Consumers hunkering down for the coming waves of cost of living increases, inflation and falling real incomes, are starting to reflect on some tough choices. If money is tight, what elements of the lifestyle stay, and what go?
Clearly there are some non-negotiables – food, shelter, transport – which will always be first in line. In some households, these will consume the lion’s share of the available disposable income. In many developing markets, food provision on its own consumes 40-50% of all disposable income, such as in sub-Saharan Africa, India, Indonesia [source: UN Food and Agriculture Organisation], a proportion that has, until very recently at least, been in long-term decline. In developed markets such as the US and the UK, this figure is much lower, typically averaging around 10% [sources: USDA, ONS]. However, this proportion tends to be closer to 15% in lower income households within developed markets. According to the UK Office for National Statistics, the poorest 10% of households in the UK spend more than half (54%) of their average weekly expenditure on essentials such as housing, food and transport; for the richest 10%, it is 42%.
With cost inflation in the majority of markets accelerating at a rate that hasn’t been seen in over 30 years, households across the world will see a rapid and significant disruption to their budgets in 2022, peaking in the second half of the year, according to most economic forecasts. Decisions on what bills to pay and what groceries to buy, already central to many lower income households’ lives, will become pain points for middle and higher income households as well. When this happens, even affluent consumers will need to make some tough choices: do we go out to eat on Friday, and stick with value-range groceries, or spend our going-out money on higher quality produce? Do we go on vacation abroad this year, or make do with visiting relatives in the car? And do we really need to drink wine as often as we do?
For the moment, there are no straightforward answers. Partly this is because households are only starting to see some of the major changes in their costs, and may also have remaining unspent savings built up over the pandemic. Time, and the evidence from market and consumer research in the coming months, will tell.
In the meantime, what should strategists in the wine industry be thinking about? We can observe how consumer behaviour from Covid can inform what might happen in the coming inflation / cost of living crisis. Here are four takeaways from our Covid coverage which we anticipate will still be relevant:
- In times of trouble, core audiences matter more than peripheral ones.
During Covid, Wine Intelligence data showed a polarisation between those who were frequent users of wine brands and sub-categories, and those who were peripheral users. When faced with lockdowns, the former group doubled down on wine consumption in the home, while the latter group effectively exited the wine category, including a large cohort of younger LDA consumers whose relationship with wine was largely driven by social, out-of-home wine drinking in on-premise locations. The lesson was that, when external factors intervene, committed drinkers will stay committed, and marginal drinkers will find substitutes. The net result was several markets where wine volumes have historically been static or in decline, such as Sweden, UK, Germany, halted or reversed the trend so that wine volumes actually grew; and at the same time we saw shrinking populations of regular wine drinkers in several markets, with younger LDA+ consumers being the most likely absentees.
- Changing behaviours in other categories can have big effects in wine budgets
One of the most profound findings from the giant natural experiment that was the global Covid pandemic and consequent lockdowns, was the way in which consumers spent money that would have otherwise been allocated to activities that were prohibited or severely restricted – chiefly vacations and out-of-home activities. In many markets, the loss of the pleasures of going out and going on holiday resulted in a significant boost to domestic purchases of personal luxury goods in markets such as China, according to Bain & Co’s annual China Luxury Report. The lesson here: if spending constraints remove or restrict one type of activity – say a week on a tropical beach – consumers will compensate with other, more affordable alternatives – say a domestic getaway with good food and drink. The key question will be similar to point 1 above: how much does wine matter to you as a consumer? More or less than that concert, or trip overseas, or a new bicycle?
- Availability is almost as important as value
As Woody Allen famously once said, “80% of success is showing up”. Brands that thrived in Covid were typically ones that remained available to consumers when shopping choices were restricted. Wine brand awareness and usage data recorded by Wine Intelligence from the UK during the pandemic showed this study in contrasts. In the UK convenience stores remained open throughout the pandemic and were often a more accessible point of purchase for consumers; in addition, the country’s well-developed online supermarket shopping channel had the infrastructure to respond to a surge in demand. In the UK, top 10 brands were strong in both of these channels, and especially dominant in the convenience channel. As consumers pivoted to at-home consumption, chose shopping locations or online channels they could use, and shopped quickly and purposefully, brands that were more prominent, and available, benefited.
- Brands with little or no real equity will be found out
Many producers in the global wine business claim to own ‘brands’; fewer would care to admit how much ‘equity’, or realisable value, their brands actually have. Of the many definitions of brands available, perhaps the most appropriate is the one used by accountants when valuing brands, which is the difference in price that can be commanded by a given brand against a generic (or own-label) equivalent. In this regard, the wine category generally does poorly – with a few notable exceptions. Developing a genuine brand in a relatively low priced, supermarket-dominated, commodity market such as wine is hard work. Unlike spirits and beer, there is rarely enough marketing investment available, and too often the available cash is funnelled into point of sale discounts to keep volumes moving. On the plus side, the relatively few brands that have managed to develop equity that can command a price premium – which in wine would be a sense of reassurance, familiarity, trust and above all pleasure in the idea of consuming it – will be better positioned than ‘brands’ that are no more than a label and a price point when times get tough.
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