales volume is up 27% and sales value has risen 30%, it is clear that unit sale price has increased and this is true because of the distribution of purchases in different price points.. While sales have increased in all price categories, the fastest growth is for wines $11 and higher. Interestingly, the highest percent growth rate is in the $20 to $24.99 price category.
Some speculate that this rise is driven in part by consumers who are substituting retail wines for the ones they would otherwise have purchased at a restaurant. A $25 wine purchased at retail and consumed at home (perhaps with a home-delivery restaurant meal) might seem like a bargain compared to a similar wine with a higher mark-up on a restaurant wine list. Bottom line: consumers are moving up the wine wall, but paying less at the same time.
Online wine purchases are booming, too, but the reported pattern is different according to shipment numbers for April 2020 from Nielsen’s partnership with Wines Vines Analytics in collaboration with Sovos ShipCompliant. Sales volume increased by 45% compared to the previous year. But sales value rose by only 15%, which means that average unit price has fallen.
Indeed, the average bottle price in this sales channel fell from $42 to $33. Some of this might be due to changes in the commodity composition on online purchases, but readers of this column probably guess that discounting also plays a part. Here at Wine Economist world headquarters our email inbox is filled with sales offers that start with free shipping and continue with increasing levels of discounts.
Significantly, according to the Nielsen data, Napa Valley wines, which are the Big Dog in the DtC market, had the largest average price reduction. Our friend Allan found a Napa winery in obvious financial difficulty that offered full cases of their California- and Napa-appellation wines for the price of one or two bottles. Some of the deals like this are shared with club members, but some are kept quiet indeed to avoid reputation erosion.
So it is up the down staircase. DtC buyers are snapping up expensive wines at discount prices. Many thanks to Nielsen’s Danny Brager, Senior Vine President Beverage Alcohol Practice, for sharing data and insights.
Up and Down in 2009
Consumers also looked for ways to go up the down staircase during the global financial crisis a few years ago. Here are two Wine Economist columns from 2009, when internet sales were less of a factor, that examine how wine consumers were shifting their buying strategies during the global financial crisis: Wine, Recessaion, and the Aldi Effect and Extreme Value Wine Goes Mainstream.
Significantly the bargain-seeking changes we saw then didn’t really disappear when the economy improved. Wine buyers continued to search out bargains, at both low and high price points even as “premiumization” swept through the market. Hey, that’s up the down staircase again!
Wine , Recession and the Aldi Effect
January 13, 2009
Aldi stores are about to expand in the United States, drawn here by the recession according to an article in today’s Wall Street Journal ( “Aldi Looks to US for Growth” ). I wonder how this will affect the wine market?
A Tough Nut to Crack
Aldi is a German “hard discount” store chain. A “hard discounter” sells a limited selection of house-brand goods at very low prices in small, bare-bones outlets.
Hard discounters are a niche, albeit a growing one, in the U.S. Wal-Mart is a successful discounter, of course, but not a hard discounter because it still features many mainstream branded products, its prices are higher and its stores a bit more plush. Aldi and other hard discount stores drove Wal-Mart out of Germany, according to the WSJ article, but the U.S. market has been a tough nut for the hard discounters to crack. American consumers are primed to buy brand-named products and they like lots of choice, marketing experts say, and so tend to resist the house brands that hard discounters feature, which has limited their penetration here.
Germans are more willing to sacrifice brand names for low prices, apparently. Aldi and other hard discounters are dominant powers in German retailing. The WSJ reports that 90% of German households shop at Aldi stores and 40% of all grocery purchases are made in hard discount outlets.
Divide and Conquer
Interestingly, there are actually two Aldi store chains in Germany. Aldi is short for Albrecht DIscount. The Albrecht brothers who founded the company after World War II fell out over the issue of tobacco sales in their stores. They divided the German market between them (Aldi Nord and Aldi Süd) and then, eventually, split up the world market too. Here are links to Aldi USA and Aldi International websites if you want to learn more about this retailer’s local presence and international reach.
Wine is an important product in Aldi’s German stores, as you can see from the wine selections featured on their website. I believe that Aldi is the largest single retailer of wine in Germany.
Since Germans are rich and Germany makes great wines, you would think that Aldi must sell mainly fine wines, but you would be wrong. Aldi’s median German wine sale is red not white, imported from a low cost producer, sold under a house-brand name, packaged in a box or TetraPak and priced at around one euro per liter.
