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?

 

 

Cooper’s Hawk Winery Leverages Its Unique Business Model

chw

It is time to circle back to check in on one of America’s most innovative wine companies: Cooper’s Hawk Winery & Restaurant.  Cooper’s Hawk has carved out an unexpected market segment (it is too big to be called a niche) and built a loyal following. Can its unique business model continue to thrive in today’s challenging wine business environment?

Cooper’s Hawk by the Numbers

The numbers are impressive. The big winery in Woodridge, Illinois produced 675,000 cases of wine in 2019, according to Wine Business Monthly data, making it the 29th largest wine company in the U.S. — just behind Hess Family Wine Estates and ahead of Wente Vineyards in the U.S league table. Grapes come from the main U.S. vineyard regions and select international sources.

The wines are sold exclusively through a 43-location restaurant/tasting room network that supports what might be the largest wine club in the world with nearly 450,000 members. That takes my breath away.

I first wrote about Cooper’s Hawk Winery & Restaurant in a 2018 Wine Economist column. I was impressed with the vision — bringing wine country (and wine!) to consumers located far away from California vineyards. Customers enter through a “Napa-style” tasting room that includes a gourmet foods market space. The upscale casual restaurant features Cooper’s Hawk wines by the bottle, glass, or flight, with carefully-chosen pairings suggested for each menu item.  Wine club members can pick up their “wine of the month” at the tasting room, giving them an opportunity to sample other wines and to dine in the restaurant.

The thing that excited me about Cooper’s Hawk Winery back in 2018 was the fact that they were successfully engaging consumers in a new way and obviously building interest in wine in general while expanding their own customer base. Bringing a taste of wine country to the local mall or other nearby location might not work for everyone, but it obviously resonates with a lot of folks who can’t get to wine country themselves but still want a bit of that experience.

Epic fail: Sue and I have so far failed in our resolution to experience a Cooper’s Hawk restaurant first hand, but that makes sense in a way when you think about it. We spend a lot of our time in wine country, which is exactly where Cooper’s Hawk is not. So we were excited when we received an invitation to attend a celebratory virtual tasting of Cooper’s Hawk and other wines.

Go Big in Chicago

The occasion for the celebration was the announcement that Cooper’s Hawk’s new flagship location Esquire Chicago received a 2020 Best of Award of Excellence recognition from Wine Spectator magazine.  The 23,000 square foot facility features a 50-foot high wine tower and offers guests 1200 different wine selections. The list includes the Cooper’s Hawk wines, of course, but also hundreds of other wines from wine producers around the globe, which is a first for Cooper’s Hawk.

I suppose you could say that Esquire Chicago and the tall wine tower is at least in part a reaction to some of the key wine market trends of the last few years. Consumers have shown a willingness to broaden their comfort zone of wine styles and, via premiumization, to stretch the budget a bit, too. If the goal of the Cooper’s Hawk organization is to unlock consumer passion for wine by simplifying choice and controlling quality and value, Esquire Chicago aims to provide opportunities to turn the flame up a notch or two. Accordingly, the wines we tasted  in the virtual seminar included two wines from Bordeaux and two Cooper’s Hawk California blends.

Thankfully there was no attempt to create a “Judgement of Paris” result. The purpose wasn’t to probe whether Cooper’s Hawk wines are better than those from Bordeaux, but simply to taste and enjoy different wines of similar general types much as an Esquire Chicago guest might do in a tasting flight.  Perfect. So we sampled a left-bank Bordeaux, Chateau La Tonnelle, alongside a Cabernet-forward Cooper’s Hawk Lux Meritage blend made from Mendocino-sourced grapes. Then we tried Chateau Coutet from the right bank along with a Merlot-forward Cooper’s Hawk Napa/Sonoma blend called Camille Proud, a special creation of CHW’s Master Sommelier Emily Wines made to honor powerful women role models.

The wines were all very good and, because they were still pretty young, even better when we returned to them over the next two days. If these are representative of the kinds of experiences that Emily Wines and Esquire Chicago sommelier Jordyn Sotelo create, then I think their guests are in good hands.

How important is the Wine Spectator restaurant award? Those who attain it are obviously proud, but there are doubters, too. There was even a case of a hoax a few years ago when someone faked an application for the award and fooled the Wine Spectator staff. My opinion is this. There are wine enthusiasts (like you, perhaps) who seek out restaurants that take wine seriously and offer interesting wine choices. A Wine Spectator award is a way for the restaurant to signal consumers of their interest in and commitment to wine.  In a world of asymmetric information (the famous “market for lemons”) such signals can be very valuable.

