Coronavirus & Wine: Market Impacts Beyond the Recession

recessionMost of the G-20 economies around the world have  effectively entered (or soon will do) the red zone of recession, violently pushed there by the coronavirus pandemic. Recent Wine Economist columns (click here) have accordingly focused on the direct economic impacts of this crisis on the wine industry.

I hope you have found the analysis helpful in thinking through the current situation. Events have moved so fast that it is difficult (impossible?) to keep up!

Today’s column steps back and looks at important side-effects — economic contagion — that need to be considered. Here are brief surveys of the wine impacts of three forces: exchange rates, online activity, and travel and tourism.

The Greenback Also Rises

The shock of the coronavirus’s worldwide spread produced a rush to safety — or anything that remotely resembles safety — in the financial markets. As in past crises, this means a demand for U.S. dollars and dollar-denominated assets driven by a combination of confidence in the U.S. economy and policies, a lack of confidence in other economic actors, or a simple desire for maximum liquidity. The liquidity factor is huge right now.

The dollar’s value therefore has risen dramatically. The Federal Reserve’s wise decision to expand dollar swap line operations with foreign central banks has helped reduce the dollar shortage and increase liquidity, but the fundamental problem remains.

A strong dollar makes imports cheaper for buyers here in the United States and this fact will become important if the exchange value persists. Imported wine will be relatively more cost competitive once the smoke clears. That’s good news for consumers, but cold comfort for domestic growers and producers. And U.S. wine exports — which have become even more important because of the domestic wine surplus — will become a harder sell due to the strong dollar.

Bulk wine from Argentina is incredibly cheap for U.S. buyers and the strong dollar is part of the story. The Argentina peso was trading at over 64 pesos per dollar late last week, for example, compared with about 42 pesos one year earlier, which is a dramatic change. Several factors besides the coronavirus, which accounted for perhaps 25% of the currency depreciation, are at work here.

The rising dollar has eroded the exchange value of the Euro and British Pound, but its biggest impacts have been on emerging market currencies. This is especially important because these countries borrow in U.S. dollars, so the local currency cost of foreign debt is magnified when the dollar strengthens.

Fragile is the word I would use to describe the emerging markets today. Mexico, for example, faces a potential health crisis, an economic crisis because they rely upon petroleum exports, which have fallen in value dramatically, and possible issues with both domestic and international debt because of the strong dollar.  Argentina faces the same problems, minus the issue of oil exports, but at heightened levels.

Even if the developed countries are able to stabilize their economies, as they are trying to do with truly heroic monetary and fiscal policies, the fragile nature of the emerging markets represents a risk to the global economic stability.

The textbook says that a  rising dollar isn’t bad or good … it is a package of  economic benefits and costs, opportunities and risks. The risks get my special attention these days, because we have all the economic risk we can use right now!

Is There an App for That?

I call it the Magnification Effect. When we look back on the coronavirus crisis in a few years I suspect that one thing that we will notice is that, while new trends emerged in business and society, the biggest effect was to magnify and accelerate certain patterns that were already there.

Screens and online interactions were already an important factor, especially with younger people who can’t remember a world without them. The further substitution of online for in-person experiences has been strongly encouraged by coronavirus isolation practices.

Will film viewers go back to crowded theaters in the same numbers when the clouds clear? Or will they decide, even more than in the past, that small screens are just fine? I suspect that everyone in the sports and entertainment industries will be watching closely to see what happens next.

Many consumers will have placed their very first online grocery or take-away meal delivery orders during the coronavirus period. Some will never do it again, but others will decide that it is a worthwhile convenience and continue these expenditures.

Do supermarket shoppers buy the same amount of wine when they shop in person versus online ordering? I haven’t seen statistics on this question, but I suspect that the online share is lower. Regulatory issues are to blame in some areas. And the difficulty of bringing the “wine wall experience” online is another.

What happens to wine when a served restaurant meal moves to home delivery? The diner may still drink wine, but it is likely to be a different wine and probably a less expensive one. Maybe its a glass from the box in the fridge? Some wineries depend a great deal on restaurant sales and this will be a particular problem for them and of course the restaurants face lost margins and sales.

No one is surprised that Amazon.com home delivery sales have surged during the coronavirus period. If the Magnification Effect hypothesis is correct, that’s just the tip of the iceberg and wine sales will be affected.

[Not] On the Road Again

Some of the most serious economic impacts of the coronavirus crisis have been on the travel and hospitality sectors. At least one international airline has already been pushed to bankruptcy and no one will be surprised if there are more business failures. The situation grows even darker when you consider the supply chain: grounded flights, canceled aircraft orders, parts and equipment suppliers both big and small squeezed tight, and so on. The impacts will be broad and deep.

Restaurants and hotels are shuttered or just barely keeping the lights on and of course this sector also has supply chain effects that start with direct employees and extend down into all the businesses (including wine, of course) that supply the goods and services that they need to run successfully.

And then there is the cruise ship industry.

What will happen to the planes, trains, ships, hotels, resorts, restaurants, convention centers, and so on once the health crisis has passed and the recession run its course? Certainly the pipeline will refill, but will it be the same? Or will people decide that they don’t really need to move around so much and so far and spend a lot of time exposed to large crowds.

How strong will the movement be to go local instead of global and online versus in person? Those practices were already here, albeit unevenly adopted in different sectors.

Viewing the situation from my perch as a recovering university professor, I sense that this may be a critical moment in some sectors. Many colleges and university, for example, have substituted online classes for in-person teaching for the rest of the current academic year. It is supposed to be a temporary shift — just until the coronavirus crisis has ended. Then it’s back to normal.

But if the online classroom works reasonably well, will it be possible to completely return to the old practices? Or will the nature of higher education change? Many graduate degree programs I’ve seen had significant online components before coronavirus struck.  More will embrace the technology now and it is likely to spread throughout the higher education environment.

This Changes Everything?

