The Unified Wine & Grape Symposium is North America’s largest wine industry gathering — a vast trade show and ambitious collection of seminars and presentations with something new and useful for every wine professional.
The 2020 Unified was the last in-person wine conference that Sue and I attended before the pandemic closures and protocols hit. So we are looking forward with more than the usual amount of excitement to the 2022 Unified, which is scheduled for January 25-27 in Sacramento.
Trade Show by the Numbers
Last year’s Unified was a virtual event and a very good one, but wine is a people business and nothing can fully replace the in-person experience. The two-day trade show will take place in the newly renovated SAFE Credit Union Convention Center on January 26 and 27. Covid protocols will be followed, of course.
You will find 760 booths and 40 large vineyard and winery machinery areas filled with just about everything anyone might need to grow grapes and make and sell wine. If you want to know what’s new, this is the place to find out.
The 2022 conference program features an expanded three full days of meetings January 25-27. The typically ambitious agenda is organized around wine industry problems and opportunities as the Daily Schedule makes clear. There is a strong emphasis on positive take-aways — practical approaches to dealing with wine industry issues and information to help us all make sense of our changing world.
The wine world has changed dramatically in just a short period of time and the themes of this year’s program take this into account, with sessions on environmental shifts, smoke taint problems, new marketing directions, and attracting and retaining essential talent. Two sessions are in Spanish.
State of the Wine Industry
Once again this year I will be fronting the Wednesday morning “State of the Industry” session. I’ll set the stage by analyzing the changing wine market from a global perspective then the all-star line-up takes over: Danny Brager (changing consumer trends), Steve Fredricks (the supply side of the wine market), Mario Zepponi (investment trends, M&A activity), and Jeff Bitter (grower trends and issues).
Danny Brager returns to the podium at the session’s end to recognize wineries that were particularly successful navigating the wine dark seas in 2021. Lots of information and analysis packed into a 2-1/2 hour session.
I don’t have to tell you that 2021 has not been the easiest year for those of us in the wine industry, so look forward to honest, straightforward analysis with a focus on practical strategies as we move ahead into the uncertain future.
Everyone in the wine business knows about the problem of bottlenecks — and I am not just talking about the kind you see in this photo. Bottlenecks or choke-points are found throughout the wine product chain and any one of them can make life difficult.
Wine’s Many Bottlenecks
Growing grapes can sometimes be a bottleneck since winegrowers get just one crop a year (apart from tropical viticulture, where multiple harvests are possible), so bad weather, smoke exposure, or labor supply problems can really mess things up. Wine production has its bottlenecks, too. Tank capacity is limited in the short run, for example, and after a couple of abundant harvests in a row there can be problems making new wine because there’s no place to put it.
Distribution is another bottleneck of the classic kind you see on the highway. Thousands of wine producers channel their products through a much smaller number of distributors — it’s like losing three lanes on a busy freeway! In my experience every industry tends to organize itself around its most severe bottleneck or inefficiency and here in the US distribution and the three tier system shapes much of the rest of the industry to a certain extent.
These days we are all coping with logistical bottlenecks. The old “just in time” system with hyper-efficient logistics has yielded to a “just in case” system, where we stock up on vital commodities when we can get them because bottleneck delays are so common. It is like the toilet paper situation at Costco on steroids.
I know a couple of wine importers, for example, that received the last of their French Rosé wines only in the last few weeks, just as the summer pink wine season was drawing to a close. The wines were caught in the international shipping bottleneck — not enough containers or port capacity to get product to market as per plan, plus of course higher cost. You know the story. Reports suggest that the ocean shipping problems that are in the news every day will not be resolved soon.
On a trivial personal level, we waited an extra four days for a wine shipment from California that was stuck in the dreaded “Troutdale Triangle” near Portland. Don’t know if the bottleneck was driver availability, trailer space limits, or processing capacity. Maybe all three! At least the wine arrived in good shape. I suspect you have a similar story to tell and perhaps without the happy ending.
Rising Transportation Costs
The cost of shipping a container, when you can book space on a ship, has sky-rocketed. The Drewry World Container Index average cost has increased from less than $2000 per standard container in 2019 to more than $10,000 this summer! The actual cost depends on timing and the specific route desired — it is a supply and demand thing.