Navigating Uncharted Waters

Any advantage is worthwhile in the current market environment. Although we did not talk about it during the celebration tasting, the shadow of the conoravirus pandemic is hard to avoid.  This is a difficult time to be in the restaurant business and not the best time for in-person tasting room sales, either. And, of course, Cooper’s Hawk has uniquely combined these two now-problematic areas to define its business model. Sounds like a recipe for trouble, doesn’t it?

But that doesn’t take into account the huge wine club, which seems to be proving itself even more important than before. With almost 450,000 members, the possibilities for engagement though virtual tastings (like ours, but scaled up considerably) are pretty much endless.  And curbside pick up of wine club shipments and to-go restaurant meals, too, where allowed,  ought to cushion somewhat the economic impacts while fostering relationships with sheltered club members.

So triple congratulations to Cooper’s Hawk: for their flagship Esquire Chicago restaurant, for the Wine Spectator recognition, and for their remarkable achievement in keeping so many club members engaged with wine during this difficult period.

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Thanks to Cooper’s Hawk for inviting us to the virtual tasting and to Emily Wines and Jordyn Sotelo for leading the discussion. Fingers crossed that readers everywhere will be able to safely visit CHW and enjoy their hospitality in person before too many more weeks have passed.

Long, Slow Road to Recovery for U.S. Wine

23-sep-2How long will it take for the economy to get back to normal? That’s the question I am asked most often these days, where “back to normal” is code for conditions at the start of 2020, before the coronavirus pandemic and the recession it has produced.

Try to Keep It Real (Compared to What?)

The answer to this question depends on how you look at it. If you are thinking about a world without concern for virus contagion, face masks, and social distancing, the answer might well be “never,” but only time will tell.

Economists often distinguish between “monetary” and “real” economic factors. If you think in monetary terms — stock market valuations, for example — we are already most of the way back. Our modest Wine Economist retirement account is pretty much back to its January 1, 2020 level thanks in part to a few trillion dollars of Federal Reserve and federal government stimulus, which has done a lot to prop up valuations.

But if you are looking at the “real” economy, where output, jobs, and incomes are what count, then the scene is not so serene. A recent report by The Economist Intelligence Unit is titled “A Q3 recovery, what Q3 recovery?” and it warns that the hoped-for big economic bounce in the third quarter of the year is no longer likely. Other business news reports that appeared over the weekend tell a similar story. Here is a link to a summary of the EIU report.

Down the Drain?

The EIU projects that when all the dust settles the U.S. economy will shrink by about 5% in 2020 compared with the previous year. That performance is roughly on par with forecasts for Japan, Canada, and Germany, The other G7 nations will envy a mere 5% decline. The EIU projects that growth rates in the UK and France will be closer to minus 10%, with Italy’s situation a bit worse.

How long will it take for these countries, which are all important wine markets, to return to their pre-pandemic levels of economic activity?  The EIU projects that the U.S. will get there first, but not until Q3 of 2022 — about two years from now. Japan, Canada, and France will be next, hitting the pre-pandemic level in Q4 2022.  Full recovery for the UK will wait until Q4 2023 followed by Italy (Q3 2024) and Japan (Q4 2024). Long road. Slow progress.

In general, the EIU reports, output in the G7 countries in Q3 2020 will be about the same as it was in 2016. Four  years of growth down the drain.

Economic forecasting is an inexact science, or maybe a black art, so you cannot bank on these specific numbers. This is especially true right now given the unknown unknowns about global public health, economic policies, and potential election surprises. But the fact that conservative estimates now suggest a long, slow economic recovery is something we need to digest.

Wine’s Particular Challenges

There are special concerns for the wine industry. An economy isn’t like a train, where all the cars are connected and move at the same speed. Different sectors adjust at different speeds and sometimes move in different directions. While wine is influenced to a great degree by overall economic trends, some particular paths to market are especially influenced by the coronavirus pandemic.

On-trade sales and DtC sales via tasting room visits will likely be slower to recover than retail sales, which we can see now as California has closed down indoor dining and cellar door operations for the second time. And this isn’t the feared “second wave” of infections — that isn’t expected until fall. This is just the echo of the first wave.

It is also important to remember that our 2019 “normal” wasn’t a terrific situation for wine. American wine was challenged by slow growth of demand, supply that was so abundant that vines needed to be pulled, and growing competition from other countries as well as other beverage alcohol categories. Curse you White Claw! U.S. wine producers need to do more than recover volumes, they need to adapt to evolving reality, too.

Simple Pleasures

So it is important and even inspiring to see how active many in the wine industry are in adjusting to what they think the new normal will be. Joana Pais, director of communications and public relations for Sogrape, the important Portuguese producer, told me in an email about the wine tourism situation in Porto and the challenges she and her colleagues face.

