What is Normal in a Post COVID-19 World?

The Coronavirus Pandemic for the wine and restaurant industries has been like getting picked up in a tornado and dropped into the Wizzard of Oz movie but without the welcoming committees. It's been dizzying to see overall demand for wine improve, at the same time premium wineries are fighting for survival. 

Wineries with a presence in grocery and drug have been beneficiaries in this massive channel shift with some showing good sales increases year over year, even spurring some renewed interest and movement of bulk wine according to Ciatti Brokerage. As an industry during the period March 1st through April 11th, total off-premise wine sales are up a massive 32%! But as most readers know all too well, that doesn't imply total sales growth is as high given that restaurant sales and tasting room sales are almost zero today.

Danny Brager from Nielsen believes that Beverage Alcohol's total Off-Premise volume growth needs to be upwards of +22% to get back to flat industry levels. At 32%, we can see today there is actually stronger demand for wine versus last year, but why?

Alcohol was treated as toilet paper for a few weeks, but let me clarify before you wander too far off the point. Consumers sheltering in place started panic buying for things like toilet paper, dried beans, canned goods, cereal, and eggs. Alcohol fit that bill as part of the "have-to-have" products so was part of the pantry stuffing trend just like toilet paper.

With a few more weeks of results, we can see that pantry stuffing doesn't explain all of the increase. Part of this increase is explained through early survey work that is revealing wine is being consumed on more occasions today. Whether because consumers don't have a commute so have more time to savor dinner at home, or a trade-off resulting from fewer restaurant wine occasions, or maybe just the fact that driving isn't involved in at-home drinking, there is no question consumers are drinking more wine and that's great news for this oversupplied industry.

    Reopening: Recognizing Opportunity

While larger wineries with distribution have done well in the past six weeks, the typical small family boutique winery has been slammed with the loss of tasting room and restaurant sales. Winery revenues have dropped typically between 40% - 60% of normal in the same period. Everyone has been scrambling to conserve cash while searching for the yellow brick road leading to new sustainable business practices. 

What has now become clear to every small winery owner is the overfocus on the tasting room model at the expense of other paths to the consumer such as investments in online, data mining, and remote sales, has cost dearly. 

But change creates opportunity and consumers and wineries have each recognized in this pandemic that there are digital ways to conveniently move wine. In fact, online sales of wine and alcohol are up over 300% compared to the same period last year. That's mostly from online retailers, but without tasting rooms being open to deliver sales, smaller wineries are now being pushed to discover new approaches to tap the online channel too.

Whether you are a small winery or an independent restaurateur, these have been the worst business conditions arguably since Prohibition and the Great Depression. Naturally with the preceding as the backdrop, its no surprise that today everyone is focused on survival. Rightfully so, but I think it's critically important to shift gears now and begin to prepare to reopen tasting rooms and normalize business conditions. 

      Reopening: It's Coming Faster Than You Think

Dorothy wasn't given a timeline for getting home and we don't have one to get us to a normal state either, but we still have to scenario plan because we can't start with just opening doors like the olden days in February. There is far more effort that needs to go into planning now well in advance of government orders allowing us to restart.

I previously suggested that June 1st would be a good date to plan for reopening in a prior blog, and that still looks reasonable. To be clinical for a moment, death rates are dropping and current modeling used by the CDC show deaths dropping to zero on July 2nd. 

So the question everyone wants to answer is: when should we begin to resume life? Do we wait until July when there is one death in the country from this virus, or is there a better approach?

We are already seeing some states and locales loosening restrictions and allowing a few businesses to reopen - of course with backlash from people who correctly point out we aren't through this disaster yet. But we are making progress in the debate. 

The fact that we are having this debate and not shouting down people with the restart point of view is part of the process that will move us from the fear of leaving our homes, to trust that it's safe to leave. But the first phases of normalizing are already taking place.

In Seattle, near one of the earliest epicenters of the virus, the city decided to reopen the Ballard Farmers Market. (below video) Montana, Oklahoma, Mississippi, Georgia, South Carolina, and Alaska have started to reopen or announced relaxation guidance and timing. Georgia has reopened bars and restaurants with capacity limits, sanitation requirements, and dozens of other precautionary measures which is something we have to look forward to and perhaps use for modeling our own response.

Colorado, Mississippi, and Tennessee are relaxing some orders and are part of a number of states promoting the phrase “safer at home.” The phrase isn't fully defined in the same way by everyone but in this context, it is an in-between step where more vulnerable populations are asked to remain at home while others begin a gradual return a more normal life.

