Anatomy of WineFuture 2021: Think Big

WineFuture 2021, an ambitious virtual wine conference, is just two weeks away and I am excited to be part of the program. The wine industry has embraced the necessary pivot from in-person events to on-line programs, so there are lots of virtual conferences these days. What makes WineFuture 2021 different?

Thinking Big

One distinguishing factor is the expansive vision of the organizers. This program thinks big, with global reach and broad societal focus.  The gist of the program is this: the world is facing not one, not two, but at least four crises and the future — of wine, but not just wine — depends on what we do to address these challenges. The four crises are these.

  • Coronavirus Pandemic Crisis. The global health crisis comes first if only because it is an inescapable fact of daily life today that is likely to cast a long shadow into the future.
  • Global Economic Crisis. The pandemic and policies to address it have pushed the global economy into crisis, which some regions suffer more than others. China seems to be recovering pretty well, for example, while Europe looks likely to slip into another recession in 2021.
  • Inequality and Social Justice Crisis. The health and economy crises have accentuated many serious underlying issues. Inequality and social justice problems are not new, but they, along with the political reactions and social responses to them, have captured our attention.
  • Climate Change Crisis. Climate change is an existential threat and no serious attempt to address other problems can afford to ignore it.

Each of these crises demands our attention. And although there is a natural desire to prioritize the crises and tackle them one at a time, it is important to consider that they are interdependent and can’t really be unstirred, to use a phrase from Tom Stoppard’s “Arcadia.” It is a dauntingly complicated situation. But that’s not a reason to ignore complications and uncertainties. It is a reason to try to unravel the threads to increase understanding so that effective action is possible. That’s what WineFuture 2021 is about.

Beyond Davos Man

Looking through the many sessions and keynote talks it occurs to me that this is the sort of ambitious agenda that I normally associate with the World Economic Forum, that insanely expensive gathering of the global elite that takes place every winter in Davos, Switzerland (except this year, of course, because of the pandemic). What’s different about WineFuture 2021 is that it focuses on the wine industry, of course, and is open to a much broader audience and pressing practical concerns. “Davos Man” has become a derogatory synonym for a certain insulated attitude toward the world and its problems. I don’t see much evidence of Davos Man at WineFuture 2021 … and that’s a good thing.

So what is it about wine that provokes ambitious projects like this? I pondered this question a couple of years ago at the equally ambitious Porto Climate Change Leadership Conference. Maybe it is because wine is an agriculture product, and so rooted in nature in a way that finance capital and some manufactured goods are not? Maybe it is because so many of the largest and most important wine firms are family businesses, which bring a generational perspective to their thinking. Maybe it is wine’s special ability to bring people together — especially thoughtful people like Adrian Bridge, who was instrumental to the Porto project, and Pancho Campo and David Furer, who are the organizing forces for WineFuture 2021.

And then there’s this. WineFuture 2021 will benefit three non-profit initiatives, with funds from the program plus an auction of items donated by speakers going to the charitable causes. The non-profits are SOS Cape Town, which works to address water issues in South Africa, The Porto Protocol, which promotes sustainability in wine, and North Bay Jobs with Justice, which supports initiatives to improve worker conditions in California.

Unfolding Wine’s Future

The four day conference begins with analysis of the challenges, then dives deep into particular areas of concern, focusing on workable solutions, before gazing ahead to the future. Here is how the first day unfolds.

Francis Ford Coppola opens the show — and with his experience in film I know he will do this in dramatic fashion. Coppola is famous for his cinema work, of course, but also for his important efforts in wine and for the values that guide his many and varied efforts. The first formal panel, moderated by the wine industry’s most famous MD — Laura Catena — will address the inescapable topic of the health crisis.

The second panel examines at the economic crisis. I’m speaker and moderator and am delighted to have Rabobank’s Stephen Rannekleiv, South Africa’s Carina Gous, and Professor Eugenio Pomarici of the University of Padova join me for this discussion.  Together we plan to break down the economic impacts and reactions in ways that generate useful insights. We are followed by important panels on reviewing and reversing discrimination, how to deal with the unexpected, and then a keynote by UNESCO Director General Irina Bokova.

The program on days 2, 3, and 4 follow with more important programing by global leaders and wine industry luminaries including keynote talks by Pancho Campo, UNWTO Executive Director Manuel Butler, and OIV Director General Pau Roca. Click here for a list of all the speakers and here for the complete program.

