COVID-19 and its impact on the Wine Industry

Selling Wine in a Pandemic

There are times in life when businesses have to react to circumstances that are well outside of anything expected, such as the Covid-19 pandemic.

The recommendation from most health authorities to avoid crowds and employ social distancing is causing havoc with travel agencies, hotels, airlines, cruise lines, and the hospitality industry. But what is the situation of the wine industry?

The pandemic is obviously hurting the wine business as well, but industry insiders expect this situation will not impact long term wine demand. This is supposed to be a short term demand shock. Consumers will buy less wine for a short time because there is a reduction in the number of occasions to do so: closed restaurants, canceled sporting events, conventions, corporate events and so many other social occasions where wine is served.

United States

Revenue losses for the nation’s more than 10,000 wineries and more than 8,000 winegrape growers due to Covid-19 could reach $5.94 billion on an annualized basis in 2020, according to a new analysis by wine industry expert Jon Moramarco, editor of the Gomberg-Fredrikson Report.

“Despite recent news of consumers increasing wine purchases from grocery stores and other outlets, the impact of on-premise and tasting room closures plus projected declines in direct-to-consumer sales will offset any short-term sales gains when taking into account all sales channels,” said Moramarco. The Covid-19 pandemic is altering consumer buying patterns in areas such as off-premise and e-commerce in ways that won’t be fully clear for some time.

In total 97% of all U.S. wineries produce less than 50,000 cases and are estimated to experience annual revenue losses of between 36% to 66%, with smaller wineries most impacted. Projected losses increase as winery size decreases with wineries producing 1,000 to 5,000 cases expected to see lost revenue of 47.5% and wineries producing under 1,000 cases or less expected to lose 66% of revenue.

Individual U.S. wineries will be impacted differently depending on their primary channels of distribution. The annual revenue loss for U.S. wineries and growers is based on the following projections by channel and Moramarco’s assumption of a 50% recovery of restaurant, tasting room and other on-premise wine sales within three months of the lifting of shutdowns (which is estimated to be late May 2020). Moramarco does not anticipate full revenue recovery until three to six months after a Covid-19 vaccine is widely available.

US Wine Industry Annual Revenue Impact

• On-Premise: With social distancing and mandated closures of restaurants, winery tasting rooms, hotels and other on-premise businesses, estimated losses will be 80%. Down $2.54 billion
• Direct-to-Consumer (DTC): Winery DTC shipments for wine club (long-term subscriptions for limited availability wines) and allocation sales are estimated to decline 10%. Down $323 million
• Tasting Room Sales: Cellar door sales to consumers visiting wineries where the wine is delivered to consumers at the time of sale are estimated to decline by 80%. Down $3.0 billion.
• Winegrapes: In addition to direct impact on winery revenues, the shortfall in sales will also create an excess of winegrapes as inventories will be more than required. This is the impact on winery owned grapes and third-party growers this year. Estimated lost winegrape sales total will be 25%. Down $1.40 billion
• Off-Premise Sales: The off-premise retail sales (grocery stores and other outlets) will be less severely impacted and are benefiting from the decline in on-premise sales during shutdowns. While the initial response to shutdowns has been a large jump in off-premise sales, more recent trends show moderation. Estimated annual impact increase of 10%. Up $1.33 billion.

“Wineries, like all other hospitality businesses, are feeling the impact across the board,” said Robert P. Koch, President and CEO of Wine Institute. “Our wineries rely heavily on their tasting room and restaurant sales which have been decimated. While we are confident in the long-term consumer demand for California and U.S. wines, we anticipate a long recovery period.”

“Grape prices were bad before the COVID-19 pandemic hit, but now we are confronted by the prospect of a financial disaster for growers,” said John Aguirre, President of the California Association of Winegrape Growers. “We are grateful that winegrowers continue to operate with extra safety protocols in place, but there is a direct link between the success of tourism, hospitality, events and restaurants and the financial health of the many growers who supply grapes for wines sold in those segments of the wine market.”

China

China’s burgeoning wine industry is facing a barrage of problems – due to the enforced closure of catering and pub businesses – that resulted in sales interruptions and payment collection difficulties. The industry faces a liquidity crunch just as it gears up for spring production.

The catering industry is just resuming business while the demand for liquor and alcoholic beverages in the retail market hasn’t recovered yet, so cash flow-back from sales are still stalled, Chen Lizhong, owner of Xinjiang Tiansai Vineyards, told Yicai Global. “Our firm’s offline sales dropped 80% from the same period last year”, Feng Yingzun, general manager of Ningxia Leirenshou Winery, revealed to Yicai Global (noting that the winery’s online sales have also been significantly impacted). For example, its sales on China’s major e-commerce marketplace Taobao under Alibaba Group Holding declined 20%.

Leirenshou Winery is a representative enterprise of China’s large-scale wineries and can produce over 1 million bottles of wine a year, with a 50-50 split in online and offline sales, the report indicated. Feng said that the fourth quarter of each year and the first quarter of the following year is the peak season for wine sales, with 70% of the firm’s annual sales completed during this period, the report said.

The Covid-19 outbreak happened to occur in the first quarter, thus wine which should have been sold out before the Spring Festival is still on the shelves.

The company has 109 employees and pays 300,000 yuan (US$42,282) to 500,000 yuan monthly for their social insurance premium and wages, in addition to fixed expenditures and payment for spring farming and grapes, Feng revealed.

So the winery is facing a 5 million yuan (US$704,711) funding gap before the next peak sales season in the fourth quarter comes.

Shanxi province’s largest winery Grace Vineyard also announced earlier that the company’s financial results for the first quarter are expected to be unsatisfactory due to plummeting wine consumption amid the outbreak, the report said.

Meanwhile, vineyards in Penglai city, Shandong province, which abounds in wine haven’t received any new orders, Shen Guoquan, director of the city’s wine bureau, told Yicai Global.

April to June is the planting season for wineries, which requires a lot of investment. Some wineries also make final payment to grape growers for the previous year during this period, and their loans from banks are generally due at this time, the report said. In fact, last year was a bad year for China’s wine industry, with sales of wine companies declining to varying degrees, which added to the financial pressure on winery operators.

Huo Xingsan, deputy secretary-general of the wine branch of the China Alcoholic Drinks Association, told Yicai Global that some wineries are indeed facing financial difficulties.

Local governments have unveiled support policies such as low-interest loans, but industry insiders think these policies have provided limited help. Some winery owners told Yicai Global that they cannot apply for low-interest loans because they have no collateral.

Even without the Covid-19 outbreak, financing difficulty has been a long-standing problem plaguing China’s wine industry. Banks are not willing to lend money to wineries, Zhang Yanzhi, owner of Ningxia Xige Estate, complained to Yicai Global.

Wines produced by most wineries need one to two years ageing in oak barrels before they go on the market, which can take up a lot of money, industry insiders said. Banks, however, prefer fixed assets such as land and real estate certificates to raw wine or finished wine as collateral for loans.

About E.J.McKay

E.J. McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.