Beverage analysts from Rabobank sat down with executives from multiple wineries of various sizes to discuss the industry's performance in 2022 and to speculate on what might happen this year. The last question was always the same: What is the biggest mistake your leadership could make in the face of the uncertainty and pessimism that has defined 2023 thus far. Here are the three biggest mistakes, as told to Rabobank:
Mistake No. 1: (Don't) Get Long on Supply
Managing inventories was the biggest concern of the wine executives. "Everyone is swimming in wine!" one said. Or at least those who sell below $15. "Sure, wineries overcommitted. But then we were all surprised by the magnitude of the slowdown in wine sales over the past 15 months."
John Sutton, CEO of Wine Group, explained that wineries plan for forecasted volumes one to five years before the consumer sale occurs. If market trends most negatively, wineries become long, which was the case in 2022 and heading into 2023.
Thus far it appears distributors have helped cushion brands from the pain of lower sales volumes. "Moving forward, those excess inventories will be a drag on performance because distributors can use current inventories to service an uptick in demand, delaying the need to reorder from suppliers," Rabobank said.
Once long, it may take several years to get back into a supply and demand balance. How bad it will be in the next few years all depends on this year's harvest. A small harvest will quicken the path to a balance supply, while a large harvest will make it worse, the analysts explained.
While none of the high-end execs the Rabobank team talked with would admit to being concerned, they did concede there might be just a little crack in the market for high-end wines.
"High-end brands benefiting from the booming luxury wine segment are seeing slowing sales, margins squeezed, and some wineries likely have cellars filled with more wine than they can sell at current prices," Rabobank warned.
Mistake No. 2: (Don't) Stop Supporting Your Brands or the People and Ideas the Build Them
Making draconian cuts to marketing and sales budgets is a huge No. 2, the execs agree. But when times get tough, execs tend to forget about a 2010 Harvard Business Review study that found that firms that focused on operational efficiencies instead of layoffs to control costs and which increased their marketing spend, capitol expenditures and R&D were far more likely to outperform their competitors.
Mistake No. 3: (Don't) Cut Bank on Sustainability Programs
Growers want to do the right thing but in a business like farming, with such tight margins, a bad year can be catastrophic. Buyers need to insure the financial incentives to "do the right thing" are there even in a downturn.
Brands have huge incentives to talk about their commitments to reducing waste and greenhouse gases, but there's little accountability. Investors, banks, government and retailers should hold banks accountable for keeping their sustainability promises.
"A great example is recycling. Almost every beverage company from wine to soft drink has committed to increase the recycled content of their packaging. Meanwhile, their lobbying groups, from the American Beverage Association to the Wine Institute are fighting bottle bills that would increase recycling rates."
There's never a better time than now to invest in sustainability initiatives with a short-term payback that can help wineries maintain profitability. One such initiative is packaging, especially lightweighting bottles . "The single most effective way for most wineries is to reduce their GHG emissions is by reducing the weight of their glass bottles," the analysts said.
Also: renewable energy. For those who think energy prices will go down and stay down, Rabobank's energy analyst, Joe DeLaura, said: "There's always the possibility that things will get worse. And the problem with energy markets in general is those upside prices are often magnitudes higher than people expect. Being proactive and investing now means that you've taken control of your energy costs. You no longer have to deal with any outside factors."
All the biggest mistakes require the same ingredient: Short-term thinking, Rabobank said. Companies choose to set aside their long-term priorities for short-term, financial security. "Sure, recessions suck," but you don't want to over react, look back 10 years from now and ask, "What were we thinking?"