When I started writing this piece over a week ago about the main impacts of the Coronavirus (COVID-19) on the wine industry I was trying to establish the severity and reach it would have. Since then it has become very apparent that the virus has already and will continue to have a significant impact on all industries including the wine industry. The number of cases in South Africa has exceeded 400 in just over two weeks prompting our President to declare a State of Disaster to deal with the virus including amongst other things international travel bans and the closing of schools. There have been more and more cancellations and shutdowns from tourism, hospitality and wine organisations across the globe. And we are only at the beginning.
So, with a focus on the South African wine industry what do I believe the impacts are going to be?
The world has been teetering and is ripe for a global downturn. Regardless of the levels of mortality of the virus, or its ultimate reach, the sentiment and panic around the world has already indicated that there will be another global downturn. The likely impact of this in South Africa is reduced interest rates which will provide some relief to those wine producers with high finance costs. A declining Rand might also be seen as beneficial in terms of receiving higher prices for wines exported. The problem with the export model, however, is that we have seen and are likely to see lower export volumes as other countries such as the UK and in Europe reduce the level of wine imports into their countries.
The converse is true for imported services and goods which usually form part of the input costs into wine production. A weakened Rand will mean that these items will become more expensive. There will also be a lower supply of these goods as China and other manufacturing countries are in ‘shut down’ mode which again will increase the price of import goods, if available at all.
The virus has led to heavy reduction in travel, whether due to sentiment or imposed by Governments around the world in the form of travel bans. Some airlines have stopped or restricted flights. Travel companies have seen most of their tours being cancelled with a very reduced pipeline for the months to come. Hotels and restaurants are seeing lower occupancy levels and patronage respectively. Tourism and hospitality are directly linked to the wine industry in terms of providing an outlet for the consumption of wine but also in terms of wine tourism where the associated revenue generated at the wine farms will be reduced. Coupled with the reduction in farm visits, we are already seeing several wineries that have shut their tasting rooms due to the risks of the virus.
The demand for wine locally will likely decrease as people socialise less due to cautionary measures and financial constraints. With a reduction of global wine purchasing and with the 2020 harvest looking to be back to full production levels we might find ourselves in the situation with a local and global oversupply of grapes. The risk here is that the price received for grapes or wine falls back towards the unsustainable levels of the past. Hopefully the ever-increasing focus on quality wines prevents this from happening.
The cancellation of trade shows and other events, especially Prowein means that the ‘business’ that usually gets done at these events is limited to online meetings. According to the wine producers I have spoken to it’s the random meetings at these events that often lead to the biggest business development for the winery.
Another thing to consider is the lack of investment that goes with uncertainty. This may be in the form of maintenance investment in the wineries, but also in terms of the commercial and financial deals that will no doubt be put on hold until there is more certainty in place.
The picture painted above may not be a great one, but this is an international ‘world event’. There are, however, a number of positives that I am taking away from the Coronavirus:
South Africans are a resilient bunch. Like with many other challenges we have faced as a country, I believe that we will come out of this stronger. Stay safe and try and find the positives that the situation brings. It is a great opportunity to spend some time with your family.
All the best
Cape Wine Academy Principal