Back in the early days of 2022 the NorCal wine industry was sighing with relief. Beside the fact that there had been no devastating wildfires in the region in 2021 (or 2022), Americans were still flush with money from fiscal stimulus and low interest rates, and there was a general sense that things were on track toward normality.
But then, only a few months into 2022—as my mother was fond of saying—the crap hit the fan. Inflation started to rocket skyward, a new variant of COVID reared its ugly head, China’s rapid growth slowed dramatically, Russia invaded Ukraine, the value of the dollar increased so much that international travel dwindled to a trickle at the very same time fuel prices hit all-time records, which curtailed travel locally.
Even so, in 2022 people continued to buy wine, so a sense of fragile optimism permeated the wine industry. However, 2023 will likely be more challenging than anything we’ve seen in recent memory.
2023 headwinds
For the last decade or so there was a belief that China might become one of the world’s leading wine-consuming nations. That now seems highly unlikely. Wine exports to China were down more than 30% in 2021, and the final numbers from 2022 are predicted to be even worse. Part of this contraction is because of the country’s recently-lifted strict zero-COVID policy, where even a single infected person might mean an entire town is forcibly locked down. Another part is that the Chinese public has dramatically reduced its spending.
In China it is estimated that more than 70% of personal wealth is tied up in real estate. This is because it was only in 2004 that Chinese citizens were allowed to own personal property and today it remains one of the only wealth investment options for the rank-and-file. Prior to that all land was owned by the state. However, at the end of 2022 home sales in China have declined up to 70% in some areas, with prices declining in double digits. Beyond this rattling of consumer sentiment, harsh crackdowns on dissent, plummeting export markets, trade wars and new limits to travel have left many Chinese people unwilling and unable to spend money on nonessentials such as wine.
Europe heading for major recession
With a nearly $5 trillion GDP, Germany has by far the largest European economy, with the next nearest being the United Kingdom, which sits at around $3.5 trillion, and then France at roughly $3 trillion. To achieve its dominant position Germany has relied on cheap power—mostly from Russia—to fuel its growth. But no longer. Because of sanctions and sabotaged pipes, the days of a cheap, steady supply of power from Russia have ended. Germany—and many other countries—are seeking to find alternatives and, as a result, Europe is expected to see negative growth in 2023 and beyond.
Drying up investment activity
For the last few years there has been a lot of outside investor interest in the wine industry. But that is likely to evaporate due to a host of factors. As measured by the Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX), volatility is at record highs. This uncertainty is partially due to the war in Ukraine and Europe’s downturn, but it has also been exacerbated by an evaporating crypto-currency market.
As a result of all this volatility, the number of new initial public offerings (IPOs) on Wall Street dropped 90% in 2022 compared with 2021. And what had been the darling of the IPO world—special-purpose acquisition companies (SPACs,) which are basically shell companies that make launching an IPO “easier”—have vaporized due to SPAC launches losing on average more than 50% of their initial value within the first year.
You might not believe that any of these “distant” economic realities will affect your business, but they will. With fewer global markets, declining economies and less investment success, the demand and willingness to pay high prices for what is a non-essential luxury product like wine will continue to slacken.
The bottom line? Expect global dynamics to put downward pressure on prices, reduce demand and reduce export opportunities. The bright spot? We live in a time where global expansion is being replaced by forces that will favor businesses that sell and source locally. Figure out how to do business locally and you will not only survive these tumultuous times, you might even thrive.
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