The rising ocean shipping costs have an uneven impact on product categories depending on the value of the goods involved. The higher rates have a relatively small impact on the final price of high-value goods such as electronics. But bulky, lower-value products can be hit pretty hard and there are stories circulated about items, such as cheap garden furniture from China, where the new shipping rates are higher than the value of the goods themselves.
Higher shipping rates act like a $8000 per container tax on imported wine, with the proportionate burden falling hardest on less-expensive wines. The higher cost combined with less dependable delivery schedules creates real problems for anyone with business interests in imported wine.
In the past such ocean shipping disruptions have been both smaller and relatively brief. The magnitude of this situation is unprecedented, however, and there are indications that higher costs will not as quickly disappear. Ocean shipping is a boom-bust industry. When ocean rates have been high as they are now, shipping companies have invested heavily in extra capacity that, when it came on-line all at once, pushed rates and profits down. The big shipping firms today intend to be conservative in their orders for new ships to prevent a collapse in rates a few years down the road.
The Big Bottleneck
The bottlenecks within the wine industry directly affect the wine trade, but they are not the only impacts to consider. Micro-bottlenecks within industries like wine aggregate into macro-bottleneck problems and risks that affect national and the global economy.
Come back next week for thoughts about how this big bottleneck issue might affect the economy overall and the implications for wine.
Wine has become one of the world’s most globalized consumer goods. The OIV estimates that 45% of all wine crosses at least one international border on its way from producer to consumer. And that’s just the finished product. If we examine the whole product chain, to include bottles, corks, and so forth, wine’s globalization index would be even higher.
So it is significant that wine today faces headwinds, obstacles, and distortions that make global wine a risky business. Taken together, these forces impact every part of the wine trade.
The covid pandemic has created new headwinds and magnified some existing ones that make global wine trade more difficult and uncertain. On-premise sales are critically important to some segments of the wine industry, for example, and the recovery from lockdowns is slow, uneven, and uncertain. Bars and restaurants have struggled to refill to capacity in many cases, even where rules permit this, because of both uneven response by wary consumers and difficulty attracting and retaining service sector workers.
Many wineries invested time and effort into establishing alternative paths to market during the pandemic and now they must wonder whether direct-to-consumer and other strategies will continue to be as critical to success and what aspects of these efforts should be expanded in the future. There are a lot of puzzle pieces to put together as we move into the new normal and the picture that they create won’t be the same as it was pre-covid.
Wine globalization has been powered by favorable trade policies and efficient transportation logistics over the last 50 years, so it is significant that obstacles have appeared in both areas. US tariffs, Chinese tariffs, Brexit uncertainty — the list of trade policy factors that create barriers to particular wine flows is much longer than in the past and some counties (Australia, I’m looking at you) have been hit particularly hard.
But an even bigger obstacle for wineries not directly affected by trade policy has been the breakdown of ocean shipping logistics, which moves bulk wine, packaged wine, and intermediate goods such as bottles and corks. A world-wide shortage of shipping containers is to blame and big increases in the costs of shipping a container is one result. Port congestion, which adds extra days or even weeks and much uncertainty to shipping schedules, is an unwelcome side effect.
Finally, foreign exchange rates have introduced or magnified distortions in the relative prices of wine on international markets. The graph above shows how the US dollar (USD) has fallen relative to the Euro in the pandemic period. The dollar has recovered a bit of its value recently, but it is hard to know if this rise can be sustained. In general, a falling currency encourages exports and discourages imports. The impact on US wine exports has been muted, however, by the several factors noted above including especially demand-squelching pandemic lockdowns in target markets.
The dollar’s fall came as a bit of a surprise, as I noted in a column about a year ago. Now there is another surprise. The Economist newspaper reports that the dollar is still over-valued by over 10 percent against the Euro!
The Economist released its most recent Big Mac Index report last week, which uses international fast food hamburger price differences to estimate the relative purchasing power of various currencies. This might sound like a foolish exercise, but the Big Mac Index has a pretty good track record as a general indicator of over- or under-valued currencies.
