By Barbara Barrielle
Today senior members of the Ciatti Company, a major player in global grape and wine brokering, invited other experts in vineyard real estate and beverage industry to join them on a webinar to discuss the state of the wine market, what changes we will see and what the future may bring.
Glenn Proctor,Ciatti Partner, spoke about the wine and grape domestic market, Greg Livengood, Ciatti Partner, spoke about the global market, Steve Rannekliev, Global Sector Strategist- Beverages at RaboBank, spoke on market observations and consumer insights while Tony Correia, The Correia Company, outlined vineyard real estate in California and M&A activity.
Across the board, the panel agreed we are in an unprecedented time and that worries are real. Given the experience among these experts, they see a future that will be a bit brighter, though it may take time to get there. “We are all going to get through this together, and there are brighter days ahead,” said Proctor.
California Wine and Grape Market
Proctor explained the serious impact shelter in place during the coronavirus has had on the wine business due to closures of restaurants, tasting rooms, travel and, effectively, tourism.
Bulk market activity picked up in March but centered around the mainstays of Chardonnay, Cabernet Sauvignon and Pinot Noir. “Bulk prices have remained stable,” said Proctor, but “prices are still low in relative terms.”
And, as he pointed out, it is all about value and off-premise brands that were well-positioned benefitted while the bulk market fed these brands. There are more available grapes as wineries give notice on long-term contracts and activity tends to be strongest in the Central Valley (value brands) and coastal regions where value buyers are coming in looking for deals.
This year’s California crop size is looking to be average to slightly below and an uncertain future means that grapes are available, payments are delayed, cash flow is strained, and it is a time of creative deals, contract price and payment term renegotiations and difficult financing. “I’m hopeful there could be opportunities in the new normal,” said Proctor.
Global Wine and Grape Market
Greg Livengood points out that globally the 2018 crop of 292 million hectoliters (MHL) was the largest crop ever and the market is still trying to absorb this glut. 2019 was more in line at 263 MHL. The big three; France, Spain and Italy, still dominate in grape growing and wine production and will determine their harvests will determine the market balance.
Tracking the Southern hemisphere, Livengood pointed out the Chilean and Argentinian crops were smaller in 2020 by about 20%. These markets are struggling with civil unrest as well as the COVID-19 shutdowns.
Domestically in South America consumption has waned so Chile and Argentina look to export markets. Chile finds home in North America and China for their grapes while Argentina has the same markets but the quality of bulk for export has increased markedly.
In Australia. The crop was off 15-20% and combined with their extensive wildfires, smoke taint is an issue. Because they have taken a stand against China in the coronavirus tension and China is a major market for Australia, they may see even more trouble. New Zealand is a bit down but fortunate that prices are holding and the demand for Sauvignon Blanc is strong, although their bulk Sauvignon Blanc grapes are among the most expensive.
Although South Africa had a slightly larger harvest, COVID-19 and the complete quarantine has killed their domestic and international market. No alcohol was allowed to be sold for months and export channels were severely curtailed. Presently, they can be considered a good supplier of Sauvignon Blanc at attractive prices.
In Europe, wineries are roughly three times as dependent on on-premise wine sales that are supported by tourism and dining out, compared to U.S wineries, so they have been hit hard and are hoping for a quick return of that traffic.
Livengood explained that the economic situation now calls for value and international trade will be in value wine, “as easily sold in a box as a bottle.”
The Crisis of On-Premise
“We’ve got a real challenge in the on-premise. We need to rethink the route to the consumer,” said Steve Rannekliev, “It’s likely the current challenges will be measured in years not months.”
Even with the return to restaurants and the government constraints for safety there are many who will hesitate before going out, especially in the 55 and older population. On-premise will have a difficult time getting back to normal with social distancing keeping occupancy low in a business that typically needs 60-70% to break even. Estimates seem to be about ten quarters for restaurants to recover to where they were in 2018 – and things were even better in 2019.
The take out popularity had begun before the virus outbreak and grew exponentially during lockdown. Normally take out and delivery does not help on-premise wine sales. What does help sales is eCommerce and online wine sales have exploded with companies like Wine.com and Drizly reporting growth in the 100-1000% range.
The future is in new ways to connect with the consumer and to connect directly with the wine drinker. “In a world where consumers are having more occasions at home, how do we connect with them?” ask Rannekliev. “I think eCommerce is part of that solution.”
Mergers and Acquisitions
Tony Correia pointed out that the vineyard market was all worried about the big crops of 2018 and absorbing those grapes. “Six months ago we were worried about bulk homeless grapes, now we are on a survival level with the coronavirus, a kind of red blotch for humans.”
There is a major concern about the supply/demand imbalance, especially in areas like Paso Robles, which has seen quite a few vineyard sales to opportunistic buyers. Correia likes the Salinas Valley because if the grape crop isn’t working out, the area is easily planted to other crops or land can be leased to other produce growers.
In Paso, water is an issue and a property with water rights commandes almost double the price. Very little activity in vineyard sales in Sonoma or Carneros but Napa closed a few deals before COVID-19 and even a few during the crisis. Napa is “truly unique with a huge worldwide recognition so there are always buyers.”
Correia points out that there is still a lot of investment money out there and vineyards are still attractive investments for funds. Buying older vineyards and revitalizing/replanting them for a fresh new start means those funds are not concerned about the present because they are planning for the future.