The coronavirus, COVID-19, has meant that the wine sector is operating in a very dynamic environment, both within Australia and in our export markets.
To keep you informed of the latest developments, this week our bulletin will explore the situation for trade and logistics as well as the operating environments of our top three export markets – China, the USA and the UK.
Trade and logistics
There are currently no changes to trade agreements that restrict the export of Australian wine into our key markets. Wine Australia continues to support Australian wine exporters through the Regulatory Services team and by keeping the sector informed of the latest market insights.
While there are no regulatory restrictions, trade is being impacted by logistical and supply chain constraints – an impact being felt by various industries worldwide. The inability of Chinese manufacturing facilities to reopen after Chinese New Year festivities created a shortfall in Chinese exports and a resulting drop in the number of shipping containers in the Trans-Pacific and European trade routes. Furthermore, imported containers were stacking up in Chinese ports, creating significant congestion.
As COVID-19 spread rapidly to other countries, logistics around the globe are now faced with the same issues – reduced available shipping capacity, pressure on equipment availability and port congestion and subsequent surcharges. As a result, there has been significant disruption to global trade. Total idle capacity of container ships is at record levels.
While Chinese manufacturing and trucking capacity is recovering as workers return from self-isolation, the pandemic is dramatically impacting on the rest of the world. Major international shipping lines have been reduced as strict confinement policies are implemented, borders close, production and consumption slow and tourism ceases. For example, on the Trans-Pacific route alone, more than 100 sailings have been cancelled between the end of February and mid-April. While most ports are open, one of the biggest trade issues is the shortage of shipping containers.
Research from Nielsen shows that, in light of COVID-19, retailers in China are facing 3 primary challenges: insufficient inventory of some categories (62 per cent of retailers), difficulty in logistics and distribution (59 per cent) and inadequate staff to deliver orders (48 per cent).
Australia’s largest export market by value, China was first struck by COVID-19 in December and official confirmation of the outbreak was made on 8 January 2020.
In the lead up to Chinese New Year (CNY), several Australian wine exporters to China had already shipped their wines. But with a lockdown imposed on residents and restrictions placed on family and friend gatherings, along with the closure of restaurants, bars and cafes (where wine is normally consumed), people turned to purchasing more practical items while confined to their homes. The total sales of fast consumer moving goods (FMCG) 2 weeks before CNY grew by 15 per cent according to Kantar Worldpanel, higher than the full year FMCG growth rate of 5.3 per cent in 2019. But sales fell 24 per cent during the CNY week and another 41 per cent in the following week. Sales of both alcoholic and non-alcoholic drinks declined by more than 40 per cent during the 2 weeks after CNY with family gatherings cancelled; gifts were no longer of wine or other luxury items, but rather instant noodles.
Trading Economics recently reported that retail sales in China declined 20.5 per cent compared to the previous 12-month period for January and February 2020 as consumers were afraid to go to crowded places.
Reports during the extended lockdown showed some people continued to drink wine, making the most of online wine tastings. Further to this, with e-Commerce more advanced in China, online wine purchases were still possible with zero contact delivery through platforms such as Tmall. Seeing an opportunity arising from the crisis, research on key Chinese retail companies and traditional grocery stores conducted by Nielsen found that 67 per cent plan to expand online channels in the upcoming year.
Now in March, the people of Wuhan are starting to leave their homes as the number of new COVID-19 cases appear to have slowed. Business is slowly resuming as roads, trains and airports are reportedly being reopened over the coming weeks.
United States of America
The United States of America (USA), Australia’s second largest export market by value, is now the country with the most confirmed COVID-19 cases globally.
At the time of writing, more than half of the USA states are in lockdown, with the severity of measures varying from state to state. This is having a severe impact on off- and on-trade sales of consumer goods and services. In the week ending 7 March 2020, the value of sales in the USA on-trade declined by 20 per cent, when compared to the same week in the previous year, according to Nielsen/CGA. This was due to 38 per cent of consumers reducing their time out of the house and 53 per cent avoiding big gatherings. This decline in on-trade sales was happening even before most states closed on-trade dining, bars and pubs in mid-March.
As we move further into March and even more social restrictions, the opposite is happening in the off-trade. Sales of consumer goods in the off-trade increased by 53 per cent in the week ending 14 March 2020, compared to the previous year (IRI Worldwide). The leading product groups behind this growth are paper products, home care and over-the-counter healthcare. However, alcoholic beverages also experienced a 28 per cent growth in sales compared with a year ago.
Nielsen also offers some insight on how each alcoholic beverage category has performed over the same period. According to their data, wine grew by 28 per cent, sprits by 26 per cent and beer/malt beverages/cider by 14 per cent in the week ending 14 March 2020. For comparison, in the quarter ending 25 January 2020, wine was flat at 0.6 per cent, sprits at 3.8 per cent and beer/malt beverages/cider at 5 per cent. Large packaging is doing particularly well (sales of 3-litre boxes of wine increased by 53 per cent) due to the ‘stocking up’ mentality. Nielsen also stated that wine in the US$11–25 per bottle segment performed particularly well, although there were double digit growth rates for every price segment.
Sales of alcohol in the off-trade are set to continue as most states have now declared alcoholic beverage businesses as ‘essential’. According to Total Wine & More, a large alcoholic beverage retailer, Australian wine is performing as well as the rest of the market, with growth rates ranging from 30 to 75 per cent, depending on the USA region of sale.
Online sales of alcohol are also increasing. Drizly, a wine delivery platform founded in 2012, has stated that customers are spending 50 per cent more than usual and that their sales volume in the days leading up to 16 March has grown at 5 times the rate earlier in 2020.
Wine.com, one of the largest online wine retailers in the USA, has also experienced an increase in sales. Daily demand is triple that of a normal day in March as new and existing customers buy more bottles per order than usual. They are also spending less per bottle – an average price of US$23 instead of the normal US$32. Australian wine is keeping pace with the overall market growth on this platform as well – selling at an average price of US$19.75 per bottle.
As the situation develops, more unique alcohol sale arrangements are emerging. For example, the state of New York now allows any restaurant permitted to sell take-away to also include the sale of alcohol with any food order.
Consumers in the United Kingdom (UK) are also under strict social distancing restrictions, which are having a similar effect on the off-trade/on-trade share of business as in the USA. In the week ending 14 March 2020, total sales of consumer goods in the on-trade dropped by 15 per cent compared to the previous year, driven most strongly by restaurants, which declined by 21 per cent in sales (CGA). Again, this was before more severe warnings were put in place by the UK Government, so it is expected that these figures will deteriorate further.
The latest off-trade sales data from IRI Worldwide, for the week ending 21 March 2020, reports a 48 per cent growth in grocery and non-grocery sales compared with the same week a year ago. This equates to more than £1 billion in additional sales, bringing total sales almost to those the week before Christmas 2019. Red New World wines featured in the top 12 categories of absolute value change, growing by £13 million, or 64 per cent.
The disruptions to the global trading environment are somewhat tempered by the depreciation of the Australian dollar, which recently fell to a 17-year low against the greenback. The lower Australian dollar may provide a competitive boost to Australian wine exporters.
Next week we will examine the situation in the domestic market.