the world economy could be in even worse shape than it is now. It's hard to see what could top the events of Oct
10 , when share values slumped by an estimated
£2.7 trillion in 24 hours, but you never know.
In one sense, of course, this is only the beginning. I don't want to sound like Eeyore, but most commentators agree
the turmoil that has devastated the financial markets in Black October is about to spread into the real economy, leaving consumers and businesses with some very tough decisions. One estimate is that a million people will be out of work by the end of the year. Those of us who are fortunate enough to have jobs are certain to face higher taxes, leaving us with less disposable income.
What impact will all this have on the wine trade, which is already struggling to cope with exchange rate fluctuations and escalating packaging, transport, energy and production costs? I don't think I'm alone in believing
the prognosis is grim and getting grimmer. Some UK businesses must be on the verge of going under.
As I've argued before in this column, the only (slightly) optimistic note is provided by strong, if statistically small, sales growth over £6. This may be partly a reflection of the fact that people are eating at home more often
and treating themselves to a better bottle of wine, but that's not the only reason. Call it escapism if you like, but against the odds some punters are still keen to trade up.
If that's the good news, what's the bad? It's hard to know where to start. But how about the on-trade, where many pubs and restaurants are desperate for customers? There must be a lot of unpaid wine bills out there and almost as many sweaty
palmed suppliers preparing to recover their stock at short notice.
In the off-trade, meanwhile, things are heading downmarket apace - £2.99 has become the new £3.99. The supermarkets are increasingly prepared to work on single-digit margins (or use wine as a loss leader) to maintain their market share, although the multiple high street specialists do not have the same luxury. If the recession continues, the rash of three-for-£10 and credit crunch wines will surely bring the average price of a bottle of wine back under £4 with a corresponding drop in quality.
Things are no better at the production end. The shares of most
drinks groups are struggling, while heavily-leveraged wineries must be terrified of what the banks will say, or do, next. Will they go on lending money to the wine industry in the short
and medium-term? It has to be said that
there are safer options, even in these parlous times.
Unless things improve pretty smartly, my prediction is that hundreds of wineries will go under, or be taken over, within a year. The situation is more acute in the New World than the Old, largely because borrowing tends to be higher (and, for the bigger companies, shareholders more exacting) in the southern hemisphere, but the carnage will be terrible everywhere, especially as EU subsidies begin to be scaled back.
Until now, fine wine hasn't suffered from the economic downturn, with strong price increases (and returns on investment) in 2007 and the first half of 2008. The reason for this was simple: demand was much stronger than supply for the top wines, particularly from vintages such as 2000 and 2005 in Bordeaux. I suspect this may be about to change. Bankers and hedge fund managers aren't the only people who buy top wine, but some of them are going to be anxious to offload some cases fast in the next few months. Prices of many fine wines are almost certain to fall. Like the London housing market, a correction was probably inevitable anyway.
Some members of the wine trade think
consolidation may prove a boon. Talking to Wine & Spirit recently, Bill Rolfe of
10 International argued
it's the "only way to improve the profitability of those who are strong enough to survive after the dead wood has been removed". There's a degree of truth to this. The wine business is famously fragmented, with limited economies of scale. Indeed, you could argue that some UK supermarkets behave the way they do because no supplier (even Constellation) is big or powerful enough to stop them.
But I still think wholesale consolidation is a worrying prospect. It will reduce consumer choice
cede further control to the companies with the deepest pockets rather than the highest standards. There will always be room for mavericks and innovators, but
it is being squeezed by lower margins and dwindling ambitions. Measured against the near collapse of the banking system, this may seem insignificant. But with hindsight I suspect we may see 2008 as the start of a new and sobering reality for the wine trade.