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.
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.
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.
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.
The 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.
It 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.
What is going to happen to the value of the U.S. dollar as the coronavirus crisis unfolds? That was the question that a couple of wine economists (I was one of them) were asked in a zoom meeting back in May.
The dollar’s going to stay strong, we both said. That’s what happens in a crisis. Investors rush to the safety and security of the dollar whenever there is uncertainty and risk. Ironically, the dollar sometimes rises even when the U.S. is the source of the uncertainty, but that’s another story.
Up and Down Economics
Zoom ahead a few weeks to the start of August. The dollar’s value unexpectedly fell dramatically in July as this chart from x-rates.com shows — the largest monthly drop in a decade. The sudden exchange rate change will affect the economy directly and indirectly in many ways — some even believe that it has contributed to the somewhat puzzling situation in the stock market, where values have risen recently despite bad economic and pandemic news. The cheaper dollar makes dollar-denominated financial assets cheaper for foreign buyers, who look for capital gains when the currency eventual rebounds.
What happened? Why? And why does it matter for the wine industry?
Some people believe that a strong dollar is good and a weak dollar is bad, but the truth is that exchange rate shifts create many positive and negative forces and the net effect depends on the economic environment at the given point in time and your particular circumstances. The strong dollar of the last few years, for example, made wine imports cheaper in dollar terms and discouraged wine exports — both big negatives for U.S. growers and producers.
But the strong dollar also tended to reduce the cost of equipment and supplies used in U.S. wine production including vineyard and cellar machinery, bottles, capsules, corks, and so on. The strong dollar also indirectly benefited the U.S. companies that import and distribute foreign wine and the on- and off-premise firms that sell it. Wine has a long supply chain and so there are complex exchange rate effects.
The falling dollar tends to reverse all this by increasing the cost of imported wine and wine production supplies and making U.S. exports relatively cheaper abroad. If you run a vineyard in California, the reduced competition from imports is good news. If you run a distributor that specializes in imports this is more bad news in a year with lots of bad news to digest.
Elementary, My Dear Watson
Although the falling dollar caught me by surprise because I focused on the crisis effect, others who watched exchange rate fundamentals might have seen it coming. That’s because there were indications that the U.S. dollar was over-valued and ripe for a fall at some point.
When we say that a currency is over-valued, we mean that the exchange value is such that the currency purchases more abroad than it does at home. If you travel to Europe, for example, and your euro purchases seem cheap in terms of their dollar equivalent, it is an indication that the dollar is over-valued (and the euro under-valued).
The Economist newspaper keeps track of how much currencies are over- or under-valued using their famous Big Mac index. As this graph shows, as of June 2020 the Economist index suggested that U.S. dollar was over-valued compared to all but three (Sweden, Lebanon, and Switzerland) of the currencies that the newspaper tracks.
The British pound was 25% under-valued relative to the dollar. Other wine country currencies: Canadian dollar (-11%), Euro (-16%), Australia (-19%), New Zealand (-23%), Argentina (-38%), Chile (-39%), and South Africa (-67%). Logically, the U.S. dollar would need to fall quite a lot to restore equilibrium between the currency’s internal and external purchasing power.
In my experience, the Big Mac index is a reasonably good predictor of long-run exchange rate tendencies, but there are many other factors that impact the exchange rate in the short term. In particular, the flight to safety that many of us expected seemed very likely to overwhelm the trade-based adjustments that the Big Max index is based on.
None of the Above
But an article in last weekend’s Financial Times suggests that there is more going on than adjustment based on “burgernomics.” Faith in the U.S. as a safe harbor in the storm has weakened, according to the article, because of what is seen as a very poor response to the pandemic. The coronavirus continues to spread, the economy remains very weak, the Federal Reserve is running short of tools, and Congress is gridlocked. And have you heard that there is an election coming up? The eurozone looks like a calmer, safer haven by comparison.
