The scale of the crisis prompted by the COVID-19 epidemic is global and has therefore impacted the wine market on a planetary level. Martin Cubertafond, a strategy consultant and lecturer at Sciences-Po Paris specialising in the global wine trade reviews the immediate impact of lockdown and predicts possible future developments in this fascinating exclusive interview.
Lockdown has profoundly changed our consumer habits. To what extent has the wine market been affected by this crisis?
Martin Cubertafond: Generally speaking, the on-trade distribution channel (i.e. consumption in bars, cafés, restaurants, etc.) has shut down. This generally represents 20-25% of volume and slightly more in terms of value. However, some markets quickly switched to the off-trade segment, which relates to off-premises consumption. This shift occurred very rapidly in the United States. Distributors with dedicated on-trade sales teams reassigned them to off-trade. Consequently, even some of the more prestigious brands that were initially sceptical of distributing their products through large retailers did not delay long before going down that path. As a result, they succeeded in switching lost on-trade volume to off-trade. However, the US is virtually the only such example. The same trend has not been observed in countries like France or the United Kingdom. People have not drunk at home what they would normally have consumed in cafés or restaurants.
So consumers have generally been drinking less during lockdown. But what is the situation regarding the value of bottles purchased?
There has not been a significant difference in the United States, since higher value wine has been available in supermarkets. But elsewhere, there has been a reversal in trends. In recent years, we have witnessed premiumisation of the market, with consumers drinking wine less frequently but choosing more expensive varieties. Wine is no longer a staple served with every meal as it was 30 years ago – it requires an occasion. In fact, this applies to all groceries, for which the value of purchases in France has risen over the past three or four years. People are buying slightly fewer products but spending slightly more on each unit. This trend has been abruptly halted during the Covid crisis for both groceries and wine. We have observed a return to products with lower unit costs. Examples of this trend include rising sales of 3 and 5-litre BIB wine. Less expensive wine ranges have also experienced growth.
While Covid has accelerated trends in some areas such as remote working, telemedicine and online banking, it has reversed trends in other sectors such as wine.
Has the whole concept of premiumisation been called into question?
The question is whether consumer habits during lockdown are a parenthesis in a larger trend – will we quickly return to normal or will this parenthesis be a large window slowing the return to the pre-Covid world? That will depend on the scale of the economic and social crisis that takes hold after the health crisis. If this is very severe, spending will be impacted and the parenthesis may persist. We’ll have to wait and see…
Were no signs of this reversal in trends detected before the crisis?
Quite the opposite! We have observed premiumisation in the wine segment for the past twenty years or so and in the grocery segment for the past four years. The paradigm of more for less perpetuated by the agri-food industry and superstores was being challenged. There are several reasons for this including health scandals (BSE, etc.) and disillusionment with superstores. This crisis of trust encouraged consumers to buck the trend, buying less for more. While Covid has accelerated trends in some areas such as remote working, telemedicine and online banking, it has reversed trends in other sectors such as consumption of groceries and wine.
As a result, this fall in consumption has led to rising stock levels. Is this likely to destabilise the market?
Absolutely. There are several types of stock. Firstly, there are existing stocks of wine, which are ready for dispatch but have not yet been sold. A return to business as usual will be difficult with regard to such stock. Cafés and restaurants will first need to reopen, sell enough bottles from their cellars to generate cash flow, pay any outstanding bills, and finally place new orders. A significant period of time will elapse between them reopening and ordering wine. All stakeholders at various points in the value chain (importers, wholesalers, retailers, and even consumers) are currently consuming their stock rather than purchasing.
And what is the situation with regard to wine that is not yet ready to be sold?
Due to the sudden fall in demand, there are moves to eliminate it to avoid destabilising the market. Aid schemes for the industry are being put together between various countries and the European Union, particularly with a view to supporting distillation. Wine will be distilled to produce alcohol for hand sanitiser gels or other industrial products (editor’s note: including biofuel). Large quantities of entry-level wine will therefore be destroyed. Higher quality wine varieties will generally not be so severely affected. For example, champagne improves the longer it is left to age “sur lattes”. It will be a year older and all the better for it. However, this does not apply to all wine-growing regions. Rosés are at the other end of the spectrum. Even in a premium wine-producing area such as Provence, it is extremely difficult to sell rosé made prior to the latest production year, since distributors and consumers want the most recently produced wines. So 2019 rosés, which would normally be consumed in the summer of 2020, are faced with real problems.
Are prices and therefore producers’ revenue likely to fall?
If supply and stocks exceed demand, there is indeed a risk of falling prices. All domestic and Community policies are geared toward removing this stock from the market rather than risking it being sold off at knockdown prices and causing the price of all remaining wine to fall. The rationale is that it is better to withdraw a quarter of all bottles to keep prices more or less stable rather than leaving everything on the market, which would lead to a significant fall in the price of 100% of bottles. Effective regulation will be necessary to stabilise prices as some stakeholders are out of options and may sell off their stock as a last resort. For example, the joint trade committee for champagne decided to suspend sales of champagne “sur lattes”, first for one month and then for a second month (until 28 June). These wines representing 5 to 10% of the market are a taboo subject in the champagne trade. The concept relates to bottles of champagne that are ready for distribution bar disgorging and labelling. Typically in times of crisis, operators sell this stock at knockdown prices and it is subsequently sold by large retailers at €9.90 per bottle. These “reserved brands”, whose names are only used for the duration of the promotion period, are cheaper than own-brand products. They bring in cash for producers and are loss leaders generating footfall in stores. Although they make no money for retailers, a well-placed ad in a leaflet attracts customers who go on to fill their trolleys.
