Our updated modelling is still predicting a flat 2020 for the US wine market, though economic confidence could drain in the crucial final quarter
One of my former classmates at business school now leads a strategy department looking at the airline business. Suffice it to say his job has been tougher than normal this year. At one point, during the initial lockdown period, he confessed that he was rebuilding his demand models every day, sometimes three or four times a day depending on the news.
By comparison, the wine category has been a temple of calm, and – unlike most other categories – it has actually been a beneficiary of lockdown, in volume terms at least. Clearly there has been a huge shift from on-premise to off-premise, but in most markets, this has more or less cancelled each other out.
The US market is no exception to this trend and is being closely tracked by producers around the world, given its status as the number one market by volume and value on the planet. Fortunately, despite having one of the worst experiences with Covid-19 in 2020, with disruption to hospitality continuing to this day and broader economic upheaval to contend with, US wine sales overall have remained strong.
Back in June our modelling suggested that volumes would be up in the off-premise by 10%, and down in the on-premise by 29%. Given that the off-premise sells approximately three and a half times the volume of the on-premise, we were expecting a small growth in overall volumes in 2020.
Again, back in June, we observed that a worst case scenario – a serious second wave of infection in September and October – would push the on-premise further down, closer to -50% year-on-year, and may also take the momentum out of off-premise. The net result of this would be a decline of around 3% in total wine volumes in the US in 2020.
Our latest modelling, based on consumer usage and attitude data we collected in August 2020 and bearing in mind current and anticipated restrictions in the US, suggests that we may not be quite at that worst case scenario, but things are not as rosy as they might have been. Also, there is more uncertainty in our data – we are now predicting a range of outcomes for 2020 depending on the twin impacts of the extent of the second wave of virus infections, and the broader economic picture, dependent in large part on what Congress can agree by way of stimulus, and also consumer confidence change arising from who wins the presidential election in two weeks’ time.
Our bet remains that total wine consumption in the US will show static volumes for 2020, with consumers broadly drinking the same amount of wine, but inevitably drinking proportionally more at home versus in the on-premise. What has changed is the level of uncertainty because of these factors, coinciding with the crucial fourth quarter of the year when wine (and alcohol generally) benefits from the holiday season surge.
The ‘base case’ or default position of the model is that the second wave will not spiral out of control, but will hamper on-premise through the November-December festive period, and that some form of economic stimulus package will be agreed by Congress (though not a very generous one). In this version of the model, off-premise volumes are estimated to grow by around 10% year on year, while on-premise volumes for 2020 will be 35% below last year.
As with our previous modelling efforts, the current version does not account for change in overall value of wine sold due to the complexities of channel pricing. Our view remains that the implications of a major switch from higher value on-premise product to mainstream priced off-premise product would lead to a ‘significant’ value decline in the US market this year, even if we see a small uptick in volumes
The more pessimistic version of the model has the virus running unchecked through to January and beyond, and no political consensus on economic rescue packages until a new presidential term begins in on January 20. In this scenario the model suggests on-premise year on year volumes fall by closer to 40%, and off-premise volume increase pegged back to 5-7%, giving a net negative overall volume out-turn for the US market of about 3-4%.
As we noted earlier in the year, the biggest winners of the post-Covid wine market in the US are bigger brands, and domestic brands. Both have good exposure in mainstream off-premise, and – as with other markets, such as Australia, domestic producers have benefited from a surge of ‘buy local’ instincts from consumers. If this negative scenario occurs, coupled with the impact of tariffs on certain European wines (unless quickly repealed by a new administration), 2021 may prove to be a tough year for wine producers exporting into the US.