Covid-19 has officially been a pandemic only since March 11, but its effects on the economy are already dramatic. For several industries, the current crisis is likely to become the most severe since the Great Depression. This is notably the case for the travel & leisure industry. In this article, we investigate the impact of Covid-19 on the fine wine market which represents the upper segment of the wine market and which is closely connected to the hospitality industry.
The market for fine wines is dominated by France, with Bordeaux and Burgundy accounting respectively for close to 50% and 20% of the trading activity in 2019 (Liv-ex.com). Other major players include Italy, Spain, Germany, the U.S.A. (all as producing and consuming countries) and China (mostly as a consuming country). Buyers typically include fine-dining venues, whose revenues are currently down to zero in most cases, as well as consumers, collectors and investors whose purchasing power is suffering from the economic and financial turmoil. Given the context, it’s obvious that the wine market is going to experience a correction.
But two questions remain open: How severe will this correction be and how long will it take for the market to recover?
Looking for a point of comparison
To gain some insights into these questions, it is useful to have a look at past crises and their impact on the wine market. From a medical standpoint, the only but rather imperfect benchmark is the Spanish flu pandemic from 1918-1920. Over this period, wine prices dropped by more than 25% according to Dimson et al. (2015), but rebounded by close to 30% in 1921, (these figures have been adjusted according to inflation). However, apart from the sanitary situation that bears some resemblance with the current Covid-19 outbreak, the context could hardly be more different. In 1918, we were at the end of the Great War, the wine market was much less globalized than today, the political situation extremely unstable, and the economic conditions marked by raising inflation.
The Global Financial Crisis (GFC) of 2008 constitutes a more relevant benchmark. It followed a period of economic growth and political stability in most wine producing and consuming countries. Inflation was fairly limited. The wine market was in a trend of both increasing globalization with the emergence of new customers from the Far East and rapid financialization with the development of dedicated tools such as price indices and valuation services. Until summer 2008, wine prices were rising and even after the collapse of Lehman Brothers, they remained rather resilient. According to Masset & Weisskopf (2018), prices subsequently declined by a mere 25%. However, these limited losses occurred in a market marked by a quasi-absence of transactions. The trading activity resumed in late spring 2009 after the release of the new 2008 vintage in Bordeaux, which can be considered relatively successful thanks to better-than-expected quality and attractive prices. The wine market then not only rapidly rebounded but also entered into a strong upward trend. This can be explained by the pressure on demand due to the arrival of new customers from the Far East and the development of wine investments (with notably the launch of wine funds). The interest of speculators for this new asset was initially spurred by the diversification potential it offers and then further reinforced by the buzz surrounding the release of the outstanding 2009 and 2010 vintages.
What happened to the wine market post-2009?
Since the GFC, the wine market has strongly evolved. The bubble-like price hike of highly reputed Bordeaux wines between 2009 and 2011 has been followed by a severe and long correction where it took four years for the market to reach its lows. In parallel, several regions have seen their reputation and the prices of their wines increase rapidly. Burgundy, in particular, is now challenging the leading position of Bordeaux. Newspaper articles about the insane prices paid by some wealthy collectors for a few bottles of fine wines almost exclusively relate to Burgundy nowadays. Rhône Valley, Piedmont and Tuscany follow the path of Burgundy, but are still rather behind it in terms of prices.
Some preliminary takeaways
The discussion so far illustrates a few salient facts about the wine market. First, given that the supply of fine wines is fixed in the short to medium-term, demand drives prices. Changes in demand can be exogenous (arrival of new customers) or endogenous (shifts in the demand/preferences from existing customers). Over the last decades, the demand for fine wines has become truly global. Stated differently, there is no more reserve in demand, except perhaps in India (but it will take years before wine consumption becomes significant there). Second, the demand from existing customers is far from stable and is highly sensitive to market signals. On the one hand, the release of a critically acclaimed vintage tends to provide support for higher prices on the primary and on the secondary market. On the other hand, during good economic conditions, prices stagnate without a special vintage or occasion to make people purchase wines. Third, the wine market is complex, and reputation as well as prices in different regions may follow distinct patterns depending on customers’ preferences. Fourth, one of the motivations for holding fine wines is their supposed ‘safe-haven’ nature. The sharp decline of Bordeaux wines experienced during the Eurozone crisis provides empirical proof that this is not the case, at least not for the most liquid  and financialized wines. This observation, coupled with the fact that the liquidity quickly disappeared on the wine market during the GFC, may influence the trading decision of wine investors if the Covid-19 crisis worsens.
What to expect then?