Safer yet, in some eyes, is gold, which isn’t tied to any particular country. Buying gold is a way to vote “none of the above” regarding major currencies. (There’s also Bitcoin, but that’s another story;)
The price of gold hit a record high of $1983 per troy ounce last week. The high price is the result of some investors looking for safety and others making speculative purchases. Demand for gold for use in jewelry and so forth is down because of the pandemic’s impact on sales of the finished products.
Looking ahead, it is difficult to know where the dollar will go next. Financial markets tend to over-shoot — to zoom too high when they are rising and over-state declines. So it will take a while to know whether July’s dollar decline will persist or if the currency will bounce back quickly.
So pay attention to the risks that exchange rate variability produces. Many wineries will find their exposure to exchange rate risk is small and difficult to identify. But if you have substantial foreign currency costs or revenue streams, you might think about hedging strategies to insure to some degree against unfavorable movements. And everyone ought to consider counter-party risk: are the people who owe you money exposed to increased risk? Will it affect their ability to fulfill their obligations?
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.
Wine consumers today seem to be going “up the down staircase” (to evoke the clever title of Bel Kafuman’s best-selling 1964 book). They are buying more expensive wine at lower prices. That sounds crazy! Read on for analysis and a look back to what happened in 2009.
The COVID-19 Wine Boom
Recent consumer trend data from Nielsen and Wines & Vines Analytics present a complicated picture of off-premise wine consumer behavior for March and April 2020. Wine sales at supermarkets and other retail outlets have boomed, as you know. The initial pantry stocking frenzy was followed by a growth plateau, but high growth rates have returned in recent weeks.
The dollar value of off-premise wine sales in the Nielsen-measured channels has risen at a 30% rate since the COVID-19 crisis began compared to the same period last year. Wine sales in the week ending March 21 surged to 66% more than the previous, year which is amazing.
The rise in off-premise sales is partially offset by the collapse of the on-premise (bars, restaurants) channel. Net sales are up, but not by as much as you might imagine. Nielsen estimates that off-premise sales need to rise by roughly 22% (by volume) to offset the falling on-premise sales. Wine volumes are up 27.7% since March 7, so that’s a 5% net volume gain.
Less is More? Or is More Less?
Since sales volume is up 27% and sales value has risen 30%, it is clear that unit sale price has increased and this is true because of the distribution of purchases in different price points.. While sales have increased in all price categories, the fastest growth is for wines $11 and higher. Interestingly, the highest percent growth rate is in the $20 to $24.99 price category.
Some speculate that this rise is driven in part by consumers who are substituting retail wines for the ones they would otherwise have purchased at a restaurant. A $25 wine purchased at retail and consumed at home (perhaps with a home-delivery restaurant meal) might seem like a bargain compared to a similar wine with a higher mark-up on a restaurant wine list. Bottom line: consumers are moving up the wine wall, but paying less at the same time.
Online wine purchases are booming, too, but the reported pattern is different according to shipment numbers for April 2020 from Nielsen’s partnership with Wines Vines Analytics in collaboration with Sovos ShipCompliant. Sales volume increased by 45% compared to the previous year. But sales value rose by only 15%, which means that average unit price has fallen.
Indeed, the average bottle price in this sales channel fell from $42 to $33. Some of this might be due to changes in the commodity composition on online purchases, but readers of this column probably guess that discounting also plays a part. Here at Wine Economist world headquarters our email inbox is filled with sales offers that start with free shipping and continue with increasing levels of discounts.
Significantly, according to the Nielsen data, Napa Valley wines, which are the Big Dog in the DtC market, had the largest average price reduction. Our friend Allan found a Napa winery in obvious financial difficulty that offered full cases of their California- and Napa-appellation wines for the price of one or two bottles. Some of the deals like this are shared with club members, but some are kept quiet indeed to avoid reputation erosion.
So it is up the down staircase. DtC buyers are snapping up expensive wines at discount prices. Many thanks to Nielsen’s Danny Brager, Senior Vine President Beverage Alcohol Practice, for sharing data and insights.