The June 2021 Big Mac Index finds only four currencies over-valued relative to the USD, so the currency distortion would favor US wine export sales. Significantly, Sweden (+9.6%) and Norway (+11.5%) are in this group and they are both importanr potential export markets for US wine.
The list of currencies that are under-valued compared to the USD is long and includes a number of significant wine producing countries that gain an advantage from the exchange rate mis-alignment.
Euro area -11.1%
New Zealand -15.7%
South Africa -59.6%
Several of these countries are important wine exporters and so their under-valued currencies give them a cost advantage in competition for US sales. Global wine has always been a tough business. The current combination of these headwinds, obstacles, and distortions make the global wine trade particularly challenging as we head into the fall.
What will the wine world look like a year from now? Will our assessment of 2021 be good, bad, or ugly? Last week’s Wine Economist column briefly explored a “Roaring Twenties” scenario that is making the rounds both for wine and for the economy generally.
The Roaring Twenties theory holds that the pandemic has created pent-up demand for all the things that we’ve had to sacrifice in the last year but that will soon become available again. Parties and celebrations. Gatherings in bars and restaurants. Travel and tourism. They won’t all necessarily come roaring back at once, but the rebound will be substantial and be fueled by a corresponding rebound in economic activity.
The Roaring Twenties scenario is what I call a “ceteris paribus” (holding all else constant) theory. That is, it assumes that pretty much everything remains the same except that the covid vaccine lets people come out and play. With interest rates pegged near zero, fiscal stimulus doubling-down, and financial markets soaring, the good times will surely roll, or at least that’s what some hope and others firmly believe.
The Wheel’s Still in Spin
But it is important to keep in mind that a lot of positive events have to line up all at once for this to happen. I was reminded of this by the cover of The Economist newspaper’s The World in 2021 issue, which features a casino slot machine device (and not a crystal ball) as its symbol. The future isn’t written and waiting to be perceived is the message here. There is a lot of risk and uncertainty ahead.
The future, whatever it turns out to be, won’t be just one thing. It will be the combination of what happens on the politics wheel, the economics wheel, the public health wheel, the environment wheel, and so on. Our experience in 2020 shows that these wheels can sometimes align in terrible ways — think pandemic, recession, wildfires, and social and political unrest. There is even the chance of problems in one area cascading through the system in a vicious cycle.
We might feel we deserve the happy flip-side of things in 2021, but the odds of a golden Goldilocks outcome are longer than we’d like. We should anticipate problems as well as potential good times. Not trying to be unnecessarily gloomy — just realistic.
To simplify, let’s imagine that 2021 depends on four variables or spinning wheels: public health, economy, politics, and the possibility of “black swan” wild card events Clearly there are many different possibilities for public health. The hope for very fast roll out of vaccines is no longer realistic, although there is a sense that officials are learning quickly about troublesome bottlenecks. Fingers crossed …
Attention is focused on vaccines, but the virus surge continues in many regions with record case counts and deaths. It isn’t clear how quickly vaccination can overcome community spread and whether this third infection round is the last or will be followed by more surges or echoes of this one into the future.
Spinning the Economic Wheel
Clearly a lot is riding on where the public health wheel settles, especially for the travel and hospitality sectors, which are economically important both in general and for the wine industry. Then there is the economy wheel. to consider.
The relatively strong economic recovery in the United States is built on heroic levels of government support, which will end at some point, but when? Will monetary authorities hold their nerve and keep the spigots open as the economy begins to open? Will fiscal stimulus continue to preserve incomes and employment? What about the high levels of debt that corporations and governments have taken on?
This will depend to a certain extent on politics. Each of the major economies is currently experiencing its own unique brand of political instability or crisis. It is easy to imagine scenarios where political crisis in one country creates contagious economic or social problems elsewhere. Here in the United States there is widespread disagreement about what a good political result would look like. Many observers, for example, were happy when it looked like Republicans would control the Senate and gridlock would prevail. Gridlock, to this way of thinking, would mean that only the most moderate policy actions would prevail.
The Curse of the Black Swan
Now, with Democrats in the White House and majorities in the House and Senate, more aggressive policies are possible, at least in theory. Is this good or bad? Opinions vary according to political persuasion and the particular programs considered. So you can see that ceteris is unlikely to be paribus in 2021. And that doesn’t take into account any “black swan” wild cards that might be on the deck.