Travel to Portugal was booming before the pandemic and wine tourism in Porto and the Douro benefited.  These travel flows collapsed during the spring and are only slowly rebuilding. “It is true that tourism is scary slow,” she writes, “but let’s face it as an opportunity to rethink the purpose of hospitality and work on developing truly incredible experiences, enjoying the simple pleasures of life!”

She’s right about that and more. As I wrote in Around the World in Eighty Wines, wine’s great gift is its ability to give us pleasure. So long was we keep that front and center wine’s future is secure. But the challenges we face on the road to the future are daunting.  The next two to four years will test our collective resilience, but I hope they also excite our imaginations.

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I am already starting to think about what wine market situation will be in January 2021 when the next Unified Wine and Grape Symposium takes place. The conference and trade show will be virtual this time around, reflecting the reality of the pandemic and the uncertainty that must necessarily cloud plans for large gatherings. It will be different, that’s for sure, but there are opportunities, too.

 

Bastille Day Reflections: Libertè, Ègalitè, Rosè

Rose auroreToday is July 14, France’s national day — Bastille Day — and it is a good moment to consider Rosè and the democratization of French wine and wine in general.

One thing that I like about Rosè is that is symbolizes to a certain degree the classic values of freedom (libertè) and equality (ègalitè).  There isn’t any fixed recipe for Rosè. Winemakers have considerable liberty in choosing grapes, blends, and styles. And Rosè levels the playing field a bit, too, allowing less well-known regions to compete with the elites.

I have friends who tell me they just don’t like Rosè — and I believe them — but which Rosè offends them? There are so many different styles that it seems like there would be something for everyone. If you don’t like Rosè maybe you just haven’t tried the right one yet. Sue and I have sampled Rosè wine all around the world (see this list of global Rosè wines of note from the recent Decanter wine competition) and enjoyed pink wine’s diversity of hues, flavors, and aromas.

 Libertè, ègalitè

French wines are traditionally identified by place, a practice that privileges a few elite regions and their wines. Bordeaux. Burgundy. And especially Champagne. This is not an accident. As I wrote in my book Money, Taste, and Wine: It’s Complicated, the appellation system was more or less invented by Champagne producers to protect their sparkling wines first from copycat wines produced elsewhere and then from sub-standard quality wines made at home.  Only Champagne was Champagne, which consigned many first-class French sparkling wines to the third class carriage.

The famous Classification of 1855 established a pecking order for Bordeaux wines. It is not a big stretch to move to the idea that wine in general is rank-ordered, with the most famous names at the top. France has lots of different wines (even more different wines than cheeses, if that is possible), but they are not equal, at least in the marketplace.

This situation is changing. The popularity of Prosecco has weakened Champagne’s hegemony. Besides, the joyous gatherings where special corks are popped are fewer and smaller in the age of Covid-19. Bordeaux, which priced itself into irrelevance in some ciercles, has descended a bit with softer prices flowing out of this year’s unusual en primeur circus.

The Pink Wine Boom

But the biggest force in the growing democratization of French wine is Rosè. Sales of French Rosè were booming in the U.S. before the crisis and continue to be very strong. Indeed, French wine today rides on a pink wave. This is apparently true even within France, where reports suggest that pink outsells white wine in French supermarkets. Incroyable!

Yes, I know there is a hierarchy within the Rosè world. Provence is a first among unequals in the opinion of some. But even taking this into account, I think that Rosè is the wine of French democracy. What is Rosè after all? It is not a region (Rosè is made all over France and the world). It is not a grape variety, either. Rosè wines from all over France and sometimes all over the world are often displayed together in shops and supermarkets, giving humble appellations and obscure grape varieties an opportunity to compete on their own terms, which does not happen very often in the world of wine.

An Arrogant Frog?

carte-domaines-paul-mas-2017Three wines that we received from Paul Mas illustrate these points very well. Les Domaines Paul Mas is an ambitious family wine business rooted in the South of France. Paul Mas reminds me of Jackson Family wines in California. Jackson is best know for its high-volume Kendall-Jackson wines, especially the popular Chardonnay. But when you look more closely you see a collection of focused, high quality wineries that together explore the complex possibilities of the region’s terroir.

Paul Mas is a little bit like that. You might know it best in the U.S. for its popular Arrogant Frog wines. Labels feature a snooty but suave wine-drinking, beret-wearing frog. The wines were fine when I first encountered them, as I recall, but the marketing was the thing that caught my attention. Arrogant Frog is still with us (there is a Chateau Arrogant Frog) and better than ever, but under Jean-Claude Mas’s leadership the firm has grown and focused its attention on the specific terroirs of Languedoc and Rousillion. We tasted and appreciated several of these wines when we visited Languedoc and Roussillon two years ago. So we were pleased to get the chance to focus on the pink wine portfolio.

