Devil's Advocate - Tough(er) Times Ahead

The wine industry is only just recovering from the pandemic. Now Robert Joseph, playing Cassandra rather than his usual Devil's Advocate, suggests that the wine industry is facing tough financial headwinds. The only hope is of China coming to the rescue, but that's far from certain.

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Robert Joseph - the Devil's Advocate
Robert Joseph - the Devil's Advocate

Sooner or later, what goes up, usually comes down.

Historically, the US has had 14 recessions since the crash of 1929 and, between 1960 and 2007, according to the International Monetary Fund, 21 advanced economies were in recession 10% of the time, often as a result of local conditions.

Over the last half century, there have been global recessions in 1975, 1982, 1991, 2009 and 2020, a frequency pattern suggesting that we were overdue for a downturn in 2020, even if a pesky little virus hadn’t showed up. 

The Covid Recession differed from others in having little upside. Unlike wartime, for example, when the population is kept busy and defence spending can temporarily boost an economy, the pandemic simply turned off the taps, while costing unthinkable amounts of cash.

Then came Putin’s war with Ukraine.

The question today is not just whether the world can avoid another global recession or set of local ones, but how it is to handle low growth with levels of inflation to which nearly two generations are unused. Prices are rising by over 10% in Germany and the UK. The last time that was happening in Britain was in 1981. In the US, the figure is 8.3%. Better, but still painful.

Worse still, the rise in the cost of essentials - heat, light and food - is higher. Food inflation in Germany in September 2022 was 17.7%. In Britain the equivalent figure was 14.6%.

The wine industry is caught in a double bind here. Its own rising costs - energy, raw materials, logistics - are forcing producers to put up prices at precisely the time when customers will have less money to spend on their product.

Middle-Income Feeling the Pinch

There’s another problem that is particularly acute in the UK, historically a vitally important market for wine. While a small section of the British population much of which works in finance has become much wealthier, and even more able to afford eye-wateringly expensive Burgundy, most of the population has less money, in real terms, than it had after the 2009 recession. The expression ‘heat or eat’ was being increasingly used before it became clear how far fuel prices were likely to rise. That particular increase may not be as severe as feared, but there is no question that general inflation is affecting a broad swathe of the population. As the marketing and advertising trade publication The Drum reported earlier in the year, “Laura Bebbington, managing partner of insight at Havas Media Group UK, said: ‘The cost-of-living crisis has intensified and become more far-reaching, with mid- and high-income households and all age groups feeling the pinch. With inflation and its impacts now well-established and a growing nervousness around spending and job losses, people are tightening their belts to the maximum as the dark clouds of recession loom once again.’”

UK - a Special (Basket) Case

Mike Veseth, the American ‘Wine Economist’ whose words are always worth reading, recently focused his attention on the UK’s specific problems which he says go deeper than the inflationary pressures that are affecting other developed nations: “Already more economically fragile than [some] other countries… it must now confront the fact that its new government seems to be both economically reckless and politically tone-deaf (an unusual combination — it is usually one or the other). So the Bank of England has had to raise interest rates even faster than expected and invoke emergency measures to prevent fire-sale losses among pension funds.

To invoke the car example... the UK’s drivers are stomping down on both the brake and accelerator pedals at the same time. Not a very safe situation according to most driving instructors.”

Veseth - rhetorically? - wonders if Britons will spend their money on increased mortgage payments or on wine - and similarly muses whether German consumers will choose to “shiver in the cold while they drink their usual ration of wine? Or staying warmer but cutting back on price or quantity?”

Will Germans, Brits or citizens of other markets spend their diminished funds on eating and drinking outside the home - especially after getting used to not doing so during the pandemic?

The implications for wine retailing at under $20 are clear. But what of  those pricy Burgundies and everything in between. Here too, the picture is far from rosy. In his latest report, Stephen Rannekleiv, Global Beverages Strategist at Rabobank, suggests that while “affluent consumers may be less impacted by unemployment and other factors than lower-income consumers… declines in household net worth have a strong correlation with declines in super-premium wines and spirits. Recent declines in household net worth – and the possibility of more declines to come – suggest we may see softness in the super-premium market in 2023.”

China to the Rescue?

Against these gloomy forecasts, there is one possible ray of hope. According to Bobby Verghese of UK-based analysts GlobalData, in his latest report, China may rescue the wine industry. Its wine market will, he estimates, increase at a compound rate of 11.5% over the next few years - growing from CNY268.6bn ($42bn) in 2021 to CNY462.4bn ($72.2bn) in 2026.

 “Wine” Verghese says “is becoming a popular alcoholic drink among Chinese consumers owing to its perceived health and beauty benefits, and the influence of Western lifestyle habits. Young Millennials and Gen Z adults, who wield considerable purchasing power, are reshaping the Chinese wine market. Wine vendors are adapting the product offering and marketing and branding activations to suit this young cohort. In addition, wine brands are building their presence on leading ecommerce portals such as Alibaba Tmall, targeting these digital immigrants and natives…. Wine companies are leveraging digital and social media marketing strategies, including live streams with key opinion leaders and celebrity brand ambassadors to connect with younger audiences. Manufacturers are also introducing small-size wine bottles to encourage novice drinkers to try out their brands or labels.”

Depressingly, Veseth is unconvinced. “Five years ago, China would have been the engine we counted upon to pull the global wine trade and, indeed, the global economy, out of its storm. Now its weakness on both fronts (covid lockdowns prevent a return to normal wine market conditions, for example) stand in the way of recovery”.

I’d love to disagree with him, but I can’t.

Veseth and I may be dismissed as Cassandras but I for one will take that as a compliment. People who invoke her name forget it was that ancient legendary princess's peculiar fate to make prophecies that were invariably pessimistic, never believed - and always correct.




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