Wine Industry after COVID-19
By the time this essay is being written, COVID-19 Pandemic victims worldwide accounted: “5.3 Million cases & 340 Thousand deceased cases”.
· Who would ever estimated that a Pandemic disease would hit the world in 2020?
· Who would ever plan a Pandemic disease situation?
· Which Risk Management model had put a Pandemic Disease situation hitting globally?
· Which establishment has even a crisis management plan implemented?
· What preventive measures have been put into action?
The answer to all the above questions is a “relative” NONE. If the largest Multinational Corporations operational models proved to be a total failure in such crisis, then the SMEs can’t be blamed for it.
Direct Financial effects of COVID-19 on the Wine Industry:
With a global market size of approximately 400 Billion Dollars [1], the wine industry is just a fraction of this global economy. However, it is an integral part of the food & beverage supply chain, due to its direct & indirect employment opportunities for all working contracts (full time, part time, seasonal) where millions of families rely on its income to participate in the economical cycle.
On a European Union level, the wine industry employs 3 Million direct jobs, who produce 63% of the global wine production, with more than 10 Billion Dollars of export.
Overnight, the industry was asked to shut down due to COVID-19 same as all Food & Beverage institutions where there is a direct contact with the client on a daily basis, with no near horizon of recovering or going back to normal to say the least.
According to “WineAmerica”, its member wineries lost 400 Million Dollars in March alone[2]. Taking the optimistic time for recovery being 1 year (excluding the recovered losses), we are talking about at least a global loss of 20 Billion Dollars globally for the wine industry.
However, this figure is only the direct financial loss of the industry, because we are not taking into consideration the effect of such losses to the overall economic cycle which is much higher (Restaurants & Hotels, Retail, Agriculture, Banking, etc).
From an oenotouristic angle, which is interdependent from the wine industry itself, the scene is even worse, because it is directly linked to the global travel industry effects, where IATA estimates that the global airlines losses could fall to more than 252 Billion Dollars this year[3], with Europe being the worst to be hit.
COVID-19 Impact on Wine Production & Distribution:
a- On-Trade Channel:
The on-trade channel has to be shut down with the immediate closures of all Food & Beverage establishments. All active production centers operate at slower pace mainly due to:
· Slow market activity — drop of sales;
· Special staff management;
· Problems with logistics; and
· Problems with the supply of materials.
b- Off-Trade Channel:
Supermarkets and grocery stores continue to operate quite normally, even though a few logistics problems have been reported. However, the duty-free channel is completely frozen, due to closure of Airports.
Priority is given to basic needs products and hygiene products and therefore they have:
· Reduced the space allocated to wine in large distribution;
· Reduced the space earmarked for wines in warehouses;
· Reduced, in some cases, the number of wine SKUs on offer; and
· Rescheduled orders to later dates or cancelled deliveries.
When looking at the value, a shift to entry-level wines has also been observed in this channel. As an example, bag-in-box sales increased compared to the same period last year;
However, the sales in this channel does not compensate in any market the loses in the on-trade, neither in volume nor much less in value and rentability.
c- Online Sales:
Wine customers rely more than ever on online platforms, with an increase in volume. However, the types of wines purchased have also shifted slightly, with a 10% decrease in the average price spent per bottle[4]. As a consequence, super premium wines suffer severe decreases in sales while less expensive denominations, and white wines in general, have seen their sales increasing.
It is to note that the delivery of wines at consumer’s door is facing logistic problems and limitation due to restrictions of movement within the national territories.
d- Oenotourism:
All wine companies have stopped oenotourism activities, with the ensuing huge impact on the sales directly at the wine producer place. Appointments, including mid-term ones have already been cancelled and wine tourism workers are on lay-off.
e- Staff Management:
It was a major drawback during this period, especially that the wine industry relies on the human factor to a great extent. The main reasons for this drawback are:
- COVID sick leave and associated quarantines;
- The need to reduce working hours/staff costs due to expected drop in sales;
- Temporary suspension of labor contracts due to economic causes, mainly in the commercial & oenotourism departments;
- Necessary adaptation made by wine establishments;
- Separation of working teams and workers for vineyard activities, and in cellars and bottling plants;
- Safety measures in the transportation of workers
- Lack of protection material and some companies had to close part of their facilities when not able to ensure protection measures, especially for small producers;
- Some activities in cellars are stopped (i.e. In Champagne), because of the implementation of the health measures
- If the situation does not change drastically, problems are expected when more intensive works are required in the vineyard and in the cellar. At this aspect, even if, for the moment there are some cases of working force shortage for current pruning activities, this will become critical later, when non-local seasonal workers are needed for the harvest period;
- The potential limitations for use of seasonal workers.
f- Supply Chain:
From a business perspective, there was some disruptions in the supply chain, like:
- The delays in receiving supplies due to logistics reasons, especially for glass bottles which has been reported because of the reduced activity of bottle producers, and for containers.
- Lack of truck drivers due to sickness, quarantine or drivers not wishing to travel to “COVID-19 Hot spots”. This issue has been faced also by Domaine Valentin Zusslin, where they had to send their pallet to Beaune, in order to be taken by the logistics company and ship it to Singapore. As a consequence, transport costs have increased dramatically in some cases for international deliveries
- Reduced availability of containers especially the ones sent on the export. It will take time to recover them because of reduced global economic activity;
- Distribution platforms prioritizing other products (i.e. Medical products);
COVID-19 Impact of Wine Exports:
Some export operations continue but not in a regular manner. Today, almost all the wine operators have been unable to maintain their exports at the same level since the crisis started in China last January.
Looking at the evolution of the COVID-19 outbreak outside the EU, many markets, including the US one, are already showing symptoms of stoppage and companies face a strong decrease in sales with the implementation of harsher quarantine measures by some countries.