Wine may not be the most important sector that will be impacted by local/online trends, but it will need to adjust to them. Wine tourism has emerged as an important industry, especially in the decade since the start of the Great Recession. The United Nations World Tourism Organization (UNWTO) sponsors annual global wine tourism meetings (the 2020 meeting is scheduled for Alentejo, Portugal later this year) that focuses on wine tourism as an economic development tool as well as a profitable business area.

How much will wine tourism and associated industries be affected if global/in-person is replaced significantly by local/online? Too soon to tell, like most things about this crisis. But important to monitor.

Wine, Recession & the Curse of the Unknown Unknowns

 

The coronavirus pandemic continues to gain momentum, causing serious economic disruption around the world. The wine business has experienced a number of important impacts already and the future is uncertain.

Booming Sales … for Now

In the immediate run, retail wine sales are booming in many regions and through on-line vectors as consumers stock up on wine along with toilet paper in anticipation of possible store closures and enforced isolation.  How much this will turn out to be an increase in wine consumption versus a change in the timing of purchases is unclear. But retailers are happy for the business in either case.

It has been inspiring to see the wine industry rising to the challenging of consumers who suddenly find their usual wine purchasing patterns disrupted. Like you, we have received many offers of discounted shipping and home delivery. Tasting rooms have responded in many ways including virtual wine tastings. These direct sales are especially important for wineries that need to replace lost on-premise accounts as bars and restaurants shut their doors for now.

The learning curve is steep in this new environment and not everyone is equally successful, but we are making progress. Which is a good thing, since the need to adapt to new consumption patterns will not end when the “all clear” alarm sounds. Many buyers will revert to their old patterns, but some won’t, at least not immediately, and the current period is a good time to learn more about what that uncertain future might look like.

A number of significant economic surveys of the direct and indirect economic impacts of coronavirus on the wine industry have appeared. Rabobank released two reports late last week (here are links to the first and second reports) that I find especially useful and recommend to you.20200321_cuk1280

What’s Ahead for the Wine Economy?

What’s ahead for the wine economy? One way to think of the problem is in terms of Donald Rumsfeld’s famous taxonomy of knowledge (see video above) which divided the world into known knowns, unknown knowns, known unknowns, and unknown unknowns. It sounds crazy when you hear it the first time, but it kinda makes sense.

There are a lot of economic known unknows (things we know we don’t know) for the wine economy (and the economy in general) right now, which explains why financial markets are so jittery. Three important factors are wealth effects, income effects, and attenuated wine consumption occasions.

We know that wine will be affected by the vast decrease in wealth that the plunging financial markets have produced. Some investment portfolios have lost 20 to 30 percent or more of their value since the start of the year. If that is what happened to your retirement account and you are at or nearing retirement age, it is not an easily-dismissed problem. Luxury purchases are likely to be put on hold and for many consumers wine is a luxury. Holding on to wine club members is going to be a challenge and that’s just the tip of the iceberg.

The wealth effect is especially critical because it is likely to disproportionately impact baby boomers, who have been the bedrock of the wine economy for many years.

Helicopters and Bazookas

We know that wine demand will be affected by falling incomes and rising unemployment.  New unemployment claims are surging as parts of the economy slow or come to a halt. Some sectors are expanding — this is a good time to find a job at Amazon.com, Walmart, and — at least in Washington state — at the unemployment benefits office itself, which is staffing up to meet the rising need.

A wide range of estimates of the broad economic effects have been published. Most suggest that first-quarter GDP in the United States will be slightly negative when the dust clears and that the second quarter will be much worse — somewhere between a 10% and 20% decline. That would be the biggest one-quarter fall ever. Job losses could be as high as 5 million in the U.S. Incredible.

Estimates for other countries are also negative, reflecting the global nature of the coronavirus pandemic and the economic collapse it has induced. Economic conditions in Italy are much worse than in the United States and will strain the ability of both Italian and European policy-makers to respond effectively, especially as the crisis grows in Spain as well and the contagion continues.

There is some good news in that government stimulus packages are on the way in the U.S. and elsewhere to try to offset falling demand. But much damage can be done in the short run and it is difficult to effectively target aid, hence the resort to Europe’s “bazooka” the American “helicopter money.” Thus far, it must be said, the financial markets seem to believe that the crisis is bigger than the responses proposed.

Finally, we know that, since wine demand is conditioned by the occasions people have to consume it, the sudden decrease in available occasions (bar and restaurant closures, regulations limiting private gatherings, etc.) will have a big impact irrespective of wealth and income effects.

The travel sector is one of the hardest hit by the coronavirus and that will impact wine, too. A lot of alcohol is consumed at airports and on cruise ships. That’s not going to happen very soon. New York Times wine columnist Eric Asimov did his best to address the occasion deficit last week in a column that told readers it is OK to drink alone if you are forced to self-isolate. Virtual cheers!

The Cost of Uncertainty

We know that these forces will hit the wine economy, but we don’t know exactly how, how much, when, and when things will turn around.  That’s a lot to not know, so it is no surprise that the uncertainty alone is having an impact. It is hard to make confident decisions when the risks can’t be calculated.

I recently received an email from Anthony Bozzano of Bozzano & Co., a San Luis Obispo- based company focused on sales and sourcing of bulk wine (similar to traditional bulk wine brokers), as well as custom brand development for national retail. Anthony writes that

A couple of our larger winery clients, who consistently buy and sell in multiple truckload volumes, are putting all bulk wine purchasing and sales on hold until they understand the full effects of the current situation.

Due to market uncertainty, some boutique wineries are pulling back from active bulk wine negotiations. One such customer from Santa Barbara County told me that their already past-due distributors have informed them that, due to the frightening rate at which restaurants are closing their doors, they do not know when, or if, they will be able to pay their bills.

Uncertainty about the future and concern about counter-party risk are not limited to the bulk wine trade and not completely unexpected in turbulent times. The existence of so many known unknowns increases risks and makes actors up and down the supply chain hesitant to commit to future endeavors.

The wine business is particularly  susceptible to these problems because it is so much dependent on time. Grape vines are not annual crops that you can switch back and forth easily from season to season. Wine is made just once a year and you have to live with what and how much you’ve produced.  When current decisions are necessarily locked in for an extended period of time, it compounds the risk and these are risky times.

