How CoronaVirus Will Change the Alcohol Industry
The problem with trying to predict the impact of the CoronaVirus on the Alcohol Universe is the same problem of predicting its impact on any industry: We don’t yet know the severity of the impact the Virus will have people and society and we don’t yet know the effective lifespan of the virus going unchecked by medical intervention such as a vaccine or effective treatment. But of course, predictions can be based on assumptions.
Let’s assume, for the sake of this post, that the current personal quarantining will continue unaltered through May. This is optimistic and reflective of my general disposition. Let’s assume further that science will develop a vaccine/effective treatment within a year. Again, optimistic, but not a dumb assumption.
Given these assumptions, I think we can say the following about the impact of the CoronaVirus on the Alcohol Universe.
1. DTC Law Changes. Alcohol producers (Distillers, Brewers, Wineries) will make a concerted and renewed effort to convince lawmakers to allow them to both deliver their products locally and use common carriers to deliver their products. This, in turn, will speed up the creation of a national DTC marketplace for all categories of alcohol products.
2. Digital Product Marketing. Some number of alcohol producers will keep their digital marketing and consumer outreach efforts ramped up even as the CoronaVirus threat wanes, having seen a real return on investment to those efforts. And as more states enact legal DTC shipping and delivery laws for all categories of alcohol, some larger percentage of producers who would otherwise not have engaged in significant digital marketing will engage in this marketing channel.
3. Consolidation. It’s hard to imagine that a number of producers, retailers, restaurants and even some wholesalers will be so hard hit by the economic impact of the CoronaVirus that they simply will not survive. This will lead to consolidation at every tier. Consolidation isn’t always a bad thing, particularly when the consolidation is a mutual decision between the consolidator and consolidated. In this case, however, it won’t be an intended outcome.
4. Recessionary Spending. America is in a recession now, if not a depression. The country was seemingly on the verge of some sort of economic slowdown even in advance of the CoronaVirus. The near term future has to be seen as a recessionary future, even as economic activity ramps back up. This means alcohol consumers trade down, spending less per product. It means, for wine, the rise of the $10-$15 per bottle of wine and a diminished market for wines $25 – $50 per bottle.
5. Higher Taxes. Given the historically low price of money, now is not the worst time for the Federal government to borrow money to fight the economic impact of the CoronaVirus. However, that money needs to be paid pack. It seems near impossible to make even the slightest attempt to begin to pay back the initial 2,000,000,000,000 that is in the recent “stimulus” package, let alone attack the additional 23,000,000,000,000 of federal debt that had accumulated before the CoronaVirus outbreak. Cutting spending to raise funds to attack the debt is a path to recession and pain. At the very least, expect the corporate tax rate to be restored to where it was prior to the Trump tax cuts and expect personal income tax, particularly on the wealthy, to increase. This means generally less spending on alcohol and lower revenue for producers, retailers, wholesalers and the rest of the alcohol industry. There are other paths to dealing with a national debt this large that don’t necessarily include increased corporate and personal tax rates. However, this path is the most direct.
6. A Move From Individualism to Communalism. I believe one of the most important impacts of the CoronaVirus outbreak will be a social move toward more communalism and less individualism. This, in turn, means a greater societal tolerance for preemptive action taken to mitigate potential health threats. If I am right this does not bode well for the alcohol industry. It means a greater tolerance for .05 blood alcohol limits for drivers. It means greater tolerance for and acceptance of dubious claims about alcohol’s impact on our health and therefore more tolerance for restrictions on alcohol use. It means more tolerance for arguments that use “the health of the children” to justify restrictions on alcohol use. Expect a more restrictive environment on alcohol use going forward particularly in the areas of impaired driving and advertising, if not others.
I’d remind readers that the above predictions assume a relatively optimistic outcome (quarantining through may and the eventual development of a treatment/vaccine for the CoronaVirus. If, on the other hand, the treatment/vaccine does not come and/or if the severity of the virus requires truly longterm quarantining and a continued contraction of the economy, well, all bets are off.
Still, the above predictions are something that everyone in the alcohol universe ought to think about, particularly in terms of how they will impact their business.
Thank you Tom. Watching Governor Cuomo every morning convinced me the state governments are currently experiencing substantial shortfalls in sales and income taxes although government expenses are increasing. The contractual protections of public pensions among other needs will force state legislatures to raise substantial revenues by many means possible, including alcohol excise taxes.
Jim,
Yes…Excise taxes. If we see the light at the en of the tunnel by July 1, then yes, excise tax increase are not unlikely.
Good although sobering thoughts Tom. I think we’ve reached the inflection point where winery eCommerce becomes a viable channel, and yes, an ongoing source of real revenue. Let’s hope so as its long overdue.
Good posting. Numbers 1-4 seem logical and likely. Re #5 the real interest rate on long-term debt is slightly negative: investors are basically paying feds to take their money. Short of deflation, even a massive increase of bond-financed deficit looks pretty safe and digestible. Of course (haha) that doesn’t mean no tax increases; but I don’t see corporate taxes or taxes on the very wealthy having a big impact on wine. Excise taxes a different story, especially at the state level where deficits are restricted.
#6 is really interesting and plausible, but hard for me to predict with any confidence.
Found this from an article on Yahoo today:
“U.S. sales of alcoholic beverages rose 55% in the week ending March 21, according to market research firm Nielsen. Spirits like tequila, gin and pre-mixed cocktails led the way, with sales jumping 75% compared to the same period last year. Wine sales were up 66% while beer sales rose 42%. And online sales far outpaced in-store sales.
Nielsen said online alcohol sales were up 243%. Danelle Kosmal, a Nielsen vice president, suspects growth rates peaked that week as people loaded up their pantries before state stay-at-home orders went into effect.
Kosmal said data for the week ending March 28 will be a better indicator of ongoing demand.”
Very key is that online sales rocketed up. I suspect that as people ‘find’ that option and see the convenience of it, it will become a more defacto standard that they will use. Those that are using it more than previously, will obviously continue using it.
Bill,
Yes, I don’t disagree. However the degree to which consumers who are using online sales will continue to will be determined by the degree to which states change their wine shipping laws.
Tom –
Sure, I agree, but I also think there are a lot of people that never really thought about it when you have the liquor store down the street or on the way home from work. While some stores are still open, people doing social distancing, find this option, to order by mail, refreshing. Not to mention you can find older vintages of something you loved that are no longer locally available and wines that are never available locally.
But to your point, the real growth is where you cannot ship today, but can ship tomorrow. I know I will take advantage of that and rejoin wine clubs that I cannot be a member of, today.