A Black Swan event is something with very low (but not zero) probability, but very high impact. The covid pandemic of 2020 is a good example of a Black Swan event. The possibility of a global pandemic, originating in Asia and spreading through international travel vectors has been known for some time. Indeed several of my university students studied the situation in the aftermath of earlier Asian pandemics and a number of government- and non-government agencies worked on detailed response plans.
It seemed pretty clear that there would be a problem eventually, but the particular path and specific consequences were not clear. Looking back it appears that countries that had previously experienced such a pandemic took the possibility more seriously and acted more decisively than others did. In any case, the low-probability event happened and the cost has been very high.
Black Swan Inflation
Inflation is the Black Swan event I most worry about for 2021. (Although I am not sure which kind of inflation — see Neil Irwin’s recent New York Times column.) Most economists acknowledge that there is a chance of an inflation spike is 2021 or 2022, but most assign a very low probability to the threat. Nothing to worry about. And probably they are right. However …
Literally trillions of dollars (and other currencies) have been pumped into the global economy recently and so far inflation in general has remained very low Governments and businesses have borrowed enormous sums at the resulting low or even negative interest rates. A resurgence of inflation would push interest rates higher and alter dramatically the economic landscape.
In a way, an inflationary surge would make the covid pandemic crisis a bit like the oil crisis of the 1970s. The initial impact of the oil crisis was harshly disruptive, but the long term effects, including both high inflation and the draconian policies needed to contain it, were challenging, too, and cast a long shadow over global events.
Good, Bad, or Ugly?
So you can see that the Roaring Twenties is just one of many possible economic scenarios and, even if it comes to pass as many hope, there are still many possible pathways and denouements. Good, bad, or ugly? Too soon to tell.
I know that some people believe that wine is immune to economic cycles, but wine businesses are businesses with debts, interest payments, counter-party risks, and so on. What happens to the economy happens to all of us in one way or another and it is wise to think about the possibilities.
Times are changing and perhaps that’s as much as we can confidently predict. This kind reminds me of an old Bob Dylan song. Listen up!
As the door to 2021 slowly swings open, the landscape looks both familiar and transformed at the same time. When the U.S. wine industry entered 2020, for example, the problems seemed to be stagnant demand on one side and excess wine grape supply on the other. Not a good situation for the world’s largest wine market, but not something beyond our ability manage, either.
Those problems are still with us, although they’re a bit lost in the fog. Structural wine production capacity is still too large, but this is disguised a bit by a smaller 2020 harvest in California and widespread smoke damage, which took some grapes off the market.
Overall wine demand is still under-performing, too, but that is hard to gauge exactly because of the way that wine channels have been disrupted by the covid pandemic in general and bar/restaurant restrictions in particular. Consumers are buying much more through retail channels, a good deal more direct-to-consumer and much less in the on-trade. Whatever the net impact, which seems to be negative, the effects on individual wineries in particular sales channels is significant.
The Unified Sine & Grape Symposium‘s “State of the Industry” session is about two weeks away so those of us on the panel are working to put our thoughts about 2021 in order. Here are some of my working notes. The theme here is that, while there is plenty of bad news going into 2021, if you take an international perspective on the U.S. situation, it quickly becomes clear that things could be much worse. If that sounds like a “glass half full” perspective, well it is.
Take the loss of on-premise sales. These lost sales are costly indeed, but producers in Europe had it much worse because they depend much more on bar and restaurant sales. No wonder their industries are hurting to badly and that crisis distillation is back in some E.U. countries.
If people in the U.S. wine industry are looking for something to be thankful for, they might consider how lucky they are not to be Australia. The U.S. industry has been caught in the trade war crossfire to be sure. Importers and distributors have been hit by U.S. tariffs on many European wines, for example, and China has imposed tariffs on the relatively small amount of U.S. wine sold there.
As if matters weren’t bad enough, the U.S. recently imposed 25% tariffs on French and German still wines above 14% abv, which had been spared in earlier rounds of the trade wars. U.S. firms that import, distribute, or sell these wines are collateral damage in the bigger trade fight, which has nothing to do with wine. These are daunting challenges, to be sure, but nothing in comparison to what Australia is experiencing.
