Author – Deborah Steinthal, Managing Director I Scion Advisors I McMinnville, Oregon

COVID-19’s toll on the wine industry is substantial, with potential long-term consequences.  Everyone’s context has been scrambled. Things are super fluid. It is impossible to guess at next week, let alone predict next year. For many these are surreal, unsettling and terrifying times. For some this actually spells opportunity.

This is the kind of market that is making warriors out of (some) Northwest wine entrepreneurs.  As past recessions have proven, the strong become stronger through exceptional leadership and by leveraging opportunity. COVID-19 crisis has catalyzed the same behaviors. Over the last couple months, I have been collaborating with roughly 20 top Northwest winery leaders[1] – assessing near and mid-term impacts of COVID; while trying to understand different options for the future health of their businesses.

(You may be wondering) why now?  These types of leaders expect to see more change in the next couple years than in last 20 years.  And to make change happen in their organizations, they want to understand HOW to reset direction, so they can drive with purpose, and revamp their paths with their teams. These leaders are tapping into the collective genius of their communities; energizing through humanitarian as well as innovative and practical acts of leadership. They are not just reacting to disruption but also are reshaping the future. The speed at which they are reacting to change, their mindset, persistence, creativity and (pre-COVID) preparation – are driving double digit sales growth over 2019, for most.

My purpose with this article is to share some of this magic. I hope to inspire others to follow in their footsteps, through understanding HOW these leaders are approaching this crisis and having a framework for managing through substantial near and mid-term decisions.  I believe in what Warren Buffet said this week: American Magic will spur economic recovery.  And the American wine industry has historically proven this to be true.

[1] 5,000 to 100,000 case producers.

Lessons from our warriors.

As gritty and uncomfortable as we all are right now, this crisis is fast becoming a crucible for true leadership.

These Northwest warriors are pivoting to meet new demand trends – FAST. People are still buying wine and a lot of it (per Danny Brager, Senior Vice President of Beverage Alcohol at Nielsen). Premiumization is still strong and has moved to off premise retail across all three categories. The average price per equivalized volume is still ahead of where it was last year. Here are examples of HOW some leaders are recognizing AND leveraging new trends in the making.

  1. Experimenting with a variety of opportunities to meet customers’ changing needs.
    • Alcohol e-commerce retail sales have more than doubled vs. one year ago (+234%), and they have increased almost five-fold in just the latest two weeks of that time period. Wine continues to be the largest by far, commanding almost 70% of online alcohol retail sales.[5]
    • Small wineries (those between 5K and 50K cases annually) experienced the largest increase in both percentage and absolute terms[6], as compared to both larger and even smaller wineries.
    • Consumers are buying and paying more for local product and experience; family owned; and trusted sources.
      • Wine brands may have a leg up on spirits and beer. Wineries are mostly small, family owned businesses in rural settings – who largely support social causes in their communities.
      • Wine consumers are fundamentally social and are expected to be more so this summer after 2-3 months of SIPing[7] at home. IF they can find safe ways to do so. Many may find rural winery settings to be safer than urban.
      • Most NW wine brands are ideally positioned to serve these consumers’ pent up need to socialize, as they gravitate even more to locally sourced products where distances travelled, particularly with foodstuffs, are as short as possible, thus minimizing possible exposure to COVID-19.
      • Wine  consumers are possibly less price sensitive when you are a trusted source AND not a commodity. Under current circumstances, the case may be even more so.
    • At Home dining behavior reinforced by COVID-19 SIPing will likely be with us long term.[7]
      • Consumers are transferring money they spent on alcohol in a restaurant, bar – usually at higher cost, to something they are buying for less at stores or online, or from those on-premise establishments that are offering alcohol to go at much reduced prices than ‘normal’.
  2. Embracing somewhat counterintuitive, new selling practices. Think about these scenarios for a moment.
    • Revamping their tasting room experiences and offers, to attract less vulnerable, younger consumers – driven to be social and more apt to show up at your winery this summer.
      • Note however, that most heavily (and early) hit by jobs loss are the young ‘fresh out of college crowd’ working in restaurants and other low wage earners/hourly.
      • Some brands may find ways to entice this crowd through more affordable social experiences.
    • Balancing out digital experiences and offerings to appeal to all age groups, as more vulnerable, older consumers – are more apt to buy on-line; tasting rooms may feel less safe for a while.
      • 45-65-year-old fans are still employed (mostly) and investing in culinary luxuries at a fast clip (from the safety of their homes).
      • If the economic recession accelerates, this age group will be affected as well and buying habits may shift away from high-end wines for a period (more aligned with 2008 recession).
    • Getting even closer to consumers; through evolved brand positioning and offerings.
      • Understand consumer’s needs and wants. Find out what they are thinking and move out before your neighbor does.
      • Commit to optics; learning/investing in new tools. Collecting data and using it to guide laser-focused campaigns. Getting on the phone with customers, buying data, collecting (social media, digital data) and listening hard. To accelerate your learning curve on the use of optics, call Paul Mabray, CEO, Emetry.
  3. Innovating! Warren Buffet has reminded us that magic happens when we are connected to our heart and mind. How to achieve this?
    • The U.S. wine industry is reconnecting with their creative passion, only this time it is on the demand side (‘how to become world class in 1-1 Marketing?’), instead of the supply side (‘creating world class wines’).
    • Getting comfortable with ambiguity. Starting somewhere and learning along the way. Being ok with incremental change. Experimenting in little ways, learning and amplifying what works.