The Curse of the Unknown Unknowns

What next? The global coronavirus pandemic has pushed us into the real of unknown unknows — factors that we don’t really know that we don’t know.  They say that what you don’t know can’t hurt you. But they are wrong.

So it is no wonder that the stock market’s “fear index” set a new record last week. With a highly interconnected global economy subject to uncertainty on so many levels, it is impossible to really know what could happen next and how severe its impact might be. No wonder investors sold off stocks, bonds, and commodities last week and rushed to cash and Treasury bills, sending short term interest rates below zero.

Many analysts and policy-makers under-estimated both the public health and economic impacts of the coronavirus crisis in its early days. A few are still in denial. For the rest of us, it is important to accept the risks, unknowns, and knowledge that many forces are beyond our control. And then, cautiously, to move ahead.

Wine, Recession, and Coronavirus: This Time is Different?

94528e9a-5845-4871-bef5-3285eca66dd5Last week’s Wine Economist column was a working draft of my analysis of how the coronavirus pandemic might impact the wine industry.  One focus was on the possibility of a recession in at least some parts of the world and slowing economic conditions generally.

An economic downturn would certainly impact the wine industry. Wine is, after all, a discretionary good for most consumers.  I haven’t heard of anyone filling their Costco wagon with wine the way they have done with toilet paper, although I have seen reports of people stocking up for an anticipated quarantine period. People don’t stop drinking wine during times of economic uncertainty, but they do buy less and many scan the shelves more intensely looking for lower prices. The coronavirus alters the menu of wine-drinking occasions, which will have an impact, too.

Rising Recession Probability

Recessions now seem very likely in parts of the Eurozone (the three biggest economies — Italy, Germany, and France are all on the brink). A recession in Japan and perhaps Australia is also likely.  Economic growth is projected to fall in China and a insiders are thinking the unthinkable — that the economy could not just slow down, but actually shrink as manufactured exports and domestic consumption both fall. Data on the first two months of the  year paint a dark image.

Indicators are flashing red here in the United States, too. The stock market’s long bull run ended last week when equity prices fell by a total of more than 20% from their all-time highs.  The Treasury bond market has been under intense pressure and a liquidity event cannot completely be ruled out. Corporate junk bonds are increasingly suspect as investors dump their riskiest holdings to cover loses elsewhere.

Significantly, we have seen truly historic economic interventions designed to head off economic collapse. The Fed’s $1.5 trillion liquidity injection is one example and Sunday’s announcement that it cut its benchmark interest rate target to near zero while also lowering the discount rate is another.. Yes, that’s trillion and zero. Quantitative easing is back, too, in a very big way.

President Trump’s national state of emergency declaration and the follow-up economic stimulus package are also noteworthy. The German government announced an economic stimulus “bazooka” and the end of their zero deficit policy. The list goes on. Some officials say they aren’t really worried about a recession. But it is obvious that they are.

Global financial markets opened with a thud on Monday following the Federal Reserve’s surprise announcement, dropping dramatically on the economic stimulus news and ended the trading session down more than 12 percent. Markets are forward looking for the most part and the big economic actions taken around the world seem to have used up all the ammunition to fight a recession foe. What’s left in case things get worse? I wonder where the markets will be when this column is automatically published early Tuesday morning?

cavatappiMeanwhile, borders are closing, shutting down the flow of people and some services between countries while quarantine measures increasing limit activity within them. Spain has followed Italy into lockdown and other countries seem likely to adopt containment policies too.

The impacts are both global and local — a recent Financial Times article reports on the small business situation in Seattle, home of the first major U.S. outbreak.

Economic forecasters have raised the probability of a recession here in the U.S., although estimates vary and depend on many factors.  If you take each sector into account, as the Wall Street Journal did over the weekend, the lost sales and incomes add up quickly. And then you have to factor in the impacts that don’t show up in the headlines. You know something’s really wrong when the NBA, NHL, Champions League, March Madness, SxSW, and Formula 1 all cancel or postpone events. 

So the wine industry needs to prepare for the recession that may already be here in a practical sense (technically it takes two consecutive quarters of economic decline to meet the definition of a recession). But this recession is likely to be different from the financial crisis of 2008 or the dot com bust before that. It is important to be ready for what’s happening now and not prepare to fight the last war.

cwinePast is Prologue?

There are too many potential impacts to attempt a comprehensive analysis here, so let me focus on just one area of concern: shifting patterns of direct-to-consumer sales.

Demand for wine fell significantly during the Great Recession and a lot of our discussion was about trading down. Consumers kept buying wine, but they moved down a shelf or two some of the time to save money. And they shopped the online discount sites where upscale wineries tried to quietly get rid of their excess inventory.

One of the main lessons that we learned from the Great Recession was the importance of direct-to-consumer sales and the power of the tasting room and wine club to generate margins when managed properly. Wine businesses made direct sales a bigger part of their strategy. Tasting rooms, wine clubs, personalized service — right down to that birthday phone call. Cooper’s Hawk, a surprisingly large wine business built around a tasting-room themed upscale casual restaurant chain, has nearly 300,000 wine club members. Amazing.

One thing that is different about today is that potential consumers seem to be shunning retail spaces as “social distancing” practices are adopted. Tasting room sales are down significantly, according to some reports, and Washington state wine leader Chateau Ste Michelle closed its facilities to visitors. In California, the government has suggested that tasting rooms and other non-essential businesses temporarily shut their doors.

As more and more people are tested for the coronavirus there are likely to be staff shortages, too. This isn’t just wine’s problem, but it is a problem because a revenue stream than many wineries rely upon is interrupted.  What to do?

Is There an App for That?

Other retail sectors are looking to the internet to help them connect with consumers who hesitate to make physical contact and this seems to be a smart move for wine businesses, too. The cornoavirus is only going to make web-based storefronts and mobile ordering a bigger element of any wine business strategy. But web sales are different and it is not enough to simply stock your internet shelves and open the virtual door. You are going to need hooks to attract and hold customers.

