Coronavirus Deals a Painful Blow to China's Wine Industry

The Chinese wine industry experienced a tough year in 2019, and was hoping for a fresh start in 2020. However, the coronavirus emerged in late December 2019 and rapidly spread in most cities nationwide in the first two months of 2020. This event has taken a dramatic toll on consumption, and disrupted the entire value chain of the wine industry. If the situation persists for the next few months, the wine industry will be structurally damaged. On the other hand, the current crisis also brings the wine industry an opportunity to rethink strategies.

Supply-Side Disruptions

Congestion of Wine Imports

In the past two years, the imported volume of wine in the first quarter accounted for 25% to 30% of the total imported volume of wine in China, according to China Customs. However, due to labor shortages and logistics disruptions caused by the coronavirus, a backlog of imported wine containers in ports led to a cratering of imports in January and February 2020. Meanwhile, as cold storage is congested at ports, shipping companies are charging a congestion tax for reefer transport to China, with prices ranging from USD 1,000 to USD 1,250 per reefer container for the use of reefer plugs (see Further Assessing the Impact and Implications of Coronavirus on China's F&A). This will greatly increase costs for wine importers.

Domestic Wineries Resume Operations at a Slow Pace

According to the National Bureau of Statistics, domestic production volume in the first quarter normally makes up 30% of the total production volume of wine in China. However, the lockdown measures implemented in response to the coronavirus, together with the substantial extension of the Lunar New Year holidays and 14-day quarantine requirements for workers moving from one town to another, have significantly delayed resumption of production and business. The original sales orders and contract plans for the first quarter will be broken and rescheduled. According to industry contacts, most large domestic wine producers could fully resume operations in the second quarter of 2020.

Distribution Channels Are Impeded

Brick-and-Mortar Stores Slowly Return to Normal

While e-commerce platforms expanded quickly in recent years and accounted for 30% of retail sales, we estimate that brick-and-mortar stores still dominate with 70% of retail sales in 2019. Most brick-and-mortar stores suspended their operations during the peak period of the coronavirus outbreak (late January to mid-February). As the epidemic situation improved in most regions of China, the modern retail channels (super/hypermarkets and convenience stores) started to reopen in mid-February. However, we think the short-term improvement in wine sales will be limited, considering wine products are not daily necessities. Furthermore, operations at most of the traditional retail stores (food/drink/tobacco specialists and independent small grocers) are still suspended. Even the stores that remained open still suffered huge losses, due to fixed operating costs. As mentioned by 1919 Wine & Spirits, one of the largest liquor specialist chains, their offline store sales fell by 90% as a result of the virus, and around 1,000 stores have been temporarily shut down to mitigate more losses. They estimated current cash flow is only enough to survive one year. However, most small and medium-sized traditional distributors could run out of cash in as little as two to three months, and could be forced into closure or bankruptcy.

Foodservice Is at a Standstill

The foodservice industry continues to be impacted by the coronavirus outbreak. According to our latest report, China’s Foodservice Industry Continues to Suffer, there is no clear sign that operations will get back to normal soon, and most foodservice operators will experience further revenue losses if the situation persists. Some large foodservice chains started to reopen in mid-February, though most of them provided only takeaway or delivery service rather than eat-in, which greatly blocked wine consumption in restaurants. According to Euromonitor, 68.6% of the wine sector’s revenue was generated through on-trade channels (foodservice) in 2018. Thus, foodservice losses will continue to ripple through the wine sector.

Consumer Sentiment Will Define Post-Virus Scenarios

Scenario 1: A Tighter Grip on Unnecessary Spending

After the virus is vanquished, the lingering psychological impact of this virus is likely to weaken consumer confidence in China’s economy. Thus, many consumers could prioritize their spending on daily necessities and postpone or reduce their purchase of indulgent goods. Consequently, many consumers will be more likely to downshift to cost-effective wine products for a certain period. Meanwhile, in order to generate much-needed cash flow, we expect price wars will occur frequently after the virus, which will also worsen consumption declines in wine.

Scenario 2: The Rebound Effect of Compensatory Consumption

Most Chinese consumers who have been stuck at home for several weeks due to the coronavirus outbreak have a strong desire to socialize. After the epidemic subsides, compensatory consumption will appear, especially in service sectors like catering and entertainment. Demand from private gatherings and business and wedding banquets, delayed by the virus, will quickly rebound and drive an increase in wine consumption. Furthermore, consumers in third- and fourth-tier cities, who have less cost of living pressure and more leisure time compared to consumers in first- and second-tier cities, will have a stronger consumption intention and more frequent social activities, which is more likely to result in a post-virus rebound in wine consumption.

Implications for the Wine Market

A New Round of Industry Consolidation in Wine

The coronavirus outbreak will weed out wine companies with cash-flow issues and single trading patterns. Many wine importers mainly import low-priced products and simply wholesale them to channel dealers. Low profit per bottle makes them more dependent on sales volume to make a profit. The virus outbreak has prevented them from hoarding large amounts of inventory to get back cash flow in the short term, leading to the bankruptcy of many importers and channel dealers. Thus, the threshold of entry to the wine market will be virtually raised. The wine companies with high-quality products, diversified channels, and brand influence will gain momentum for sustainable development after the epidemic. At the same time, consumer demand for brands is increasing, which supports sales and profits for big brands. China’s fragmented wine industry will be consolidated.

Consumer Appetite for Health-Related Products Will Grow

In the aftermath of the epidemic, Chinese consumers are likely to become more health-conscious. Naturally healthy and functional food and drinks will gain greater traction with them. Wine is perceived to offer certain health benefits, which will help increase home consumption on a daily basis. Meanwhile, wine makers can stress the purported benefits of wine consumption, such as support for heart health and anti-aging effects, to appeal to and further expand the base of wine drinkers.

Acceleration of Channel Diversification

The impacts of the virus will also make wine companies pay more attention to the importance of diversified distribution channels. During the coronavirus outbreak, most consumers were hunkering down at home, and most public consumption locations were closed. The wine companies that mainly rely on a single distribution channel were the most affected. We believe wine companies will rethink their distribution strategy, which could lead to a more vigorous development of the ‘omnichannel model.’ New retail models, including self-service wine machines, community commerce platforms, online apps or platforms, and food delivery platforms, should be integrated into current distribution channels in order to create a seamless consumption scene.