Is Your Winery Ready For The Next Recession?
Many economists are sounding the alarm that the next recession is around the corner and could arrive as soon as late 2020. Many early warning signs are already apparent including the yield curve inverting in March for the first time since 2007. This sign has been an affirmative indicator of a looming recession each time with only one exception.
A combination of other factors are creating a perfect storm of indicators including credit card debt being at its highest level since 2008 and leveraged lending increasing by 40% since 2016. Additionally, the ongoing trade war and tariffs with China has led to increased costs for new equipment and supplies.
The writing is on the wall and it is time for the wine industry to start planning how to weather the incoming storm.
Who Is Best Positioned To Survive?
In a 2014 study, authors Douglas Jordan, Sandra K. Newton, and Armand Gilinsky, Jr. explored if the size of a winery and average price point predicted which businesses fared better during the 2008 recession. They concluded that the larger the winery, the better it survived. Additionally, lower priced wines increased in sales, while high-end wines suffered the most. The bottom line is that small and medium boutique producers, especially those at the mercy of purchasing grapes, selling high end wines will be most impacted by a future recession. Larger wineries will be able to better deal with the downturn due to their economies of scale and larger existing customer base.
The worst-case scenario is that the impact of the next recession kicks in during the 4thquarter. At this stage in the wine production cycle, winemakers will be locked into their grape contracts and harvest will be ending. Wineries will have paid top dollar for the grapes and then be met with a decrease in demand as soon as the wine is ready to hit the market.
Wineries that do not rely on purchased fruit and are estate grown are best position to pivot during the next recession. If demand is clearly slowing down, they can sell excess wine on the bulk market, albeit at a deflated price by then.
Channels Will Close
During the 2008 recession, wine sales actually increased, but it was not good news for all. Big time collectors started drinking from their stash instead of investing in additional premium bottles. For consumers looking to buy wine off-premise, they downgraded and swapped their $30 bottles for $15 bottles. On-premise sales slowed with restaurants leery of investing in more inventory and instead opting to sell through their current stock.
The slowdown in on-premise sales and price implosion in off-premise sales led many wineries to look to the Direct-to-Consumer channel to pick up the slack. Many established wineries with iconic flagship wines continued to sell, but the demand was much lower. Nonetheless, DTC proved to be a promising and higher-margin channel compared to wholesale.
These patterns will reemerge during the next recession. I predict many consumers will cancel their excessive wine club memberships, but hold on to their one favorite. What are you doing today to make sure you are the one favorite wine club they hold onto?
Plan Now And Reap The Benefits Later
When the next recession hits, the market will be awash with premium wines like Napa Cabernet. According to the Sovos 2019 Direct to Consumer Report, the $60.00-$79.99 price point generated the most revenue for the industry last year. This price point and statistic should alarm anyone selling wine in that price range. The first cut consumers will make is to downgrade their $65 Napa Cabernet for a $30 Cabernet from a more value driven region.
Agile wineries that are able to pivot and restructure their product mix will be most successful. Instead of selling a single vineyard Cabernet at a high-price, be open to blending your single vineyard Cabernets together to make an appellation specific wine that can be sold at half the price point. If you have a loyal fan base, you might be able to still produce some of that single vineyard Cabernet, but odds are not as much as in previous vintages.
Many wineries will want to resort to discounting their existing portfolio to increase DTC sales. There may be a short-term benefit to this plan, but long term you will devalue your brand. Eventually, the economy will rebound and then you will have to phase-out the discounts your customers are now trained to expect. Your brand’s integrity will endure better if you create a new lower price label which you can always discontinue once the economy rebounds.
The indicators show the recession is not an “if,” but a “when”. Heed this warning and start coming up with names for your lower priced SKUs and start thinking about the label design. You could go all the way and get the COLAs approved by the TTB so you can print the label as soon as you are ready to deploy this tactic. Odds are you, and anyone else that reads this, will be ahead of the curve and first to market with your recession ready wine.
Double Down On Direct-To-Consumer
The last recession showed the industry that DTC is the answer and ever since 2008, DTC wine sales have been increasing steadily in this country. Take advantage of the current robust economy and invest more in your DTC channel today. While sales are strong and you have the cashflow, take on new initiatives like redesigning your website, kick off digital marketing campaigns, invest in SEO, and focus on social media.
Use the next year to grow you customer base as much as possible and hope that when customers start to cancel wine club memberships in the next recession, your winery is the favorite they keep. If you prepare yourself properly for the next recession and have the fundamental building blocks in place for your DTC channel, you will have a better shot of surviving the downturn. During the 2008 recession, not many wineries went out of business. Unless you plan now, I think this next recession will be different.
Simon Solis-Cohen is the founder of Highway 29 Creative, a leading digital and creative agency serving the wine industry. He challenges clients to think about the future and constantly innovate. The agency chases data, not fads, and provides one-stop shopping for wineries looking to enter or jolt their direct to consumer sales. Their approach starts by designing and building a website focused on conversion (wine sales, club sign ups & tasting room reservations) and then dives into each digital channel with consistent and effective content and messaging. What to learn more or looking for advice? Shoot Simon a message at firstname.lastname@example.org.