How COVID-19 is making ‘warriors’ out of wine entrepreneurs.

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:
   • Summer selling season: how to attract less vulnerable, younger customers to your tasting rooms, even outdoors? And what will be the unknown cost of that? See WSJ article – Rural destinations emphasize their “safe, uncrowded” spaces as tourism officials eye future travel.
   • Digital: how to build enough scale in ecommerce and social media sales, to replace lost business and/or win new wine club members and/or capture the evolving ‘At home’ market. See Robert McMillan’s, SVB, Blog article: Post Lockdown opportunities for wineries.
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.