WineFuture 2021 is kind of a big deal. It thinks big, acts big, and seeks to set a high standard for the wine industry as we move  into the future. I am proud of the wine industry for its support of and commitment to big ideas and big initiatives like this one.

2021 Wine Scenarios: Good, Bad, or Ugly?

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!

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Wine Future 2021, Idaho Wine, The Unified: Wine Economist World Tour

The Wine Economist World Tour is back on the virtual road in 2021. We hope for the return of in-person events before too long, but until that’s possible virtual events will do very well. Here are the first three stops for the new year.

The Unified: State of the Industry

The Unified Wine & Grape Symposium (January 26-29, 2021) is going virtual this year, including both the seminars and the amazing trade show.  It will be quite an experience.

The program addresses a host of important issues, with special attention to wildfire threats and diversity and inclusion initiatives. Several sessions analyze changing wine market conditions including the State of the Industry session on Wednesday, January 27.  Danny Brager, Glenn Proctor, Jeff Bitter, and Jon Moramarco join me on the virtual panel.

Idaho Wine Commission: State of the Industry

The Idaho Wine Commission’s annual meeting goes virtual this year, too, with half-day sessions on February 22-23, 2021. This is the third time I’ve spoken at this event and I am sad that I won’t be able to visit Boise in person to refresh friendships, exchange insights, sample great Idaho wine, and enjoy Boise’s amazing Basque food scene.

I will anchor the first day’s program with a special take on the State of the Industry. Greg Jones, the world’s foremost viticultural climatologist, will speak the following day. Economic change, climate change. Food for thought for Idaho’s dynamic wine industry.

Wine Future 2021: Challenges & Solutions

WineFuture 2021, an incredibly ambitious international event, will happen on February 23-26, 2021. This big international conference boasts an all-star cast. I will lead a panel on the economics of the crisis on February 23.

The folks behind Wine Future 2021 think big. The theme of the first day is the four crisis challenges facing wine (and the world): climate, economy, pandemic, and inequality. Day 2 focuses on solutions and sources of inspiration. The final two days look to the future from many different points of view.

Wine Future 2021 has been hosting a pre-conference webinar series since November to get ideas in the air and discussion flowing. You can view previous webinars (including one I did with Rabobank’s Stephen Rannekleiv) and register for upcoming broadcasts on the Wine Future 2021 Webinar home page.

Anatomy of Georgia’s Wine Export Surge

Exports of wines from Georgia (the country — the cradle of wine — not the U.S. state — the cradle of Coca Cola) have surged in recently years, a fact that is both well-deserved and timely. Georgia deserves the increased recognition of its wine sector both because it really is the cradle of wine, with literally thousands of years of history, and because the wine industry and government have invested heavily in recently years to raise standards and promote products in key markets.

Ticking All the Boxes

Georgia wine’s success in 2020 is especially timely because travel and tourism — another important Georgian industry — has been hard hit by the global coronavirus pandemic. Ideally the wine and the tourism industries work together to generate needed income, especially in rural areas. Georgia is sort of running on one cylinder this year, so wine’s boost is especially appreciated.

Sue and I visited Georgia in 2016 and we were impressed by the friendly people. beautiful scenery, striking crafts and culture, delicious food, and excellent wine. We recently re-immersed ourselves in virtual experiences of Georgia through the third annual Ghvino Forum  and a “Georgian Wines 101” trade tasting of six Georgian wines expertly led by Taylor Parsons with special guest winemaker Iago Bitarishvili of the iconic Iago’s Wines.

My particular focus for the Ghvino Forum was a presentation by Tornike Kodrzaia, Head of Research at TBC Capital on the economics of Georgian wine. Wine is important culturally in Georgia (a fact that a recent film Our Blood is Wine makes very clear), but it is also a key element of the economy.

A Complicated Situation

Kodrzaia presented data that showed the Georgian wine sector to be a complex mosaic. A survey of large- to medium-size wineries, for example, revealed high financial returns — about twice the average for Georgian businesses in general, he said. That is incredible. It would be interesting to dive deeper here, to see if the same is true about smaller wineries and if the returns to growers are also positive.

Georgian wine is not a single thing, so it is important to understand its components. Home production was very high during the Soviet era and is still large, especially compared to other countries we have visited. The foundation of Georgia’s high per capita wine consumption is wine made at home or by friends or family, although Kodrzaia noted that commercial wine sales have increased in the domestic market.