Up and Down in 2009
Consumers also looked for ways to go up the down staircase during the global financial crisis a few years ago. Here are two Wine Economist columns from 2009, when internet sales were less of a factor, that examine how wine consumers were shifting their buying strategies during the global financial crisis: Wine, Recessaion, and the Aldi Effect and Extreme Value Wine Goes Mainstream.
Significantly the bargain-seeking changes we saw then didn’t really disappear when the economy improved. Wine buyers continued to search out bargains, at both low and high price points even as “premiumization” swept through the market. Hey, that’s up the down staircase again!
Wine , Recession and the Aldi Effect
January 13, 2009
Aldi stores are about to expand in the United States, drawn here by the recession according to an article in today’s Wall Street Journal ( “Aldi Looks to US for Growth” ). I wonder how this will affect the wine market?
A Tough Nut to Crack
Aldi is a German “hard discount” store chain. A “hard discounter” sells a limited selection of house-brand goods at very low prices in small, bare-bones outlets.
Hard discounters are a niche, albeit a growing one, in the U.S. Wal-Mart is a successful discounter, of course, but not a hard discounter because it still features many mainstream branded products, its prices are higher and its stores a bit more plush. Aldi and other hard discount stores drove Wal-Mart out of Germany, according to the WSJ article, but the U.S. market has been a tough nut for the hard discounters to crack. American consumers are primed to buy brand-named products and they like lots of choice, marketing experts say, and so tend to resist the house brands that hard discounters feature, which has limited their penetration here.
Germans are more willing to sacrifice brand names for low prices, apparently. Aldi and other hard discounters are dominant powers in German retailing. The WSJ reports that 90% of German households shop at Aldi stores and 40% of all grocery purchases are made in hard discount outlets.
Divide and Conquer
Interestingly, there are actually two Aldi store chains in Germany. Aldi is short for Albrecht DIscount. The Albrecht brothers who founded the company after World War II fell out over the issue of tobacco sales in their stores. They divided the German market between them (Aldi Nord and Aldi Süd) and then, eventually, split up the world market too. Here are links to Aldi USA and Aldi International websites if you want to learn more about this retailer’s local presence and international reach.
Wine is an important product in Aldi’s German stores, as you can see from the wine selections featured on their website. I believe that Aldi is the largest single retailer of wine in Germany.
Since Germans are rich and Germany makes great wines, you would think that Aldi must sell mainly fine wines, but you would be wrong. Aldi’s median German wine sale is red not white, imported from a low cost producer, sold under a house-brand name, packaged in a box or TetraPak and priced at around one euro per liter.
You could say that it is Two Buck Chuck (TBC) wine, but in fact TBC is more expensive. TBC is to Aldi wine as Wal-mart is to Aldi itself. (Note: Wal-Mart now has its own brand of two dollar wine, which makes this comparison even more appropriate. It is called Oak Leaf Vineyards and is made for Wal-Mart by The Wine Group.)
The Aldi Effect
Aldi figures that the recession is its moment to press more vigorously for U.S. market share. Data indicate that consumers are much more cautious now, so perhaps they won’t be so picky about brand names and will, like their German cousins, be willing to trade down for a lower price. TheFinancial Timesreports that Aldi sales in Great Britain are up 25 percent! Aldi plans to speed up store openings in the U.S. and to expand into New York City. New York! If you can make it there … well, you know.
The good news here is that Aldi’s U.S. push may also help drive wine deeper into the U.S. consumer mainstream. You can say all you like about the quality of Two Buck Chuck but it sure did help expand the wine culture in the U.S. and some (but not all) my TBC-drinking friends have moved upmarket for at least some of their purchases. The wine may not be to everyone’s taste, but its market impact has not been all bad.
Will Aldi Succeed?
Will Aldi’s drive be successful? There is reason to think it will be. They seem committed to tailoring their hard discount operations to local market conditions, which is important because markets have terroir as much as wine.