Large quantities of entry-level wine will therefore be destroyed.
Is this crisis, which by its nature is creating an increase in unwanted stock, likely to prompt a review of the recent liberalisation of planting rights, which was aimed at producing more wine?
Absolutely and it is essential to take the long view of this issue. The liberalisation of planting rights is a European decision. In the 1980s, enormous surpluses of wine were produced in the EU, and through the Common Agricultural Policy (editor’s note: CAP), the European Union withdrew many wines from the market by funding their destruction through distillation. Then, rather than subsidising distillation every year, Europe decided to support vine grubbing. However, once you start funding grubbing, you have to regulate planting, otherwise there will always be opportunists who grub up their vines only to use the money they receive to replant elsewhere, sometimes even receiving benefits, since Europe encouraged certain grape varieties and production methods. Planting freedom was therefore abolished. Once the situation had more or less been rectified 25 years later, the EU decided that planting could be liberalised again. It therefore authorised a certain volume of planting distributed among countries based on requirements. Following a long period in which the balance had been negative with more vines grubbed up than planted, a positive balance was restored albeit highly targeted on products experiencing high levels of demand such as Provence rosé and cognac. Now, with the market in turmoil and Europe about to fund crisis distillation again, it seems logical that planting rights will be reviewed. We’ll see!
Under normal circumstances, what is the breakdown of wine sales?
In France, 80% of the total volume is sold by large retailers of various types. While direct sales have completely evaporated in France at only 2%, this segment is in better shape in Italy. Traditionally, this was how our grandparents bought their everyday, staple bottle of wine that they drank with all their meals. They purchased it from the village cooperative, which would gauge the quality of a wine based on its ABV. This has now disappeared and wine tourists, who focus on more premium-quality wine and small volumes, have not filled the gap.
All crises cause a lot of damage, but also generate opportunities.
What is the situation regarding online sales?
The online segment has developed slowly because wine is a complex product. It cannot be digitised like train or concert tickets. It is bulky and fragile – when preparing orders, boxes must often be unpacked and repacked, wrapped and shipped, which is expensive. Even the best operators are incapable of keeping costs below €1.50 per bottle. Therefore, no business model exists for budget wines. While €40 bottles of champagne are profitable, there is no margin on €7 bottles of wine. However, there has been a boom in online wine sales during the Covid crisis with estimated growth of between 70 and 150%. Online sales have risen more in a few weeks than in recent years, with five years’ growth seen during the crisis. This trend may persist, since returning online customers are now joined by a host of new customers.
Have direct sales also benefited from the crisis?
It’s a bit early to say, but the basic phenomenon driving local consumption and short supply chains appears to have been bolstered by the crisis, especially since people have shown a desire to sustain local producers. Another model combining direct sales with online sales has proven very effective as demonstrated by platforms such as Les Grappes. This website (editor’s note: www.lesgrappes.fr – deliveries to Luxembourg are possible) features pages presenting information and photos on each individual wine estate. However, all the back office and logistics (ordering, stock management, payment and shipping) are managed by the platform. Les Grappes has negotiated a deal with DHL. Winemakers keep the necessary packaging on their premises. They also print and attach delivery notes to parcels, which are collected by couriers. The website makes a percentage on all orders. Middlemen are cut out of the process, with bottles dispatched straight from producers’ cellars to customers. Such solutions are very useful for small estates and have proved popular with customers. And this is by no means a minor trend – Les Grappes shipped 800,000 bottles last year and now things have really taken off. Sales are estimated to have doubled in April. I believe this service will last the distance even when the market stabilises, since many consumers have taken the plunge and have been satisfied with the service.
Agility, responsiveness and speed will be required to gain a foothold in these new niches.
Has the crisis had a different impact on large and small producers?
I believe the crux of the matter lies more in geographic exposure, i.e. where you sell (on the domestic market, specific export markets, etc.) and pricing policy. The impact on champagne producers, who sell their wines at very high prices, has not been universally severe. In contrast, the situation is potentially catastrophic for those selling low-cost wines in just one market.
Producers who have exclusively targeted fine dining, large retailers and events will struggle to survive the crisis…
That description fits Dom Pérignon perfectly. LVMH is the world leader for marketing and has given the entire champagne segment a boost. While Dom Pérignon accounts for just 10% of LVMH’s champagne sale volumes, it represents a third of its profits. It is sold exclusively in bars, nightclubs and VIP clubs, which have all been closed. Even though Dom Pérignon is large, powerful and well-positioned in terms of pricing, it will suffer. This proves that there really are no rules in this crisis.
Consumer demand for traceability is unlikely to be weakened by the crisis.