Three Shades of Pink

We tasted three very different Paul Mas Rosè wines. The first is the Côté Mas Rosè Aurore, a blend of Grenache, Cinsault, and Syrah with the IGP Pays d’Oc designation. You get a full liter of this fun wine for about $12.99. Full of flavor, the packaging (see image above) emphasizes casual elegance and screams “picnic.” Picnics can be rustic or elegant and this wine would work either way. You would not regret opening this bottle on a warm day in the company of friends (social distanced friends, of course).

Next came Chateau Lauriga, a Syrah and Grenache blend, AOP Côtes du Roussillon, with a retail price of about $20. Lighter, more elegant, a very different take on Rosè, which is as it should be since both the blend and the terroir are different. A bit more serious, too, if you know what I mean.

We enjoyed both these wines with early summer meals, but our favorite was the Domaine Lauriga Le Gris. I’m not sure what made this wine stand out, but we just loved it. Could be the grape variety, terroir, or maybe the older vines (43 years old) made the difference.  Le Gris is 100% Grenache Gris, designated IGP Côtes Catalanes. At about $14 per bottle, it sits comfortably in the Rosè market sweet spot.

A Mind of Its Own

Do you see why I associate these and other Rosè wines with libertè and ègalitè?  Speaking of libertè, there’s one more Rosè wine I want to tell you about.

liberteOur friend Caro Feely (author of several  excellent wine books), invited us to zoom into a virtual tasting with members of Chateau Feely‘s wine club. Chateau Feely is a biodynamic estate in Saussignac, about an hour from Bordeaux. Caro’s books document the challenges and satisfactions Caro and family experienced as they worked endless hours to make their vineyard sustainable in every sense. I recommend the books to anyone who is thinking about buying a vineyard to winery.

The subject was Rosè and the intimate internet audience was pleased to sample two of Feely’s fine Rosè wines, an experience that might have changed how they think of Saussignac, Rosè, or both. One of the wines especially caught my attention.

It is called Libertè. Made with native yeasts from Cabernet Sauvignon grapes (one of the approved varieties for Bergerac AOP), the wine exploited its freedom by taking an unusually long time to complete fermentation, thus earning its designation. It is a wine with a mind of its own. Everyone agreed that Liberty’s taste is something special.

So please raise a glass of Rosè and join me in a toast.  Libertè, ègalitè, Rosè!

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If you want to know more about Rosè you should read Elizabeth Gabay’s recent book on the pink wine revolution. Here is our review. 

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.

 

Wine & Coronavirus Recession: Three Questions

51ufhc3glvl._sx361_bo1204203200_This is the Age of Uncertainty (to reference the title of John Kenneth Galbraith’s famous book) both in general and with respect to the wine industry. Everyone’s looking  for answers as they confront a murky future. But most answers right now (especially including my own) are at best informed speculation, subject to frequent revision.

If we can’t have solid answers, maybe the next best thing is to try to refine the questions. Herewith my attempt to pin down three important questions about the near- and intermediate-term wine market and environment.

Please use the comments section below to raise other questions that need attention now

Q1: Recession Uncertainties

It is clear that the conoravirus pandemic and its health and economic effects have  produced a global recession of historic proportions.  Income and wealth have declined and unemployment increased. There is no way that wine cannot be affected by such an economic downturn. Many questions about the recession beg for answers. How deep?  How long? The Great Depression made a indelible mark on the people who lived through it. Will the coronoavirus recession do the same?

There are pluses and minus to consider. Monetary and fiscal stimulus packages have been huge by historical standards — much larger than during the Great Recession of a dozen years ago.  And we’ve seen some bright spots in the data. The May employment numbers in the U.S. surprised nearly everyone with a strong net increase in jobs and decrease in unemployment. A short, sharp V-shaped recession, while still unlikely, may not be as impossible as most of us believed.

But there are problems starting with the jobs report figures themselves, which may result in under-estimates of unemployment by several percentage points because of unusual data collection and classification problems created in part by the deep churning of the labor market.  I am also very concerned about changes in state-local government employment. Budget deficits in the second half of the year may lead to big lay-offs in local governments just as economic re-opening brings others back to the workplace. Programs to stabilize employment have so far focused on private sector jobs and left public sector employment pretty much alone. This will be a problem, but how big is unclear.

Bottom Line: I think it is all going to come down to the question of consumer spending.  Governments have already gone all-in — they may not have much more to contribute to a recovery. Business investment — the real kind, not the stock market — will probably lag consumers, not lead them. And trade has fallen taking potential net export gains down, too. It’s going to be up to consumers to get the economy moving.

