What happens in the wine industry when the economy shuts down?

What happens in the wine industry when the economy shuts down?

For the most part, wines in the U.S. are distributed one of two ways: either through a three-tiered distribution system or by direct-to-consumer sales. Each channel presents pros and cons for wineries, and most large wineries end up channeling a portion of their wine to each. 

Decisions about which lane to choose are based on demand forecasts and made months in advance of the final sale. This typically occurs after the product is bottled, labeled and made ready for sale.

Quick facts:

The wines you find available for purchase today were produced – for the most part – at least two years ago. 

Wines that are produced and/or imported for restaurants and hotels cannot simply be redirected for sale in the D2C market.

In fact, once a case of wine enters one lane of sale, it is nearly impossible to redirect to another.

Three-tiered wine distribution

The distribution laws in most American states require producers to go through wholesalers, who then sell to retailers, who sell it to consumers. Here’s what this looks like:

Winery X ->
 sells to wine distributor -> sells to restaurant (or wine shop) -> sells to You

This system may sound inefficient by requiring the middle step of a distributor - and it certainly can be - many smaller wineries would never be able to sell their wines without strong partnerships with distribution channels. 

However, wineries receive less money from each bottle you purchase in the three-tier system. When you buy directly from a winery, the price you pay as a consumer is close to what you’ll pay at the wine shop. In the latter situation, the distributor is taking some of the cut.

Direct-to-consumer wine sales

Alternatively, a winery can sell their wines direct-to-consumer (DTC). This distribution process allows for producers to sell to customers without the need to go through a wholesaler, in states where their license permits. By removing the layer of a distributor, the winery is able to net more dollars per sale.  

At Claudine Wines, we pass those savings along to our customers

What happens to the wine industry when the economy shuts down?

At the time that I write this, COVID-19, has had a catastrophic impact on the lives and jobs of millions of individuals. To mitigate casualties and “flatten the curve,” government leaders around the world are ordering daily activities to a halt – and the economy is, quite frankly, tanking. The Dow Jones Industrial Average saw its biggest quarterly drops since 1987; the S&P 500 has had its worst quarter since 2008.

Restaurants have wine but no customers to drink it - wine that cannot be put back into another sales channel very easily. Distributors are seeing their inventory levels rise with new vintages arriving, pushing out the older ones.

Meanwhile, wineries have payrolls to meet, grapes to grow, utilities to pay and fewer people to buy their wine from traditional sales channels. On top of that, we are seeing a continued softening of the wine market that is not likely to rebound immediately, even after the economy slowly begins to open.

The wineries are doing what they do best: produce wine. And the gorgeous weather blanketing Northern California is hard at work making sure the 2020 vintage is another classic!

But rather than bottle and label wines destined for sales channels with diminishing demand, wineries will likely choose to bottle less wine this year. Subsequently, more barrels should be available for wholesale purchase by négotiant businesses like ours.

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