Recession And The Wine Industry

As the dust starts to settle down from the storm created by the world economic crisis, it is probably an opportune moment to take stock of the effects of the recession on the world wine industry.

Has this tumultuous event re-shaped the wine business landscape? If so, who took the biggest hits and who managed to scrape through? Let’s explore:

  • Top of the tier, ultra-premium segment: These, mostly investment grade wines, may not be entirely recession proof but are certainly the least affected, except for a brief period in the last quarter of 2008. A successful En Primeur 2008 campaign (of course also boosted by Parker’s ratings!) and a northward bound Liv-ex Fine Wine Index are a testimony towards this argument. Extremely positive reports about the 2009 Bordeaux vintage has also added to the optimism.

Live-ex Fine Wine Index

  • The mid-priced sector: The hardest hit sector of the industry. Without the luxury of  having safety nets of big and investment quality brands (Screaming Eagle, Penfolds Grange et al), these wines felt the maximum pinch of the downturn. A drastic change in the consumer spending in restaurants as well as off-premise and internet buying patterns meant that a $45 bottle of wine that was selling regularly in the pre-recession times, now seems like a rather expensive buy. A reason why many wineries (as well as retailers) offered huge discounts or additional sops to keep their mailing address customer base intact.
  • The economy class: Two extreme contrasts were witnessed at this level. At one end, the small producer (especially from California, Australia and New Zealand to some extent) who depends on a constant cash flow to sustain his business, saw the orders drying up as the retailers simply couldn’t afford to tie their resources in the form of additional inventories. On the other hand, a lot of industry watchers feel that this sector really benefitted from the downfall of others as the so called ‘expensive wine habits’ were downgraded to a more reasonably priced (although not ‘cheap’) ‘recessionary’ drinking behaviors. So, the $45 mentioned above was probably split between three wines!

Apart from the general overview, a country-wise breakdown will also reveal the winners and losers in the last eighteen months. Wine regions with traditionally high fixed costs in viticulture and winemaking, like the prestigious California AVAs (American Viticultural Areas) and fine wine regions of Europe, were the natural sufferers. Whereas countries like Chile and Argentina with their broad range of price points coupled with extremely competitive fixed costs (especially, labor cost) clearly came out on top, consolidating their position in the vital American and UK markets. On the other end of the spectrum, the bulk wines of Australia and Marlborough (Sauvignon Blanc) are adding to the woes of the local industries, although as expected, New Zealand exports are still likely to cross the one billion dollars mark by next year.

Overall, so far the wine industry has weathered the storm better than the other sectors like real estate and stock markets, and although it is too early to claim that we are out of the choppy waters, the forecasts definitely predict of a smoother ride in the near future.

Cheers,

Niladri

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Social media – A necessary evil?

This compelling and brilliantly analysed piece of article should be a matter of great interest (and concern at the same time) to all the social media addicts and networking netizens of this planet. No prophecies here, just pure and simple business logic – freebies do not last forever!

So, what significance does a likely scenario of these networking sites vanishing in the thin air hold for the wine industry? In recent past, the skyrocketing popularity of social media brought a myriad of free advertising opportunities for primarily web based wine businesses which thrive on traffic numbers like wine search engines, wine information sites, wine blog sites, wine marketing portals and even wineries and wine retailers who saw a marked increment in their newsletter subscription thanks to Facebook, Twitter, YouTube and the likes.  They have not only provided these businesses a platform to reach a worldwide audience but also reduced their dependence on conventional traffic sources like Google and Yahoo to some extent.

What makes these social networking sites such potent marketing tool and is there too much of a hype surrounding their effect on wine businesses? Following are two examples among many others that probably answers this question and also precisely explains the implications of social media on today’s wine business:

  • Recently, a job posting that came to be known as a ‘Really Goode Job’ evoked a tremendous amount of interest within the wine fraternity not only because of the extraordinary perks involved but also due to the prime eligibility criteria for the role being a ‘social media whiz’. When was the last time anyone heard of a winery investing so much to exploit the benefits of social media?
  • Gary Vaynerchuk of Wine Library has more than a whopping 330,000 followers on Twitter. One doesn’t need to be a top notch MBA to figure out what this, almost cult following, means to his business in terms of $$$.