[5] Danny Brager, Senior Vice President of Beverage Alcohol at Nielsen
[6] Danny Brager, Senior Vice President of Beverage Alcohol at Nielsen
[7] Shelter in Place.

Framework for change: first things first.

We are all hoping demand will realign with supply before too long. The reality is for most, this will take 24-36 months. COVID-19 carries with it health safety milestones that make even near-term decisions murky to navigate at best.  So where to start?

Francis of Assisi provides good wisdom here: ‘Start by doing what’s necessary; then do what’s possible; and suddenly you’re doing the impossible.’

NEAR-TERM – Navigating through July. Many small wineries have the ability to make it through the next 90 days; more so, those who received PPP grants[8]. Nevertheless, we have many hurdles ahead:

  1. ‘Two legs (of a 3-legged stool) just got sawed off – for many: overnight, most Northwest wineries lost 60-70% of their revenues. To survive, they must shift to developing alternative sales channels – at warp speed. And then move to scaling these. Or they will go out of business.
    • Gone: restaurants/hotel/resort – essential, recurring annual revenues (40-60% of revenue). During the 2008 BIG recession, this sector took 36-months to recover. COVID-19 may have compounded the issue, as health constraint weakens an already low margin business model.
    • Gone: tasting room traffic (20-30% of revenue). This channel has traditionally been an indispensable feeder to wine club sales – the remaining and most profitable 30% of the business.
  2. Supply-side domino effect: wineries are complex small business models, typically with high fixed cost and capital expenditures. Entering 2020, many of these businesses were in growth mode and sitting on a fair amount of inventory, ready to capture market opportunity.
    • Wineries are moving fast to liquidate half of their 2019 bulk wines; may reduce by half 2020 production, want to dispose of excess fruit, before incurring cost of making excess wine.
    • Vineyard owners should expect to be squeezed heavily for a few years with more limited demand and downward pricing pressures.
    • Vineyard owners typically carry debt on their land; have heavy labor and input costs. They will be at risk for a prolonged period of time.
    • Many winemakers are managing supply chain disruptions – as they too have been dependent on buying packaging goods from China.
  3. Fight to preserve and build cash positions: liquidity is king, ideally through end 2020. Various combinations of approaches are in process.
    • Most Oregon wineries have already furloughed 2/3ds of staff on average[9].
    • Applying for PPP[8] – not all have banking relationships that can facilitate.
    • Selling off inventory, however possible: some are discounting heavily; some not all.
    • Managing through possible slowdowns in customer payments: distributors who are especially hit by massive loss of restaurant business may be facing similar cashflow constraints as soon as June/July.
    • Silver lining: timing of spring Wine club shipments and releases enabled many to build cash reserves. Few wineries saw material attrition (consumers are still buying wine they love).
  4. Development of remaining team members:  with so much competition for customer share of mind, training dollars go a long way.
    • Learning how to become more customer-centric; how to communicate more professionally through phone outreach, to retain essential relationships.
    • Zooming! With distributors and new customer communities (‘winemaker as celebrity’).
    • Marketing/PR and building digital presence in all directions.

