Supply Chain Special – What’s the impact on wine?

Ordinarily, a European wine importer would not be delighted at a situation where it takes six months to ship wine from Napa. But Peter Mitchell MW, wine director of Laytons in the UK, was looking on the bright side. The half-year it had taken to get a container from the Pacific coast to the UK in the run-up to Christmas was, after all, an improvement. Earlier in 2021, the same run had taken nine months.

This, perhaps, is the business equivalent of long-COVID. If hospital trolleys on the street and deserted city centres were the early images of the pandemic, quietly closed businesses, rising prices and sclerotic logistical systems are its medium-term business legacy. Last year, one importer showed me his shipping-tracker app. On the screen were dozens of coded dots, each one a vast container ship berthed off the coast of California waiting for a slot. "That," they said, "is the problem. Right there."

Or, as one merchant told me last week: "We're importing products from one of the biggest brand owners in the world, and even they don’t know where things should be."

This is the 'Supply Chain Squeeze' – a drag on business, sales and profits that’s been alluded to by global business after global business over the last few weeks. For wine, it’s an issue right the way down the line, from viticulture and winemaking to packaging and getting products to market.

Two years after COVID-19 first appeared, the trade might have thought that the labour problem would have gone away by vintage 2022. Indeed, some production countries - such as South Africa - are little affected. However, the lack of international and interstate travel has complicated matters in Australia. Official sources suggest that it is "more difficult this year than last to find vintage workers" - a situation exacerbated by a condensed harvest. Accolade Wines, for one, has seen a ‘significant labour increase’.

Chile’s high COVID rates and (laudable) support measures for the poorest in society have made it more complicated to find labour - a situation that will not have been eased by the fact that the Omicron wave coincided with the run-up to this year's harvest in the country.

In most wine regions it’s still been possible to find pickers, but often wineries are having to pay more for them - and put in place expensive and time-consuming extra COVID safety measures as well. These labour cost pressures have been exacerbated further by pull-through from the market. Key wine styles such as Sauvignon Blanc are running low, following frost in both New Zealand and much of France last year. Consequently, demand for alternatives has increased dramatically.

This might be good news for the Cape’s Sauvignon producers, but it’s putting a big squeeze on price points.

Grape prices, of course, have volatility baked in. But, one of the striking factors of the post-COVID environment has been the huge increase in packaging materials. "There are massive issues with the costs of dry goods," said the export manager of one international wine group. "Price increases are anywhere between 8 and 14%."

The problem stems back to shutdowns of factories during the first COVID wave in 2020. Manufacturers of glass, capsules and cartons were often closed for weeks or months at a time. But, the global population continued to drink, and demand bounced back more quickly than expected.

Jon Smith, supply chain director at UK wine importer Enotria & Coe, describes it as a "bullwhip effect shooting thru the global supply chain", with misaligned products, relatively scarce labour and volatile demand leading to a cost spiral.

The most visible example of the supply chain squeeze, however, is shipping. The words "chaos", "carnage" and "lottery" come up repeatedly as soon as the subject is mentioned. COVID lockdowns have turned a slick global business into something with all the calm efficiency of an ants’ nest with the top kicked off.

Shipper Hillebrand estimates that in August last year, only 20% of deliveries between Asia and Northern Europe arrived on time. One head of bulk sourcing describes the situation as having been "horrendous".

The situation in terms of delivery times is better than six months ago, making planning possible at least, although fulfilment times are still not back to normal and pricing remains high. Shippers have already added surcharges to bottles and few are committing to figures more than three months ahead, making planning difficult.

Wine Australia estimates that container costs have more than doubled over the last 12 months - from AUD5,000 (US$3,550) to AUD10,000 per 40-foot container. Other sources, meanwhile, point out that it’s not so long ago that the cost was AUD2,500 – a fourfold increase in as many years.

"There’s an underlying level of inflation," says Jon Smith, "and whilst slowing, it’s not stopped. At present, there’s more demand than supply, so the economics say cost inflation is here for a while. That outlook isn’t likely to change significantly until more ships are built or demand settles - both of which could take 18 months."

At the time of writing, the Eurozone has hit a record 5.2% inflation. For most of the last 20 years, it’s been around 1%. Add all this together and it’s clear that while the early stages of the 'Supply Chain Squeeze' were typified by empty shelves and non-fulfilment of orders, the next 12 months are going to be about higher prices.

"Anything that you can think of that contributes to the cost of a bottle of wine - the bottle, the capsule, the energy to power the plants, the shipping - you’re talking almost double-digit increases," said the export manager at one large wine producer.

Those I’ve spoken to estimate the impact of these increases on costs as being between EUR0.30 (US$0.34) and EUR0.40 per bottle. By the time this is translated into retail prices, bottle prices could be going up by as much as EUR0.50 to EUR1.00.

Price points that have been chipped away at for five or ten years could simply be blown to pieces.

As the MD of one UK importer put it: "The GBP4.99 (US$6.75) price point will be gone." The same story is likely to be repeated across the world. It’s bad news for consumers, but it’s bad news for the trade too - particularly for businesses calibrated on big volumes, fast turnover and slim margins.

At the end of January, the big German bulk bottler, Tophi, went under. They may not be the last.