Selling on the web invites quick and easy price comparisons. Price, which is always a factor, may become even more important since buyers are not in your tasting room to receive a warm welcome, personal attention, and samples of that reserve wine you keep under the counter for special guests.

Many businesses that entered the pandemic in weak shape will be victims of falling demand, supply chain interruptions, or financial collapse. We have already seen notices in Seattle of restaurants that are permanently shutting their doors.

Everyone hopes that the coronavirus pandemic will fade in a few weeks or months. Even if we are lucky and that timeline holds, a lot of economic damage will have been done and we will start to know if consumers will go back to their old patterns or if (and how much) things have really changed. What will we learn from this crisis? How will it shape longer term behaviors and strategies? Lots of questions and not yet many answers.

If  you are looking for clues about what might happen in the U.S. and European markets when the coronavirus threat starts to pass, I recommend reading a recent Rabobank report about anticipated changes in the Chinese wine sector.  China was hit first and hardest so far by the coronavirus and its experience might provide insights about what comes next in other regions.

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About that bottle of “Coronavinus” wine shown above.  Apparently it is real. I found it on a Spanish website selling for €19.

Wine & Coronavirus: Assessing the Risks

virusConcern about the health impacts and economic effects of the novel coronavirus continues to grow. Although the health impacts are obviously most important, since lives are at risk, it is natural to also be concerned about how this potential pandemic might affect the global economy in general and the wine industry in particular.

I have been following the situation closely focusing for personal reasons on the U.S. (we live about 40 miles from the coronavirus infection epicenter near Seattle) and northern Italy (we lived in Bologna when I taught at the Johns Hopkins center there).

The Italian experience so far is noteworthy: some whole towns were initially locked down to contain the virus or slow its transmission, all schools and universities closed as a precautionary measure, and scenes of empty piazzas and tourist thoroughfares in Venice and Milan. Large areas of northern Italy, including Lombardy and its capital Milan, were later put under quarantine, which has now been extended to the whole country.

Closer to home, some schools and colleges, including the University of Washington campuses, have canceled physical classes in favor of on-line instruction. Several major employers, including Amazon, are encouraging workers to tele-commute if possible. Concern is likely to rise as additional testing kits arrive and the true picture of the epidemic emerges.

I’ve also been making some notes on wine and the coronavirus in order to try to think more clearly about the potential economic risks to the industry. I thought I would share them here even though they are necessarily incomplete and change daily — just like everything else about the coronavirus.

Here is a quick analysis of several areas of concern, starting with the most general and then narrowing. Use the comments section below to point out issues I have neglected or gotten wrong.

Recession Risk

Japan, Italy, and Germany were already teetering on the edge of recessions before the coronavirus outbreak, so it is not unreasonable to think that they will be sucked into economic downturn, potentially taking other countries with them through the sort of economic contagion that face masks and hand sanitizer are powerless to control.  This is a serious problem since there are also worries about slowing economic growth in China,  the United States, and the United Kingdom. Chinese exports were down 17% due to supply-side factors for the most recent period, which bodes ill for their economic situation.

Central banks have pledged to counter the economic impacts of coronavirus although they have so far stopped short of pledging coordinated action, which would be most effective. The U.S. Federal Reserve cut its key interest rate target by a half percentage point last week, but the financial market response was weak in part because this action had already been factored into investor expectations according to some observers. In any case interest rates are a blunt tool when faced with a specific problem such as coronavirus.

With interest rates already so low (and in some cases negative), the concern is that preemptive central bank strikes against coronavirus will use up all the ammunition left to deal with recession and economic contagion. The risk of a global recession, probably smaller than the global financial crisis of a decade ago and certainly different from it, is thus magnified by coronavirus.

The possibility of a recession with its impacts on income and employment both broadly and in the wine industry is thus a very serious concern. Recession risk: medium to high and probably rising.

Supply Chain Disruption

One impact of coronavirus has been to make us more aware of the inherent risks in international and global supply chains and associated just-in-time production strategies. Bottlenecks anywhere along the chain can potentially impact final production.

Some factories in China were either closed because of the coronavirus threat or slow to re-open after the Lunar New Year holiday, which has created parts shortages and headaches in many industries as well as reducing international trade flows. International shipping schedules and container availability have both been disrupted on some routes.

Wine is certainly affected by supply chain issues related to the coronavirus, although not as much as some other industries such as automobiles and electronics. Glass imports from China are one important concern and I am sure there are others.  Wine exports, which are of growing importance because of the domestic surplus, may also be disrupted.

How have supply chain issues affected your wine business? Please leave comments below. Current events seem likely to cause many firms to reconsider their supply chain strategies, shifting closer to home in some cases and relying less on “just in time” supplies in others.

Supply chain disruption risk: significant and rising as the virus spreads.

Travel and Tourism

Travel and tourism are down dramatically in many regions as people avoid airports and crowded situations in general where contagion might take place.  Soccer matches have been cancelled or postponed in Italy, for example, and a few games played to empty stadiums.  It is unclear how this summer’s Olympic Games in Japan might be affected.

Wine tourism is likely to be a victim of the general decline in domestic and international travel, although it is too soon to guess how great the impact will be on tasting room visits and sales. Direct sales to visitors have become a very important economic factor for  many U.S. wineries, so any decrease in wine-related travel would be important.

Airlines and cruise ships are also good wine markets for those who can secure their business and the sudden decline in flying and interest in cruising will necessarily affect those sales, too, as well as threaten the financial health of the air and cruise businesses themselves.

Business travel is affected along with vacation trips. Several large international wine gatherings have been canceled or postponed including ProWien in Germany, for example, and Taste Washington here in the U.S. Many people are asking themselves “is this trip really necessary?” when health risks are involved. The cancelled meetings are expensive both in terms of direct costs and potential lost business. The impacts continue to spread.

Travel- and tourism-related risks: High.

On-Trade and Off-Trade Impacts

China is one of the most important wine markets, especially for French and Australian wineries, and its wine demand has fallen significantly in recent weeks according to early reports as consumers have hesitated to gather in restaurants and other venues out of concern for the coronavirus. How long this situation will last and how much wine demand will rebound when the health scare has passed are open questions.