MID-TERM – Accelerating the turn (July – December). Many wineries will be challenged with keeping doors open through year-end, as states re-open and the virus continues to lurk. Few have the capacity to survive beyond 6 months, unless demand and supply-side economics are right-sized. Many issues to consider:

  1. Understanding cashflow impacts of a variety of decisions.
    • What happens in 2022 if production is halved in 2020, for example: what are breakeven points, guiding critical priorities. What can you afford?
    • Rationalizing profitability of wines in current portfolio; adjusting product and channel mix.
    • Adjusting multi-year production numbers.
    • Furloughing vineyard crews if need be (until harvest).
  2. Plans exist to fill gaps left by loss of restaurant and tasting room business, including:
  3. COVID containment shows up (more likely spring 2021 or later).
  4. Much more financial assistance is provided from state and federal governments.
    • The huge sudden loss of sales will likely causing a domino effect throughout the industry, quickly driving foreclosures and bankruptcies unless more cash is made available to small businesses, to cover payroll and cover operating costs, for extended periods of time.
    • The states will likely feel the economic impact, exponentially – if they do not respond appropriately and immediately[10].
    • Access to workers’ relief funding[11] will be critical to preserving our workforce, so they don’t head out of state. Undocumented workforce is afraid to apply for unemployment.

Near  and mid- term, we will need to manage through more ambiguity and find ways to survive ‘Whitewater ‘periods, as the virus rears its ugly head through the fall and winter, or other unexpected consequences appear.  In the end, the Northwest DNA is incredibly resilient and will prevail. We have weathered significant crises; know how to hunker down. We are creative with a warrior mindset.

[8] CARES Act Paycheck Protection Program
[9] Wine America April 2020 survey
[10] The Oregon wine industry has been responsible for driving at least $5.6 billion in statewide economic impact annually, including $787 million in wine tourism, and supporting nearly 30,000 jobs, much of this in rural Oregon.
[10] Washington State is the 2nd largest premium wine producer in the United States, responsible for driving $7 Billion in economic impact annually, with over 1,000 wineries.
[11] Roughly $10m in Oregon.

60 DAYS AGO?

‘Brand Oregon’ and ‘Brand Washington’ were in optimal positions.

  • Oregon experienced 67% growth in 2019 (1 of only 2 wine regions globally). Stands for family owned, small producers. Reputation for very high-quality driving strong economics.[2]
  • Washington State’s small to mid-sized producers were in an equally strong position. ‘The performance of Washington’s small, high-end producers remains a tremendous success story that is easily seen once you isolate that data from the big boys.’[3]

[2] 1.5% of market and 18% of WS America wines rated 90+; (Parker reviews recent 65% >90 pts (2017 vintage).

[3] Smaller producers in Washington state have similar statistics, once St. Michelle Wine Estates numbers are subtracted. Erik McLaughlin, CEO, Metis.

GROWTH MINDSET (rather than fear)

Many are millennial leaders and are practicing crisis management while home schooling their kids. They are driving solid results from hard work, agility, fearlessness and unbounded optimism[4] .

Leaning on core purpose and passion for the cause: finding ways to preserve the core; making the tough decisions early; managing what they have control over.