You could say that it is Two Buck Chuck (TBC) wine, but in fact TBC is more expensive. TBC is to Aldi wine as Wal-mart is to Aldi itself. (Note: Wal-Mart now has its own brand of two dollar wine, which makes this comparison even more appropriate. It is called Oak Leaf Vineyards and is made for Wal-Mart by The Wine Group.)
The Aldi Effect
Aldi figures that the recession is its moment to press more vigorously for U.S. market share. Data indicate that consumers are much more cautious now, so perhaps they won’t be so picky about brand names and will, like their German cousins, be willing to trade down for a lower price. TheFinancial Timesreports that Aldi sales in Great Britain are up 25 percent! Aldi plans to speed up store openings in the U.S. and to expand into New York City. New York! If you can make it there … well, you know.
The good news here is that Aldi’s U.S. push may also help drive wine deeper into the U.S. consumer mainstream. You can say all you like about the quality of Two Buck Chuck but it sure did help expand the wine culture in the U.S. and some (but not all) my TBC-drinking friends have moved upmarket for at least some of their purchases. The wine may not be to everyone’s taste, but its market impact has not been all bad.
Will Aldi Succeed?
Will Aldi’s drive be successful? There is reason to think it will be. They seem committed to tailoring their hard discount operations to local market conditions, which is important because markets have terroir as much as wine.
But there is a more important reason. Both German Aldi chains are present in the U.S. now, although you are probably not aware of them. Aldi Süd operates on under the Aldi name, of course, with the same logo as in Germany. The owners of Aldi Nord invested years ago in a different chain, based in California and intentionally tailored for thrifty but upwardly mobile U.S. consumers. It’s an upscale Aldi Nord and it has been very successful here.
Perhaps you’ve heard of them. They have limited selection, smaller stores, lots of house brands, and low prices. They even sell a lot of wine. The name?
Oh, yes. Trader Joe’s!
Extreme Value Wine Goes Mainstream
November 1, 2009
Our friend Jerry doesn’t seem like the kind of guy who would go digging around in the closeout bin or shopping for wine at Aldi — too classy for that — but there he was at Joyce and Barry’s house on Friday showing off his latest finds: cheap wine from a Grocery Outlet store.
The wine wasn’t so much good or bad as simply intriguing — is it really possible for a sophisticated wine enthusiast like Jerry to be satisfied shopping for wine at an “extreme value” store? Only one way to find out, so we got in the car the next day and headed for the strip mall.
Searching for Extreme Values
Headquartered in low-rent Berkeley, California, Grocery Outlet bargain market is America’s largest extreme value grocery chain with more than 130 independently owned stores in six western states. It has been in business since 1946. Prices are low, low, low.
Grocery Outlet stores here in the Pacific Northwest are supermarket sized spaces filled with off brand and closeout products along with a wide enough selection of fresh goods to allow families to do all their grocery shopping in one place. They are nice if not especially fancy stores. I can see why budget-minded families shop there.
The wine corner at the nearest store was large and well-stocked. Most of the brands were mysteries (one was even named “Mystery” as in “Mystery Creek” or something like that), although a few third and fourth tier products from recognized mass-market makers were available. Mainly, I think, these were leftover wines closed out by distributors to raise cash or make room for incoming shipments along with no-name brands “dumped” under a bogus label.
The wines came from all over — California, naturally, Australia, France, Italy, Chile. There was even a $3.99 “Champagne” from Argentina. Honest — it said “Champagne.”
Prices were suitably low — most of the wines sold for $2.99 to $5.99. It isn’t hard to make money selling extreme value wine when you can buy up surplus bulk wine for just pennies a liter and package it up for quick sale. Extreme value retailers are the perfect distribution channel for wines like these.
As you can see from my receipt, I walked out with three bottles of wine for a total of $13.97 plus tax. “By shopping with us you saved $28.00.” That would mean an average of 67% off the retail price.
Unexplained Tales from Down Under
I wasn’t really surprised at what I saw as I surveyed the wine wall. Then, slowly, a different kind of wine mystery began to unfold.