Restaurant wine sales are important outside China, too, of course, and so this is an important market to watch. News reports suggest that those who are concerned about contagion sometimes turn to home delivery of meals or groceries in order to avoid crowds. This is not advantageous for wine sales in many areas, including the U.S., where wine under-performs in home delivery sales relative to other products.

Wine market risks: Significant with a good deal of uncertainty.

The Bottom Line

The bottom line so far is that the coronavirus has many effects that are detrimental to the economy in general and the economy of wine in particular. Anyone in the wine business would be wise to ask themselves a series of questions that starts with “how well prepared is my company for a recession?” and continues down the list to supply chain disruptions, swings in consumer demand, altered trade patterns, tasting room strategies and policies, and so on. It is already too late to anticipate some impacts, but not too soon to think through others.

That said, the most important questions are probably the ones I haven’t asked here. The research I did in my other life as an international economics professor probing financial crises suggests that contagion doesn’t always stay in its lane.

We saw this on Monday when coronavirus-driven falling demand for petroleum sparked a price war that drove oil prices down dramatically. Some oil investors dumped equity holdings to cover their oil losses, sparking a global sell-off there, too. Corporate junk bonds — and there is a mountain of them out there — could be next in line. If they start to fall central banks will need all the resources they can muster to keep liquidity flowing.

Liquid Assets Podcast: Can U.S. Wine Win Back Its Mojo?

268x0w“Can U.S. Wine Win Back Its Mojo?” That’s the title of the lastest Rabobank Liquid Assets podcast, which I recorded along with  Rabobank’s Global Strategist Stephen Rannekleiv and Analyst Bourcard Nesin in Sacramento during the annual Unified Wine & Grape Symposium meetings earlier this month.

The mojo question was at the front of our minds because earlier that day the speakers at the State of the Industry session had painted a complicated picture of American wine’s prospects. There are still opportunties in the U.S. market (the rumors of wine’s death are exaggerated, I said in my presentaiton, paraphrasing Mark Twain), but there are undeniable problems, too.

The best guess is that 200,000 tons of wine grapes were left on the vines in California in 2019 for lack of buyers. Perhaps 30,000 acres of wine grapes need to be taken out of production to balance demand and supply. So it is no surprise that our discussion centered on ways to boost demand and therefore lesson the supply-side pain.

The podcast is fast-paced and raises interesting points about the potential for wine exports (my contribution to the discussion), the need for increased attention to e-commerce sales (Bourcard’s point) and Stephen’s analysis of the challenges of building brands for a changing market environment.

Interested? Follow this link to “Can U.S. Wine Win Back Its Mojo?”

Second Thoughts about the Wine Wizards of Oz

The Wizards of Oz” (see below) appeared on The Wine Economist a dozen years ago in  February 2008. It looked to Australia for insights about what might be ahead for the wine industry. I’d forgotten all about this old column until it started getting  “hits” recently, which caused to me give in another look.

The basic idea was that what’s happening in the global wine market sometimes happens in Australia first or most clearly. I think this might have been one inspiration for my book Extreme Wine, which argues that the best place to see the future of wine is at the edges, where change is happening fast, not in the more stable center.

Re-reading this column makes me think how quickly things change (Fosters?) and how much some things persist. Do you think the argument stands the test of time? I am not sure how far I would push it now and maybe I pushed it too far then, too, but the climate change and ecological limits analysis still seems timely.

Let me know what you think in the comments section below (or tell me in person if you are attending the Unified Wine & Grape Symposium in Sacramento). Here’s the 2008 column as it appeared then.

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The Wizards of Oz (February 19, 2008)

20_australian_wine_industry_segments.jpgWhen I think about the future of the global wine market, my thoughts frequently stray to Australia because that’s where I see so many current trends originating or being most effectively exploited.

Export driven marketing strategy? That’s Australia. Branded varietal wines? Everyone talks about Gallo and Constellation brands, but who has done it better than [Yellow Tail]? Foreign market penetration?  The Aussies again, replacing the French as the strongest competitor in the British market and a strong presence in the United States.

Australia even wins the prize for the most sophisticated national wine strategy. Click on the image above to see a representation of the latest Australia wine strategy, which divides the market into twenty (20!) key segments where Aussie wines can compete.

Australia’s Boom and Bust

No doubt about it, if you want to learn about wine economics and integrated wine business, you should look to Australia. But that doesn’t mean that all is well down under. As I have written in previous posts, Australia has experienced a roller-coaster of wine market problems. First it was the problem of over-supply, which pushed prices down to unsustainable levels. And then, just when it seemed like things couldn’t get worse, they did and the early signs of wine shortages began to appear, which caused me to declare that the era of cheap wine was coming to an end. In each of these cases, trends that I see in many places now were first apparent in Oz. No wonder that I’m starting to view Australia as my leading indicator of global wine market trends.

This makes the news in Jancis Robinson’s column in Saturday’s Financial Times particularly sobering (not a good word for wine lovers). Robinson’s article suggests that Australia has hit ecological limits to the production of cheap wine. Water is scarce and expensive and this means that the cost (and therefore price) of bulk wines like [Yellow Tail] must rise — from A$0.40 in 2006 to A$1 in 2007 according to the article. That’s not quite a leap from unsustainable to unaffordable (the A$ is about 91 US cents today), but it presents a completely different business model. More to the point, however, the price rises exist because costs are high and the product is in short supply. Robinson is optimistic that Australian winemakers can compete and even thrive in the new market environment, but adjustment won’t be easy.

Robinson reports that Fosters has started sourcing some of its Lindeman’s brand from its vineyards in Chile (for the British market) and South Africa (in the U.S.). This continues the practice we have seen in the U.S. for some time for short-supply Pinot Noir. U.S. brands like Pepperwood Grove and Redwood Creek frequently contain Chilean and French wines respectively. Now, Robinson reports

There is much talk, though not much evidence, of basic bulk wine being imported into Australia from southern Europe, South Africa and South America to fill the so-called “casks” (boxed wine) and the cheapest bottles and flagons for the bottom end of the domestic market, prioritising export markets for such inexpensive Australian wine as the brand owners can afford. Australia has swung from famine to feast and back to famine in terms of its wine supply recently and bulk wine imports are nothing new. I remember encountering a director of one of Australia’s largest wine companies looking very shifty round the back of some fermentation vats at Concha y Toro outside Santiago de Chile in the mid-1990s.