  • Repurposing production lines to meet demand for masks, hand sanitizer and other necessities for front line workers; raising money for laid off restaurant partners.
  • Recommitting to what they hold to be true and expanding, shifting work daily, to be more effective in meeting their needs wherever (and whatever) they are.

Reframing near-term with agility:  7-day plans, every 7 days.

Building trust – preserving essential relationships: employee, customer, community and banking partners.

Have all hands-on deck (at least, those remaining hands):  laser-focused on customer outreach, listening and selling.

Positioning for opportunity of all shapes, sizes and colors:

  • Meeting customers where they are – through Innovation: finding new ways to engage.
  • Improving margins through downward pressure on grape prices.
  • Listening hard for M&A opportunities (and building cash reserves).

Getting comfortable with ambiguity and developing reentry plans. (yes!)

  • Getting ready for the ‘re-openings’: Oregon’s Governor Kate Brown aims to include brewpubs, wineries in our hoped for – early  May reopening.

[4] Mixing confidence and hope, with realism.

FIGHT FOR SURVIVAL (for some)

Roughly 9,000 wineries across the US are small and mid-sized businesses. The under 5,000 case category is the most vulnerable.

In Oregon, this represents 2/3rds of 793 wineries. Most are under $1m in revenue. A good number of these faced poor profitability, before the crisis.

Have very little dry powder/contingent reserves, surfacing two big problems.

  1. Liquidity: these wineries are facing an immediate cash flow crisis. Cash flow is their top priority at this time.
  2. Solvency structure: most banks are partnering with top clients to help out. A large number of wineries do not have these types of partners.

Have limited expertise or ability to shift selling practices.

  1. Lack resources to invest in digital technologies, for example.
  2. The weak won’t make it – typically the bottom 20%, true in any recession.

PROGNOSIS FOR OUR FUTURE?

Long-term term, I believe in the viability and growth of the US wine industry; Oregon and Washington especially.

History shows that stronger leaders and new opportunities come out crisis.

Many wineries will be positioned smarter vis-a-vis new market trends, such as the At Home scenario – with more relevant customer experiences, targeting younger demographics.

If we act fast, we may ward off the anticipated decline we were facing prior to the crisis: younger demographics shifting away from wine, to spirits and other competitive options.

Many wine brands will make the massive shift to digital, with really great next generation skills and tools facilitating 1-1 consumer relationships.

The real question is WHO will be the winners at the other side of this?

Deborah Steinthal I 707.246.6830 I deborah@scionadvisors.com


ABOUT THE AUTHOR. Deborah Steinthal is Founder and Managing Director of Scion Advisors, a leading boutique, strategy consulting firm serving the U.S. wine industry. With a proven approach enabling business owners to position for profitable growth or for exit, she has worked alongside over 150 winery owners and CEOs; and has moderated over 80 Winery CEO Roundtables involving more than 50 top wine industry CEOs for over a decade. Deborah’s expertise is in the area of business growth strategy, family business transformation, and board and leadership development.

Based out of McMinnville, Oregon; born in Lima, Peru; raised in Belgium and Germany; Deborah has lived, worked and travelled globally. She is broadly published in the national business press, an invited speaker, panelist and widely quoted for research on key practices, such as such as How to Build a Pull Brand, Digital Commerce and Family Business Transition.

For more information call Deborah Steinthal at 707.246.6830.


Among her clients: Cristom Vineyards, Adelsheim Vineyard, Wine by Joe, DeLille Cellars, Woodward Canyon Winery, OVS, Willakenzie, Elizabeth Chambers Cellar, Patz & Hall Winery, Benziger Family Vineyards, Calera Wine Company, Delicato Family VIneyards, Cakebread, Spottswoode, Gundlach Bundschu, Luna Vineyards, Clos Du Val, Quail’s Gate Winery, Wente, J. Lohr, Choice Lunch,
 Cowgirl Creamery, 
Easton Malloy 
(producers of Peppermint Bark for Williams-Sonoma)
, and McEvoy Ranch.

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