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Facing 60% hit to key sales channels, smaller wineries need to stash cash, cherish loyal consumers: analyst

Though retail and direct-to-consumer sales of adult beverages surged as the coronavirus pandemic took hold, U.S. wine business, dominated by California producers, is expected to eke out just 1.0% sales volume growth overall this year, mostly the result of a roughly 60% decline in wine sold in closed or restricted restaurants and tasting rooms, according to a top industry analyst.

Even if the bounce from the economic slump will be relatively quick compared with the last two recessions, the shockwave from lost sales this year in those key channels for North Coast producers will reverberate for two or more years, said Jon Moramarco, who runs the beverage alcohol analytics firm BW166 and publishes the influential Gomberg Fredrikson Report.

Total U.S. wine sales through off-premises retailers such as grocery, club and fine-beverage stores; on-premises-consumption venues such as restaurants, bars and hotels; and direct-to-consumer channels of tasting rooms and e-commerce are projected to grow this year to 410.8 million 9-liter cases from 406.8 million in 2019, Moramarco said, citing state and federal tax and economic data.

He’s projecting similar volume growth the next two years, as retail and e-commerce sales decrease from 15.3% and 17.0% growth this year while tasting-room and on-premises sales rebound in 2021 and 2022, respectively.

But because of discounting and lost sales opportunities, the value of this year’s sales overall is expected to fall 14.4% to $64.3 billion, pushing down vintner revenue by 4.4% and margins by 8.6%.

“(F)or many companies, break-even should be considered a success this year,” Moramarco said this week to nearly 600 who signed up for the Business Journal’s 20th annual Wine Industry Conference, held virtually this year.

Download Jon Moramarco’s presentation at Wine Industry Conference 2020.

What should be concerning for vintners are the long-term impacts of the restaurant closures, public anxiety about the virus and shifts in consumer shopping behavior to retail and online, he said. The 16% estimated share of wine that had sold through on-premises venues in 2019 may be only 12% for the next three or four years.

“There will be some changes in consumer behavior,” Moramarco said. “Consumers are hesitant to travel right now, and I think the travel industry is going to be slow to come back. Consumers are becoming more accustomed to dining at home, and I actually think that can be a benefit for the industry, but it's going to change the dynamics of that on-premise/off-premise mix.”

Moramarco said he assumed in his projections that restaurants would come back at half capacity by this fall and tasting room visitors return substantially in the second half of next year, all in the context of one or more vaccines for the COVID-19 virus entering wide distribution early in 2021. Recent events may change that, he said.

As coronavirus cases started rising in late spring and early summer, a number of states rolled back their easing of lockdowns in June and July. California on July 14 shuttered indoor dining and tasting statewide, but a number of North Coast vintners already had been moving visitor experiences outside since getting the initial state green light in early June.

The National Restaurant Association on July 27 said the second shutdown has again darkened nearly 100,000 locations, and the industry has lost $145 billion in revenue and two-thirds of its jobs from March through June.

Before the pandemic was declared in early March, the overall U.S. wine business was coming off 25 years of mostly steady sales growth, 3.4% compounded annually, according to Moramarco. But the trajectory slowing in the last two years to just about 1% annually. That even reached the segment of wines retailing for over $9 a bottle, a segment that had been growing at double-digit rates in 2013–2018, after being hit hard in the Great Recession of 2007–2009.

On top of that, consumer behavior in Wine Country had been changing in the past few years, he said. Even as the number of visitors to the region has been increasing, the number of wineries they go to each trip has been decreasing, as vintners have responded to consumer desire for expanded experiences. With new wineries that have opened, the average number of visits per location has gone down.

And the record-sized 2018 California wine grape harvest has added a supply surplus to the problem, but different from the post-9/11 and global financial crisis, this surplus has been impacting growers in the premium coastal regions of the state more than those in the lower-priced interior regions, Moramarco said.

“So we’ve had a great run,” he said. “COVID-19 is causing challenges, but I still see the wine industry having a great future. But it’s going to be a lot of work.”

That work includes closely forecasting cash needs, being strategic in spending and continuing to use the phone and digital marketing tools honed so far in the pandemic to cement relationships with loyal consumers who may return the favor when economic conditions improve.

Jeff Quackenbush (jquackenbush@busjrnl.com, 707-521-4256) covers wine, construction and real estate.

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