The Covid has fully touched one of the most valuable ambassadors of the Spain brand and that represents around 1% of the national GDP. The wine sector is seriously injured, but fortunately not fatally. The closing of the Horeca channel (hotels, restaurants, bars …) during the almost three hardest months of confinement and the subsequent capacity restrictions and limitations; the absence of 83 million international tourists; cancellations of weddings, ceremonies and all kinds of events … hto open a deep wound in the first vineyard in the world (We have 969,000 hectares dedicated to growing grapes, 13% of the world total), which has not been able to stop the increase in wine consumption in homes during the confinement and the increase in internet sales. This coupled with a drop in exports, by an international market weighed down since the beginning of the year by the pandemic in China, by tariffs on Spanish and French wine (not Italian) from the United States (nothing more and nothing less than a 25%), due to uneasiness over how Brexit will unfold and the new Russian wine law, which came into force last June, have formed the perfect storm for this sector to navigate in a sea of uncertainty when it is about to close the harvest campaign in the coming weeks.
Spanish wineries billed around almost 5,400 million in 2019. Only in the first four months of the year they have lost 35% of their income. And the estimates of the Spanish Wine Federation (FEV) do not foresee a rapid recovery in the remainder of 2020, since they expect to end this year with a drop in sales of between 20 and 40%. A strong setback for a sector that can boast of being the third largest wine producer in the world (with an average annual production of wine and must of between 40 and 42 million hectoliters). The hole has come from the hermetic closure during the confinement of restaurants, bars and hotels, the fundamental pillar of national wine consumption. “The hospitality industry accounts for 60% of the value of national sales,” he says. Rafael del Rey, general director of Spanish Observatory of the Wine Market (OEMV).
A study of the Interprofessional Wine Organization of Spain (OIVE) says that, before the arrival of Covid-19, the Horeca channel represented 54.5% of the total value of the wine marketed in our country, although much less in volume, 31.4%. “The wines destined for restoration, the premium ones, with a higher added value, are the ones that are suffering the most”, details Angel Villafranca, president of the wine sector of Agrifood Cooperatives of Spain and president of the OIVE. “And that channel where it was marketed cannot be replaced by another,” he continues.
Indeed, it seems to have been so. The growth of wine consumption in households during the state of alarm and the exponential increase in internet sales have not compensated, by far, the hole left by what has not been sold in hotels, bars and restaurants. And that during the confinement, the consumption of wine grew by 64.5% in the food channel, a percentage even higher than that of beers (60.7%), according to the OEMV. And online sales increased 161.2%, that is, six times more were sold online than before the pandemic.
But those two phenomena have not been enough results for this industry. In fact, a survey conducted by the FEV indicates that 98% of the wineries stated that they have been “seriously, seriously or quite” damaged due to the situation and, especially, micro-enterprises, although the majority continued to maintain production.
The new normal has helped, but it has also not been able to absorb all that was lost months ago. «During the de-escalation, the hospitality industry reactivated sales, but not at a normal rate, the capacity was very low, there have been fewer celebrations … The 83 million tourists in 2019, who are potential consumers of our wines », he explains David Palacios, president of the Spanish Confederation of Wine Regulatory Councils. “If the Horeca channel is not fully opened, the recovery of wine is not going to be real. And a winery that has closed down cannot be recovered in two months: if you don’t take care of the vineyard, it dies, and if you don’t take care of the winery’s wine, it is lost ”, says Ángel Villafranca.
Relieve the market
With the wineries full, with no outlet, with a drastic reduction in sales and in view of the new harvest that was coming, the Government approved in June a package of extraordinary measures for the wine sector worth 90.5 million euros, which come from European funds. An amount destined to crisis distillation, private storage and green harvesting. “This has helped stabilize the market in the months leading up to the harvest. But there was no extraordinary euro, because that money comes from the budget that the EU dedicates each year to support the wine sector of each member country. Now we have to commercialize the harvest and the scenario is very worrying due to the uncertainty “, clarifies Villafranca.
There is another very negative effect: many winegrowers have denounced the low prices paid to them for the grape. “The drop in sales has affected the entire wine chain and the weakest link is the wine grower. There is a lot of uncertainty in marketing. That is why the prices have been very low, ”says Palacios.
However, the sector has already learned lessons from the 2008 crisis. Then, the decline in the purchasing power of many pockets also had an impact on the consumption that was made in bars and restaurants in our wines. Since then, many of the more than four thousand wineries in Spain began to diversify their sales in different channels and markets. “Most of the wineries are internationalized and diversified, even the smallest”, says Rafael del Rey. Perhaps for that reason —and because “strong promotional campaigns have been carried out, offering a greater variety of wines for all audiences, with more wine bars”, says Del Rey— 2019 was the year in which the recovery of domestic consumption was consolidated, which increased by 9%.
But the pandemic arrived. And also other ups and downs that turned the international market upside down. Something that has done a lot of damage to our wine industry. We are the world’s leading exporter in volume, with just over 21 million hectoliters in 2019 —That is, almost more than half of the 40-42 million that are produced on average in each campaign. 11 million were allocated to domestic consumption in 2019—. And the third largest exporters in the world in value, with about 2,700 million euros exported last year. “Without exports many companies in the wine sector could not survive,” he says Raúl Compes, vice president of the European Association of Wine Economists and professor at the Polytechnic University of Valencia. Therefore, each adjustment or mismatch in that market affects us. And in the first seven months of 2020, exports have fallen 10% in volume and 5.6% in value, according to OEMV.
America is hurting. Since last October, the US Government imposed additional tariffs of 25% on Spanish wines (also on English, German and French wines), except sparkling wines, those with an alcoholic strength of less than or equal to 14% by volume and that are in containers of two liters or less, as “punishment” for the case of subsidies to the aeronautical company Airbus. This “is being assumed by the wineries and therefore suffering a significant loss of commercial margin at the cost of staying in a strategic market,” says Del Rey. The US is the main destination for our packaged wines. For this reason, “where it does the most damage is in the wines with Denomination of Origin, which are the ones most demanded by the American public,” says Palacios. “The United States is a very attractive market. It is the first world wine market and the first imported in value, that is, it pays higher prices. Hence, wineries and companies are making an effort to counteract the tariffs, ”says Raúl Compes.
Brexit is not noticeable
And they are also doing it to take positions in the international market regarding Brexit. “They are more commercially aggressive”, qualifies Compes. Thus Since the United Kingdom left the EU on February 1 and until July, Spanish exports to the British market increased by 6.7% and we gained market share to reach 7.9%. But even so, Brexit worries, “because of the effect it may have on the pound sterling, which could make the price of our wines more expensive; for the possible tariffs that it imposes; because of the barriers that may be established in labeling and processing and because it can impoverish the British by reducing their purchasing power “, De Rey explains.
Exports to Russia are another workhorse, since a new wine law came into force in this country last June that “prohibits the mixing of Russian wine with wine in bulk from third countries to be called wine. It’s a way of protecting your production, ”says Compes. Spain is the main supplier of bulk wine to Russia. Since then, our bulk exports have fallen by more than 95%. And those of China were also reduced, and not only because of the pandemic, but because “this market was slowing down before, as it is making a large investment in its wine sector,” says Compes.
And in all this sea of uncertainty, the wine sector navigates towards diversification, opening new markets, trying to attract the millennial consumer, promoting the online channel, options such as wine tourism … But, as David Palacios predicts: «Our recovery It will go hand in hand with the economic recovery of the country and this with the health recovery.