Now let’s talk about the post-crisis future. Winning back markets that are experiencing this reversal of trends that you mentioned will be a huge challenge for producers…
Absolutely. Apparently the Chinese word for “crisis” consists of two characters, one meaning “risk” and the other meaning “opportunity”. All crises cause a lot of damage, but also generate opportunities. Openings will emerge in the wine industry due to consumer demand for wines that are different in terms of the product itself, its packaging, the way it is consumed, etc. Will there be demand among customers for 75cl bottles, or boxes of two, three or six bottles? Will people want to buy wine using the same distribution channels? The main priority will be to keep in step with consumers’ immediate and future requirements. Agility, responsiveness and speed will be required to gain a foothold in these new niches. Work will need to be done, particularly on distribution and consumer relations. Many virtual tastings and tours have taken place during lockdown. Although sometimes awkward, they reveal a need to reach out to consumers and producers’ communities. I believe we will see some very exciting developments in the coming months and years, with changes in wine consumption, buying and logistics.
However, there appears to be a clash between two tendencies. Before the crisis, organic wine was riding the crest of a very dynamic trend. However, during lockdown, many people have opted for entry-level wines, which are rather conventional. Are these two trends compatible?
My feeling is that consumer demand for traceability is unlikely to be weakened by the crisis. Trust in the food and beverages sector goes beyond wine. People still want to be told what has been done and that they will not be poisoned. I can’t see that changing in this stressful period. However, despite persistent and even increasing consumer demand, it is possible that some producers will decide to delay their conversion due to falling consumption and the higher cost of converting to organic production. A substantial package of subsidies from states for organic wine-growing may provide an appropriate solution, since organic production requires labour in a time of rising unemployment. An important development for the champagne market came this year at the Vinexpo event, where the dominant LVMH group with 20% market share in terms of volume and a third in value, announced its “Living Soils” strategy with very firm commitments to sustainable development and soil health. These pledges are in fact so firm that it will be difficult to renege on them! LVMH has significant influence in the champagne market and the future will also depend on the group’s policy in the coming years.
If producers expect everything to go back to the way it was before, they are taking a significant risk.
In Luxembourg, although only 4% of the planted area is cultivated organically, what is more significant – and even somewhat paradoxical – is that the Luxembourg wine-growing region was the first to prohibit insecticides in 2007 and glyphosate has been banned from vineyards this year. Winemakers have voluntarily adopted more sustainable cultivation methods.
This is good news! Organic certification offers the benefits of traceability and chemical-free production. As a highly legitimate and very persuasive form of certification, should organic production now be considered a general solution or should more specific solutions be adopted that are more appropriate to the diversity of vineyards in view of their specific issues? Organic certification is perhaps not a universal solution … the top priority may be to convey a consistent message and ensure total transparency. Customers may be prepared to accept the use of certain chemicals if explanations are provided and agents are used in a highly consistent and traceable manner. In any case, winegrowers will have to make these types of efforts. LVMH’s announcement at Vinexpo is very illuminating. In one lecture they explained at great length that soils need to be protected at all costs and chemicals should not be used systematically, and in the following lecture they suggested that organic certification is not a one-size-fits-all solution for the whole world, since some countries experience specific issues requiring adaptation. This amounts to questioning organic production while claiming a desire to set an example on soil! Time will tell whether organic cultivation is the universal solution, but in any case, transparency will be key.
In the current crisis, is there an advantage in selling mainly to a local market as is the case in Luxembourg?
Selling locally is all well and good, but also entails risks. If you sell 100% of your goods in the local market and there is a crisis in Luxembourg, you are more vulnerable than someone selling 10% of their output in 10 countries. On the plus side, if you sell locally, there are benefits in terms of a low carbon footprint, short supply chains, identity, etc., but on the other hand you are dependent on one market.
I believe they should be proactively improving their existing distribution networks, but they also need to be very responsive and willing to innovate in terms of new products, distribution channels and consumption patterns.
Should we expect the post-crisis market to pick up where it left off pre-crisis or will it completely change?
Not everything will be different. There is no risk in assuming there will be some continuity from the pre-crisis situation. However, if producers expect everything to go back to the way it was before, they are taking a significant risk, since the post-crisis landscape will be a combination of what we had before and the new situation. I believe they should be proactively improving their existing distribution networks to resume activity in the second half of the year. However, they also need to be very responsive and willing to innovate in terms of new products, distribution channels, and consumption patterns.
Is wine-growing sufficiently instilled with a culture of innovation?
You are right to highlight this point. Although wine-growing is capable of innovation, it does not have speed in its genes as it is an agricultural sector with only one harvest per year and a great deal of inertia – if you plant a vineyard today, it will take at least three years to make wine or even seven for premium-quality wine. This is not the mobile phone industry where innovations occur four times a year. Some producers will have the luxury of being able to wait several years for it all to blow over, but this is not the case for everyone. Everyone else will have to innovate. It will be a very interesting period. Current high-flyers will still be performing well in six months’ time. However, in 18 months’ time, the high-flyers will not necessarily be the same as six months ago. There are sure to be surprises both ways.