COVID-19: The straw that breaks the camel’s back?

[The Conversation] - Published on August 26, 2020 in Science and Society

Protests and the crisis in Hong Kong (a key hub for wine in Asia) in 2019, Brexit, U.S. sanctions (Trump tariffs), and now COVID-19: developments in international trade over the past few months have been anything but dull, and the wine industry—which relies heavily on exports—is inevitably feeling the impact.

Carole Maurel, University of Montpellier

The wine market has weathered many crises and has proven to be resilient. However, according to forecasts by IWSR, global wine sales could drop by 13% in 2020 due to the current crisis, reflecting a more severe impact than during the 2008 financial crisis.

These cyclical challenges are causing significant uncertainty among businesses—many of which are small and medium-sized exporters—and are exacerbating certain structural difficulties that these businesses had still been managing to contain before the COVID-19 pandemic.

The latest market report from FranceAgrimer (July 2020) confirms the downward trend in French exports over the first four months of 2020 (-16% in volume and -36% in value compared to April 2019) across all wine categories, with Champagne seeing the sharpest decline.

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Unfortunately, the current situation serves as a real-world example of how the environment affects the export performance and financial health of wine businesses, and underscores the need to foster the resumption of trade relations and initiatives to develop and promote sales.

Given this unprecedented situation, we analyzed the content of 238 articles retrieved using the search engine of Vitisphère—a portal offering news, networking opportunities, and specialized services dedicated to professionals in the “vine and wine” sector—over the period from March¹, 2020, to July 26, 2020.

The goal of this initiative was to use a dynamic approach to assess the impact of the current health crisis on exporting companies in the French wine industry, as well as the initiatives and responses of industry stakeholders to this crisis. Here are some of the key findings gathered during our study over the past five months.

International and domestic sales are down

As a direct result of lockdowns and border closures—from China in January to Europe in February and March and the Americas in March—international business came to a standstill during this period. This is evidenced by the numerous postponements of international trade shows to the summer of 2020 or even 2021.

These events are key milestones for the commercial development of companies in the sector, and their postponement further hinders their international operations, even though innovative initiatives have emerged in the form of online trade shows. These postponements result in reduced cash flow and missed opportunities to develop and maintain networks with both French and international clients.

Another sign of the halt in international activity is the disruption of the supply chain: overcrowded ports, and port and airport operations at a standstill.

Similarly, lockdowns and border closures forced sales teams to halt their travel, particularly for export-related activities, which were replaced by a shift to remote work—a necessary step to maintain business relationships from a distance.

In addition to this setback on the international front, the health crisis has led to a decline and shift in consumption in the domestic market: the cancellation of spring wine fairs at supermarkets, and the suspension of operations at cafés, hotels, and restaurants (CHR), as well as the halting of wine tourism.

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FranceAgrimer’s market report confirms a decline in sales of Appellations d’Origine Contrôlée (AOC) wines, stable sales of Protected Geographical Indications (PGI) wines, and a sharp increase in “bag-in-box” wines.

A sharper decline is expected in the high-end segments, largely due to the closure of restaurants and the cancellation of social gatherings as a result of the lockdown. However, the impact on industry players varies depending on two factors: their level of dependence on these channels and the situation in the production region prior to the crisis.

In fact, private wineries appear to be more severely affected than cooperative wineries, due to their heavy reliance on sales at their own tasting rooms, to the hospitality sector, and to wine tourism, compounded by the slowdown in exports.

Furthermore, in Bordeaux, for example, this crisis is exacerbating the challenges facing the industry, which has been grappling for the past two years with a slowdown in domestic and Chinese consumption in particular, and is already struggling with structural overproduction due to shifting consumer preferences and the need to adopt more environmentally friendly practices —not to mention the numerous weather-related setbacks of 2020.

The Rise of Online Shopping

As early as the beginning of March, journalists were speculating that some of the lost international demand would shift to the domestic market and that this would present an opportunity for e-commerce (atrend confirmed bya study from IRI showing a 179% increase in online sales in March and April).

In addition, the lockdown provided an opportunity for some winemakers to innovate and launch their own online stores, offering shipping within France and across Europe. Others began offering home delivery or “click-and-collect” service at their wine cellars.

The same upward trend is evident in the auction market. In Hong Kong (the world’s leading market for online wine auctions), for example, online sales began to rise as early as March 2020, replacing in-person auctions. It remains to be seen whether these trends will continue to develop in the coming months.

Surplus inventories are a cause for concern

One key factor is on everyone’s mind amid the current decline in wine sales both in France and abroad: excess inventory (estimated by the industry at 3 million hectoliters ).

Inventory is an essential component of the operating cycle for companies in the industry and plays a major role in cash flow requirements.

Declining sales, lower yields, and unpredictable weather—all these factors are disrupting the inventory balance for industry stakeholders. We now fully appreciate how critical this is to the long-term viability of these businesses.

That is why the entire industry has been lobbying the European Union, the French government, regional authorities, and banks over the past five months to secure measures and assistance to manage these excess inventories, with a view to the 2020 harvest, for which storage capacity must be freed up.

Emergency distillation and private storage were at the center of the discussions, along with requests for exemptions from social security contributions due to a decline in business and for assistance with promotion and marketing.

However, not all stakeholders and regions have the same needs when it comes to aid—the Bordeaux region and Languedoc have a greater need for distillation (accounting for 60% of requests) than regions such as Champagne, Burgundy, or Alsace, for example.

Additional measures are being considered, such as individual supplementary quotas, the interprofessional reserve, and the possibility of increasing the proportion of the 2019 vintage in the 2020 blend.

Given climate change and the likelihood of future crises, it is essential to develop a toolkit for managing both downward fluctuations (such as poor harvests) and upward fluctuations in wine inventories, which can affect companies’ financing needs and operational risk and threaten their long-term viability.

This toolkit must take into account the diversity of situations and the profiles of the stakeholders involved, as this crisis shows us once again that the wine industry is multifaceted and that a one-size-fits-all solution is not appropriate.

Finally, while for some the current crisis has provided an opportunity to demonstrate solidarity (donations of alcohol for the production of hand sanitizer, charity sales, and the promotion of wine tourism), this period is above all a chance to reflect on the future, strategy, and business plans.

To bounce back, wine industry stakeholders have no choice but to act on the trends revealed during the crisis: corporate social responsibility, online sales, and the expansion of “bag-in-box” sales in the hospitality sector to reduce the carbon footprint, among other initiatives; these are all challenges that must be addressed during this period of uncertainty for the French wine industry and its long-term viability.

Carole Maurel, Associate Professor of Corporate Finance and International Management, University of Montpellier

This article is republished from The Conversation under a Creative Commons license. Readthe original article.

Keywords: COVID-19, Economy, Company, Company