As per the European committee of Wine Establishments, January and February 2020 wine imports in China have decreased around a 30% in volume with respect to 2019 imports. Sales’ losses in the on-trade channel are dramatic considering that they occurred during the Chinese New Year celebration.
The reduced export activity is due to the cancellation of orders made months ago, fewer orders, potential payment problems and delays, and difficulties in ensuring logistics due to the shortage of freight forwarders containers and rise of transport prices. In addition to the COVID-19 issues, there was already the new exchange tariffs with the USA that just started to lay its effects on EU wine exports to that market.
COVID-19 Impact on Finances:
Cash flow is one of the biggest concerns to wine companies and is directly linked to the duration of the crisis. In addition to the drop of sales, most customers are asking for delayed payment terms and of the risk of non-payment is considerable due to several partners along the wine commercialization chain going bankrupt.
Midterm Impact for 2020 Vintage:
COVID-19 is impacting the functioning of the wine chain and wine markets but, more importantly, it will have a very negative and long-lasting impact on the global economy.
A reduced economic capacity is expected of consumers with the consequent general decrease in wine demand, and demand for more expensive wines. In addition, the reduced airline traffic over the next months will also affect drastically the travel retail channel.
Considering this multifactor decrease in wine demand and the levels of wine stocks, the EU will face an oversupply of wine compared to the capacity of the market resulting in a high risk of wine depreciation.
Many wine companies expect to buy less wines or grapes during the 2020 harvest as a consequence of the negative expected sales in the next months.
The future reopening of the on-trade sector will not mean the recovery of this channel. We foresee that the partial dismantling of the on-trade as well as importers and distributors’ potential closures, due to the dramatic pressure they are suffering, will make it harder for them to recover and will require more investment from wine companies.
Emergency Measures to be implemented:
While the wine sector needs some emergency measures to be adopted to deal with the immediate impact of the crisis, the challenges for the sector will not instantly disappear after the limitations for citizens movement are lifted. Therefore, the immediate priority should be on the preservation of wine companies, so that they could survive the immediate effect of coronavirus. This preservation depends mainly on the capacity to protect the finances of wine companies.
- Encourage bottles less than 20 euros:
As the ongoing trend in the market, will be to reduce the average price per bottle, this segment should be encouraged in the wineries as it will be the cash cow for them, rather than premium wines;
- Encourage VRAC wines:
Mr. Christophe Macra MW (Owner of Cave Apogé — La Defense) mentioned, that it is the first time in his career that VRAC wines has been requested in La Defense area, which is considered one of the top hubs in Paris for premium wines. Therefore, if in such areas these wines started to gain popularity, I recommend that these wines to be rethought seriously, and offered in the market in a different view;
- Change business models:
Some wine-related establishments will need to rethink their business models entirely, especially if they were relying on On-Trade segments solely to generate revenue. The new business model has to be Hybrid, where different revenue-generating channels are secured at a minimized cost structure.
- More quality products from cooperatives:
In line with the VRAC & reduce average price per bottle, cooperatives in different wine regions can play the leader role in this aspect, by:
a- Encouraging small producers with limited balance sheets to enroll in the cooperatives;
b- Produce more VRAC wines;
c- Increase the quality of these wines to be more appealing;
d- Change the perception of wine cooperatives for the end user, to make it the wine of choice;
e- Produce other wine-based products;
- Business clusters:
As done is most wine regions, certain wine-related establishments should create Clusters, to promote the wine scene in that specific region. Some regions have done a better job than others in this regard, therefore public authorities should be the umbrella of their activities (financial, marketing, logistics, etc).
- Domestic tourism:
As international tourism is expected to suffer for the next 2 years due to COVID-19, domestic tourism should be highly invested in by all concerned stakeholders to encourage local wine industry, and avoid cash to be leaked outside the local economy.
- Encourage local manpower for harvest, instead of cheaper foreign manpower:
As 2020 harvest season is approaching, local producers (especially the ones who are financially capable) should encourage local seasonal workers via the foreigners (especially from eastern Europe). Local authorities should also put strict regulations on this matter.
- Offer virtual wine experiences to clients:
With the era of Virtual & Augmented Reality (VR), wine companies should embark it heavily as part of the oenotouristic activities to create wine experiences remotely, and supply winery-priced wines to the clients.
- Innovation of new wine-based products:
A lot of products can be made based on wine thanks to its health benefits, especially cosmetics. New startups can emerge in this market, and help in buying bulk wines for their own industry.
- Governmental support for the wine industry:
As part of its efforts to support the wine industry, governmental measures should include:
a- Reduce VAT Taxes on wine;
b- Remove commercial loan defaults penalties by the banks;
c- Provide support to delay suppliers’ payments by granting financial guarantees;
d- Remove export taxes (where applicable)
e- Remove import taxes (where applicable)
Finally, few people were more or less prepared (intentionally or unintentionally) for a crisis like COVID-19, and they were able to gain competitive advantage in the global economy, especially with the speed of healing from its effects. Therefore, it is of utmost importance that the above measures to be taken into consideration immediately, in order to avoid the undesired implications after the pandemic risk is mitigated.
[1] Source: https://www.globenewswire.com/news-release/2019/01/30/1707450/0/en/Global-Wine-Industry-Trends-Will-Reach-USD-423-59-Billion-by-2023-Zion-Market-Research.html
[2] Source: https://www.decanter.com/wine-news/wineamerica-survey-forecasts-economic-impact-us-wineries-coronavirus-435475/
[3] Source: https://www.nationalgeographic.com/travel/2020/04/how-coronavirus-is-impacting-the-travel-industry/
[4] Source: European Committee for wine producers