Since 2020, the world has transformed. First the pandemic that brought the global economy to its knees and produced a powerful driving force towards digitization, and then the increase in public debts together with the war in Ukraine causing inflation to run out of control.

The impact on the wine economy has been significant with both negative and positive effects.

The Negatives

On the one hand the lockdown of shops, restaurants and hotels, the collapse of business travel and tourism, the halt to trade fairs and events, the disruption of the supply chain, the isolation of China, and inflation, firstly due to the increase in government debt to deal with the pandemic and then the increase in energy costs and packaging materials following the war, are all squeezing consumption.

The Positives

On the other hand, the rise of e-commerce and the digital economy, post-pandemic “revenge spending”, the rise in value of the ruble and the boom in exports to Russia have all favoured per capita wine consumption and export.

While the pandemic seems mainly to have favoured a shift in purchases and consumption from one channel to another with an overall growing total, inflation and recession are another story.

The leading European large-scale retail groups expect inflation and the recession to cause an 8 to 12% drop in consumption. The first signs are already visible.

We are in a state of structural volatility which makes forecasting and planning difficult.

While small and flexible businesses can still manage, albeit with some difficulty, to navigate more and more by sight and adapt, large businesses with significant fixed structural costs find it very difficult indeed.

  • Until last year, large-scale distribution and discount chains with their million-bottle tenders dominated the market and dictated prices and conditions, putting entire denominations in difficulty. Today they struggle to find suppliers willing to commit to offers that go beyond a few hundred thousand bottles of wine.
  • The cost and availability of glass, previously trivial links in the value chain, have become critical factors. No producer has the certainty of the cost and availability of glass bottles for more than two months and wants to risk either selling at a loss or paying penalties for non-delivery.
  • Also, logistics, once considered almost a commodity, is becoming increasingly complex. The pandemic, lack of truck drivers, Brexit, supply chain disruption due to China’s isolation and high oil prices have driven up costs and, in the case of some destinations, costs have multiplied. Finding affordable trucks, ships and planes is a challenge.

It feels like the end of an era.

In this context, large companies, whose returns and share prices are based on a model of continuous growth, are experiencing a period of severe tension.

This crisis, in the same way as previous ones, favours portfolio down trading towards lower price ranges. In times of crisis like this, there is a significant increase in the consumption of low-priced wines and luxury products, not accessible luxury, but luxury in the true sense of the word.

“In times of great uncertainty, having better intelligence gives an enormous competitive, strategic and tactical advantage, and means performing better.”

It is the main reason why physical retail will increasingly be squeezed out by e-commerce, Amazon in the West and Alibaba and JD in China. In just a few years after the acquisition of Whole Foods, Amazon has perfected its know-how both for suppliers, producers and for consumers, integrating the two worlds, digital and physical, into a single omni-channel universe.

The great battle for the wine market is just at the beginning.

E-commerce platforms are testing and introducing new technologies, from robotics to artificial intelligence.

These technologies will simplify the purchasing process and make it more transparent, faster and safer. They will bring physical retail to its knees as it cannot offer exciting content, only the bare product and the price.

Thanks to consumer profiling before, during and after the purchase, e-commerce is information technology and produces maximum efficiency and effectiveness in terms of:

  • definition of the product portfolio
  • production,
  • purchasing,
  • logistics,
  • communication,
  • promotion, and
  • after-sales service.

It reduces complexity, simplifies and speeds up the purchasing process and offers an unparalleled delivery and after-sales service.

The same innovations are also exploited by suppliers and producers with the launch of brands owned by the platforms and produced by co-packers up to the development of production plants integrated with artificial intelligence and robotics.

“A retailer that can offer strong emotional content, a fun and satisfying purchasing and consumption experience, an immersion in an experiential world that is out of the ordinary, that is all easy and immediate, creates value.”

For the wine market, that world could be represented by wine shops, wine bars, the wine sections in department stores, restaurants, wineries that engage in wine tourism, fairs and festivals. It is a world where people are still at the centre and which offers those emotions that the consumer, immersed in the solitude of the digital world or in the fake conviviality of social media, needs so badly.

The exhibitionism and voyeurism of social media is an end in itself, because deep down we are aware that most of what we see is fake.

These years of crisis have served to remind us that health, conviviality, freedom to move, meet friends and be in the midst of nature are not always a given. A return to sobriety is underway, even to solidarity.

Wine is an excellent travel companion, both when everything is going well and when everything seems to be going wrong. It is a pleasure within everyone’s reach and relatively easy and cheap to reproduce. It is a product with an omni-channel vocation that has all the potential to continue to thrive even in difficult times.

The underlying risk – generational change

It is evident that the sector lacks a transgenerational transition strategy. The greatest threat lies in generational turnover bringing new purchasing and consumption behaviours.

The risk is of not engaging new generations of consumers and leaving wine in the role of a nostalgic product, the product that father and grandfather liked.

The world of spirits, which a few decades ago was facing a constantly declining trend, has been able to reinvent and reposition itself. By creating and riding the mixology trend, it has relaunched the consumption of spirits by younger age groups, also thanks to important investments in communication and promotion.

The new generations, from millennials onwards, lack the link to the territory and its traditions that characterized previous generations. There is less interest in having to put in effort to experience pleasure and enjoyment.

Everything must be just a click away and immediately enjoyable in a simple and fast way. Communication works if the messages are few, simple and clear.

This is totally the opposite of the communication used by the wine sector, which, except for the world of Prosecco and sparkling wines, strongly gravitates around culture, tradition and territory with an almost self-referential complexity. Just look at the Protected Designation of Origin (DOP) and Protected Geographical Indication (IGP) systems to realize this. The growing consumption of cocktails and flavoured alcoholic beverages is cannibalizing the consumption of still wine.

 

What to do? How to add value?

Simplify, excite and create a system (or better) territory network – these are the keywords.

di Alexander Hofer

Business Partner