Consumers have surprised many analysts by saving an amazingly high proportion (about 30%) of their incomes in recent weeks, which may be good for their individual financial security but unhelpful in terms of  increasing aggregate demand. It is easy to say that they didn’t spend because the shops were closed, but there is more going on. It is that age of uncertainty thing.

Consumers will continue to hold back on spending so long as they lack confidence in economic recovery. Until that confidence switch is flipped, economic growth is uncertain and consumers are right to be cautious. Is that a Catch 22 problem? Yes.

Q2: Wine’s New Normal?

Consumers are also at the center of questions about how the wine market will look when the recession and pandemic fogs start to clear. In the short run, the situation is a bit like the person who was swept over a waterfall. Half-way down things seem to be going just fine, but there’s a big splash ahead and it is hard to know who’s going to sink or swim away.

As noted in recent Wine Economist columns, there has been much turbulence in the wine market so far this year. Wine sales volumes are up overall but revenues not so much as high-margin restaurant sales have been replaced by lower-margin retail. On-line sales have risen dramatically, albeit from a relatively small base.  Wine hasn’t done as well as spirits, which seem to fly off the shelves, but better than beer.

As Rabobank’s Stephen Rannekleiv noted in a recent Ciatti market update webcast, the wine industry is going to need to rethink the route to market and how on-trade, off-trade, on-line, cellar door, phone sales (!), and other strategies fit together and what products work best in each channel. Consumers are changing their buying behavior for other products and wine shouldn’t think it is different in this regard. On-premise sales, in particular, are likely to be slow to recover as bars and restaurants struggle to both safely and profitably serve customers.

Bottom Line:  They say that generals are always preparing to fight the last war and so are often unprepared for new battle lines when they emerge. The same might be said for many wine businesses. The lesson that many small and medium-sized wineries learned in the last war (the Great Recession) was the importance of direct-to-consumer cellar door sales.

This strategy is problematic in a socially-distanced world. Shifting on-line now seems like the obvious reaction, but does that change the nature of consumer relationships and perhaps the nature of wine itself? Remember that Jeff Bezos picked books for his Amazon.com start up because they could easily be commodified. If that’s where wine is going, there will be implications. Fortunately (see last week’s Wine Economist column), many wineries are finding ways to keep wine personal even in the virtual space. How is wine going to evolve to succeed in an increasingly on-line market place?

Q3: Global Wine Market Threats

The global wine market environment is most directly defined by the big exporting wine economies. Italy, Spain, and France are the Big Three that together producer more than half the world’s wine. Argentina, Chile, and Australia are much smaller, but very important. New Zealand is tiny but punches above its weight. China, like the U.S. is currently most important in terms of global dynamics as an importer.

Wine sector conditions are unfavorable in all the largest wine-exporting countries. On-trade sales are much more important in Europe than the U.S., accounting for more than half of wine purchases. The closures of bars and restaurants during the pandemic lock down period has therefore produced a huge unsold inventory of wine. Some of this will disappear through emergency distillation schemes, which promise to dispose of between 750 million and one billion liters of excess wine. The rest will be looking for export market sales.

The bad old days of the EU wine lake depended on distillation to eliminate subsidized unmarketable wine. The policy changed several years ago to focus subsidies on modernization and marketing to encourage producers to make wines that the market would absorb. But no amount of marketing euro is going to help this year, so surplus wine will head off to the distillery. Maybe it will end up as hand sanitizer?

A billion liters is a lot of wine taken off the market. But I don’t think it will be enough to prevent a short term worldwide wine glut, especially when you consider the troubles that Southern Hemisphere producers are experiencing (despite short harvests in many regions). Australia and Chile depend on China to buy much of their wine and China’s growth has slowed dramatically. New Zealand looks especially to the UK and US markets, which are in recession. Argentina and South Africa have large domestic markets, but there are complicated economic and political problems in both countries that have affected sales.

Bottom line: A lot of wine is going to be looking for a home in the next year. Who in the world is going to buy it?

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Galbraith’s Age of Uncertainty was both a book and a 1977 television series. Here is the first episode.

Down the Rabbit Hole: Wine Takes the Virtual Plunge

alice02aThe recent pivot to on-line and virtual programs, events, and communication presents challenges and opportunities. How well has the wine industry responded? What does the future hold? Join me on a trip down the virtual rabbit hole to find out.

Can’t Un-Ring a Bell

It has been fascinating to see how quickly we and our wine industry friends and colleagues have adapted to using technology to overcome necessary distancing and business and travel restrictions. There are costs, for sure, in terms of lost personal interactions, but gains, too. They say that you can’t un-ring a bell, and I don’t think we can (or should) completely un-do the recent pivot towards virtual communications.

