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In a way, the positive-sum game of the past has been replaced by a zero-sum situation depending on how the market is defined.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.