The global wine sector is facing significant disruptions in different links of the supply chain and there are increasing signs some of these changes are structural and will require strategic responses, according to a new Rabobank report.
In its latest Wine Quarterly report, Rabobank says, since the middle of 2021, at least five aspects of the global wine supply chain – agricultural production, freight, labour, geopolitics, and energy – have started to face significant disruption all at once, causing “headaches” for wineries around the world.
Rabobank Global Beverages Strategist Stephen Rannekleiv (pictured below) said while some of these disruptions had been driven by short-term cyclical factors and may see improvements in the near to medium term, unfortunately, others are starting to appear to be more structural in nature.
“As wineries grapple with so many disruptions, the immediate responses have been more tactical than strategic. This makes sense because it has not always been clear which challenges were short-term cyclical issues, and which changes were likely more structural in nature,” he said. “However, we would argue that energy prices and geopolitical factors are more structural in nature, and any ‘solutions’ moving forward should take them into account. We need to reassess supply chains with a fresh, creative perspective. Old assumptions that have formed the basis of the current operating model – like free trade, cheap fuel, and cheap freight – should be questioned. It is important to rethink how to thrive in a context where the rules of the game are different.”
The report says the five key factors challenging the sector are:
• Freight: Shipping rates for containers experienced exponential increases in 2021. This rise in freight costs – of 200 per cent or more in some cases – and sporadic shipping availability, has led to a dramatic increase in the cost of importing wine in some markets.
• Fuel: Brent Crude oil prices have risen 70 percent since March 2021. Natural gas prices in Europe have risen 550 percent over the same period. These rising fuel costs are hitting producers around the world and are felt all along the supply chain – from fertiliser costs, operating costs, transportation, and packaging. The vast majority of wine globally is sold in glass bottles, which is an energy-intensive operation. Packaging costs – of which glass is the largest component – can account for 12 to 35 percent of a winery’s cost of goods sold.
• Labour: The impact of rising labour costs is not just felt in the vineyard, but also in wine production, transportation and sales, with a bigger impact in some regions than others.
• Geopolitics: The direct impact of numerous geopolitical developments in recent years has caused volatility and disruptions in the global industry.
• Ag Production: In 2021, Europe had one of the lightest grape harvests in decades. In the US – the largest wine producer outside of Europe – the 2021 wine grape crop was below average. As a result, inventories are relatively tight, keeping upward pressure on bulk wine pricing in most regions.
Rannekleiv said the impact of this variety of disruptions is felt very differently by wineries in different regions or price segments. “Wineries in Europe have been hit to a much larger degree than other regions and European producers are taking the greatest brunt of rising energy costs,” he said. “For producers in Australia, geopolitical factors have had the greatest impact by far. In 2021, exports to China, their largest market, fell by 97 percent, after China imposed tariffs of 166 percent to 218 percent on imports of Australian wine.”
The report says pricing actions have been the “first and most obvious line of defence” by wineries to try to maintain margins. But as consumers face rising cost pressures for numerous basic staples, it says, other more structural and strategic responses may be worth considering. These could include complete rethinking of packaging; shifting more of the supply chain operations closer to the end consumer where possible to improve efficiency; and diversifying (of markets and/or sourcing) to help mitigate geopolitical risk.