In collaboration with the Hochschule Geisenheim, ProWein has presented its current ProWein Business Report. This year's title: "Ways out of the crisis." The most burning issue, of course, is the cost explosion. Additionally, there is a decline on the demand side, further driven by the general health trend and the economic situation of individual households.
According to Prof. Simone Loose, Director of the Institute of Wine and Beverage Business and responsible for the study, the solution can only be to adapt the industry to these new realities. Specifically, this means better addressing the needs of future consumers, while simultaneously tackling the structural problem of overproduction, which likely only succeeds with state support.
The immense costs increase is still the most pressing issue, although not as severely as in the previous year. Significantly less worrying now are the supply chain disruptions of 2022 and health policy concerns – surprisingly, given that advertising bans, tax increases, or mandatory labeling remain high on the health policy agenda of organizations like WHO or the EU. The declining wine consumption is perceived by industry players as one of the most urgent problems, even more so than in the previous year.
By contrast, climate change is not a concern for less than half of respondents. The current economic issues are clearly overshadowing the long-term challenges that the industry will face. This is not a promising sign for the necessary structural transformation towards sustainability needed to mitigate climate change. The industry's focus on immediate economic concerns may be overshadowing the need to address the longer-term impact of climate change, which could have significant consequences for the wine industry globally.
Cost reductions, price increases
Cutting costs and raising prices is the most common strategy to survive in times of crisis. About 72% of companies have reported attempting to offset costs with higher prices – but this has also led to a decrease in sales. Other important steps included aligning the portfolio more closely with the lower-priced category and investing more in marketing and sales. Consequently, a third of the trade companies saw an increase in the entry-level segment. Additionally, many have streamlined their assortment and delisted unprofitable items.
Producers are primarily tweaking their portfolio, discontinuing less profitable products, and instead focusing on "innovative products." There's also an increasing shift towards foreign markets, as such diversification promises more sales stability.
Reduced investment in the industry
The industry as a whole has also invested less: 40% of the surveyed companies report having reduced or completely stopped investments. Naturally, a backlog of investments is not conducive to the future viability of individual companies and the entire industry. "If you want to consolidate your position in the market, you have to be prepared to invest money," comments researcher Loose.
Reducing staff, however, is an option for only a few. Given the labor shortage, it seems that every employee in the wine industry is invaluable.
Nearly all companies report negative impact on performance
Only half of the companies managed to maintain their previous year's sales. In the trade sector, 23% saw an increase, while among producers, only 16% reported a positive increase. However, only 10% of businesses were able to match their previous year's profit. Over half of the trader’s report profit losses compared to the previous year, and this figure rises to 60% on the producer side. This dramatically shows, according to Prof. Loose, the continued decline in profitability in the wine sector.
While producers from key European wine countries still see a negative trend in the current situation, the outlook is significantly more positive, suggesting that the worst may be over. Only Spain, with its small harvest, shows more restrained optimism.
More than two thirds of producers and retailers therefore expect only a moderate price increase. These assessments vary among producers by size: larger companies are more optimistic, while smaller wineries and cooperatives are more pessimistic, though less so than recently.
Sentiment is also improving among distributors, more so than among producers. In the on-trade channel, the positive development is largely due to the resumption of business post-pandemic – the so-called "Revenge Tourism" or "Revenge Travel," where people indulge in newfound travel and consumption freedom.
Particularly in trade, there's a strong focus on the entry-level segment. Consumers are trading down, opting for cheaper products. The difference between the current state and expectations is interesting: Producers, especially, expect the premium and super-premium segments to develop positively, despite recent poor performance. This is particularly true for France and Italy, known for many top origins. In contrast, Germany is the only country that does not believe in the success of its top wines, which have recently performed very poorly. Researcher Simone Loose is also skeptical as to whether this expected premiumization will actually occur. Are French and Italian producers possibly clinging to their own Grand Cru lifeline?
The trade, while hardly believing in the top shelf, is clearly predicting a further strengthening of the entry-level segment. However, this outlook varies from market to market: Switzerland, the Netherlands and Austria are more optimistic about premium wines. Conversely, Germany, Belgium/Luxembourg, Scandinavia and the key premium target market of the US/North America are less so.
Almost everyone agrees that the mid-range price and quality segment will likely face the toughest challenges.
Here, too, size is often the decisive factor: very large companies that can cover the entire product range and make the best possible use of economies of scale will be better able to absorb the downturn. Accordingly, the signs point to further concentration in the wine industry.
Decline in consumption and solutions
From the respondents' perspective, the reasons for the decline in consumption vary. In Germany, declining household budgets are seen as the main reason for this development. The shift to other (lighter or lower-alcohol) beverage categories is also cited by many as a cause.
Regardless of the specific reasons in each market, declining domestic consumption increases the pressure to export, hence the need to explore new markets. A key strategy recognized by industry players seems to be to better target young consumers, simplify wine and make it more accessible. However, this cannot be achieved without the necessary investment and expertise in (digital) marketing. Prof. Loose also appeals to the German wine industry: Adherence to the Romanesque appellation system makes wine more complex and complicated, whereas the opposite is the need of the future.
Controversy is surrounding the potential of the alcohol-free wine segment
Whether the non-alcoholic wine segment is the key remains a matter of debate. Researcher Loose sees significant potential in sparkling wine, while noting that there is room for quality improvement in still wine. However, competition from non-wine beverage categories is a challenge. Indeed, large breweries and spirits companies are often more innovative and financially stronger than the wine industry. To compete effectively, the wine sector needs to step up its game, especially in terms of digitalization, as Loose also evaluates.
The current state of the industry in this context will be discussed by Prof. Simone Loose at this year's Meininger's Wine Conference titled "Wine Goes Tech: From Robots to AI, From Vineyard to Shelf" on March 9, the day before ProWein. For more information on the conference program and registration, see HERE.
For the seventh time, the Hochschule Geisenheim, conducted the survey on behalf of ProWein. This time, 2,018 industry players from 47 countries were surveyed, working in wine production (855), retail (687), or import/export and distribution (476). Each report focuses on a thematic aspect; this year, it's the economic crisis and its impact on the industry. More than half of the respondents (1,173) are from Germany, where the Geisenheim University network is naturally very strong, so the German perspective is disproportionately represented.