Inflation, cost of money and slow consumption weigh on Italian wineries

Inflation is no longer running as fast as it did a few months ago, but it is still high and eroding the purchasing power of families, in Italy and around the world. The costs of raw materials, materials and energy are falling but remain high, and the interest rate hikes decided by the ECB in recent months have sent the cost of money and mortgages soaring. A perfect economic storm, impacting all sectors of the economy. Wine, of course, is included. With businesses, whether they are large structured companies, small labels of excellence, or large cooperative groups, coming to terms with shrinking margins and management models that need to be revised, not least in light of increasingly onerous and complicated access to credit. All with the awareness of a very difficult picture, but without panic, because the sector, despite everything, at least with its most virtuous realities, is solid and has been able, over the years, to face and overcome many crises. As emerges from the reflections of producers and managers of some of the most important companies in Italian wine, by economic value, size or blazon - such as Antinori, Caprai, Biondi-Santi, Frescobaldi, Angelini Wines & Estates, Planeta, Terre Cevico, Gruppo Italiano Vini (Giv) and San Michele Appiano - who were asked by WineNews how the current situation that sees, among other things, declining GDP (in Italy and elsewhere), consumption that is not running and interest rates raised several times by the ECB, which make it more difficult for everyone to access credit for liquidity and investment, are impacting business management. With a glimpse of a harvest that, by all forecasts, will be rather low in quantity.
Reflections that, as mentioned, start from a decidedly lacklustre economic picture, both Italian and global. According to an analysis by Alessandro Minello, professor of Business Systems Economics at Ca’ Foscari University in Venice, inflation, in one year, costs Italian families an average of 1,700 euros. While according to an analysis by the price comparison portal Facile.it, considering the current situation and futures on Euribor, the reference index for variable-rate mortgages, “with the rise in ECB rates, those who have subscribed to an average variable-rate mortgage in January 2022 have so far suffered an outlay of 60% more, a percentage that could reach 61% in December, and then drop to +57% in July 2024 compared to the initial instalment”. In addition, as an article in the “Wall Street Journal” points out, on a macroeconomic level, Europe, which remains the world’s most important area for wine consumption, after decades of growth, is getting poorer, and is also ageing as a population.
“The French are eating less foie gras and drinking less red wine. The Spanish are centring on olive oil. Finns are encouraged to use saunas on windy days when energy is cheaper. Across Germany, meat and milk consumption has fallen to its lowest level in three decades, and the once booming organic food market has collapsed. Italy’s Minister of Economic Development, Adolfo Urso, convened a crisis meeting in May on the prices of pasta, the country’s favourite staple food, after they rose by more than twice the national inflation rate”, wrote journalist Tom Fairless, in a piece in the world’s leading financial newspaper on July 17, where he pointed out that “adjusted for inflation and purchasing power, wages have fallen by 3% since 2019 in Germany, 3.5% in Italy and Spain, and 6% in Greece. Real wages in the United States increased by 6% over the same period, according to OECD data”.
Figures that, in their own way, summarize the complexity of the situation for households and businesses. In particular for those in the wine sector. A sector in which, as is well known, the marginality is not huge, with the exception of a few realities of absolute excellence, and in which investments, although very often co-financed with public funds such as those of the Psr or the Ocm Vino, require huge amounts of liquidity that often arrives from banks and which, therefore, now costs much more than before.
“The conjunctural situation is particular because after the post-Covid euphoria, there is now more reflection, as is normal, otherwise there was a risk of losing touch with reality - is the analysis of Renzo Cotarella, CEO of Marchesi Antinori, a reference reality, for prestige and as an entrepreneurial model, of Italian wine - certainly the increase in rates does not help and there is a bit of a slowdown in the industry in general. The wine season has been very difficult, the markets are precisely more reflective, and this is certainly not the best way to approach the harvest. But, in general, there are no great difficulties, at least in the area of ultra-premium wines, above 10-15 euros on the shelf, which is still doing quite well. It is the areas of less expensive wines that fear a major reduction in consumption. The wine sector in general is not showing signs of great distress, and in the face of a bit of a slowdown on 2022, there is also greater awareness in dealing with the situation. Interest rates are slowing investment, but there are also other aspects that are back to being manageable in the rebalancing of the market, such as energy costs, which after major increases in the past year, are pretty much back to normal, and that certainly helps wine. Which, however, does not sell itself, but requires a lot of work and knowing how to manage it”.