Georgian’s prefer white wine — and it is easy to see why if you sample a fine Chinuri, for example. But traditional export markets prefer red wine, so that is a production focus. Russia and the CIS markets demand semi-sweet red wines, which Georgia produces in abundance. Uncertain political relations, however, are behind a movement to diversity export markets and reduce dependence on Russia.

China has emerged as an important market for Georgian wines, but the Chinese prefer dry red wines over the semi-sweet products. Chinese consumers are drawn to the story of Georgian wine — its long history and Silk Road associations– as well as its quality. Many Georgian Wine Houses have opened in Chinese cities to tell the cultural story and promote the wines.

Rising Tide in the U.S. Market

The United States export market is growing quickly from a small base, with above-average prices.  Over 800,000 bottles were exported to the U.S. through October 2020, for example, a substantial increase from 678,000 in 2019 and less than 200,000 in 2014, when the current surge began. The average ex-cellar price of exports to the U.S. was $5.11, according to Georgian statistics, more than double the export price for China and CIS countries. So you can see why the U.S. market is a focus.

Georgian wine is exceptionally diverse, so it will be interesting to see which of its many facets shines brightest in the U.S. market. Natural wine is a growing market niche and many Georgian products can fly that flag proudly. But many of the traditional producers are quite small, so critical mass is an issue. Iago Bitarishvili is an immensely important producer, for example, but only 5000 bottles of his amber Chinuri were made in 2019 according to the data we received.

Georgia is home to literally hundreds of native grape varieties, which creates a kaleidoscope of interesting choices for some consumers and a confusing blur to others. (Sue suggests an initial focus on red Saperavi and perhaps also white Chinuri — excellent wines that buyers will not be afraid to try to pronounce.) Many of the wines are hand-sells, however, which makes Covid closures of restaurants and wine bars in many areas an additional challenge. The six wines that were included in the Georgian Wine 101 tasting were made from these grape varieties: Tsitska-Tsolikouri, Kisi, Chinuri, Tsolikouri-Otskhanuri, Tavkveri, and Saperavi.

But Georgia, Georgians, and Georgian wine have survived these thousands of years because of their determination, commitment, and resilience, so they are unlikely to be defeated by these temporary challenges. We look forward to learning more and Georgia and its wines and to witnessing their continued export growth.

Georgia’s Lost Eden

Just as I was putting the final touches on this column a friend wrote to tell me about a new Georgian wine he sampled over Thanksgiving and really enjoyed. The project is called Lost Eden Red Blend and it ticks many of the boxes needed to break through in the crowded marketplace. It is a blend of 100% Saperavi from several vineyards — I’m guessing the marketing folks thought “red blend” would be more approachable that Saperavi. The wine is made by an 11th-generation (!) winemaker. The packaging is unique, don’t you think? You will remember this wine if you try it and like it.

The wine is “semi-dry” with 15.4 g/l residual sugar and 13% alcohol. 4500 cases made. Suggested retail $18.99. It is a type of wine we tasted and enjoyed in Georgia and that is popular here in the U.S. where many consumers talk dry and drink sweeter. The wine is modern in style, according to on-line documents, but pays its respects to tradition by blending in a portion of wine made in the traditional qvevri method of clay vessels buried in the ground.

Some of my friends will be disappointed that a wine like Lost Eden gets attention. They would like Georgia to be known in the U.S. exclusively for its traditional qvervi wines. But Georgia is a small country that punches above its weight in the wine world by leveraging all of its many advantages, including some high quality sweeter red wines.

We haven’t tasted the wine, but we have sampled the story told on the website, which draws on the people and country, their culture and history, and of course the food, too, including the iconic supra feast. Georgian wine is complicated, as noted above. This is only one side of Georgian wine, but one that seems likely to spark greater interest in the wine and the country in general.

Georgian wine is on the move. Let’s see where it goes next!

Wine, Tariffs, & Globalization

The wine trade has always been as global as transportation technology and political economy have allowed. So it is no surprise that the economist David Ricardo sought to make his theory of international trade based on comparative advantage clear and obvious by choosing an example that all his readers would appreciate — Portuguese wine exchanged for British wool.

A World of Wine

If you want to get a sense of wine’s global reach today I suggest you visit your local upscale supermarket or wine shop and survey the landscape there. I had my university students do this back in 2011 and reported the results in a Wine Economist column.  The local Safeway store carried about 750 wines from a dozen different countries back them, which caught the students by surprise. The store has expanded its wine wall since then, with even more offerings, and the supermarket across the street has an even larger set of wine choices. Globalization delivers a world of wine to your doorstep!

