Some people think that wine is recession proof.  They’re wrong.

Demand and Supply

The still evolving economic crisis is already having serious impacts on the wine industry.  Although some segments of the industry are gaining as a result of the collapsing credit markets and contracting real economy, there are a lot of losers, too.  Herewith a brief report compiled from a variety of published and industry-insider sources.

In the short term the problem is all about falling and shifting demand.  In the longer run, the supply effects of the financial crisis need to be considered.

The hospitality industry is a bellwether of the overall economy — restaurant meals and hotel stays are some of the first things to be sacrificed when people and businesses are uncertain about the future.  It is no surprise, therefore, that restaurant wine sales are down, apparently a reflection both of fewer customers and smaller tabs (wine tourism is falling, too, although high gas prices are part of that story).  This is already affecting both wineries who target restaurant sales and restaurants that have invested in high-margin wine programs in the last year to try to compensate for soaring food costs.  The squeeze is on, as I wrote in March, and getting worse.

The evidence I’ve seen concerning supermarket and wine store sales suggests that buyers are trading down.  The $10 and up market segment has been the fastest growing part of the Wine Wall in the last two years.  It’s still expanding, but the pace of growth has slowed considerably and there is evidence that buyers are trading down within it.  An article in today’s New York Times suggests that even very affluent buyers are being more cautious.

Low cost wines ($4 and less) are seeing a surge in sales.  This has apparently created something of a crisis in Great Britain that pits the big retailers (the supermarket chains) versus the big producers (the global wine companies like Constellation Brands) in a battle for control of the Wine Wall.  The producers see their long term future in upmarket wines and have worked hard to reposition themselves in at the top of the Wine Wall.  They are very much committed to this strategy.  The retailers, however, are focused on value wines.  They see a real short term threat in discount store competitors.  They need to stress value and lower price, on the Wine Wall and throughout their stores, they believe, to keep their customers from switching to Aldi-class hard discount outlets.

There is a lot of turbulence in the middle of the Wine Wall ($4-$10), which is the heart of the market in some respects.  Microdata harvested from grocery store loyalty card programs suggests that buyers really are trading down from $7.99 to $5.99, for example.  Since the cost of making the distributing a $5.99 wine is not $2 less than a $7.99 wine, trading down has a big effect on producer and retailer profits.  Wine may be recession proof if you look only at overall volumes, which have held up pretty well for the industry as a whole, but don’t expect revenues and profits to tell the same sanguine story.

Not everyone will lose from this trend, of course, as there are many wines that are positioned to appeal to value-conscious buyers.  But the upmarket strategy that so many winemakers have embraced, and which I still believe is wise for the long run, is taking a short term hit.  And the effects on the wine industry may be especially large because some of the key regional wine markets are also the areas that have been most affected by the mortgage crisis and will be heavily hit by credit tightening.

Credit Crisis Effects

Most industry people I’ve talked with are focused on the short run impact of the recession on wine demand, and that makes sense.  Making wine is all about long term decisions and relationships, but making a living  from wine means holding onto buyers now. But I think there will be longer term supply effects that should be considered because this economic downturn isn’t just a recession, it is also a credit crisis.

Even if the Treasury rescue plan is a success, I still believe that credit will be much tighter for the next three years (some of my colleagues think it will take even longer to work though the credit cycle).  This will have serious effects because so much of the real economy has become dependent upon ready credit to finance business operations and to fund customer purchases.  Winegrowers are obvious potential victims of this trend.  Winegrowing is a risky business with special credit needs and an overall credit freeze could have serious effects that may extend all the way from the price and availability of the grapes themselves to the value of vineyard properties. Retailers and distributors may also need to scale back their operations to match their reduced access to credit.

The big global wine companies may be affected, too.  Anyone who follows the business has noticed that the big corporations are all trying to reconfigure themselves around particular market strategies.  Constellation is moving upmarket and shedding downmarket wine units while others are refocusing on particular parts of the Wine Wall.  A credit squeeze will both change the logic of some of these investments and make funding of sales and purchases more difficult.

Finally, the credit squeeze is affecting foreign exchange rates and this means that producers around the globe, who may or may not be affected directly by the crisis, will inevitably suffer indirect effects. The dollar has appreciated rapidly against many currencies in recent weeks (the Euro’s cost has fallen from $1.44 to $1.38 is just the last few days, for example) as international investors have sought a save haven for their capital until the international effects of the crisis become clearer.  This exchange rate effect will work against those US producers who hoped to increase sales abroad and benefit European exports here.

There will be a lot of economic turbulence from shifting demand and supply before we come out of this crisis. Buckle your seat belts.  We’re in for a bumpy ride.