But there is a more important reason. Both German Aldi chains are present in the U.S. now, although you are probably not aware of them. Aldi Süd operates on under the Aldi name, of course, with the same logo as in Germany. The owners of Aldi Nord invested years ago in a different chain, based in California and intentionally tailored for thrifty but upwardly mobile U.S. consumers. It’s an upscale Aldi Nord and it has been very successful here.
Perhaps you’ve heard of them. They have limited selection, smaller stores, lots of house brands, and low prices. They even sell a lot of wine. The name?
Oh, yes. Trader Joe’s!
Extreme Value Wine Goes Mainstream
November 1, 2009
Our friend Jerry doesn’t seem like the kind of guy who would go digging around in the closeout bin or shopping for wine at Aldi — too classy for that — but there he was at Joyce and Barry’s house on Friday showing off his latest finds: cheap wine from a Grocery Outlet store.
The wine wasn’t so much good or bad as simply intriguing — is it really possible for a sophisticated wine enthusiast like Jerry to be satisfied shopping for wine at an “extreme value” store? Only one way to find out, so we got in the car the next day and headed for the strip mall.
Searching for Extreme Values
Headquartered in low-rent Berkeley, California, Grocery Outlet bargain market is America’s largest extreme value grocery chain with more than 130 independently owned stores in six western states. It has been in business since 1946. Prices are low, low, low.
Grocery Outlet stores here in the Pacific Northwest are supermarket sized spaces filled with off brand and closeout products along with a wide enough selection of fresh goods to allow families to do all their grocery shopping in one place. They are nice if not especially fancy stores. I can see why budget-minded families shop there.
The wine corner at the nearest store was large and well-stocked. Most of the brands were mysteries (one was even named “Mystery” as in “Mystery Creek” or something like that), although a few third and fourth tier products from recognized mass-market makers were available. Mainly, I think, these were leftover wines closed out by distributors to raise cash or make room for incoming shipments along with no-name brands “dumped” under a bogus label.
The wines came from all over — California, naturally, Australia, France, Italy, Chile. There was even a $3.99 “Champagne” from Argentina. Honest — it said “Champagne.”
Prices were suitably low — most of the wines sold for $2.99 to $5.99. It isn’t hard to make money selling extreme value wine when you can buy up surplus bulk wine for just pennies a liter and package it up for quick sale. Extreme value retailers are the perfect distribution channel for wines like these.
As you can see from my receipt, I walked out with three bottles of wine for a total of $13.97 plus tax. “By shopping with us you saved $28.00.” That would mean an average of 67% off the retail price.
Unexplained Tales from Down Under
I wasn’t really surprised at what I saw as I surveyed the wine wall. Then, slowly, a different kind of wine mystery began to unfold.
Sue must have sharp eyes because she picked out the first surprise. Sam’s Creek Marlborough Sauvignon Blanc 2008 for $3.99. That’s awfully cheap for a New Zealand wine here in the U.S. I’ve read about heavily discounted NZ wines in Great Britain but not here in the U.S. — until now.
New Zealand is a high cost wine producer that has succeeded in charging a premium price for its wine. Indeed, NZ earns the highest average export price of any country in the world despite surging production that threatens to create unmarketable surpluses. Everyone worries that one day the export limit will be hit and prices will start to tumble from $12-$20 down to, well, $3.99. Is that what this Sam’s Creek wine really means? The end of NZ wine’s premium price?
Frighteningly, Sam’s Creek isn’t a no-name closeout wine. The label says that it is made and bottled by Babich, one of the famous names in New Zealand wine, and the internet tells me that Waitrose sells it for about $10 in Britain. I wonder if the unsold British inventory has somehow made its way here?
Prestige Wine at Extreme Value Prices
Two more bottles raised more questions about New Zealand wines. I paid a whopping $5.99 for a 2008 Isabel Estate Marlborough Sauvignon Blanc. I almost overlooked it, but the label caught my eye. Isabel Estate is one of the most famous Marlborough quality producers, exceedingly well-known in Great Britain where this wine sells for about £10, but not so widely distributed here in the U.S., I think.
