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California wine business takes tough lessons out of the pandemic: experts

It’s a difficult time for wine and other businesses to plan for the future as the U.S. economy roars back from the pandemic amid rollicking price, supply and labor pressures, according to wine industry experts at a business event Wednesday. But they said some of the tough lessons learned as wine businesses fought to survive will be key to success in the recovery.

“The market is not returning to what was,” said Jon Moramarco, editor and partner of Gomberg Fredrikson, publisher of closely watched reports on wine, beer and spirits industries.

The good news for the wine business is that leisure travel, a key wine market, is trending up as economies reopen from pandemic restrictions, but the bad news is that business travel and spending on wine to entertain clients may be trending downward with efficiencies found with digital tools such as video conferencing, he told the audience of the Business Journal’s 21st annual Wine Industry Conference.

Also in the midst of significant change are post-pandemic approaches to tasting rooms (appointment only) and Wine Country tourism marketing, plus potential for more share of sales shifting to off-premises-consumption channels such as stores, Moramarco said.

Survival of the quick and the bold

A key lesson learned from the Great Recession of 2007–2009 was that wine companies that acted swiftly and made bold decisions were the ones that did well amid a steep fall-off in purchases of fine wine after that global financial shock, said conference speaker Mike Holden, CEO of Clos Du Val in Napa Valley.

“I came from the school of thought that brands were built direct consumer and through on premise. And if that had been the case for this business that I now work in, we would have been in a difficult situation unless we're able to pivot quickly,” Holden said.

That’s when he learned that it’s critical to balance a winery’s channels of distribution, what he calls be “channel agnostic.” That means developing off-premises trade accounts as well as direct-to-consumer efforts and on-premises accounts such as restaurants and bars. That became critical during the pandemic, when tasting rooms were ordered closed but club membership and e-commerce proved resilient revenue centers.

Marketing wine via social media and other digital platforms such as virtual tastings is the future of the business, especially for family and other small-scale producers, according to speaker Tammy Boatright, founder and president of VingDirect, a direct-to-consumer business consultancy.

“Our clients — we work for family wineries — overall saw an increase in sales and profitability for 2020,” Boatright said. Key to that was moving quickly into virtual tastings with the goal of getting new customers and building relationships with them.

Industry gears up to prevent wildfires

While wine marketing may not be going back to the way it was, North Coast wine grape growers, vintners and public officials are busily working to make sure the region won’t be going back to the way it was with massive wildfires raging across large swaths of the counties. Conference speaker Rick Jones, owner and manager of Jones Family Vineyards, recounted how his family escaped the advancing flames of the Glass Fire in early morning of Sept. 27, 2020.

“At that point, I realized that this was something that we had to take seriously,” Jones said.

The Glass Fire burned 67,500 acres of Napa and Sonoma counties and damaged more than two dozen wineries, according to Cal Fire. A month earlier, the LNU Lightning Compex, which included the Hennessey and Walbridge fires, burned 363,000 acres in Napa, Sonoma, Lake, Yolo and Solano counties.

Jones noted that Napa County government and other agencies have received over $30 million in funding to reduce fuels for the next conflagration, and Sonoma County has received $37 million from the Federal Emergency Management Agency to do likewise.

He pointed to the need to fix California’s property insurance of last resort, the FAIR Plan, to be able to cover rural wineries and ranches, as a number of local operations have received letters of nonrenewal from their insurers because of the heightened fire risk and losses estimated by Moramarco to be $2.3 billion in Napa County alone last year. Senate Bill 11 would allow the FAIR Plan to cover such properties, and it passed the Legislature in June and awaits the governor’s review.

Inflation risk is expected to be temporary

At the half-year point, it appears that the U.S. economy hit “peak growth” in its rebound from the recession sparked by the pandemic, said conference speaker Sarah House, senior economist for Wells Fargo. Gross domestic product growth is expected to have been 9% for the second quarter of this year, pushed on by money that came through the $1.9 trillion federal relief package signed early this year on top of more states’ allowing their economies to reopen from restrictions such as capacity limits and mask mandates.

California lifted many of its restrictions June 15.

“We're still expecting very solid activity throughout the rest of this year, and even on into 2022,” she said. “For 2022, we're still looking at growth somewhere north of 5%, which is essentially double the economy's potential rate of growth.”

That rosy outlook is fueled partly by the overall financial strength of consumers coming through the pandemic, while the growth has been tempered by bottlenecks in supply chains in a number of sectors across the economy, resulting in price increases, House said. Real disposable income, adjusted for inflation but not taxes, is above levels before the virus, but some slowdown is expected as enhanced unemployment benefits are ended in the last states in September.

That ending of benefits, on top of the return of children to school in person, is expected to ease some of the labor shortage nationwide, with about 3.5 million still not back in the labor force, but job shifting and retirements during the pandemic could keep the labor participation rate below pre-pandemic levels, House said.

Even so, economic demand has been fueled by limited opportunities for consumers to spend, outside of home improvement, during the pandemic restrictions, House said. Supply chain issues are making it difficult for businesses to secure products to sell and for consumers to buy, so spending is expected to remain fairly strong for a while, she said.

Upward pressure on prices is coming from many angles, House said. Overall pricing for commodities is 30% higher than before the pandemic and at the highest level since 2011, and food prices have soared 60%, so many margin-strapped restaurants are having to pass on those increases to patrons. And costs of moving goods to market is soaring, with limited availability of sea-going containers and workforce to unload ships and truck products.

A big factor in increasing prices are wage increases, House said. Wage growth in the previous business cycle average 2.4% annually, but in just the past three months they have jumped 19% on an annualized basis.

“It’s costing money to get these workers back,” House said. The U.S. economy won’t get back the jobs lost until late next year or early in 2023, she said.

Inflation is forecast to be 5% over the next 12 months, receding in the second half of next year, she said. But with the Federal Reserve focused on unemployment, it isn’t expected to start pulling policy levers to slow the economy for a while, she said. That said, inflation likely will settle into monthly growth of 0.3%, from pre-pandemic levels of 0.1%-0.2%.

“That doesn’t sound like a lot, but it adds up over time,” she said.

Good time to sell your business

In this environment, where the Fed isn’t expected to move interest rates upward significantly soon, it’s a good time for winery, brand and vineyard owners to consider selling their businesses in the next 12 to 18 months, according to speaker Mario Zepponi, partner in Santa Rosa-based beverage business mergers and acquisitions firm Zepponi & Company.

“Our viewpoint is that it's going to be a stronger second half in 2021,” Zepponi said. “And we look forward to an even stronger 2022 when it comes to acquisitions and sales.”

The Wine Industry Conference, with 80 in attendance, was underwritten by Farella Braun + Martel, Moss Adams, Wells Fargo and Zepponi & Company.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.

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