Sue must have sharp eyes because she picked out the first surprise. Sam’s Creek Marlborough Sauvignon Blanc 2008 for $3.99. That’s awfully cheap for a New Zealand wine here in the U.S. I’ve read about heavily discounted NZ wines in Great Britain but not here in the U.S. — until now.
New Zealand is a high cost wine producer that has succeeded in charging a premium price for its wine. Indeed, NZ earns the highest average export price of any country in the world despite surging production that threatens to create unmarketable surpluses. Everyone worries that one day the export limit will be hit and prices will start to tumble from $12-$20 down to, well, $3.99. Is that what this Sam’s Creek wine really means? The end of NZ wine’s premium price?
Frighteningly, Sam’s Creek isn’t a no-name closeout wine. The label says that it is made and bottled by Babich, one of the famous names in New Zealand wine, and the internet tells me that Waitrose sells it for about $10 in Britain. I wonder if the unsold British inventory has somehow made its way here?
Prestige Wine at Extreme Value Prices
Two more bottles raised more questions about New Zealand wines. I paid a whopping $5.99 for a 2008 Isabel Estate Marlborough Sauvignon Blanc. I almost overlooked it, but the label caught my eye. Isabel Estate is one of the most famous Marlborough quality producers, exceedingly well-known in Great Britain where this wine sells for about £10, but not so widely distributed here in the U.S., I think.
How did it get here and who among the Grocery Outlet clientele would recognize its quality sitting there surrounded by cheap and cheerful closeouts?
The third wine makes the puzzle more complicated. It is a 2004 Te Awa Merlot from the Gimblett Gravels of Hawkes Bay. Te Awa Farm is another famous NZ producer and, while this wine — a estate product from a distinguished producer in a famous region — may be slightly past its prime and therefore a typical closeout risk, it is still very surprising to see it sold at a place like Grocery Outlet for $3.99 rather than the $16-$20 retail price.
These three New Zealand wines may be random surplus wines found in the sort of place where random wines go to be sold. Or they may be indicators of important changes in the world of wine. Kinda makes you wonder, doesn’t it?
Wine markets are all about supply and demand. It is pretty clear that a supply of interesting wines has appeared along with the rock-bottom remainders at extreme value stores like Grocery Outlet, pushed along, no doubt, by the slump in fine wine sales.
What about demand? And what does Grocery Outlet tell us about the wine market more generally?
The OIV released their annual “State of the World” wine sector report last week (via social-distancing video conference, of course) and it is noteworthy both for its view of the recent past and its tentative analysis of present conditions and future trends. (Here are links to the report summary, the press release in pdf, and the presentation in pdf, and the report in pdf.)
Under normal circumstances, my focus here would be on the annual report itself and the recently-released special study of the sparkling wine boom, both of which are packed full of data and sound analysis. But, as OIV Director General Pau Roca would note, these are rear-view mirror reports that document a world that does not exist in the same way anymore. They are useful for sure (see below), but don’t directly address today’s most pressing questions about the future of the global wine sector.
So we must move from quantitative measure to qualitative assessments and informed speculation, and that’s what Pau Roca provided in the press conference and resultant video report (see YouTube video below). Herewith some of the OIV highlights with my commentary.
An Inconvenient Truth
It is an inconvenient truth that the countries that rank highest for total wine consumption (the United States, UK, Spain, Italy, France, etc.) are also the countries that have experienced the most severe impacts of the coronavirus pandemic. And they will likely to be among the hardest hit by the recession. The global impact on the wine sector will thus be much more serious than if any one or two of these markets were affected.
Globally, we are looking at two important changes: a shift in sales channels and a fall in demand, immediately in some regions and eventually in others (see below). Wine sales via bars, restaurants, and travel and tourism-related vectors (think cruise ships and duty free shops) have collapsed and it is unclear how quickly these market will recover even when the green light is given to re-open.
Supermarket and e-commerce sales have risen. In some regions there is a net gain in sales at least in the short run, but this is not true everywhere. In the U.S., for example, off-premise sales have surged enough recently to produce a net gain in wine revenues in the short run.
Net decreases in both volumes and sales values are projected for parts of Europe where bar and restaurant sales are especially important and travel and tourism are big factors, however, with a resultant rising surplus of wine. Crisis distillation, which we think of as an artifact of the bad old days of the EU wine lake, seems likely to return, and in a big way, in order to stabilize wine producer and grower incomes. Maybe the industrial alcohol that will result can be used for hand sanitizer?
