Drinking More Wine During the Lockdown? You’re Not Alone

Source: https://nymag.com/

By Josh Barro

April 30, 2020

If you have been drinking more wine during the coronavirus crisis, you’re not alone. Data from Nielsen shows that wine sales for off-premise consumption during the period from March 1 to April 18 were 29 percent higher than in the same period one year earlier. Total alcoholic beverage sales for off-premise consumption were up 24 percent. Of course, on-premise sales – sales at restaurants and bars – have fallen off a cliff. But the rise in off-premise sales is exceeding the 20 percent benchmark Nielsen estimates is necessary to offset the on-premise losses. That suggests alcohol consumption is up slightly in the crisis, a remarkably robust trend since most kinds of consumer activity are way down.

Some of the extra alcohol sales may be attributable to “pantry loading”: Like with toilet paper, consumers may be buying extra alcohol now in case it becomes hard to find later. Customers might also buy in larger quantities than usual to reduce the frequency of their shopping trips – Nielsen reports sales growth has been especially strong for cases of beer, for example, while six-pack sales are actually down slightly, and that 1.75 liter (“handle”) sizes of hard liquor are selling especially well. But there are indications that the extra sales are largely going into consumers’ bodies. Consumers who told Nielsen they weren’t keeping any more alcohol on hand than usual were nonetheless spending 13 percent more on alcohol for home consumption than they had a year earlier.

Of course, it’s obvious why people would be inclined to drink right now. People are bored, they are frustrated, and they don’t have to worry about driving home from where they have dinner. Perhaps more surprising is Nielsen’s finding that there is “premiumization”: People aren’t just buying more alcohol, they are buying it at higher prices per volume on average. You might expect consumers who worry about their finances during this crisis to trade down to cheaper alcohol brands, but that does not appear to be happening, on average.

That alcohol sales are close to flat overall does not mean the alcohol industry has been held harmless from the economic crisis driven by coronavirus. As with so many aspects of the economic fallout from the coronavirus, larger firms tend to be best positioned to weather the crisis. This is especially important in the wine industry, which is more fragmented than the beer and liquor industries, with many small players dependent on sales channels that are not holding up as well as total consumption.

It’s not just restaurants and bars that are closed. Some states – such as Nevada, where wine and spirits can be sold at grocery stores and general merchandise retailers – have deemed liquor stores to be inessential businesses and ordered them to close. Even if wine- and liquor-specific stores remain open, consumers trying to reduce the number of stores they visit may prefer to buy wine at the supermarket and not make a separate visit to a wine shop. And big, unspecialized retailers like supermarkets tend to carry the biggest, best-known beverage brands, owned by the biggest companies. Rob McMillan, who runs the wine banking practice at Silicon Valley Bank, a major lender to small- and medium-size California winemakers, writes on his blog that even as large wineries have prospered with strong retail sales during the crisis, smaller wineries have often seen sales drops of 40 to 60 percent.

“If you’re primarily a supermarket brand, your sales are through the roof, and your concerns right now are, ‘How do I produce and get more wine to market? Because my sales are better than they’ve ever been,'” says Jasmine Hirsch, who runs her family’s wine business, Hirsch Vineyards, in Sonoma County, California.

But higher-end, smaller winemakers – businesses like Hirsch’s – are dependent on sales to restaurants, through wine clubs, and at their own tasting rooms. Tasting rooms have been closed by government order, and even if they were open, there are no tourists in wine country to visit them. That’s a huge hit: Silicon Valley Bank estimates that its clients typically generated 30 percent of their 2019 sales at tasting rooms. Restaurants aren’t ordering wine. And retailers, knowing that wineries have an excess of higher-end wine that can’t be sold at restaurants and tasting rooms right now, are demanding and getting discounts.

The offsetting bright spot for businesses like Hirsch’s is mail order. She says her overall direct-to-consumer sales are about 30 percent higher so far this April than they were last April, despite the closure of her tasting room, because existing customers have been ordering so much wine to be shipped to their homes. That’s not enough to offset her lost sales to wholesalers who would sell to restaurants, but it’s significant. And McMillan says his bank’s clients are generally seeing strong mail-order sales. He says more wine club members than usual are dropping their memberships – perhaps due to financial difficulties – but that effect has been more than offset by other customers increasing their purchases, as wine lovers cook more at home and look for ways to provide some semblance of normalcy and enjoyment.

“People are wanting some level of civility,” he says. “If you’re a consumer of wine, having a nice bottle of wine is civil.”

But it will be hard for wineries to keep leaning on mail-order sales if restaurant and bar closures persist into the late spring and the summer. Wine is heavy and sensitive to temperature, and it should only be ground-shipped to consumers in cooler months. As the weather warms up, air shipping will be the only viable way for wineries to send product to home customers without risk of spoilage, and that’s expensive: Hirsch says it costs her $150 to send a case of wine by second-day air, including packing costs. As with all kinds of online shopping, shipping costs are a pain point for wine consumers, and there is pressure on sellers to keep shipping prices low or even free. So Hirsch charges customers only $40 to air-ship a case of wine, and is able to make up the loss on shipping costs because of her wines’ high price point. For wineries selling lower-priced products, that’s impractical. The regular supply chain – where wine moves on refrigerated trucks and trains to wholesalers and then to consumers via retail stores or restaurants – is more robust to hot weather, but not to stay-at-home orders.

As the economy gradually reopens, smaller wine producers will be dependent on the survival of other kinds of small businesses and the resilience of other industries. When wineries can reopen their tasting rooms, will tourists be willing to travel? McMillan is hoping for offsetting effects: Tourists may be less inclined to visit California from far away, but Californians may keep their own travel more local, returning to wine country before going to the East Coast or Europe. When will it be practical for restaurants and bars to reopen, and how long will it take them (and their distributors) to work through wine inventories that had been ordered before the crisis? If restaurants are operating at reduced capacity, whether due to government orders or consumer hesitancy, it will take longer to work through the wine backlog. And if there is an overall trend of consolidation – independent restaurants and small liquor retailers being more likely to close, with sales shifting toward chains – that risks pushing consolidation up the chain, as those larger survivors tend to order wine from larger wineries.

Smaller wineries, which often sit on very valuable agricultural land, may themselves feel pressure to sell to larger, financially stronger competitors. McMillan also urges them to innovate their businesses – improving their capabilities for online sales; marketing to younger consumers who may be more inclined to travel soon after wineries reopen; adding outdoor seating so customers don’t have to crowd into tasting rooms – so they can adjust to the new shape of the market. In the meantime, consumers should benefit from ongoing deals as wineries cut prices in an effort to move product and draw in new customers. If you’re thinking about buying wine directly from a winery, and you live in a northern state like New York, you will likely need to order soon if you want to avoid paying for air shipping. But because our state does not permit wine sales in supermarkets, wine shops are deemed essential by the state and are generally open. So you may be able to find something interesting from a smaller producer without having to pay for shipping or worrying about the heat.