The Australian wine industry invested heavily in opening the door to the Chinese market and moving up-market once inside. And they were remarkably successful. As you can see above in data from Wine Australia, China was by far Australia’s largest export market by revenue in 2019, accounting for $1.3 billion of the $2.9 billion of wine exports. China bought almost three times as much as the #2 export market, the United States.
Australian wine is #1 in China, too, measured by value. Australia overtook France in the Chinese sales league table in 2019.
This was good news for Australian producers back with economic relations with China were happy ones, but now a variety of tensions exist and China was imposed up to 212% tariffs on Australian wine. I don’t know if sales will go to zero immediately, but that is a lot of tariff to absorb. Although anti-dumping measures are cited in this case, the real conflict is elsewhere. Economist have long held that anti-dumping tariffs, ostensibly designed to deal with damage from predatory pricing, are often subject to political abuse.
Australian producers hope to be able to divert previously China-bound production to other Asian markets and some of it may end up in the U.S. and U.K., too. But realistically there is just too much wine for these markets to absorb and margins in the pivot markets are unlikely to match those in China.
But things could be even worse. What if Australia was even more dependent on Chinese market? The turn of the political screw would be even more painful then. And that is what happened in the past to Moldova and to Georgia when their biggest wine export market, Russia, decided to use wine as political tool.
The Good News is That the Dollar is in the Dumpster
You can find another good news story by looking at the foreign exchange markets. Typically when there is any kind of crisis around the world there is a rush to the security (and liquidity) of the U.S. dollar. Uncertainty drives the dollar in turbulent times. Or at least that’s what we thought.
A strong dollar translates into cheaper imports, which would not have helped in any way restore domestic balance in the U.S. wine market. A strong dollar isn’t the worst thing for domestic producers, but the negatives outweigh the positives for many firms.
As I noted in a Wine Economist column back in August, this crisis is different and the dollar didn’t soar, it plunged as this graph (above), which shows the dollar versus the euro, indicates. And then, after bouncing around for a while, it plunged again.
Now this is bad news for consumers who want to buy imported wine because a cheap dollar buys less on international markets, so European wines, many already subject to U.S. tariffs, are even more expensive. But it is good news for U.S. wine producers who compete against euro-priced imports. The cheap dollar gives them a cost advantage in the domestic market. There is also a theoretical advantage in export markets, but honestly those markets are pretty congested right now with lots of unsold wine (some of it from Australia) looking for a home.
But foreign exchange news isn’t completely sunny for U.S. wine because the dollar isn’t falling against all currencies. As this graph shows, the Argentina peso is even weaker, so the U.S. dollar steadily increased in relative terms, making wine from Argentina a fierce competitor where price is the key factor, especially bulk wine trade.
Economics is often called the dismal science and these examples of good news have a decidedly glass-half-empty feel. Stay tuned for glass-half-full analysis in coming weeks.
I’ve been thinking about what the global wine industry will look like when 2020 finally draws to a close and I’m feeling overwhelmed. So many challenges. So much to digest. Maybe you feel overwhelmed, too?
I did an internet search for “Tips for the Overwhelmed” and, well, it only made things worse. So many tips for so many problems. One website had 44 ideas for what do to when you are feeling overwhelmed. Too much!
Here’s what has provoked these thoughts. Rabobank’s Stephen Rannekleiv and I will be having a conversation about the state of the wine business on November 4 in the first of a series of webinars on challenges and opportunities for wine. The webinars are meant to develop ideas that will be discussed at WineFuture 2021, an important global wine industry virtual conference set for February 23-25, 2021. (Use the links to learn more about the developing webinar schedule and the upcoming conference.)
My go-to coping mechanism has always been to break down problems into component parts, which can be somewhat easier to deal with, and then try to put them back together again. This is the break-down column where I’ll look at the challenges the wine industry faces. Next week’s Wine Economist will try to put things back together. As always, use the comments section below to suggest things I’ve left out or got wrong.