The shift to e-commerce will be welcomed by many small and medium-sized producers who have lost on-trade accounts and cannot compete effectively for high-volume supermarket sales. The crisis is an accelerant in this regard, speeding up an existing trend. Taken together, these impacts present many challenges and some opportunities, creating losers and some winners.
The emerging economic crisis has been compared with the Great Depression here in the U.S. and with the severe economic dislocations following World War II in Europe, but in truth we don’t yet know how deep the decline will be or how long it will last. That will only be clear somewhere down the road when the rear-view mirror image comes into focus.
But the mirror can reveal trends to look for on the road ahead. Here are OIV charts for global sparkling wine consumption. The top chart shows volume and value trends indexed to 2002 = 100. The lower chart shows average bottle price. Focus on the the shift in sparkling wine volumes before and after the 2008-2009 global financial crisis to see how an economic crisis can alter consumption trends.
In terms of volume of sales, sparkling wine took a big dip in 2008-2009 and then returned to its rising trend, but from the lower base. It never caught up to where it would have been without the crisis. That recession dip resulted in a persistently lower volumes against the previous trend.
And — and this is an important point — this is true even though the later years included the global Prosecco boom, which raised sparkling wine volumes even as it lowered average bottle price. Without the Prosecco boom (and the lower average sparkling wine prices it produced), the sustained recessionary impact would be even more pronounced.
Now sparkling wine isn’t all wine and the past isn’t necessarily the future — your mileage may vary, as they say — but this figure shows that recessions can have enduring impacts on global wine markets.
How Not to Waste a Crisis
They say that it is important not to waste a crisis because sometimes important changes can happen in turbulent times that would otherwise be impossible. As suggested above, many wine firms are taking the crisis as an opportunity to shift to e-commerce channels or to diversify their revenue streams. They might never have gotten around to this without the crisis. Now there is little choice.
There are good uses of this crisis, as Pau Roca noted in his comments. This global public health emergency, for example, shows us the importance of scientific expertise and collective action when faced with a global issue. It would be good if coronavirus caused us to think and act more seriously in this way about other global threats, especially the global climate change emergency, which will not go away when the coronavirus crisis is resolved.
On the other hand, Pau Roca notes, it is a wrong use of the crisis to either cynically promote alcohol consumption at this time or to do the opposite, to take this as an opportunity to advance a prohibitionist agenda. It is easy for wine to get caught in the crossfire in this crisis, as in South Africa where, for several weeks, it was forbidden to sell wine in the domestic market (because of concerns about alcohol abuse) and illegal to export it either, because of a ban on non-essential transport. Yikes!
Thanks to Pau Roca and the OIV for their work on these issues. Here’s a video of Pau’s report.
As recent Wine Economist columns have reported, it’s very clear now that the world economy has fallen into a recession, with some countries and regions affected more than others. The depth of recession is hard to gauge. A few weeks ago I thought that things would be very bad here in the United States, with as many as 5 million unemployed. But by late last week almost 10 million had applied for unemployment benefits in just two weeks and the shoes are still falling. Incredible. What will things look like two weeks from now?
Silver lining predictions based on the current wine sales surge aside, it is pretty clear that the wine industry will be negatively impacted by the slowdown in spending. How much depends in part on what “shape” the recession takes, which is to say what factors dominate the decline and how long it takes to recover.
Recessions are like stomachs — they come in lots of different shapes (see the classic 1960s Alka-Seltzer tv commercial above for humorous examples). Will it be a V-shaped recession? Or will we be dealing with a W, U, or maybe an L? The shape matters for the global economy and for the wine economy, too. Herewith a brief survey of the economic landscape.
Best Case Scenario: The Deep V
Initial projections (and many current ones, too) forecast a deep V-shaped recession. The economy will shrink rapidly for two quarters and then rebound just as quickly, so that by this time next year we will be safely back to square one. The logic behind this is simple — everyone goes home to hide out from the coronavirus and, when the danger is passed, the Reset button is pressed everyone goes back to their old jobs and habits.
This scenario makes sense if you think of the coronavirus crisis as just an exaggerated version of the annual seasonal flu season with minimal permanent impacts. But not many hold that view any more from a medical standpoint and there are big doubts about it in terms of the economy. Not all the businesses that shut down as we entered the crisis will be coming back, even with historic levels of economic stimulus.
