In 2023, the cost of money for wine businesses has doubled. Eroding marginality

Falling consumption and the cost of raw materials, energy and transportation were the most obvious problems facing Italian wine businesses in 2023. But one of the least visible and heaviest difficulties, in an industry that generally works on low margins and often needs credit to invest, has been the cost of money, pushed up by inflation itself and the various interest rate increases decided by the ECB (European Central Bank), led by Christine Lagarde. With the burden of borrowing costs practically doubling in 2023 over 2022, and looking set to rise again significantly in 2024. So says an analysis, for WineNews, by Luca Castagnetti of the “Centro Studi Management DiVino”. In short, financial expenses, in 2023, grew by +82.8%, amounting to 125.7 million euros, with the proportion of revenues rising from 0.92% to 1.68%. And, in 2024, there could be a further increase of +33%, to over €305 million, and a revenue weight of 2.24%.

“We have analyzed all the Italian wine companies that have already filed, in these months, their 2023 financial statements, having closed their fiscal year in the months from June 2023 to September 2023: these are 181 wineries out of a total population of 900 wineries that report and have revenues over 1 million euros. The sample is significant”, Castagnetti explains, “as it represents revenues of 3.35 billion euros out of a total of 13.6 billion in the entire segment. The peculiarity of this sample is that 89% of it is composed of cooperatives (162 companies out of 181): companies that, unlike the srl and spa, often have their fiscal year not coinciding with the calendar year and therefore have already filed their financial statements closed by September 2023”.
On a general level, in 2023, the companies recorded a 3% increase in revenues (and, therefore, a loss of volume as the average price increase was more than 3%) and maintained their margins ranging from 4.5% to 5.1% ebitda. At the financial level, bank debts increased slightly (+3.83%), but financial expenses grew by 82.86%, bringing the ratio of financial costs to revenues from 0.64% in 2022 to 1.14% in 2023. “A delta of half a percentage point that is not little”, Castagnetti points out, “if we consider the overall marginality of the sample fluctuates between 4% and 5%. Inventories increase by 12.89 percent from 2022 and 22.54 percent from 2021, well above the inflationary impact. On the other hand, the values of accounts receivable and accounts payable remain within the average of the inflationary swing”.
Despite this, however, the study points out, investment has not stopped (at the expense of forecasts) and fixed assets have increased in the sample companies by more than 65 million euros, an increase of +3.5%. But this is no reason to let one’s guard down, because “the current global monetary policy environment is characterized by a phase of uncertainty and caution. The major central banks, including the U.S. Federal Reserve (Fed), are carefully focused on the balance between controlling inflation and supporting economic growth. Recently, the Fed”, Castagnetti explains, “decided to keep interest rates unchanged, despite inflationary pressures, to support a still fragile economic recovery following the impacts of the Covid-19 pandemic”. This decision reflects a cautious approach, Studio Idea by Management DiVino further points out, seeking to avoid shocks to the financial system while monitoring global and domestic economic developments. Indeed, the Fed said that “recent indicators suggest that economic activity has continued to expand. Inflation has slowed over the past year but remains elevated. There has been a lack of progress toward the 2% target in recent months. We do not expect that it will be appropriate to cut rates until we have more confidence about the trajectory of inflation toward the 2% target”. In the United States, reaching the 2% inflation target is proving more difficult than expected. To contain aggregate demand, the Fed will, therefore, have to keep rates at least unchanged and postpone the start of the rate cut cycle until June. This situation will certainly affect the ECB not so much in the timing of the start of the rate cut cycle, which everyone expects by June, but in the speed and magnitude of the cuts. And this, of course, will further impact the cost of money, which in turn falls on the economy and the wine sector. Higher interest rates clearly make credit more expensive, reducing the accessibility of financing for both consumers and businesses. This generally leads to a reduction in investment and consumer spending, with a slowdown in overall economic activity. And “today we are witnessing this slowdown, leading to a reduction in wine consumption by Italian and foreign consumers”, comments Castagnetti, who also highlights the more obvious effects of the high cost of money. Starting, of course, with those on investments.
“The rising cost of money makes it more expensive for companies to access the credit needed to finance capital investments such as purchasing new land, modernizing winemaking technologies or expanding storage infrastructure. Companies”, Castagnetti explains, “may decide to postpone or scale back these projects, limiting their ability to expand or improve production quality”. But there are also impacts on the issue of sustainability and innovation. Because “innovative projects, such as those related to environmental sustainability or the introduction of new, more efficient cultivation and production techniques, may require significant investment. A high cost of money can discourage these initiatives, undermining the company’s ability to remain competitive and respond to growing demands for sustainable practices”. Of course, as the data already show, the effects on companies’ operating costs are far from negligible. Starting with debt management.
“Companies with existing variable-rate loans will experience an increase in financing costs as interest rates rise. This increase translates into higher monthly or annual interest expenses, which can significantly erode profit margins. An increase in debt costs also can cause liquidity problems, especially for those companies operating on tight margins. This can limit the ability to cover day-to-day operating expenses such as wages, maintenance, and purchase of materials”. But financial risks also increase: “with higher financing costs, the risk of default increases”, Castagnetti further points out, “especially for companies that depend significantly on external financing for their operations. This can make companies less attractive in the eyes of investors and banks, potentially further limiting access to capital”. And there are also negative effects on the export front, which is worth more than half of tricolor wine sales. And this is because interest rate dynamics also affect the value of the euro against other currencies, impacting the competitiveness of Italian exports on the world market. “Simply put, the financial management of wine businesses needs to take a quantum leap. The presence of a large number of SMEs that are often unstructured and focused on other strategic aspects does not facilitate as much as objective”, Castagnetti adds in his analysis, which also considers strategies to mitigate the negative effects of the high cost of money.
“To cope with these impacts, wineries can adopt several strategies. Starting with investment. Investment plans”, Castagnetti explains, “should be driven by the competitive advantages directly related to them, the only ones that create the necessary conditions for their financial coverage. Other investments that respond to other logics and/or indirectly related to obvious competitive advantages could be postponed to times when the cost of money should decrease. In addition, with high interest rates the long-term value of real estate assets decreases and therefore their high value on corporate balance sheets could become difficult to sustain”.
But, as indeed many have done in recent months, at the corporate, and even private, level, work can also be done on debt restructuring. For example, negotiating more favorable financing terms, or converting variable-rate debt to fixed-rate debt to avoid future surprises. And one can, and should, “improve operational efficiency to reduce costs, for example by adopting technologies that improve productivity or reduce resource consumption. Wine companies that have control over the entire wine supply chain are favored in this regard”. “Last but not least”, as they say, work can be done on diversifying sources of income. For example, exploring new markets, especially abroad, or sales channels, such as online trading. All, of course, hoping for a reduction in the cost of money, which would help consumption, investment, and the lives of consumers and businesses.