As we entered 2020, global wine confronted a number of serious challenges including …
Stagnant Long-Term Wine Demand. As I noted in 2019 (in a column titled Global Wine’s Lost Decade) the relatively strong growth in global wine demand of earlier years peaked in around 2007-8 and has been relatively stagnant since then. (See OIV data above.) There are a varieties of demographic and economic theories for this condition, but the important fact is that no important wine region (with the possible exception of New Zealand) can be confident today that rising demand will smoothly absorb increased production.
In a way, the positive-sum game of the past has been replaced by a zero-sum situation depending on how the market is defined. That’s a big change.
The American wine industry entered 2020 with a lot of wine in the tanks and stagnant overall wine demand. Although wine sales revenues were increasing modestly, due to premiumization, the volume of sales, especially at lower price points, has fallen. Younger generations of consumers were not picking up the slack as baby boomers reduced consumption. Hard seltzers and similar products accounted for most of the growth in beverage alcohol sales.
Climate Change Challenges. The supply side of the global wine industry is increasingly affected by climate change, both the global warming that we normally think of when “climate change” is mentioned and also the increased instability of weather that accompanies it. The 2017 global wine grape harvest was the lowest in a generation due to unfavorable weather conditions in key regions, for example. The 2018 harvest, however, was abundant. Meanwhile global temperature records continue to be set year after year.
The bottom line is a boom-bust pattern due to climate change within a general environment of excess supply and rapidly evolving growing conditions.
2020 Perfect Storm
The events of 2020 (so far) have added additional challenges and headwinds. Chief among the events are …
The Coronavirus Pandemic and Channel Shifts. The public health impact of the coronavirus pandemic is the most important thing, of course, but the closures and lockdowns designed to reduce contagion disrupted wine sales channels dramatically, too. There was a major shift in where people were located, with work-from-home replacing on-site work for many. Home was also the default location for those who lost jobs due to closures, suffered reduced employment hours, or simply needed to be at home to tend to family members including children engaged in remote learning.
Eating and drinking are now more home-based, too. Bars and restaurants were ordered to close or, if allowed to remain open, experienced vastly lower customer counts. These factors resulted in a dramatic channel shift for wine sales, with on-premise replaced by booming off-premise sales. Overall wine consumption decreased little if at all, depending on locality, but the composition of demand changed, especially favoring high volume brands. Wineries that depended disproportionately on cellar door and on-premise sales were forced to pivot quickly to direct-to-consumer sales and other channels.
The Recession and Economic Policies. Fear of contagion plus the policies necessary to safeguard public health created a global recession. Heroic economic stimulus in many regions lessened the short term impact of the initial economic crisis, but it is unclear that stimulus can be sustained as the health crisis continues.
There has been much discussion of the “shape” of the recession, with optimists anticipating a short V-shaped downturn and pessimists fearing a long Japanese-style L shape. At this point the two shapes that seem most relevant are W — initial decline and recovery followed by a second wave decline — and K — quick recovery in some sectors such as finance but continued decline in others, increasing economic inequality.
Needless to say, wine demand is conditioned by who has lost or gained income, how much, and how they see the future.
Every important wine region has wild cards that make the situation more complex. Chile faces social unrest, for example, and Argentina must deal with financial risks as it walks the tightrope between international debt default and domestic financial crisis. Australia has entered its first recession in a generation and finds relations with China, a key market, under unwelcome pressure.
Europe and the UK seem locked in a Brexit death spiral, with wine caught in the middle. Wine is also in the crossfire in the EU-US trade war tit-for-tat, with US tariffs in retaliation for Airbus subsidies now followed by EU tariffs in retaliation for Boeing subsidies.
Wild cards abound in the US starting with wildfires in wine country and ending with the election, which has drawn every topic into the culture wars. What a mess! The wildfires, which seem to grow more destructive every year in terms of direct impacts on vineyards and cellars, smoke taint issues for grapes and wine, and impact on wine tourism operations.
Winegrowers in the US are also anxious to know how the Constellation-Gallo deal, which should close in November, will work out. The deal is finishing in a wine market environment that looks very different from the one when it was first struck.
Add all these factors together and, well, it is no wonder that you feel overwhelmed. Pretty much no matter where you are in the world of wine or what position you have in the supply chain, you confront change and challenges on multiple fronts. Tune in next week when I will begin a short series of columns that try to sort out what the future might hold.
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.
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
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.