Consumers will find it hard to recover, too. A 2019 Federal Reserve survey found that about 40% of American households did not have the ready cash or credit to weather an unexpected $400 economic emergency. Those 10 million (and growing) unemployed workers are facing a lot more than $400 worth of problems. The crisis will badly undermine the foundations of their economic security.
But a deep V is not out of the question if the massive bazooka blasts of government aid and helicopter drops of interest-free money are effective. If they work and work fast, then the Reset button will engage a speedy recover. I hope that’s what happens.
I’m worried that the problems are deeper and that you can hit the Reset button until you are blue in the face, but the economy won’t spring back so quickly. If I am right, it is bad news for the wine trade, which might have hoped that consumers would stock up on wine now, drink it all up while sheltering in place, and come back for more in the fall.
Double Dip W
A second fairly optimistic theory currently making the rounds is that the economy rebounds as described above, but then a second coronavirus pandemic wave appears in the fall or early next year. The necessarily closures and quarantines would trigger a second recession, but it would be smaller and shorter because the world would be better prepared.
I don’t have a strong opinion about the double dip recession scenario except to note that (1) there is no reason to think that the current pandemic will be the last we will see and (2) I sure hope we learn from our mistakes this time around.
The double dip W complicates things for wine because it makes it even harder to predict when a sustained economic recover would power higher wine sales. Instability and uncertainty — is this the new normal?
The Classic U-Shaped Recession
The U-shaped scenario is a third possibility. The U-shape recession is longer in duration but less deep than the V or the W. Full recover might take 3 to 5 years, not a few months. This is the classic recession shape and it sometimes works this way. Demand falls for any number of reasons, so that inventory builds up and production slows down and unemployment rises (which further depresses demand). Excess inventories are eventually drawn down and new orders placed, which stimulates production creates incomes and jobs, and encourages a rebound in demand.
The U shape would be a problem for wine because several years of depressed demand would exacerbate the structural wine surpluses that plague the industry both in the U.S. and in many other wine-producing countries. Supply-side vineyard adjustments, which are already recommended in order to reduce capacity, would be critical.
There is reason to doubt the U-shape scenario, however. First, the coronavirus recession is more than just falling demand, so a demand-based theory doesn’t seem to fit all that well. And, second, it would seem like the bazookas and helicopters would shorten the cycle if this scenario holds, so the U would become a V. That’s a bit of good news, which I supply at this point because things are about to get very dark.
L is for Liquidity Trap
The worst case scenario, from a strictly economic standpoint would be an L-shaped recovery. The global economy plunges and then … does not recover for a very long time. An extended recession is of course very bad for the wine industry as it would undercut the economic foundations of wine buyers of all generations.
There are a couple of realistic scenarios that could lead to such an outcome.
The first is a financial crisis. The coronavirus recession may have started with health issues, but there is a high probability that a financial crisis will follow. Not necessarily a banking crisis this time, because banks are better capitalized than a decade ago, although banks and non-bank lenders are still vulnerable The worry focuses on weakness in and liquidity of corporate junk bond debt and emerging market debt and the contagion that collapses in these markets can cause. You might add state and local debt problems to the mix if the crisis persists for more than a year.
We have already seen several instances of financial markets freezing up, or nearly so, in a panic for liquidity. This could create the conditions for a liquidity trap, which is a situation where financial actors are so concerned about liquidity that they soak up any new funds that are injected into the financial system, not spending, investing, or lending. Monetary policy, even maybe helicopter money, is impotent because the new funds just disappear into reserves with no real economy impact.
You can call the second scenario the Zombie Economy and it goes like this. Many firms collapse during the coronavirus crisis, but are kept alive — just barely — by aggressive government support. They don’t die, but they aren’t really alive enough to actually recover either. They continue on for years soaking up trillions of dollars of (debt-financed) resources and preventing an economic shake-out that would free up resources for self-sustained growth.
Is the Zombie L-curve possible? It seems hard to believe … until you call it by its other name: post-bubble Japan.
What’s going to happen? What will the recession look like? I really don’t know, but I hope that the coronavirus health crisis and the economic dislocation it causes are both milder than seems likely at this point and that we return to health quickly. Fingers crossed that the massive economic stimulus that is being unleashed around the world is effective.