That is all an important preamble to begin the discussion of what the wine business will look like next. We have to guess what reopening will look like because we want to find the right paths to the consumer and at the same time, want to avoid hitting some brick walls.

      Reopening: Different Than What You Left

You will remember from the story, that when Dorothy and her colleagues arrived at the Emerald City, all wasn't exactly as they had imagined it. The same will exist for the wine business. But reopening is certainly an exciting vision off in the distance!

When we do open the doors again, the consumer will be different than the one we left in March, and their purchase patterns will have evolved as well.

What are some of the changes to expect? Many believe that the present consumer trend of buying higher-production brands in grocery has to do with the consumer now shifting for comfort in a time of crisis but I'm not a believer that will continue through the forthcoming recession. 

I think behaviors behind purchasing in grocery stores are largely panic influenced and not a reflection of real consumer demand. I think consumers are buying larger production brands because that's what's being sold in the grocery stores, not because of comfort, so I can't predict that will continue. What about price increases in the grocery channel? Is that a trend that will continue?

Price discounting in the family-run winery when tasting rooms are closed, and price increases in grocery stores when distributors are fighting to keep store shelves stocked isn't a true reflection of normalized demand either. 

There is too much emotional noise to suggest these trends will continue out. Simply said, with the growth rates in off-premise, distributors don't need to use promotions and discounts for the present and that raises the price. Neither case - what we see in boutique wineries or what we see in off-premise is indicative of what I expect when we reopen tasting rooms.

Interestingly to me though is the $20-$25 price tier. That continues to perform ahead of all other price tiers in off-premise in every weekly period since the beginning of March according to Nielsen. That's an interesting trend by itself, but how can it be that in a period when we have an implied unemployment rate of 17%  - the worst in our lifetimes, that we also see higher-priced wine moving so well? 

Part of it is due to channel shifting and panic as discussed, but I've been suggesting for some time that the retiring boomer would be moving down in pricing appetite while the younger consumer will be trading up as they find their financial footing. That perspective might give us a hint into the consumer we will discover when we reopen.

      Reopening: The June 1st Consumer

At the end of the Wizzard of Oz, Professor Marvel came clean and acknowledged he was a fraud but he did have a way to get Dorothy home. Then the dumb dog jumped out of the balloon basket chasing a cat and Dorothy ran after him, leaving the professor sailing away and seemingly with it, Dorothy's only opportunity to find her way back to her home and normal life.

Life, when we get back to reopening, won't be the same as it was when we left in mid-March. The consumer will have evolved and found new ways to satisfy their wine demand away from the tasting room, and among other things - they will be a younger crowd. That's an opportunity we don't want to let sail off into the blue!

That's one point I want to underscore: With this restarting of business, please don't try and attract younger people to wine country by talking about your wine quality, soils, or how bespoke an experience you will create. PLEASE INCLUDE THE CONCEPT OF FUN WHEN YOU REOPEN! Everyone, old and young, wants some fun after this experience so that has to be what you sell first.

I have quite a few thoughts that you can think through that may be of help next. So why don't you click your heels together three times and  ... well ... ok nevermind. That's a little too sappy. How about you just read my views of what June 1st will present below and we'll leave Dorothy and Toto out of it.

Returning To Normal:

• We will be in a recession of unknown length and depth and like prior recessions, we will find that consumers are more frugal on the whole.
• Different from past recessions, this one hurt lower-paid hourly workers more but will leave typical wine consumers less impacted and still employed. That has the potential to make for a shallower recession in premium and luxury goods.
• With a still sizeable oversupply of wine and competitive wineries offering discounts to increase sales, we will see price drops and shoppers expecting deals. Segmenting consumers will be key to driving successful luxury strategies.
• The state reopenings taking place now are phasing in relaxed orders, and we should expect the same precautions for wineries. A lower level of traffic in the tasting room is to be expected as people work through fear and move to trust. Those wineries that don't have a by-appointment approach to the tasting room will have to adopt that to ensure customer flow doesn't overtake mandated lower capacity limits. 
• Reduced capacity for tasting rooms means reduced revenue - unless you find a way to enhance the other off-site sales channels.
• Rethink your tasting fee approach to a variable pricing model, perhaps cutting the fees in half or even waiving them for slow periods during the week or day, with higher fees at prime times. Use segmentation strategies and attract younger consumers with different music, messaging, ambiance, a greater use of outdoors and lower fees during slow points.
• A repeat of a point from other videocasts, find an "on-ramp" for new consumers. If you expect to have a novice younger consumer showing up and buying $45 wine, you may be disappointed. In this time of excess supply, you can produce a wine that is value-priced for online sale or to sell away from the tasting room. Two caveats: 1) please do not sell a materially lower priced wine in your tasting room. It will cannibalize sales. 2) This strategy won't materially improve profits. If it's break-even that's fine, as long as you use it as marketing and don't try and grow it every year. It's marketing.
• With slower startup sales compared to the past, wineries are advised to pay close attention to staffing levels and manage staff size tightly to revenue growth and activity measures.
• One creative use I've seen in oversupply in the past is to create a bottle of wine called "gratitude," or "thankfulness" ... something along those lines, and surprise a customer with a gift of the wine when they buy a case or half case. Just be careful about the packaging costs and to keep it special, don't offer it for sale. That ruins the impact.
• Tasting rooms will need to be prepared and enhanced to reduce community spread. Local and state orders will create some policies, but something as simple as handing a glass to a customer has to be considered as a hard surface that can be a transmission point. Do customers pick up their own glasses from a washing rack? Should tasting room employees wear masks and gloves? Should bars have a plexiglass sneeze guard installed? Will social distancing require six-foot separation between people coming in the same car? What signage and messaging should you prepare and how will you position and use it? What cleaning approaches will you insist on? Will you provide free-standing hand sanitizers to use at the door? Many wineries will need to hire a receptionist to keep people from overfilling the tasting room.
• With mandated limitations likely on capacity, wineries should be thinking about creative ways to use the space outdoors to get closer to normal capacity, even if its a popup shade covering two barrels and a plank.
• With the closure of restaurants and shelter in place orders, Americans have been forced to rediscover the joys of the family home-cooked meal. CGA reports that the frequency of consumption has improved with well over half of wine-drinkers either maintaining or increasing the number of times they drink wine during the week. So in this case, wine is catching a break, and wine is being linked to home meals. Some consumers will want to continue the dining-at-home trend and it's up to the wineries to exploit it, making sure those consumers aren't only shopping for wine in grocery stores.
• "Safer at home" orders will still have older consumers staying put when we reopen. That means wineries will have marginally younger consumers visiting if you properly market. How will you adapt your marketing and sales approach to reach that consumer, making sure they come to your winery?
• The digital practices you developed and discovered during this lockdown will need to be reinforced and enhanced to attract the older "safer at-home consumers."
• In another spot of good news, consumers will want to get out for the summer but won't be going to Europe or even New York. They will be looking for great experiences and staycations. Consumers staying home for the summer are an opportunity if you plan ahead, collaborate, and market your region. Consider partnering with a local restaurant, balloon concession, regional attraction, and local guided tours to create adventures and share customer lists.
• Many reports suggest 10% to 20% of restaurants will fail before June 1st and more after with constrained seating. The restaurants that do open will have capacity constraints which will lead to a lower sales volume of wine. That puts even more pressure on other sales modes. Phone sales should be part of everyone's playbook.
• The slow consumer shift to online shopping was rocketed forward with shelter in place orders, and can't be undone. The genie won't go back in that bottle. That spells opportunity for wine producers and online wine retailers, the latter of whom will be looking for more supply.

The Great Recession was materially different from this one. That was an asset driven recession that hurt consumers who owned homes, particularly consumers that had over-leveraged themselves. While job prospects were made worse for younger consumers, they didn't get hurt as much as older consumers because they didn't have homes or other assets. 

This recession is different in that the majority of the 17% of unemployed consumers are in the hourly workers class. They are consumers who worked retail cash registers in malls, waiters, people in hourly sales roles, cooks, cleaning crews, hospitality workers, etc. So part of the explanation of higher wine demand today lies in who is still employed. The higher-paid college graduates, the very people who we've depended on for years as wine customers will be in relatively good economic conditions when we reopen testing rooms, and that gives us hope for tomorrow.

I'll say it again: Demand for wine is up and wineries have an opportunity to recover and improve sales. We only have to figure out how to give wine consumers what they desire, delivered to them at the right price, and through the right channels. When we do that, we will see success again!

What's Your Opinion?

• Do you have a different perspective?
• What do you see changing and how will you prosecute the change?
• Have you learned anything from this abnormal change in business conditions?

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