Fractional responses with spatial dependence of Portuguese wineries’ domestic market sales to an exogenous shock (Covid-19)
From Firenze University Press Journal: Wine Economics and Policy
Samuel Faria
Department of Economics, Sociology and Management (DESG), University of Trás-os-Montes and Alto Douro (UTAD)
João Rebelo
Department of Economics, Sociology and Management (DESG), Centre for Transdisciplinary Development Studies (CETRAD), University of Trás-os-Montes and Alto Douro (UTAD)
Alexandre Guedes
Department of Economics, Sociology and Management (DESG), Centre for Transdisciplinary Development Studies (CETRAD), University of Trás-os-Montes and Alto Douro (UTAD)
Sofia Gouveia
Department of Economics, Sociology and Management (DESG), Centre for Transdisciplinary Development Studies (CETRAD), University of Trás-os-Montes and Alto Douro (UTAD)
Based on business and consumer surveys, recent studies show that containment measures established at the onset of the pandemic determined either temporary or permanent closure of businesses, mobility restrictions, and losses in income, which led to an increase in economic uncertainty, affecting worldwide wine consumption. The perception of an economic crisis caused a change in purchasing behaviours, namely in spending and preference towards non-premium and mid-range wines. Moreover, the pervasive effect of the pandemic, which sprawled geographically almost with-out limitations, varied between countries, and among companies, according to different lockdown measures, demand elasticities, and reliance on sales channels.
Overall, the repercussions of the pandemic caused significant losses for wine-producer countries, especially in domestic market sales and exports with effects that are likely to last throughout the coming years. Depending on the business model adopted by each country, wine industries may differ in the impacts on and perceptions of the extent of the crisis. Therefore, the level of resilience and ability to adapt to a disrupted business environment impacted by an exogenous shock depends on the structure and behaviour of firms in their location.At the firm level, the impacts of the pandemic varied according to its market sales focus. Smaller wineries were particularly affected by the pandemic’s impact on the on-trade channel, mostly sustained by tourist activities (e.g., bars, hotels, and restaurants) as well as those more dependent on selling directly to consumers at the winery. All this led to a sharp decline in points of sale and local wine consumption in various wine-grow-ing destinations.Regarding the location of wineries, the pandemic had differentiated regional impacts at the national level because of both higher production volumes and collective recognition mechanisms (e.g., the tradition of high quality). The discrepancies at regional levels also affect-ed the resilience of firms, due to the influence of loca-tion on performance. Wineries tend to cluster in the same geographic area which affects their production capabilities. Therefore, while some regions have shown stronger resilience, others have struggled more during the pandemic also due to different levels of local constraints, suggesting that a firm ́s location might have influenced its economic resilience. Some agglomeration externalities develop naturally due to spatial proximity between wine producers. For instance, the performance of neighbouring wineries can encourage the diffusion of marketing-related externalities for the entire region.This poses additional considerations with implications for managers and, even more so, for regulating bodies. Geographical clusters in the Portuguese wine industry are highly directed to collective promotion in third countries and exploring regional tourism activities. Whilst such strategies have improved the position of the industry at an international level, there are a few more opportunities that this paper highlights, which, if taken, would make firms more resilient. These are par-ticularly relevant during a crisis caused by an exogenous shock. In this context, researchers have highlighted the importance of a firm’s resilience in mitigating the impacts caused by an exogenous shock such as a financial crisis, natural disaster, or pandemic. Previous research has informed that those firms that resist retaining busi-ness stability, particularly, throughout a disruption tend to sustain sales losses, reduced market share, and dimin-ished revenue [14]. In particular, small businesses, which represent most of the Portuguese wine industry, are defi-cient in several critical factors (e.g., knowledge, resources, or liquidity) that ensure business resiliency to implement the required adjustments necessary to endure, following a considerable economic shock [15]. Firms with lower debt ratios tend to be able to recover more quickly due to available resources to employ different strategies and control losses [16]. Therefore, the analysis of the economic performance of wineries is typically accomplished by examining the progress of financial indicators, such as the returns on assets (ROA) or other operational indicators, such as earnings before interest, taxes, depreciation, and amortizations (EBITDA). Despite the earlier efforts