Global trade in wine, both bottled and shipped in bulk, is incredibly important to wine producing countries. The largest producers — France, Italy, Spain, Portugal, Argentina, Australia, New Zealand, Chile, South Africa — could not possibly sell all the wine they produce in their domestic markets. The collapse of global wine trade would be a global wine catastrophe.

And the trade in wine isn’t the whole story. Global markets exist for corks, capsules, winemaking services (think “flying winemakers”), and bottles, too. We’ve visited wineries in South Africa, for example, that import glass bottles from Europe and then export the finished wine to the UK, China, and the US. That’s globalization! Chinese glass has an even broader global reach.

Peak Wine Globalization?

By some measures globalization generally — taking into account goods, services, and people — reached a peak about the time of the global financial crisis and has since shrunk as a percentage of global GDP. Global wine resisted the de-globalization trend, however, but perhaps now is catching up.

Some of the macroeconomic drivers of wine imports and exports such as rising disposable incomes and stable exchange rates have been impacted by the Covid recession. And of course Covid restrictions and behavioral changes have negatively affected both on-premise wine sales and travel and tourism vectors, too.

There are attractive pockets and niche markets for wine sales all around the world and smart producers have sought them out. But the three big wine targets in recent years have been the UK, US, and China and each of these has become more challenging.

The UK issue is Brexit and it is shocking that there is so much uncertainty about the nature of future trade arrangements with just a few weeks to go before the exit from the EU is final. Britain’s unsuccessful attempt to navigate the twists and turns of Covid have pushed the country into a recession that is likely to grow worse before it gets better — a bad thing for income- and price-sensitive wine demand. Add to this the possibility of a botched Brexit and you might see Britain’s status in world wine trade diminish substantially.

Tit for Tat

The US market is suffering from Covid and recession problems as well and its own set of trade issues. The Trump trade wars have increased tariffs on wine imports from the EU, for example, but also generated retaliatory tariffs on US exports to China.

Wine has been caught in the crossfire in the Boeing-Airbus trade dispute, as The Wine Curmudgeon recently reported. The WTO has ruled that the US can impose tariffs on EU products in response to Airbus subsidies and that the EU can put tariffs on US products because of subsidies to Boeing. Wine figured prominently on the US tariff list, but the EU plans to focus on US spirits instead of wine, with new duties on vodka, rum, etc. on top of previous tariffs on U.S. bourbon.

How did the US wine industry dodge the tariff bullet in this case? Trade policy is sometimes very personal when you think about it. EU tariffs on US wine would fall heaviest on California producers — think for a moment important politicians from California. (Does the name Nancy come to mind?) Not necessarily someone the EU wants to upset.

Tariffs on US spirits fall heavily on Kentucky bourbon producers. Can you think of an important political leader from Kentucky that EU officials might enjoy roughing up a bit? Maybe some guy named Mitch? Just thinking out loud …

China vs Oz

And then there’s China. Down in Australia there is more than a bit of concern about wine trade with China. China has grown to be Australia’s largest wine export market, so rumors that the Chinese government might impose tariffs on or even ban imports of Aussie wine entirely are serious concerns. It is not clear that the US and UK, the other big export markets, could easily absorb the resulting flood of  unsold wine.

Since tariffs are as political as they are economic, there is hope that, with a changing US administration, the troops in the wine trade wars might stand down and a truce be agreed. This could start with both sides backing down over the Boeing-Airbus duties. That would certainly be a good outcome and I don’t think it is impossible.

No Easy Fixes

But tariffs aren’t the only factor preventing a return to the previous era of wine globalization as noted above, so don’t expect a quick fix. International producers seeking to penetrate the US market in particular need to be aware of how much the on-trade to off-trade shift has changed which wines American consumers buy, where they buy them, and how much they are willing to pay.

The process of restoring wine’s global reach seems likely to be a process and probably a slow one, with some firms and regions more successful than others. The faster the global economy returns to health, the faster the clouds will clear for global wine.

Vino-ligopoly: Zero-Sum Wine Game Strategies

Last week’s Wine Economist column was a thought experiment. What if the Covid recession was a game changer like the oil crisis of the 1970s? Both crises undermined fundamental economic assumptions and generated long-lasting impacts. In particular, drawing upon the work of MIT economist Lester Thurow, the oil crisis changed the nature of the game from positive-sum growth to zero-sum competition for shares of the pie.