How did it get here and who among the Grocery Outlet clientele would recognize its quality sitting there surrounded by cheap and cheerful closeouts?
The third wine makes the puzzle more complicated. It is a 2004 Te Awa Merlot from the Gimblett Gravels of Hawkes Bay. Te Awa Farm is another famous NZ producer and, while this wine — a estate product from a distinguished producer in a famous region — may be slightly past its prime and therefore a typical closeout risk, it is still very surprising to see it sold at a place like Grocery Outlet for $3.99 rather than the $16-$20 retail price.
These three New Zealand wines may be random surplus wines found in the sort of place where random wines go to be sold. Or they may be indicators of important changes in the world of wine. Kinda makes you wonder, doesn’t it?
Wine markets are all about supply and demand. It is pretty clear that a supply of interesting wines has appeared along with the rock-bottom remainders at extreme value stores like Grocery Outlet, pushed along, no doubt, by the slump in fine wine sales.
What about demand? And what does Grocery Outlet tell us about the wine market more generally?
Hosted by Dr. Ted O’Connell, they are required listening if you want to broaden and deepen your understanding of the coronavirus crisis. I encourage you to click on the link above and sample the growing list of podcast topics.
I was flattered to be asked to join Dr. O’Connell on April 15 to discuss how the coronavirus impacts the economy in general and the wine economy in particular. The podcast was released a few days ago. Listen here:
In this episode, Dr. Ted O’Connell and Mike Veseth discuss various economic aspects of the COVID-19 pandemic. Some of the questions covered include:
Is the United States currently in a recession?
What can we learn about the economic effects of the virus from Italy and China?
How has the pandemic affected the economics of the wine industry?
What industries related to wine have been affected by the pandemic?
Thanks to Ted O’Connell and his associates for the opportunity to speak to the podcast audience. They are doing a great service by helping those of us outside the medical and public health professions better understand the forces that are shaping our lives. Special thanks to Pedro Fernandes for facilitating this project.
Are you listening to more podcasts and audio books while you shelter in place? I am guessing that people might especially appreciate the sound of a voice these days. I started thinking out this when I noticed the sales trends of my book Around the World in Eighty Wines. I think we expected that e-book sales would rise when everyone went into semi-isolation, but it looks like the audio book is the most popular format, followed by the hard back and then e-book. Paperback due next month.
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.
In my other life as an economics professor I studied financial crises and their implications (one of my academic books, which seems eerily relevant today, was called Mountains of Debt). One thing that I learned about the financial sector is that crises are generally followed by periods of consolidation.
Smaller, more fragile banks and investment firms fail or fall into the hands of larger firms (sometimes the big ones fail too as the Washington Mutual collapse of a few years ago reminds us). Eventually new community banks appear to fill the gaps that the bulked-up big banks leave behind.
Banks and Wine: No Joke
How are banking cycles related to the wine industry in the current coronavirus crisis? Well there is a joke that the only person crazier than a winery owner is her banker. But no one is laughing at jokes like that these days.
There is a serious connection. A recent Wine Business Monthly report suggests that the American wine industry looks a lot like the American finance industry and that a coronavirus recession shake-out is likely to lead to a wave of consolidation.
Only 56 out of the more than 10,000 U.S. wineries are really really large, producing more than 500,000 cases per year. These are the JP Morgan Chase and Goldman Sachs of the American wine scene. Another 246 wineries are very large, producing between 50,000 and 500,000 cases annually. Taken together, this small number of wine producers accounts for most of the wine produced and consumed.
The Bottom of the Pyramid
At the other end of the scale are 2773 wineries that make between 1000 and 5000 cases a year and an incredible 6420 wineries that produce less than a thousand cases. These are the community banks of the wine world and they are the most dependent on direct sales including especially tasting room sales. They are, therefore, the most vulnerable today. About half the estimated $5.94 billion wine industry loss due to the crisis comes from lost cellar door sales.
