Major economic issues at the center of wine supply chain entrepreneurs’ attention

The “ProWein Business Report 2022”: “Out of the crisis - The current situation of the International wine sector”, is the survey that the Geisenheim University curated, involving 2.500 industry professionals — small and large companies, cooperatives, exporters, importers, retailers, and restaurateurs — from all over the world. The results have clearly shown that their main concern is essentially the major economic issues, and, according to them, these are the main challenges and threats that the wine supply chain will face in 2023: cost growth (85%); disruption along the supply chain (66%); global economic recession (55%); climate change (40%); International trade wars (39%); low profitability in the wine industry ( 38%); anti-alcohol health policies (32%); new regulations aimed at protecting the environment (32%); drop in wine consumption (30%); currency volatility (27%); Covid-19 (23%); and demand for no wine and low alcohol (16%).
Therefore, expectations for 2023 are generally negative. Among small companies, the balance between optimists and pessimists is decidedly in favor of the latter (-20), the large companies are exactly half and half, and Cooperatives are also strongly negative(-19). The good news, at least on the domestic front, is that trust is higher among Italian companies (a balance of +5), compared to all of its other European competitors: France (-11), Spain (0) and Germany (-36). However, expectations are generally decreasing everywhere compared to 2022. Furthermore, over the past few years, only in 2021, in the midst of the Covid-19 Pandemic, did similar pessimism prevail. Confidence is declining also commercially, where the balance between optimists and pessimists is slightly better, among exporters (+10) as well as among importers (+18). But, it gets even worse from the trade point of view, wholesalers (+9), specialist retailers (+1) and on-trade (-6).
It is easy to imagine that what weighs heavily on the balance sheets of wine producers, is energy costs. Twenty percent of companies indicated they had “very strong” effects, 42% “strong” effects, 34% indicated “medium” and just 4% indicated “minor” effects. Energy costs, which trade also pays have a “very strong” or “strong” impact for 43% of companies. The direct effect, therefore, is that 66% of the companies in the wine supply chain said their financial statements, even though declining, will still be in positive territory in 2023. Instead, 14% said they will show losses, although, in any case, their losses will be amortizable, thanks to reserves they have set aside, while 7% said the situation is risky and could turn out to be critical. The companies’ immediate response to this increase in production costs is price adjustments (68%), but it is not the only one. The focus is also on energy savings along the supply chain (59%), investments in renewable energies ( 41%), stopping some productions (11%), transition to different forms of energy (8%) and reducing working hours (7%). In this context, only 24% of companies in the wine supply chain believe that the energy crisis can be resolved in 2023, while 37% think that there will be a solution only in 2024.
Another critical issue that we have see concerns transportation and the supply chain. In 2022, 79% encountered problems with transportation and logistics, and 88% had difficulties related to availability of materials. The bad news also includes the sharp increase in prices of goods and containers (81%), delays in deliveries (70%), reduced margins due to transportation costs (59%), customers not making purchases due to cost increases (29%), or uncertainties about delivery times (21%). Almost all producers faced a shortage of glass bottles, but the availability of stoppers and cardboard was also a problem.
Companies have therefore thought about increasing the stocks of their supplies, thereby further stimulating demand, and ending up having to adapt to changing conditions. The result is that companies have had to invest more time in coordinating supply chains, but the costs of invested capital for stocks of raw materials have also grown. Some contracts, instead, due precisely to the lack of bottles and other materials, have been lost. Regarding trade, 50% of merchants recorded a reduction in supplies on 5-25% of their assortment, causing them to switch to other products and increase stocks, thereby cutting off some producers from the supply chain. Only 27% of companies in the wine supply chain believe that problems related to transportation and the supply chain will be resolved in 2023, while 54% say they will have to wait until 2024 for a solution.
How are companies reacting to the economic crisis? The first objective is cost reduction (60%), then the search for new markets (57%), adapting to the offer of market trends (46%), reducing investments (36%), focusing on local markets (31%), focusing on the strongest brands (29%), focusing on local products (28%), investing in innovative products (27%), focusing on the entry level range (17%) and laying off staff (4%). Consumers, on the other hand, are expected to react to the crisis by continuing to drink wine, but to a lesser extent, and spending less, which always happens in an economic recession phase. Instead, fine wines will be impacted much less than the mid-range priced wines.
Moreover, the appeal of the various countries of origin of wine on the markets in 2023 is very interesting. In the USA, Italy is ahead of everyone, followed by France, Spain, the USA itself, Argentina and Portugal. In Canada, France, Italy and Spain are all on the same level, while in Brazil, Portugal is at the top, ahead of Argentina, Chile, Spain, France and Italy. Germany turns out to be independent, and prefers German wines to the wines of Italy, France and Spain, in that order of preference, which is the same as in Austria, but of course, Austrian wines are in first place. In Switzerland, somewhat surprisingly, Spanish wines are the most attractive, followed by Italian and French wines. In Great Britain, the wines of South Africa lead the way, followed by France, Argentina and Italy. In Ireland - which ended up in the crossfire of the Mediterranean countries because of their decision to put health warnings on the labels - Italian wine is the favorite, followed by wines from Spain and Germany. In Italy, National productions win hands down, ahead of France and Germany.
Continuing on, in Holland the producers that attract the importers and traders’ interest are those from Italy, Spain and France, which is the same in Belgium, while in the Czech Republic the preferences are wines from France, Germany and Italy. In Northern Europe, Sweden votes for French, Spanish and Italian wines, Denmark for Italian, French and German wines, Finland prefers wines from Italy, Spain and Germany, and in Norway, productions from France, Italy and Germany.
Reversing the situation, Italian wine producers have indicated their top ten markets to focus on in 2023: the USA, Canada, Switzerland, China, Japan, South Korea, Germany, Great Britain, Singapore and Sweden, reducing the role of two main outlets in Europe - the UK and Germany - where growth is slowing down sharply, leaving more and more room to the fears of a recession that appears unavoidable. Our number one competitors, the French, will focus on the USA, Japan, Canada, Singapore, UK, Germany, South Korea, Switzerland, Belgium and Denmark, while the Spanish producers look to the USA, Germany, Japan, Canada, Holland, UK, Switzerland, Denmark, Belgium and Poland.