Let’s hope the day never comes when these sites cease to exist but if the worse comes true and with no more free cows to milk, most likely, it will be back to square one with Google (in spite of possibly losing YouTube) and other search engines having the last laugh. Wine websites have to rush back to their SEO consultants to make sure they rank highly on Google to get new visitors, failing which they will have no other choice but to dig deep into their pockets to find alternative and costlier means of marketing their products.

Do I hear the alarm bells ringing?

Cheers,

Niladri

Being ‘Savvy’, but at what cost?

‘Sav’, ‘Sav Blanc’, ‘Savvy’ or plain Sauvignon Blanc, call it whatever you like, such is the popularity of the Kiwi version of this wine globally that it is seriously vying for a place alongside other New Zealand national symbols/icons like the All Blacks, the Haka, the Silver Fern, the kiwifruit, the kiwi bird, the Beehive and Pavlova among many others. Wholehearted endorsements from well known wine critics over the years have further boosted its stature. According to the official website representing the Kiwi wine industry, the grape variety accounted for 60% of the total harvest in 2008. The meteoric rise in demand of the style (Marlborough Sauvignon Blanc to be precise) has also resulted in frantic expansion of vineyards and resultant increment in production to an extent where the industry insiders have started voicing concerns over possible risks of quantity eventually taking over quality. This sentiment recently surfaced from the very heart of the wine-growing region itself.

No doubt it has brought vinous glory to the country and certainly fuels the wine economy, which is aiming at the billion dollar mark by 2010, but any fair minded wine-lover who has interest in Kiwi wines will wonder whether this obsession with Sauvignon Blanc is justified in terms of the versatility of the wines that the country is able to produce. It’s not only the logarithmic growth in production but the potential of other wine regions and grape varieties that should also be a point of discussion. And there is always the fear that a commercialisation of this magnitude may overshadow the artisan nature of wine-growing that a large number of labels in New Zealand have come to represent.

The only other country that comes close to this unidirectional approach is Germany where Riesling rules, but New Zealand is not constrained by a lot of climatic factors which puts Germany on the viticultural limits. In wine-growing terms, the country is quite diverse with the regions scattered between latitudes 36° north to 45° south, the northern hemisphere equivalent of southern Spain to Bordeaux. Favourable growing conditions, well defined seasons and infrequent vintage variations make grape growing a natural choice. These include names as obscure as Arneis and Zweigelt, to all the major international varieties. Whether it is the Bordeaux style reds and Syrahs of mouthwatering concentration and structure from Hawkes Bay, exquisitely fruity and powerful Pinots Noirs from Martinborough and Central Otago, elegant Chardonnays from Gisborne, range of varietals from Nelson or an interesting array of aromatics and sparkling wines from selected pockets, New Zealand has a lot more to offer than just Sauvignon Blanc. Then there are a number of intensely passionate producers spread across the length and breadth of the country who have given a new meaning to phrases like ‘handcrafted wines’ and ‘sustainable viticulture’ and are not part of the S/Blanc bandwagon.

Marlborough Sauvignon Blanc has reached extraordinary heights in a relatively short span of time and is considered one of the the benchmarks in its category but it is in the long term interest of the New Zealand wine industry to equally promote the other gems in its coffers, or as the Kiwis like to say…give the other highly deserving wines a fair go too. Anyone ‘Savvy’ out there who feels differently?

Cheers,

Niladri

Wine Business in 2009

Recession, credit crunch, global economic meltdown, sliding economies, negative growth, rising unemployment, job losses, plunging stock markets, closing businesses…words that are reflective of the current economic climate. Nowadays, it is almost impossible not to come across at least one of these (dreaded) words in your daily newspaper or news bulletins.