And they are the most likely to experience severe economic distress that might result in sale or closure. Even before the crisis a surprisingly large number of wineries were quietly on the market for the right price. The recession will push that trend to the fore.
The WBM report notes that
Ninety-seven percent (97%) of all U.S. wineries produce less than 50,000 cases and are estimated to experience annual revenue losses of between 36% to 66% with smaller wineries most impacted. Projected losses increase as winery size decreases with wineries producing 1,000 to 5,000 cases expected to see lost revenue of 47.5% and wineries producing under 1,000 cases or less expected to lose 66% of revenue.
Just as some community banks manage to come out of a financial crisis in a stronger competitive position, some smaller wineries will emerge in relatively better shape, too. It is inspiring to see the effort that is going into customer relations and marketing to make up for the lack on in-person contact. I am sure that there are lessons learned now that we be valuable when the tasting rooms open again somewhere down the road.
3-Tier versus Two Speed
Some states have relaxed their direct-to-consumer shipping regulations, which benefits all wineries but will be especially important to small ones. Wine Curmudgeon speculates that this might be the start of important changes to the three tier distribution system that would open up the wine market. That would be a big benefit for the bottom of the wine pyramid.
But at the same time it seems likely that consolidation in the wine sector will be accompanied by similar trends in distribution and for the same basic reasons. Although much is lost in generalization, there is a tendency for larger distributors to focus their value chain on bigger retailers and larger wine producers. Scale matches scale matches scale. This pattern magnifies an on-going movement to a two-speed wine market with those in the middle range (both domestic and imports) squeezed in the process.
Here is a link to the Wine Economist’s coverage of the coronavirus recession. All of the most important factors affecting the wine economy remain unknown: how deep will the recession be, how long will it last, when will the economy be open, how soon (if at all) will consumers return to previous patterns? Add to the list the question of how long will it take people to drink up all that wine and spirits they piled into their shopping carts in March? Gosh, I hope they didn’t drink it all at once!
Big “W” Recession Threat
There is so much uncertainty at present that prediction is impossible, but these are some directions that seem likely given current trade winds. It appears increasingly likely, for example, that the “shape” of the coronavirus recession will be W (a very big W in this case) and not V or U (see this previous Wine Economist column about recession shapes).
Many forecasts assume a V-shaped recession, with a short sharp economic fall followed by a quick and decisive recovery. That would be the best case scenario and there are some early indications that that might be what’s happening in China.
But there is a significant threat that a second recession will strike just as the economy is recovering from the first. The second dip could come if another wave of coronavirus strikes and large parts of the economy need to be locked down again — this is the concern being expressed about China at the moment. Many experts seem to assume a second virus wave, but are uncertain about its impact.
But coronavirus 2 isn’t the only threat. Economists are increasingly concerned that the first virus recession will be followed by a financial crisis as all the missed payments and bad loans come due. There is a lot of credit risk right now, especially counter-party risk, which is the possibility that the trustworthy firm that owes you money might fail, bringing you down, because the people who owe it money can’t pay.
In wine terms, that’s what happens when your distributor can’t pay because its restaurant clients can’t pay. A credit collapse would likely speed consolidation in both the winery and distribution sectors.
Many state and local governments have played constructive roles in the current crisis, but they might unintentionally end up contributing to the W recession scenario. Many state-locals are constitutionally restricted from running budget deficits or borrowing except for capital projects like roads, bridges, and school buildings. The first recession wave will drive down their revenues, forcing them to cut back on spending and employment. That would make the second recession wave even worse.
None of this is set in stone. Truly heroic economic stimulus (helicopter money drops, fiscal bazooka blasts) has been deployed with more to come. This would be more than enough to deal with economic problems in normal times. But these times are not normal and the head of the IMF said last week that she’s concerned the global recession will be even worse than currently envisioned. Buckle up.
Do you recognize the big W in the photo above? It is the from the classic 1963 Stanley Kramer film “It’s a Mad, Mad, Mad, Mad World.”