to investigate the economic impact of Covid-19 on the firm’s economic performance, there is a paucity of studies that analyze the real variation of sales during the pandemic, a gap this research seeks to fill by investigating the domes-tic wine sales of Portuguese wineries which have been particularly affected by the negative spike in sales in the on-trade sector comparing 2020 and 2021 to 2019, by as much as 45% and 53%, respectively. Portugal (4.6 mhl, -0.6% / 2020) reduced its wine consumption levels in 2020 and 2021, not only compared to 2019 but also to its previous five-year averages. Contrarily, the sale of wine through off-trade distribution channels (e.g., super-markets) in 2020 rose 6.4%, up to approximately 12 mil-lion litres, and 9.4% in 2021 compared to 2019, amount-ing to more than 17 million litres. On average total domestic demand witnessed a sharper decrease in value rather than volume in 2020 and 2021 in comparison to 2019, with a difference of roughly 32 p.p. and 33 p.p., respectively. These indicators show that Portuguese wineries were deeply impacted by the effects of Covid-19, highlighting the importance of on-trade and direct-to-consumer channels which suffered the most during the pandemic, comparable to other Old World countries due to distancing measures and stringency of travel restrictions.This study ́s results can be extrapolated to Old World countries given the overall average dimension of companies, mostly comprised of small-to-medium size business structures, and highly fragmented. Also, the distribution system implemented by wineries to reach the market is associated with winery size and is highly correlated to geographic origin. This posits limitations in market positioning which relate to export intensity but underlines the importance of wine tourism, which has progressively become a significant revenue stream [27]. Moreover, Portugal embodies a typical mar-ket structure of monopolistic competition which tends to influence the level of differentiation of wineries, and business performance.In the case of winery losses due to the Covid-19 pandemic, analyzing changes in domestic sales losses provides a vision of how a short-term exogenous shock impacted the ability of a firm to reach new customer demand. In this research, the percentage change of a winery ́s sales is the economic variable, which was estimated to capture two pandemic time frames, (2020–2019 and 2021–2019), and which occurs as a fraction and per-centage, which from an econometric perspective, is not considered as a probabilistic outcome, but yet has ‘both two-corner solution outcomes and continuous outcomes in the interval [0, 1]’. Therefore, for the most part, traditional models are unsuitable for estimation. The method applied in this article offers a reliable estimator for the fractional response variable in the presence of a spatially lagged (explanatory) variable, that accounts for the interdependent relationships between neighbouring firms. According to, there is a lack of studies including spatial dependence in fractional models. As far as we are aware, no study of the wine industry has yet attempted to do so.In summary, this paper uses firm-level data to inves-tigate the Portuguese wine sector ́s economic resilience in the aftermath of the exogenous shock arising from Covid-19. To address the main aim of this research, two complementary issues have been dealt with: (a) to deter-mine the economic characteristics of firms that influ-enced their resilience in the aftermath of the Covid-19 waves in 2020 and 2021 and reflected in the fall of sales in the domestic market; (b) to analyze the previous issue using a fractional response model that combines the spa-tial/geographic dependence factor of wineries. Methodologically, this research applied a two-part fractional response model with spatial dependence, which allows overcoming, at the same time, two of the main drawbacks of the existing literature which are conditioning appropriate interpretations and policy rec-ommendations. First, the relevance and advantages of using appropriate fractional response models over other regression models, which are unable to cope with values in the interval [0, 1] and not with an excessive number of boundary values in the dependent variable. Second, the importance of including a spatially lagged term in the analysis to account for the role of the firm ́s geo-graphical location in economic performance. The combination of these two issues constitutes a methodological advancement in achieving robust findings that allow a better understanding of the firm ́s behaviour (specifically those in the wine sector), namely the propensity and intensity of firm-level economic resilience in the after-math of an exogenous shock triggered by Covid-19. This study provides important managerial implications for the resilience of wineries in facing a disrupted business environment impacted by an exogenous shock and improves management decision-making in a post-pandemic and recovery phase. Additionally, it provides new scientific background on the estimation and utility of fractional response models.
DOI: https://doi.org/10.36253/wep-13917
Read Full Text: https://oaj.fupress.net/index.php/wep/article/view/13917
