Domestic impact of COVID-19 and how wine businesses are adapting

Last week’s market bulletin covered the effect of COVID-19 on trade and logistics as well as the operating environments of our top three export markets. This week, we focus on the effect of the pandemic on Australian wine business operations, summarise the impact so far on the domestic wine market, and give some ideas and examples of how businesses can respond effectively to the current challenges.

As a precursor to the information below, Australia’s COVID-19 measures are being delivered at both a federal (Australian) and state/territory level. Some states/territories have introduced additional measures on top of the federal measures, which have been determined by the individual circumstances being experienced.  

What restrictions apply to wine businesses?

Wine production and grapegrowing are essential services

Wine business activities including grapegrowing have been deemed essential by the Australian Government, which means that these activities are allowed to continue. This has been a crucial positive decision for the wine sector, allowing vintage to continue and wine to be made to keep businesses viable in future. However, maintaining this status for the sector depends on all businesses ensuring that social distancing and hygiene protocols are in place to protect employees, contractors and other people that they need to deal with. Australian Grape & Wine has a number of resources to help you assess risk and implement protocols and practices.

Cellar doors and winery tourism are restricted

Bars, pubs and restaurants have been closed for ‘dine in’ patrons since 22 March 2020 under national restrictions. However, in some locations, regulations have been eased to allow for takeaway or delivered alcoholic beverages.

For cellar doors, these restrictions meant that takeaway of food and wine purchases were still permitted, but ‘dining in’ at a cellar door restaurant for example was not. However, last week South Australia introduced additional measures requiring the closure of all cellar doors in the state from 30 March 2020 – even for takeaway wine sales. At the time of writing, cellar doors in other states are allowed to remain open for takeaway sales only (no tastings), with the appropriate overall space requirements, hygiene and social distancing rules in place. A number of cellar doors are choosing not to open. For more information see here.

Wine sales

Although bottle shops have been allowed to remain open and some states have extended restaurant licences to allow them to sell takeaway alcohol with their takeaway food, sales of wine have still been affected by the restrictions. In Western Australia, wine producers can sell 1 carton of 12 x 750 ml bottles per week per customer by mail order or online^[1]. This restriction applies only to sales within Western Australia.

Other non-government measures

Nationally, on 31 March 2020, Retail Drinks Australia announced voluntary ‘product category transaction limits would apply in participating retail outlets – including Coles, Dan Murphy’s, BWS, Aldi and others. The limit for wine is a dozen 750 ml bottles. Note that there are no legal restrictions in any state other than Western Australia on volumes of wine sold direct to consumers via mail order, wine clubs or online and many smaller retailers have not implemented product limits.   

To support responsible consumption of alcohol, particularly during self-isolation and times of extreme stress, DrinkWise is sharing a message of drinking in moderation for those who choose to drink. They have released a series of three videos discussing drinking in moderation, parents being a good role model and the Australian alcohol guidelines, as well as ways to help reduce your drinking.  

How has the domestic market been affected so far?

Shift from on-premise to off-premise

The most obvious impact of the COVID-19 pandemic on the domestic wine market in Australia has been the reduction to zero of the on-premise channel since 22 March 2020, when all licensed on-premise outlets were required to close. In Australia, on-premise sales account for approximately 20 per cent of total wine sales by volume. It is too early to determine whether there will be substitution of on-premise sales with off-premise sales with consumers purchasing wine to consume at home instead of in cafes or restaurants. It would be reasonable to expect some increase in off-trade wine sales as a direct result of the closure of the on-premise trade, as well as possible stocking up.

Early indications are that this has been the case. In the week ending 22 March 2020, wine sales in the liquor retail off-trade increased by 39 per cent compared with the same week 12 months ago, according to IRI MarketEdge scan data. Beer increased by 36 per cent and spirits by 30 per cent. Supporting this, CBA credit card data for the week ending 24 March 2020 showed that sales of alcohol had increased by 20.4 per cent year-on-year. However, this increase is only for a week’s sales and may well prove temporary once the effects of stocking up have washed through.