Maybe the parallel is off base and maybe the game hasn’t really changed. But let’s think about the future the wine industry in the sort of slow growth, low inflation, high debt economic environment that many see on the horizon, with a focus on gaining market share in a stagnant economy.

Wine’s Zero-Sum Dilemma

Zero-sum market environments are nothing new for wine. As this OIV graph of wine demand volume shows, growth in the global wine market pie was once quite strong. Imagine a trend line for 2000-2007 and you’ll see what I mean.

Now draw a trend line for 2008- 2019. It’s pretty much a flat line, isn’t it?  The picture improves if we look at value and not volume because of the premiumization trend, but the the weight of stagnant volumes is still heavy.

So the focus is on gaining market share or raising margins rather than taking advantage of a growing overall market and this creates winners and losers. New Zealand has been a victor for many years. Marlborough Sauvignon Blanc sales have increased year after year, a trend that has continued in the Covid crisis environment. Imports from other countries have struggled here in the U.S. market with even powerhouse Italy under pressure. But the Kiwi wine wave rolls on.

Trading Spaces: On and Off

Perhaps the most obvious example of Covid’s zero-sum impact on the wine market is in the shift from on-premise to off-premise sales. Bars and restaurants have suffered both because of government restrictions on opening and also because concerned consumers have avoided crowded places in general even when not officially restricted. Wine consumption overall has not changed very much, but where consumption takes place and where products are purchased has shifted significantly.

The shift to off-premise consumption has many impacts, especially for wine companies that have worked very hard to place products on restaurant wine lists and for emerging brands that use on-premise sales to get a foot in the door. Shifting your restaurant sales to shops and supermarkets is not as simple as throwing a switch. Supermarkets especially favor big brands and broad product lines and there is some evidence that consumption patterns have moved in this direction, too.

One important impact of this shift, as I explained in an April 2020 Wine Economist column, is consolidation throughout the supply chain. Consolidation is a trend that extends far beyond the wine sector, of course. In an increasingly zero-sum market environment, large firms want to get even larger both in order to reduce margin-sapping competition and also to be able to negotiate better terms and lower costs. It’s not exactly wine-opoly — more vin0-ligopoly (insider joke for economics majors who remember the difference between monopoly and oligopoly, which is competition among a few big players).

Wine Wars / Price Wars

Econ 101 teaches us that one way that firms try to gain an advantage in a zero-sum game scenario is by cutting prices. This can quickly degenerate into a price war, of course, which is the ultimate negative-sum game for sellers (and a bonanza for consumers), especially if overall demand is price inelastic.

Are we seeing price wars on the wine aisle? As I explained in a May 2020 Wine Economist column, wine prices may be falling and rising at the same time, making it tricky to pick out net effects. If you are like me, your email inbox or Facebook news feed usually contains at least one discount offer from a winery or wine club — sometimes at incredibly low prices.

Looking narrowly at off-premise data, it appears that price premiumization continues. Sales of $25+ wines surged early in the pandemic period, for example. But, as I noted in May, these high price sales replace even higher-priced on-premise purchases at least in part. Those consumers were actually trading down as they shifted from restaurant meals and wine to home consumption. This is not a price war because it is cross-channel consumer behavior, but it will have that feel for wineries that cannot easily shift sales from on- to off-premise markets.

Game Changers

It isn’t easy to win if you think of the market in zero-sum terms (although not everyone agrees on this — President Trump famously proclaimed that trade wars were easy to win). Although there are many different strategies to consider, three stand out in my mind.

The first strategy is to analyze changes in market conditions and focus closely on growth segments. There is no single wine market, so a stagnant environment can a bit like a duck on a lake — quiet on the surface, but turbulent underneath. I wrote about Precept Wine in 2019, for example, highlighting their “Willie Sutton” strategy of putting resources into growth segments.

The second is simple: accept that the game is zero-sum and play hard to win on those terms. This means being very aggressive in terms of cost and price and making sure you are on the winning side was consolidation unfolds. Being big doesn’t guarantee success (small can be beautiful in a profitable niche), but there is no great advantage to being middle-sized.

The final strategy is to try to change the game. If wine vs wine is zero sum, try to shift the game to one with better odds. Don’t sell wine, sell a lifestyle. Don’t sell wine, sell community, culture, celebrity, or culinary connections. Ship the wine, sell the dream. Hitch your wine to a horse that can carry it to new market niches. Product differentiation — that’s what it’s all about.