So what has been the impact of this economic downturn on the wine industry so far? Have you already noticed substantial turnarounds in your respective markets or expecting the same in coming months? What do you think wine businesses can do differently that will help them sail through this turmoil? How do you see the market dynamics shaping up in 2009? These are some of the questions that I raised in one of the discussions on LinkedIn a while ago, with an aim to get some expert opinion on this raging but very relevant issue.

The replies I’ve posted below came from individuals representing three different sectors within the wine industry but are quite unique in their own ways. They also somehow reflect the diversity within the industry vis-à-vis their perception of the current economic situation.

A winery owner/Winemaker:

“I think we’re looking at a fairly flat 2009. You’ll see a lot more producers forming alliances with others in an effort to weather the storm…and you’ll see a lot of smaller producers selling out or closing their doors. The ones who have the cash reserves to stay in it will be forced to re-think/re-tool their product mix and distribution schemes.
Similar changes in the wholesale market will occur, and in some markets this will continue the trend of blowing out inventories at crazy low prices…resulting in an even more painful pinch placed on the small, artisan producer. The old saw of “worry about the cases and the money will follow” adage no longer applies.

The lack of cash will continue to stress all tiers of the business. On the producer/wholesale side, this will force leaner operations, and may put plans to expand/modernize on hold. It will also continue a ‘trickle up’ problem of cash flow…accounts not paying wholesalers in a timely manner will stress a wholesaler’s ability to pay suppliers. The folks who will ride this out will have (or at least have access to) cash reserves.

We’re at least a year away from a turnaround. I hope I’m wrong, but – from what I’ve seen around the U.S. and abroad – it looks likely.”

An independent wine consultant:

“In my business, I haven’t really noticed any impact. My business is a bit different in the wine industry though. I don’t have a wine store, so there isn’t the overhead that stores and restaurants would have. I don’t have employees, so I don’t also have those expenses.
My business is very client-focused and service-oriented. As an independent consultant working with a Napa Valley winery, we offer private wine tastings, personalized gifts and gift baskets. Being very focused on really getting to know my hosts and their guests, becoming knowledgeable on the wines served at the tasting, being entertaining and helping my host with setting up their tasting, inviting the guests, etc., puts us in a different type of niche. We go to the home or office, they don’t have to come to us. It’s kind of like a housecall for wine. Pretty cool. I expect my business in the next year to flourish and grow.”

A corporate wine manager of a chain of restaurants:

“Consolidation will occur at all three levels of the industry. Smaller family owned wineries will be purchased at a discount, large conglomerates especially from Australia will be forced to sell off pieces. Consolidation will continue at the wholesale level to stay competitive.
Wine consumption won’t wain, but consumption habits will be driven into the privacy of one’s home. Comfort food and comfort wines will be a staple for at least a year. I see wines from Argentina and Chile picking up steam due to quality and price (something the Aussie’s used to have), California cult wines will see a cooling off period at the restaurant level and at auction. French Bordeaux and Champagne continues to back itself into a corner with lack of vision or compassion towards price, however I believe the Rhone and Languedoc have done and continue to reach new consumers for the very reasons Bordeaux fails.
At the restaurants, I’m seeing a downtick in check averages, but not in volume, suggesting that my guests are consuming similiar amounts of wine during the dining experience, but, on lesser priced wines. Critter and cutesy wine labels are falling out of favor as the american consumer becomes more and more savvy in knowledge and tastes, these folks will return to classic, reputable producers with Icon names (hence comfort wines).”

The current crisis will no doubt cast its shadow but only time will tell the magnitude of its effect. History is witness that the wine industry has weathered many storms in the past including wars, diseases, recessions and so on. Let’s hope this time it’s no different.

Cheers,

Niladri