Apart from the elements discussed above, differences between the current situation and the GFC exist. Last year, President Trump imposed tariffs on European products, including French wines (of less than 14 percent alcohol), but not Italian wines. Moreover, given the sanitary nature of the current crisis, many communication & marketing actions and tasting events have been postponed or cancelled. This includes the en primeur campaign, which often sets the tone for the whole wine market.
In these conditions, prices are set to decline. In Bordeaux, the good but not exceptional 2019 vintage will have to be released on the primary market at significantly lower prices than the previous three vintages to attract some interest. In other words, a discount of at least 30% compared to last year’s prices is necessary for these wines to attract buyers. Prices on the secondary market will follow the same direction even though the amplitude of the decline should, at least initially, be less pronounced. Obviously, if the Covid-19 crisis should worsen, prices may drop substantially more as many players would discount their prices to incentivize opportunistic purchases.
When talking about Burgundian wines, it has become increasingly common to hear people arguing that “trees do not grow to the sky” to support their view that Burgundy was close to overheating. For this region, the current crisis might thus mark the beginning of a long-awaited correction. Over the last decade, prices have quickly increased due to a severe imbalance between demand and supply. This imbalance is due to both the low quantities produced and the organization of the distribution channel in Burgundy. Most wineries sell an important part of their production through an allocation system , which reduces the number of bottles of the best cuvees that ever reach the secondary market. This means that market prices are based on a limited proportion of the overall production and implies that even a small change in demand may rapidly lead to important price adjustments. For most wines, this should translate into a price decline comparable to what Bordeaux will experience. But, for the top five to ten most sought-after producers, the decline is likely to be less pronounced as opportunistic buyers will try to replace those people that cannot afford these wines anymore.
In Italy, prospects seem to be more positive. The vintages currently for sale are 2015 and 2016, and both are regarded as excellent or even exceptional. Antonion Galloni (Vinous) describes 2016 in Barolo as “a vintage full of truly spectacular, breathtaking wines” and Monica Larner (Wine Advocate) calls the 2015 vintage as “picture-perfect” for Brunello di Montalcino. It is of course easier to sell great vintages. Moreover, prices of Italian wines remain reasonable compared to their French counterparts and there still is some latent demand as illustrated by the year-long waiting lists of new buyers at many wineries in the Piedmont. Thus prices will probably retract only moderately, but there will be opportunities to get access to many of the best wines.
The implications of the above analysis for the three main segments of the fine wine market can be summarized as follows:
Bargains on ‘nice’ wines: Attractive discounts on fine, but not speculative wines. Discounts will be especially important on wines that are produced in large quantities. These wines were already attractively priced and will become genuine bargains.
Access to ‘rare’ wines: There will be opportunities to get allocations at renowned wineries. If more people can buy these wines on the primary market, their prices on the secondary market will most probably slightly retract.
Wait for more reasonable prices on ‘investable’ wines:The liquidity on the market will first deteriorate, and if the situation worsens, there will be heavy discounts on those prestigious wines that are available in large quantities like Bordeaux First Growths.
Long-run effects: Headache or not?
At the time being, we know there will be a global recession but not its shape: V (severe recession followed by a rapid rebound), W (double-dip recession – potentially caused by a second outbreak of coronavirus), U (long recession – alimented by a number of bankruptcies), or L (Japan-like absence of recovery). Clearly the longer and the more severe the recession, the larger its impact on the wine market.
Apart from the economic situation, the current crisis may lead to changes in consumption patterns. Governments and people are realizing the importance of producing and consuming locally. In the case of wine, this suggests that there may not only be losers but also winners. Producers who benefit from an important local/regional demand, who focus on organic and terroir-driven wines, and who have (or who will be able to develop) a solid direct-selling channel, may - in a few years’ time - perceive this crisis as having been beneficial for their business.
 Bordeaux ‘Premier Crus’ are produced in quantities ranging from 120’000 up to close to 300’000 bottles a year. In Burgundy, most wineries do not produce more than 5’000 bottles of their most celebrated ‘Grand Cru’ cuvees per year.
 Every year, so-called ‘allocataires’ get a sample of wines at prices that are (well) below their market value but they are not expected (and in some cases authorized) to sell on their allocation to someone else.
Masset, P. & Weisskopf, J.-P. (2018). Raise your glass: Wine investment and the financial crisis. In: O. Ashenfelter et al. (Eds.) Handbook of the Economics of Wine. Singapore: World Scientific Publishing.
Dimson, E., Rousseau, P.L. & Spaenjers, C. (2015). The price of wine. Journal of Financial Economics, 118 (2), pages 431-449.