COVID-19 causing liquor industry uncertainty

05 March, 2020 by Brydie Allen

Since the outbreak of COVID-19 (also known as novel coronavirus) in late 2019, there have been more than 90,000 confirmed cases across 77 countries and over 3,000 deaths from the virus so far.

Impacts of the virus and its spread are being felt all across the world in a range of ways, and the liquor industry is no different. Things continue to move and change quickly, but we’ve rounded up the top impacts on the industry below.

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Global supply chains

As the origin of the outbreak and with the most concentrated cases (over 80,000), China has been heavily disrupted by the ongoing COVID-19 situation.

Multiple businesses, factories and routes in and out of the country have been shut down, with knock on affects being felt in a range of sectors. China is one of our key import and export partners, but with this channel at a standstill, profit, supply and logistics are struggling.

Further, the food, beverage and tobacco sector is the third largest B2B market that uses air travel, so drinks companies of all levels are feeling the loss of this integral link in the chain.

For example, common products like packaging materials and glassware that is usually ordered from Chinese suppliers cannot make it to customers in Australia. These customers are needing to spend time and often more money to source other options.

Meanwhile, stock from Australian producers cannot make it through to China and stock that has already arrived cannot be distributed. In some cases, product is stuck at ports or warehouses, as Howard Park Wines in Margaret River told the Augusta-Margaret River Times.

Tim Hunt, Head of RaboResearch Food and Agribusiness for Australia and New Zealand, said these impacts are similar to what happened after the SARS outbreak in 2003, however the COVID-19 impact will be felt deeper.

In a RaboResearch podcast about the Coronavirus, Hunt said that in 2002, Australia sent eight per cent of agricultural exports to China. That number in 2020 is anywhere up to 28 per cent.

“Add to that, the stronger links that have been developed between Australia and China in terms of exports, tourism, education and investment, we have a very different environment in which we might see the potential impacts of coronavirus this time compared to SARS in 2003,” Hunt said.

Anti-spread measures

As COVID-19 continues to spread, there have been a number of anti-spread measures both recommended and enforced, some of which have led to impacts on the drinks industry.

Take China for example – group gatherings are prohibited, and venues and stores are closed. This means that the market there has virtually disappeared, not only with no drinking occasions, but with nowhere for potential customers to buy anyway.

Elsewhere, concern about the virus’ spread has caused many to avoid large group gatherings and international travel.

For example, ProWein 2020 in Germany, originally scheduled to take place from 15 March, has been postponed due to the significant increase in cases across the world. In making a risk assessment of the trade fair event, organisers said the decision was made in the interest of safety.

Across the world, many similar drinks fairs, conferences and showcases scheduled to take place in the next couple of months have been postponed. This means that significant opportunities for both sides of the market have been lost, with both exhibiting producers and attending buyers missing out.

The perfect storm

For the industry in Australia, the past few months have been anything but easy, with COVID-19 compounding the negative effects of long-term drought, severe bushfires and flash flooding.

Tourism has taken an exceptionally hard hit from this perfect storm, especially considering rafts of travel warnings and restrictions, including the ban of visitors from China, who make up a significant demographic for the beverage tourism industry.

On a worldwide scale, the virus has also compounded the impacts of European and American tariffs uncertainty, which has caused many producers to lose parts of their share in markets they once excelled in.

There’s one brand in particular that has been hit by a COVID-19 storm of a different kind, and that’s Corona. Sharing the name of the virus’s first known name, coronavirus, Google searches for “corona beer virus” and “beer virus” skyrocketed after the outbreak, and some research organisations claimed that it was causing wide spread damage to the brand.

However, despite experiencing sales dips in Asia (as most brands have after the outbreak), Corona say this is not true. Maggie Bowman, Senior Communications Director at Constellation Brands which produces Corona, has emphasised that “consumers understand there’s no linkage between the virus and our business”.

President and CEO of Constellation, Bill Newlands said that Corona continues to perform well, stating: “It’s extremely unfortunate that recent misinformation about the impact of this virus on our business has been circulating in traditional and social media without further investigation or validation. These claims simply do not reflect our business performance and consumer sentiment.”

Geo-political uncertainty

Day by day the COVID-19 situation around the world develops, leading to significant geo-political uncertainty. In fact, CEO of IWSR Drinks Market Analysis, Mark Meek, says there is so much unknown that at this point, “no one can predict its likely impact” on the industry.

With the range of impacts listed in this article alone, many of the world’s largest drinks companies have predicted they will be affected, however for many of them, it’d hard to forecast exactly what this will look like.

Pernod Ricard is expecting that their long term growth goals will remain intact, however Chairman and CEO Alexandre Ricard said the short term impacts are hard to quantify.

“The environment remains particularly uncertain from a geopolitical standpoint, with the additional pressure related to the COVID-19 outbreak. While we cannot currently predict the duration and extent of the impact, we remain confident in our strategy,” Ricard said in shareholder communications about their half year results.

“Assuming a severe impact of COVID-19, mainly on Q3 FY20, we are at this stage providing a guidance of organic growth in Profit from Recurring Operations for full-year FY20 of +2 per cent to +4 per cent and will continue to closely monitor our environment. We will stay the strategic course and maintain priority investments in order to continue maximising long-term value creation.”

Diageo meanwhile, said that COVID-19 will impact their performance, and in a recent statement said this will be due to anti-spread measures in China and the Asia Pacific causing a drop in consumer demand, and reduction in international travel retail.

However, Diageo has said that the geopolitical uncertainty means they will continue to monitor the situation for exact results. Per their last update, the negative impact on 2020 to the group’s organic net sales and organic operating profit, was predicted to be in a range of £225m to £325m and £140m to £200m, respectively.

In a shareholder call, Kathryn Mikells, Diageo CFO, said: “If you look at what we’re seeing in the first half, I would say we’re seeing more volatility across the world and that’s impacting our results, and we’re not expecting that situation to necessarily improve in the second half.”

Treasury Wine Estates (TWE) also predict impacts, however said: “The full operating and financial impacts of the outbreak are yet to be fully determined.”

TWE do note in a shareholder announcement that they no longer believe they will achieve the previously provided guidance of EBITS growth between five and 10 per cent.

On the bright side, IWSR predicts that although in the short term there will be negative impacts, once the worst of COVID-19 has passed, the market will recover. They pointed to the return in 2004 after the SARS virus outbreak of 2003, which saw growth cover the loss of the previous year.