Ecological Limits?

Now the problem here is not that the Australians are passing off foreign wines as their own. The wines I have seen have been clearly labeled and the few cases I know about where winemakers have tried to fool the public (some years ago in New Zealand, as I recall) ended badly for the dishonest producers. They were punished pretty severely in the marketplace when their tricks were revealed.

No, my concern goes more to the heart of the problem. Maybe Australia’s ecological constraints are a short term problem that will disappear. Maybe it is an Australian problem with no implications beyond the land of Oz. Maybe ready supply from Australia wannabe producers in South America, South Africa and Europe will always be there to fill the gap.

But that’s a lot of maybes and economists are trained to get nervous when it’s maybe this and maybe that. We know that the effect of climate change on the wine industry is real. And we know — or at least I think I know — that Australia has often been a good indicator of emerging trends in global wine. If this is the case, then we are indeed about to enter a new wine world, one where the natural constraints on wine production may be about to become as important as marketing strategies.

It’s Going to be Huge: 2020 Unified Wine & Grape Symposium

 

The Unified Wine & Grape Symposium is just a few weeks away (February 4-6 in Sacramento) and I am already excited. The Unified is North America’s largest wine industry event with about 14,000 in attendance for the trade show and seminars.

Bursting at the Seams

The 2020 Unified promises to be bigger and maybe even betterthan ever before. The event has been moved out to the Cal Expo fairgrounds for 2020 while the Sacramento Convention Center is expanded and remodeled — the Unified  simply outgrew the old facilities. The one-year move means even more room than in the past for trade show exhibitors, including outdoor space for big machines and equipment. It’s going to be huge — literally!

And the program organizers have gone to some trouble to expand seminar offerings, too, with 110 speakers divided among about 30 sessions. Something for every need and interest with programs for growers and winemakers, marketing and business management. As has been the case for several years, some of the technical sessions are offered in both English and Spanish.

Labor cost and availability is an important issue in the wine business, so I am interested in one session that examines mechanization in the vineyard and includes a wine tasting. I’m guessing that the audience will be offered the opportunity to see if they can taste the difference between wines made with machine-harvested versus hand-picked grapes. Should be interesting.

State of the Industry

I’ll be moderating and speaking at the “State of the Industry   general session on Wednesday morning. Danny Brager (Nielsen), Steve Fredricks (Turrentine Brokerage), Jean-Marie Cardebot (University of Bordeaux), and Jeff Bitter (Allied Grape Growers) will be joining me on the big stage. A great team with deep understanding of the wine market.

Jeff O’Neill of O’Neill Vintners and Distillers is giving the Tuesday luncheon keynote speech this year and I am looking forward to hearing what he has to say. These are uncertain times for wine in the United States and it is easy to be pessimistic about the future. O’Neill’s company has been remarkably successful in navigating the treacherous seas, taking advantage of favorable winds. Everyone will be looking for lessons and insights they can take back to their businesses.

This is important because one cloud hanging over the meetings is a structural surplus of grapes and wine in some categories. U.S. wine demand is plateauing, which is better than some countries where demand has been falling for years. Overall wine expenditures are still rising even if overall volumes have declined.

The surplus creates a problem that may take years to correct through a combination of rising sales in old markets, development of new markets, and adjusting production capacity. Heidi Scheid is leading a session that will address the issues directly titled Strategies for Managing Through Over-Supply. Should be a standing room crowd.

Trade Wars Shrink the Pie

Trade wars are another concern. President Trump has said that trade wars are good and they are easy to win, but the wine industry has found little to celebrate about being in the center of the battlefield. Having invested years of effort and lots of dollars opening up Chinese markets, for example, many wineries have watched hoped-for opportunities disappear with retaliatory Chinese tariffs on U.S. wines.

It looks like French wine producers have dodged a bullet, avoiding sky-high U.S. tariffs that were threatened as retaliation for France’s digital tax scheme. You might have expected U.S. wine producers to celebrate tariffs on wine imports because some buyers are likely to shift from imports to domestic wines. But this substitution effect is not the only impact the tariffs have.

Prohibitive tariffs on imported wine are more likely to shrink the wine market pie at every stage of the product chain. It is hard to see how retailers or distributors can justify investment in the wine category when overall sales fall and uncertainty about future conditions is high. The uncertainty effect looms especially large, despite the recent wine tariff trade truce. If wine was caught in the trade war cross-fire before, there’s no reason it couldn’t happen again. And truces are by their nature temporary and fragile.

When tariffs work to protect an industry they tend to do so only temporarily and at high cost (struggling Harley-Davidson is a good example of this). But they more often backfire. The recent tariffs meant to protect manufacturing jobs in the U.S., for example, seem to have only accelerated the decline of the manufacturing sector generally because of the complex international interweaving of manufacturing chains and other factors.

Food (and Drink) for Thought

There a lot to think about as the wine industry moves into 2020, so I encourage readers to check out the Unified’s seminar programs and start working on a strategy for the trade show.

I’ve been to a lot of wine meetings both here and abroad, but there’s nothing like the Unified. Hope to see you there.

Air Provence: Provence Rosé Takes Flight

airp2The list of regions around the world that make good Rosé wine is very long because Rosé is a style of wine, not a wine grape variety. But the word-association game answer is easy: Rosé? Provence.

And although my friends in California and the Languedoc and other places that have nice Rosé  hate it when I say this, if you are talking Rosé here in the United States the conversation begins with Provence.

#1 Export Market: USA

The wine producers in Provence are understandably happy with this situation because they have come to depend on the U.S. market to drink up their Rosé wine exports. According to data provided by the Conseil Interprofessionnel des Vins de Provence (CIVP), the U.S. was Provence’s #1 export market in 2018, happily emptying 26.3 million bottles of Provençal wine, 98% of which was Rosé.