What’s new about this? Nothing. The most popular wine magazines, for example, have long featured food, travel, and lifestyle as hooks for their wine stories.

In fact, using product differentiation to create and protect a profitable market niche is standard “monopolistic competition” theory.  But now might be a great time to think about what makes your wine’s offer distinctive and what you can do to protect yourself from head-to-head zero-sum competition.

Wine 2020: A Guide for the Overwhelmed

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.)

Pre-Existing Conditions

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.

Wild Cards

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.

Wine Economist Guide to Wine, Coronavirus Crisis & K-Shaped Recovery

94528e9a-5845-4871-bef5-3285eca66dd5The Wine Economist has published a steady stream of columns on wine, coronavirus, and recession in recent months. I thought it would be useful to assemble them into a kind of guide so that readers can more easily find analysis on different topics and also see how the crisis has evolved.

Although there was concern about the pandemic early in the year (there were hand sanitizer stations everywhere at the Unified Wine & Grape Symposium in early February, for example), it took a few weeks for the real magnitude of the crisis to become clear.

The first Wine Economist column on the crisis appeared on March 10, 2020 and I remember being worried that my analysis was too dark and my projections too pessimistic. It took just a few weeks for the clouds to clear enough for me to realize that I had been much too optimistic instead!

Since then I have tried to analyze the situation from different angles and report and interpret economic news that might otherwise be overlooked within the wine industry.

Brought to You by the Letter K

A column in early April examined prospects for economic recovery. What shape would the recession take. V — a short, sharp shock and quick recover? Or W — double dip? U shapes are typical, but these aren’t typical times. The greatest fear was an L-shape, the macroeconomic equivalent of “I’ve fallen and I can’t get up.” Each shape presents different problems for the wine industry, so there is much at stake in this alphabet soup.

Recent articles in the Washington Post, Wall Street Journal and Financial Times suggest  that another shape will affect at least some business sectors: the K-shaped recession.  The initial sharp economic decline isn’t followed either a rising tide that raises all boats or an ebb tide that leaves them stranded on the beach . Both rise and fall take place in the K-scenario, just in different parts of the economy and in different ways.

kIt is easy to see the K-shaped scenario in recent business reports. Some parts of the economy have recovered very quickly. The S&P 500 stock market index, for example, soared to new highs.  But large scale corporate bankruptcies are soaring, too. Winners are winning big time and losers are drowning in a sea of red ink. That’s how a K-shape recession works. In fact the bull market rally is really K-shaped — look closely and you’ll find both highs and lows.

Some retailers like Walmart have reported higher revenues and earnings — they are part of the K’s upward stroke. But other important sectors such as travel and hospitality slope down. I know of one integrated hospitality company that is experiencing both parts of the K. Their city-based conference and convention operations are suffering, but their rural properties are doing well as families flee to the countryside.

K Sera Sera?

The K shows up in income distribution, too, as higher incomes are cushioned by investment returns while many lower income workers are more vulnerable to joblessness and lower pay. The current Congressional stalemate regarding supplemental unemployment benefits promises to exacerbate this divide.

I think you can see how the K effect applies to the wine industry. There has been a stark division between booming off-premise sales and a bust in on-premise accounts. It makes a big difference which market segment you are swimming in and, of course, many have feet in both ponds.

And while there is evidence of trading up — the Nielsen figures show that off-premise sales growth is high in the $20+ price segments — the impact of falling incomes and rising unemployment among some wine drinkers is impossible to ignore. Sources suggest that buyers for spot grape and bulk wine are concentrating on the value end of the market and that prices reflect this, with some coastal lots selling at California appellation prices.

One of the many important questions this analysis raises is how does the K-recovery (which is only a recovery for some sectors) resolve itself? What is the bottom line going to be? I am not yet ready to hazard a guess. Please use the comments section below for your thoughts and predictions.

A Guide to Wine Economist columns

Here are links to Wine Economist columns on wine, coronavirus, and recession. The most recent columns appear first. I hope you find the analysis helpful as you navigate these turbulent waters.

Wine, Coronavirus, & the Falling Dollar

xratesWhat 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).

bigmac

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?

 

 

Wine, Recession & the Fed-Ex Effect

botThe 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.

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What’s that gizmo in the photo above? Well, Amazon.com is experimenting with drone delivery. Fed-Ex has tested an autonomous delivery robot.