So Sue and I have decided to embrace the opportunities of virtual wine for the time being and to appreciate the many creative ways that wineries are using online platforms to get their messages out and connect with customers. Herewith several examples from our personal explorations. There is still a steep learning curve, but as you will see below, lots of progress, too. Please use the comments section below to give more examples  of successful virtual programs and events from your personal experience.

 

People, Places, Things

Let me start with an example of a simple idea well done.  Promotional videos are not a new thing and, with the rapid advance of technology, they are easier to make and to distribute via the web. But they seem to be very difficult to do well. Videos are the perfect opportunity to tell first-person stories, but so many winery videos seem to forget what their story is once the camera light comes on and default to generic “four seasons in the vineyard” images.

So we celebrate when someone gets it right and tells the story of the people, the places, and the wines and how they are all connected, as the video above from Andrew Will Winery does.  Andrew Will is located on Vashon Island, just a short ferry ride from our home base, sourcing grapes from some of the best sites in the Columbia Valley, including the Two Blondes estate vineyard.  The wines are elegant, distinctive, delicious — we are big fans.

The video is very effective in introducing the people, Chris Camarda and his winemaker son Will, their views and values, the role of terroir, and the nature of the wines.  You will know if you would like the wines after seeing the video and why they are special. And the winery is using the video effectively just now to maintain connections with customers during the current crisis.

BDX In the Rocks

The virtual space can be as interactive as you want it to be (up to a point!) so many wineries are experimenting with virtual tastings. Our friends at Reynvaan Family Vineyards in Walla Walla show one effective approach.  Winemaker Matt Reynvaan went live on Instagram several Friday afternoons in April and May, talking about his work and tasting interesting pairs of Reynvann wines.

One thing that made these tastings especially appealing was that wine-list members were invited to taste along with Matt by purchasing the library wines at their original release prices, a terrific and unexpected opportunity.

We focused on the May 1 tasting of Cabernet Sauvignon and BDX blend wines from the Reynvaan’s In the Rocks vineyard. These are very special wines that surprise many people because Reynvaan and that region are best known for their outstanding Syrah. Sue and I tasted the Cab wines when we visited the Reynvaan family last year and they are really memorable. Honestly, I couldn’t wait to relive that tasting via the internet.

If you watch the video (even if you aren’t able to taste the wines) I think you will get a sense of Matt and his family and what drives and inspires them.  Toward the end of the tasting Matt opened up the conversation to questions from his on-line audience, adding a small but important interactive element.

The Reynvaan tastings achieved many goals. It got scarce wines into the hands of people who enjoy them and probably replaced to some extent lost sales to restaurants. Most of all, however, it created and nurtured personal relationships, which everyone believes are at the heart of the wine business, and allowed Matt and family to tell their story in the most natural way.

fhw2Virtual Release Party

Mike and Karen Wade, the proprietors of Fielding Hills Winery in Chelan, Washington, had planned to host a big release party this spring for their new line of white wines.  Mike, the founding winemaker of the family operation, is famous for his distinctive red wines, but as the winery grew and winemaker Tyler Armour joined the team, it was clear that white wines and maybe a Rosé needed to be added to the mix.

The Rosé and a Chenin Blanc from the estate Riverbend Vineyard on the Wahluke Slope came first and this year they are joined by a Chardonnay and Roussanne. It’s a big deal for the winery. But the coronavirus crisis made an in-person celebration impossible. With daughter Megan’s help they organized a Zoom-fest instead and brought together friends of Fielding Hills from across the country to taste the wines and learn about them from Mike, Karen, and Tyler.

fhw3Because of the Zoom platform’s flexibility there was the opportunity for more interaction with the audience. Tyler also gave a mini-tour of the wine-making facility and Mike used Google maps to take us to the vineyards, which Sue especially appreciated.  I think everyone enjoyed the delicious wines and appreciated the opportunity to taste them together and learn about them.

Will virtual release parties like this replace in-person events after the crisis is over.  I hope not! But I hope the virtual is retained because it can reach a different and broader audience in a different way, expanding the local to the regional, national, or even global.

The Virtual Tasting Room

boedeckerBy far the most personal virtual experience that Sue and I have had happened last Tuesday, when we Zoomed to Portland to talk wine with Stewart Boedecker and a couple of other wine friends. Stewart and Athena Pappas run Boedecker Cellars, an urban winery that sources grapes from some of Oregon’s best sites. They have been trying many initiatives to connect with customers and supply them with wine while the tasting room was shut down.

One of the clever offers was a trio of “Happiness on a Tuesday” wine packages — six-packs and cases of wine put together from small quantities of interesting products Stewart rescued from the warehouse. Sue picked out an all-Pinot six-pack for us (plus another 6 bottles of her favorite Pinot Blanc) and we will be working our way through them in June and July. Our affordable six-pack included a 2014 Pinot Noir from the famous Stoller Vineyard, so there is no chance of coming away disappointed.