Rosé is one of the hot segments of the U.S. wine market and the Rosé from Provence is very strong. But it would be a mistake for the Provençal producers to become complacent about their signature wine’s position in its most important export market.

This is especially true given that the overall U.S. wine market seems to be reaching a plateau and that the current trade war environment is not friendly to Rosé wines from France that have less that 14% abv and so are subject to the recently implemented 25% tariff. And then there is the threat of more tariffs in 2020.  Yikes!

Now Boarding: Air Provence

So the Provençial producers have organized an ambitious trade event called Air Provence that is scheduled for April 6 – 7, 2020 to keep their wines on U.S. radars and deepen market penetration.  Incredibly, given their success in the U.S. market, they have even more to share. The program offers wine trade members an intense immersion in the region and its wines, with 200 producers and more than a thousand wines on offer in addition to dinners, masterclasses, and so on. The event website summarizes the program like this:

The very first edition of AIR PROVENCE, organized by the Provence Wine Council for Côtes de Provence estates, invites you to take off on a unique immersive journey at the heart of the leading rosé wines appellation. For two days, experience a business class trip to meet producers and wine merchants, discover terroirs and landscapes, and taste wines as well as Provence art de vivre.

I’m interested in Air Provence in the context of the recent discussions about generic wine promotion in the U.S. We often focus on consumer-facing strategies (the “Got Milk?” approach), but there are many places in the product chain where leverage can be applied, either as a substitute for or complement to other tactics. The Provence producers are working to get the attention of trade actors (importers, buyers, etc.) who can become active  partners in selling their wines.

Provence Rosé wines are hot, but the trade wars are creating turbulence and headwinds for the wine market generally and for French wines in particular. Provence Rosé producers are smart to be proactive, using programs like Air Provence to build on their successful market foundation at this moment of uncertainty. I wish them good fortune, but as Bette Davis said  in All About Eve, better fasten your seat belts!

What Can We Learn from the Wine in Moderation Movement?

paul-giamatti-drinking-a-001Some say that it is time for the wine industry to take the initiative to change perceptions through a generic promotion program.  The “Got Milk?” campaign made people think about milk a bit differently. Maybe a similar initiative could shift the needle on wine?

One concern, as I wrote last week, is that as memorable as “Got Milk?” was, it didn’t prevent milk’s ultimate marketplace decline. Maybe “Got Wine?” isn’t the answer. But what would a better approach look like?

Wine in Moderation

I think there are lessons to be learned by studying the Wine in Moderation movement  that began in Europe a decade ago and has now spread to many corners of the wine world.

new_branding_slideshowWine in Moderation was founded in 2008 at a time when the European wine industry faced a growing threat. It wasn’t just that wine demand was falling — that had been going on for a couple of decades. And it wasn’t just the global financial crisis, either, although that didn’t help. It was rising anti-alcohol sentiments and policies that threatened wine both as an economic activity and also as an integral part of European culture.

I asked George Sandeman, President of the Wine in Moderation Association, to explain WiM’s objectives and the lessons they have learned.

Although a message of “moderation” seemed to be well aligned with the way wines are presented on a day to day basis, focusing quality rather than quantity, we encountered difficulty in waking up the wine sector to the cold wind blowing from Geneva.

Initially there was no recognition of the social responsibility attributed to the “wine sector” (“leave it to beer and spirits!”). At best it was a reluctance to accept the fact that wine needed to be part of the social responsibility which the category required, and at worst we were sleepwalking into the same treatment as tobacco.

The traditional culture of wine was frequently overridden by need to compete in new market environments … Add to this a powerful health lobby working to demonize wine …

So the first two lessons are that the wine industry needs to wake up to sector-wide issues. And the positive story of wine doesn’t tell itself. Someone has to do it.

What wine needed, the group’s founders proposed, was an organization that would help its members tell the counter-story of wine’s benefits when consumed in moderation, and would lean against the wind of damaging anti-alcohol regulations. This was no easy task, Sandeman notes. “The concept of ‘moderation’ is not a simple concept to communicate, varies with different cultures and viewpoints, and is difficult to translate for non-English speaking countries …”

Strength in Numbers 

Wine in Moderation has evolved in the 10+ years since it was founded (you can read about its progress here). As its efforts have gained traction, it has moved from a tight European policy focus to an approach that is broader in both geography and strategy. The map of Wine in Moderation activities is now global and its focus is shifting to education of professionals. Although there are Wine in Moderation activities in the U.S. I suspect that the impact is somewhat limited by the lack of a national coordinating organization,  a role played, for example, by Vinos de Chile, Unioni Italiani Vini, ACIBEV, and FEV in Chile, Italy, Portugal, and Spain respectively.

Seventeen national organization plus several global wine companies (Pernod Ricard, Möet Hennesy, Sogrape), and a host of other groups including WSET and the Institute of the Masters of Wine now support and implement Wine in Moderation programs around the world.

So the third lesson is that there is strength in numbers. It is important to work together on several levels to address important issues.

I first learned about Wine in Moderation from George Sandeman and Susana Garcia Dolla when I was speaking at ACIBEV meetings in Porto a few years ago. Since then I have noted the group’s participation at national and international meetings, always presenting a message of wine in a cultural context.

Wine in Moderation announced a major rebranding in November 2019 with the theme of Choose – Share – Care, which the leaders hope will carry the organization forward into even more ambitious professional and consumer programs in its next decade.

  • CHOOSE to make informed choices; choose the best wine for you to enjoy, choose whether or not to drink.
  • SHARE wine with friends & family, pair with good food and water. Drink slowly and take the time to fully appreciate.
  • CARE about the wine you serve, care about yourself and about others. Avoid excess and enjoy your wine in moderation!

Increased focus on wine tourism is another element of future work. Wine in Moderation’s association with the United Nations World Tourism Organization is one step along the path to providing wineries and regional groups with more tools to shape perceptions and develop the wine tourism experience.

