Supply chain jam and rising production costs triggered by the COVID-19 pandemic and Ukraine War are crippling dry goods supplies and adding pressure to the wine industry and end consumers.
The global pandemic over the past two years have triggered a chain of disruptions to the wine industry including backlog of shipments, lack of containers, rising costs and port disruptions, as we have reported.
While the world is now entering a post-pandemic era with relaxed restrictions in most western countries, Russian invasion of Ukraine since February this year has threatened the world’s economy with soaring gas prices.
What worries the wine industry is that some of the dry goods industries, glassmaking for instance, are highly dependent on gas to fire their production ovens and factories.
The price of natural gas in Europe recorded an all-time high of €345 per megawatt-hour (MWh) on 7 March. This price has stayed in a range of €15 to 25 per MWh for a decade, before the European gas market was hit by a combination of mishaps since March 2021, according to the business news site Quartz.
In the first quarter of 2022, gas supplies from Russia dropped 30% from the same period in 2021.
Meanwhile, the dry goods industries are also facing reduced production capacities and labour shortages after the pandemic. The imbalanced demand and supply of dry goods is expected to drive up the cost of bottled wines and spirits in the end.
“We are unfortunately totally aware about the goods shortage that is affecting the wine industry and in Franciacorta a lot of wineries are facing this issue as well,” Francesca Zocchi, Senior Public Relations and Communication Manager from Consorzio Franciacorta, said.
The Consorzio represents about 100 wine growers in Franciacorta, Italy’s premium sparkling wine region. However, she declined to delve into details of the impacts on individual wineries as a policy for the wine body.
Frédéric Pacaut, Managing Director of French wine group Badet Clement, saw the price increase for a wide range of dry goods including bottles, corks, capsules, cases, labels and pallets.
“There are other inflation factors besides the energy cost. For example, there is a severe shortage on paper pulp that affects cartons and labels,” Pacaut said.
The price increase came after their low harvest in 2021 after suffering from April spring frost, which strained their profit margins. However Pacaut believes the increase rate is “a much lesser inflation rate on wine than on lots of other expenses” such as electricity bills, gasoline, bottled water and more.
“We have seen an increase of around 15% to 20% on glass and corks and 30% on wooden cases which in case of the latter is quite difficult to understand,” Maarten Leereveld, Commercial Director from the Tuscany-based wine and spirits company ColleMassari, told Vino Joy News. The company owns wineries including Grattamacco in Bolgheri and Tenuta San Giorgio and Pggio di Sotto in Montalcino.
“Prices will increase from 5 to 10% on the final product as we try not to impact too much our final price and look at the longer term,” Leereveld said. “I expect the consequences for the customers to be double in general, sometimes triple, meaning €0.20 to 0.90 per bottle.”
Eric Citone, CEO of Bruni Glass, a division of the premium glass packaging supplier Berlin Packaging, said the price spike may squeeze out low-end bottlers and producers.
Using Cognac as an example, he said in an interview with Spirits Selection: “On a bottle of Cognac at €2000, a 60% increase in the price of the bottle has little influence. On spirits at very tight prices, this is no longer the same story. The impact is huge.”
Undersized production capacities
When the pandemic started, the dry goods industries saw a significant drop in demand. According to Eric Citone from Bruni Glass, some glassmakers have stopped their production lines under low demands.
The Ukraine war-induced energy crisis promoted customers to overstock, which in turn worsened the shortage issue.
However, restarting ovens requires about two-month time, which means not all manufacturers can keep up with recovering demands at once.
Given the delay, wineries are realigning production and plan ahead. “Lead times are around 3 to 4 months which is a big issue but we are now aligning to these lead times and just need to prepare upfront the necessities,” Leereveld from ColleMassari group said.
Some manufacturers also face the problem of labor shortage after COVID-19. Economists say ageing demographics, border controls and immigration limits, as well as demands for better working arrangements can be the reasons behind the lack of workers, according to CNBC’s report.
The shortage of dry goods also revealed the lack of investment and new talents in these industries. Citone shared that the glass sector requires long-term costly investments and skills, but now it is lacking new capacities and staff training, “Glass is a special profession. Who is going to take this risk today?” He raised the concern.
Under a combination of other challenges such as digitalization and reduction of packaging, he thinks the glass sector is “undersized” to meet the new demand arising after COVID-19.
For now, Frédéric Pacaut from Badet Clement said there is no other way but to endure the soaring accumulative cost, “There is actually no way to mitigate the impact significantly. There is currently no room for negotiation with the dry-goods suppliers, who have reduced their production capacities. Like many other colleagues, we want to continue to produce and deliver and for this, we need to pay more,” he said.
Citone expected the dry goods shortage to last for the next four to five months, “On the other hand, assess your needs carefully, buy what you need, without overstocking. If everyone acts like this, we can hopefully see a normal market within six, seven, eight months,” he said.