Change in variety preferences

There is no quantitative data yet, but we expect that the switch to off-premise consumption is likely to cause a reduction in share for the products that are over-represented in on-premise sales (e.g. Pinot Noir, Pinot Gris, sparkling wine) and for higher-end products normally associated with special celebrations.

In the beer segment, IRI data for the week ending 22 March shows that lower-priced beer (less than $6.50 per litre) increased its share of the total off-trade beer segment by 5 percentage points. In addition, major beer manufacturers received over 90 per cent of the growth in beer sales, suggesting (according to IRI) that ‘at times of crisis, people experiment less and stick to brands they know and trust’.

Growth in online sales

There is very little quantitative data available on the online wine channel in Australia, but we anticipate that Australian consumers will switch to online purchasing of wine like their American counterparts. In the United States of America (USA), data from one winery sales platform showed that e-commerce switched from 20 per cent of direct-to-consumer (DTC) sales to 80 per cent over a two-week period starting on 21 March[2].

With cellar doors and on-premise outlets closed, and consumers making fewer trips out to ‘bricks and mortar’ retailers, both consumers and wine producers have little choice but to focus on e-commerce. This trend had already started in Australia following the bushfires.

Wine Australia recently published this article on how to turn your website into a virtual cellar door.

How is consumer behaviour likely to change?

Looking beyond the immediate impacts of the pandemic, Wine Intelligence predicts that the shift to online purchasing caused by the social restrictions will persist for at least the medium term, as will the shift towards at-home consumption (as a result of an expected global recession). The anticipated economic downturn is also expected to see at least a temporary pause in the premiumisation trend, as consumers prioritise value for money. In some positive news for the domestic market (although less so for exports), Wine Intelligence predicts a renewed focus among all consumers (not just in Australia) on domestically-produced wine, as populations generally become more supportive of local businesses in a time of economic crisis[3].

What can Australian wine businesses do to respond?

The most important thing for Australian wine businesses to do right now is to remain calm, clear and focused on what their business needs to do in terms its emergency plan, stabilisation plan and recovery plan, according to Wine Business Solutions. Involving employees in finding solutions is the biggest single determinant of success, in terms of small business survival in a crisis.

IRI MarketEdge identifies three key areas for wine (and other alcohol) businesses to focus on in the short term: sticking to core products, diverting resources to online and doing good (see Figure 1).

Figure 1: Summary of recommendations for alcohol manufacturers

^{Source: IRI MarketEdge}

For Australia’s 2000 or so wineries that produce less than 5000 cases, DTC sales account for more than half their revenue. While cellar doors are out of action, putting resources into online sales, wine clubs and even mail order is an obvious potential area of opportunity. There are numerous resources available to help wine businesses develop an optimal strategy for communications and club offerings. This article presents some tips for keeping consumers connected and buying wine.

Businesses are already adapting (or ‘pivoting’) in response to the new conditions. Examples of short-term adaptations include: virtual tastings conducted online, partnering with local restaurants for home delivery and using the business’s resources to do good – e.g. making hand sanitiser, donating products or spreading the ‘stay at home’ message. For more examples, see this article by Wine Intelligence.

Now might also be a good time for an investment in the longer term. Robert Joseph, British wine consultant and writer, suggests that wine businesses use any extra time available to review their business model and plan strategically for the time post-pandemic – including everything from new products and pricing models to distribution channels and promotional activities.

The Australian wine sector is strong and resilient. Action taken now will ensure it emerges from the current crisis in even better shape than before.

Resources

COVID-19 resources for wine business (Australian Grape & Wine)

Wine Australia’s response to COVID-19 (Wine Australia)

Webinar: Managing a Wine Business in a Crisis (Wine Business Solutions)

Webinar: Real Wine in the Virtual World - How to use Live Streaming to turn your Website into a Cellar Door (Wine Communicators of Australia)