Strike the Right Chord

Two things about Wine in Moderation are especially relevant to the current U.S. concerns. First, while I will admit that Choose-Share-Care does not have that “Got Milk?” punch, the message is one that I think might strike a chord with some of the groups that wine is currently failing to engage.  Health, community, and culture is a strong positive message and one that resonates with young the old alike.

And the way of getting the message out is relevant too. One thing that impresses me about Wine in Moderation (another lesson?) is its multi-layer approach. Here’s how it works:

  • The international coordination is provided by a not-for-profit international association, the WiM Association.
  • In each country, there are one or more WiM national coordinators that support the planning, coordination, implementation and accountability of the programme in their respective countries.
  • WiM supporters join the programme at national level. They actively support a wine culture that inspires well-being and healthy lifestyles and contributes in the prevention and reduction of alcohol related harm.
  • Leading wine companies further support the efforts made at international and national level setting the example with their leadership in social responsibility and high contributions. These leading companies are the Wine in Moderation Ambassadors.

Wine in Moderation movement members are given the tools they need to spread the word, which is a model that could work here in the U.S. Leadership is needed, of course, but it seems to me that our many regional wine associations and wine companies, too, would benefit from bringing a coordinated message into their diverse communications programs.

I can imagine a program with a general message agreed at a high level, but implemented with creative local twists and turns by the dozens of regional wine associations around the U.S. Such a plan would share the creative energy (and cost) while leveraging wine’s broad and diverse base.

Work together? Is that realistic? Well, what’s the alternative? In Europe, as George Sandeman said, the alternative was being regulated like tobacco. The alternative here in the U.S might be a  gradual (and then sudden) wine market bust.

This Changes Everything?

Everyone would like to find a silver bullet that would change everything for wine — in a positive way. But silver bullets are hard to come by and they show up in unexpected places. Do you remember the impact of the 60 Minutes “French Paradox” broadcast? Or the Sideways boost for Pinot Noir? (BTW Miles’ “dump bucket” scene from Sideways is definitely not an example of moderate wine consumption!)

Wine in Moderation has moved the needle in its target regions according to its most recent report. Worth further study, don’t think?

Got Wine? Is It Time for a Generic Wine Promotion Campaign?

 

I’ve had several conversations recently that circled back to the idea that the wine industry should invest in a generic promotion campaign. You know what I mean. Not “Got Milk?” (maybe the most celebrated generic promotion of all time), but something along the lines of “Got Wine?” or “Got California Wine?” depending on who’s talking.

“Got Wine?” is too copy-cat to work, of course. You can come up with something better if you give it some thought. But you get the idea.

Subsidy Wars?

One argument for generic promotion of wine is based on the realization that wine isn’t connecting with new, younger consumers the way we hoped or expected. If we want consumers to have a particular image of wine (or of the wine-drinker identity), maybe we should be more proactive in shaping perceptions.  Laissez-faire isn’t working so well. Let’s do something.

A second argument, which would support “Got California Wine?” or “Got American Wine?” is provoked by the  subsidies the European Union is giving to its member states to promote their wines in the U.S. market.

Years ago the EU used to support prices and winegrower incomes directly, but buying up surplus grapes and wine (we called the result the European Wine Lake). Now the EU has changed tactics and supports the modernization of wine production and the promotion of exports. Basically, they want the wines to be marketable and if the EU market won’t buy it all (and it won’t), then exports are promoted to avoid re-filling the dreaded lake.

This is a better approach from an economic standpoint, but you cannot blame American producers for thinking that it creates an uneven playing field. It might be better, many argue, to get the EU to stop subsidizing wine export promotion. But that would be complicated and take time. In the short run, the argument goes, generic promotion of U.S. wines might even things up a little.

Milk is All Over

Talking about wine promotion got me thinking about milk. That “Got Milk?” promotion ran for 25 years and attracted lots of attention. All sorts of celebrities posed with milk mustaches (aka moo-staches) to draw attention to milk and its broad appeal.  Everyone enjoys milk — that was the message. The Whoopi Goldberg ad was my favorite.

But, memorable as these advertisements are, they were fighting a losing battle. Increasingly, American consumers don’t follow the “Got Milk?” path.

milkI first realized this a few years ago when I heard wine economics guru Karl Storchmann talk about trends in various consumer beverages. He examined Google data about searches for wine, tea, coffee, milk, and water and concluded that  while water was rocking it, milk was fading fast. “Milk is all over,” Karl said at the time (here is a pdf of his study).

Karl wasn’t wrong. Dean Foods, America’s largest milk producer, filed for bankruptcy in November 2019.  Milk sales fell for 4 years in a row as Americans shifted to plant-based cow-milk alternatives, including oat milk and especially almond milk.

Wine vs Milk?

Got Milk? Yes. Always. But increasingly it doesn’t come from a cow.

When you think about it, what happened to milk is a little bit like what seems to be happening to wine. There are lots of new products available that compete with wine including craft beer, craft spirits, and alcoholic sparkling water.  Some of these products are popular in part because they have less alcohol than wine, addressing a health concern  in the same way that almond milk avoids a health problem for some dairy-intolerant consumers.

Is wine all over? I don’t think so. But the industry is obviously not as healthy as we’d like it to be.

So what should wine do? A generic campaign is fine, but it matters a lot who it is aimed at, what it says, and how it is organized. And someone has to pay for it. A “Got Wine?” style consumer-focused campaign isn’t the only option.

Sue and I recently attended a promotional event for Italian wine that was aimed at trade — importers, distributors, sommeliers, journalists, and various “influencers” — but not consumers themselves (there was no consumer tasting).  The product chain for wine is long and complex and there are several points where promotion can be effective.

Come back next week for thoughts on some of the issues that a “Got Wine?” push needs to take into account. In the meantime, I have discovered that there already is a GOT Wine — GOT stands for Game of Thrones!

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The chart comparing Google search term data for wine, milk, etc. is taken from Karl Storchmann, “Wine Economics.” Journal of Wine Economics 7:1 (2012), p. 3.

The video above is the very first “Got Milk?” commercial.