We like the idea of Tuesday night wines and so we couldn’t resist Stewart’s invitation to attend a Tuesday evening virtual tasting. The group was small enough that Stewart just opened up the microphones and we all chatted and learned about the wines just as if we were sitting at the tasting room bar with the winemaker. It was great and reminded us of how much we have missed such previously normal moments during the pandemic crisis.

Virtual Trade Events

It is easy to think about virtual wine events just in terms of consumers and direct sales opportunities, but the coronavirus pandemic has done much more than just shutter cellar doors. Wine fairs and trade events around the world have been canceled or postponed, depriving many producers of the opportunity to present their wares to potential importers, distributors, restaurants, and retailers.

It isn’t the same, but virtual pitches can at least partially replace the wine fair booth and give wineries an opportunity to get their messages out. That’s what I found at the On-Wine Fair, where 45 Italian wineries were each given twenty minutes to tell stories to a virtual U.S. trade audience.

I attended the webinar of Tenuta Montemagno, a producer in Monferrato (Piemonte) that specializes in wines made from local indigenous grape varieties.  The brief and well organized presentation was very effective.  Place, personality, emotion. These characteristics came through clearly. This won’t replace the traditional wine fair — the opportunity to taste and talk in person is very important — but it goes a way toward filling the gap in the current crisis and expanding opportunities in the future.

vinarium

Vinarium Becomes TeleVinarium

The virtual world really is a rabbit hole. One you dive down there’s no telling where you might end up. The only limit (besides bandwidth, I guess) is imagination.  So when the Romanian organizers of Vinarium, the International Wine Competition Bucharest realized that it might be possible to shift on-line for their annual wine competition, they took the fateful first step. First time anyone has tried  to organize a virtual wine competition, but changing conditions provoke innovation.

A typical wine competition is a coronavirus nightmare. Five jurors sit close together around a table, spitting and dumping repeatedly while sommeliers fill glasses from masked bottles in a specified secret order.  There’s a certain close-quarters logistical choreography here that, when done well, would make Balanchine smile but earn a frown from Dr. Fauci today.

Virtual Vinarium aimed to get the results, but without the risk, and on-line platforms meant that jury members could be safely isolated.

The 36 international judges from 12 countries (including 4 Masters of Wine) were divided into juries of 5 or 6 persons. Getting them zoomed-up and their OIV judging software connected was probably the easy part (although I am glad I didn’t have to figure it out). Bringing the physical world along for the journey came next. That meant taking each of the 853  entered wines and decanting them into small coded sample bottles that could be shipped away to wherever the judges were. Then, of course, they needed to be tasted in the correct order and all the usual protocols followed.

I have only judged a couple of wine competitions and I’ve always been impressed with the complexity of the logistics involved. TeleVinarium went to the next level. Outrageously ambitious!

These are just a few of the hundreds of virtual events and projects. They begin as supplements to real world activities, sometimes replace them, and have the potential to transform them. Where will it all lead? Only one possible answer. Ask Alice!

Global Wine Impacts of Coronavirus Crisis & Recession: OIV Update

pauThe 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.

oivAn 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.

Recession Effects

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.

sparkling

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.

 

Wine Industry Consolidation & the Big “W” Recession Threat

bigw-9In 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.

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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.”

 

Wine & the Coronavirus Recession: Shaping Up the Prospects for Recovery

 

As recent Wine Economist columns have reported, it’s very clear now that the world economy has fallen into a recession, with some countries and regions affected more than others.  The depth of recession is hard to gauge. A few weeks ago I thought that things would be very bad here in the United States, with as many as 5 million unemployed.  But by late last week almost 10 million had applied for unemployment benefits in just two weeks and the shoes are still falling. Incredible. What will things look like two weeks from now?

20200404_cuk1280Silver lining predictions based on the current wine sales surge aside, it is pretty clear that the wine industry will be negatively impacted by the slowdown in spending. How much depends in part on what “shape” the recession takes, which is to say what factors dominate the decline and how long it takes to recover.

Recessions are like stomachs — they come in lots of different shapes (see the classic 1960s Alka-Seltzer tv commercial above for humorous examples). Will it be a V-shaped recession? Or will we be dealing with a W, U, or  maybe an L? The shape matters for the global economy and for the wine economy, too. Herewith a brief survey of the economic landscape.

Best Case Scenario: The Deep V

Initial projections (and many current ones, too) forecast a deep V-shaped recession. The economy will shrink rapidly for two quarters and then rebound just as quickly, so that by this time next year we will be safely back to square one. The logic behind this is simple — everyone goes home to hide out from the coronavirus and, when the danger is passed, the Reset button is pressed everyone goes back to their old jobs and habits.

