It is entirely possible for wine stocks to see a boost in trading volumes as wineries continue migrating to higher traffic e-commerce streams, and more lucrative off-premise channels. Read this piece to learn about investing in wine stocks.
- Wine IPOs are rare because there is a conflict of business practice between winemaking, and Wall Street’s focus on quarterly earnings.
- Research suggests that one likely post-pandemic scenario could be akin to post-WW2 when wine-specific demand spiked.
- 2021 could be a good year for wine as consumers resurge from in home drinking to outdoor group drinking both on-premise at wineries and in restaurants.
- The wine producer landscape is fragmented thus holding back the industry’s ability to leverage data and improve marketing efforts.
- Pure play wine stocks include: Duckhorn, Willamette and Treasury Wine Estates.
Update as of May 13, 2021:
News came out that Treasury Wine Estates drops forecast as Chinese tariffs increase on Australian wine imports. The group, which is the world's largest publicly listed wine stock has dialed back its forecast for H2 2021. See details on this livewire.
Wine macro-market outlook
According to Wines Vine Analytics, US consumer spending on domestic wine fell 8% in 2020 while direct to consumer shipments rose 17% year over year (Hello e-commerce). The US remains the largest consumer of wine, in front of France, with $68 billion in retail value of wine sales, and 1 billion gallons of wine consumed. The US also exports 371 million liters for a total value of $1.36 billion per year.
Figure 1: US Wine Sales in 2020 and early 2021
Tailwinds for the wine industry going into 2021
Extra spending money from stimulus and increased household savings has tended to help wine sales during 2020. Wine is more expensive than beer so surplus savings can more easily be allocated towards a luxury product like wine. Despite restaurant closures, which tends to hurt wine demand, households increased spending on wine for home-based cooking. In fact, consumers opted to shop more frequently for their wines online, and surveys indicate that consumers will continue doing so going forward. The graph below shows 2020 growth in online wine buying, but also that online wine shopping has recently fallen, or stabilized at a new higher band. This trend looks more like a step function than exponential growth going into 2021 and indicates that higher volumes could be expected in 2021, but not necessarily more growth.
The wine business was hurt by lockdowns and social distancing because less on-premise tastings were possible due to limited mobility. Assuming vaccines will enable more mobility, that more spending will ensue, and that unemployment will hopefully improve, 2021 could be a good year for wine. In the end, those wineries that have adapted well to e-commerce during the pandemic will continue seeing success and those wineries that fell behind will catch on the trend and grow their figures.
Figure 2: Wine sees largest upswing in e-commerce buyer growth
We are still not out of the w--ineries…
- Short term issue: Switching channels to capture more demand.
Restaurants as sales channels will continue to be sluggish until business shutdowns cease. This is because restaurants will come out damaged from the pandemic. Analysts suggest wine sales through restaurant channels could potentially never come back to pre-pandemic levels, or at least for some time, thus pushing wineries to switch into other channels dubbed ‘‘off-premise’’--channels such as online wine stores (e.g.: Naked Wines, or Vivino) and grocery outlets. In other words, the future of wine selling is both in opening up wineries again and selling more online.
Before the pandemic, wineries relied heavily on selling wine from their estates directly to consumers via wine clubs and tasting rooms. However, this changed during covid-19. With some consumption habits permanently changed, selling off-premise, away from the estate, has both boomed and become the top-ranking way of doing business. This will hardly be different in 2021.
Figure 3: Sales channels for wine showing e-commerce surge between 2019 and 2020
- Long term issue: The future wine consumer base has yet to materialize.
Millennials are trailing older generations in their wine consumption in part because the 2008 recession delayed their attainment of income brackets that allow for spending on luxury products like wine (and millennials tend to favor spirits). What this equates to for the wine industry is that the marketing campaigns are often nebulous and inefficient. Marketers are attempting to keep their old consumer base while struggling to balance for its new environmentally minded millennial consumers and doing so with poor data access. With 10,000 independent wineries in the US, and even more abroad, the producer landscape is fragmented thus holding back the industry’s ability to leverage data and improve marketing efforts. #Make-wine-cool-again.
Figure 4: Millennials trail behind their parents but show increased interest in wine in 2020
How to play it: pure play wine stocks
- Treasury Wine Estates (Ticker: TWE)
TWE is a AU$7.9 billion Australian winemaker currently trading at AU$10.90 with a PE ratio of 46.1X compared to an industry PE of 52.9X. Its PEG ratio of 1.7X and PB ratio of 2.2X are both in line with industry multiples. Analysts suggest TWE could see a 26.9% earning growth this year and revenues could see an 8% increase as well. TWE covers its short- and long-term debt as well as covering interest payments with sufficient EBIT. The company pays a 2.11% dividend yield which is considered low in the Australian market for alcohol stocks. TWE has a long way to climb to get back to its pre-pandemic levels, and it very well could considering what we explored above. If the stock share price makes back pandemic losses, and reaches its previous levels of AU$17, TWE could be an exciting prospect.
- Willamette Valley Vineyards (Ticker: WVVI)
Smaller than TWE, WVVI is a $43.7 million American wine producer located in Oregon currently trading at $8.81. Its PE ratio of 19.2X is good, compared to a US beverage average PE of 27.9X. This past year WVVI’s share price rose 95.8% versus an industry average growth of 41.7%. While earnings have not grown quickly on average in the past 5 years, the last year saw a boom of 53.1% in earnings and net profit margins were higher than last year’s 6% at 8.3%. Like TWE, its long- and short-term debt levels are well covered by operating cash flow. WVVI made an impressive rebound during covid surpassing its previous share price levels and increasing net income figures from $2.51 million in 2019 to $3.94 million in 2020, according to its latest 10-K.
- Duckhorn Portfolio Corporation’s (Ticker: NAPA)
It is challenging to find pure play wine stocks, but look no further than Duckhorn Portfolio Corporation for a fresh IPO pop. Taking the California Napa region as inspiration for a ticker name is cool but being valued at $2 billion is even more so. The company’s recent IPO helped NAPA raise $300 million and saw its share price pop 20% in its market debut on the NYSE. This could be because NAPA rode the pandemic with skill, raising sales 12% to $271 million in 2020, and expanding channels to increase off-site sales. Mind you that these figures come after fires ravaged parts of the wine country in California last year, and the pandemic’s nefarious effect on restaurants closures. However, analysts suggest that the post-pandemic era could be akin to post-WW2 when demand for wine spiked—good timing for Duckhorn.
Figure 5: Treasury Wine Estates versus Willamette Valley Vineyards over past 5 years
There's SPAC action in the wine world!
Clearly SPACs have been the popular option this year for public market entry and wine companies are not immune to the bug. Vintage Wine Estates for example, indicated last month that a SPAC could be their bridge to the NASDAQ. In fact, it agreed to merge with Bespoke Capital Acquisition (ticker: BSPE) which according to their investor relations press release, has calculated an implied market capitalization and enterprise value of about $690 million for VWE. The target company has a revenue CAGR of over 20% since 2010, in a US wine market that is expected to continue growing into 2021. Moreover, their success has positioned the winemaker as a top 15 wine producer and today, sells nearly two million nine-liter equivalent cases annually.