This scenario makes sense if you think of the coronavirus crisis as just an exaggerated version of the annual seasonal flu season with minimal permanent impacts. But not many hold that view any more from a medical standpoint and there are big doubts about it in terms of the economy. Not all the businesses that shut down as we entered the crisis will be coming back, even with historic levels of economic stimulus.

Consumers will find it hard to recover, too. A 2019 Federal Reserve survey found that about 40% of American households did not have the ready cash or credit to weather an unexpected $400 economic emergency. Those 10 million (and growing) unemployed workers are facing a lot more than $400 worth of problems. The crisis will badly undermine the foundations of their economic security.

But a deep V is not out of the question if the massive bazooka blasts of government aid and helicopter drops of interest-free money are effective. If they work and work fast, then the Reset button will engage a speedy recover. I hope that’s what happens.

I’m worried that the problems are deeper and that you can hit the Reset button until you are blue in the face, but the economy won’t spring back so quickly. If I am right, it is bad news for the wine trade, which might have hoped that consumers would stock up on wine now, drink it all up while sheltering in place, and come back for more in the fall.

Double Dip W

A second fairly optimistic theory currently making the rounds is that the economy rebounds as described above, but then a second coronavirus pandemic wave appears in the fall or early next year. The necessarily closures and quarantines would trigger a second recession, but it would be smaller and shorter because the world would be better prepared.

I don’t have a strong opinion about the double dip recession scenario except to note that (1) there is no reason to think that the current pandemic will be the last we will see and (2) I sure hope we learn from our mistakes this time around.

The double dip W complicates things for wine because it makes it even harder to predict when a sustained economic recover would power higher wine sales. Instability and uncertainty — is this the new normal?

The Classic U-Shaped Recession

The U-shaped scenario is a third possibility. The U-shape recession is longer in duration but less deep than the V or the W. Full recover might take 3 to 5 years, not a few months.  This is the classic recession shape and it sometimes works this way. Demand falls for any number of reasons, so that inventory builds up and production slows down and unemployment rises (which further depresses demand). Excess inventories are eventually drawn down and new orders placed, which stimulates production creates incomes and jobs, and encourages a rebound in demand.

The U shape would be a problem for wine because several years of depressed demand would exacerbate the structural wine surpluses that plague the industry both in the U.S. and in many other wine-producing countries. Supply-side vineyard adjustments, which are already recommended in order to reduce capacity, would be critical.

There is reason to doubt the U-shape scenario, however. First,  the coronavirus recession is more than just falling demand, so a demand-based theory doesn’t seem to fit all that well. And, second, it would seem like the bazookas and helicopters would shorten the cycle if this scenario holds, so the U would become a V. That’s a bit of good news, which I supply at this point because things are about to get very dark.

L is for Liquidity Trap

The worst case scenario, from a strictly economic standpoint would be an L-shaped recovery. The global economy plunges and then … does not recover for a very long time. An extended recession is of course very bad for the wine industry as it would undercut the economic foundations of wine buyers of all generations.

There are a couple of realistic scenarios that could lead to such an outcome.

The first is a financial crisis. The coronavirus recession may have started with health issues, but there is a high probability that a financial crisis will follow. Not necessarily a banking crisis this time, because banks are better capitalized than a decade ago, although banks and non-bank lenders are still vulnerable The worry focuses on weakness in and liquidity of  corporate junk bond debt and emerging market debt and the contagion that collapses in these markets can cause. You might add state and local debt problems to the mix if the crisis persists for more than a year.

We have already seen several instances of financial markets freezing up, or nearly so, in a panic for liquidity. This could create the conditions for a liquidity trap, which is a situation where financial actors are so concerned about liquidity that they soak up any new funds that are injected into the financial system, not spending, investing, or lending.  Monetary policy, even maybe helicopter money, is impotent because the new funds just disappear into reserves with no real economy impact.

You can call the second scenario the Zombie Economy and it goes like this. Many firms collapse during the coronavirus crisis, but are kept alive — just barely — by aggressive government support. They don’t die, but they aren’t really alive enough to actually recover either. They continue on for years soaking up trillions of dollars of (debt-financed) resources and preventing an economic shake-out that would free up resources for self-sustained growth.

Is the Zombie L-curve possible? It seems hard to believe … until you call it by its other name: post-bubble Japan.

What’s going to happen? What will the recession look like? I really don’t know, but I hope that the coronavirus health crisis and the economic dislocation it causes are both milder than seems likely at this point and that we return to health quickly. Fingers crossed that the massive economic stimulus that is being unleashed around the world is effective.