“What is happening is impacting companies, but above all our clients, who are backing down, faced with mortgages that may have doubled”, stresses Lamberto Frescobaldi, at the head of Marchesi Frescobaldi, a historic dynasty and reference reality of Italian wine, and president of Unione Italiana Vini (Uiv). “In the newspapers we read that seaside cities have raised prices, and that people are moving less or at least spending less, preferring to travel abroad. Art cities are the exception, and they are full of American tourists, but outside the situation changes. One data point out of all, however, on inflation: the cost of glass for bottles, which had skyrocketed, is now coming back, and glassworks are starting to discount. But with the skyrocketing cost of money, the ECB is holding back the economy, the companies with big shoulders are holding their own, but we have to think about our customers as well. Then there is the impact on banks, which if they continue to be forced to sell money at very high prices, they will not know how to do their business. Regarding the grape harvest, it is true that downy mildew and bad weather did a lot of damage that caught many unprepared, but quantitative not qualitative, and organized and equipped companies will bring home their grapes, less but of quality, speaking also as Frescobaldi”.
“Inflation is decreasing but not as fast as we expected, and this”, points out, however, Ettore Nicoletto, CEO of Angelini Wines & Estates, among the most important groups in Italian wine, owned by the Angelini family, at the head of the famous pharmaceutical group, “is having an impact on consumption and compressing demand. We see this especially in retail and in the modern channel. We have and had much more hope on the on-trade channel, on the off-trade, but as much as the first half of 2023 went well and partly made up for the lack of consumption in the modern channel, the vagaries of the weather in recent months have created uncomfortable situations that have impacted both tourism, especially domestic, and consumption in general, because less could be consumed outside at the tables of clubs and restaurants, exacerbating the picture of the domestic market, which is not at all positive. If we look abroad, the issues are always the same, inflation, very high-interest rates, operating costs that precisely as a result of rates and increases lead companies to streamline and become more efficient, and especially in distribution, in markets such as North America, to very violent destocking phenomena. Managing stocks”, Nicoletto goes on to explain, “costs more and more because the cost of money is much higher than last year, and the distribution companies that market are trying to keep stocks very low. In the U.S. market, the level of wine and spirits inventories is the highest in 10 years, so the system necessarily has to destocking to align with a demand that is proving to be very depressed. In summary, the domestic wine industry is facing a very different picture than in 2021-2022, in which we experienced a euphoric rebound, and in which today the economy is correcting itself and consumption is shrinking due precisely to inflation and rates. I believe that this will be a year of consolidation of the industry's achievements in recent years and that 2024, I am optimistic, will be a year in which supply costs will come down, at least for packaging materials, and inflation should come down, not to pre-pandemic levels but still acceptable, putting demand back on track. We only have one big question mark in Italy, which is the 2023 grape harvest from which, between vine diseases and weather events, we risk having a surprise, in the negative, from the production point of view with a very significant drop. Basically, in 2023, we have to hold on, reorganize and accept it as a year of correction and adjustment, preparing for a 2024 in recovery”.
“After 8 months it is now certain that 2023 has been a very difficult year, price increases in materials, energy, and the world economic situation have left us with few tools even to do promotion and investments”,explains Roberta Corrà, at the head of Gruppo Italiano Vini (Giv), a leader that brings together 15 wineries throughout Italy, but also of Italia del Vino Consorzio, a grouping of 25 companies worth a turnover of 1.6 billion euros, and 15% of Italian exports, “so we hope things will end better than they began. We have seen that on materials and energy there has still been an improvement, but consumption is dropping. Today resorting to credit is absolutely more complicated than it was a year ago. We have some very important challenges ahead of us, we hope to make a positive end of the year 2023 and a positive beginning 2024, we must already look at the first quarter of next year thinking about promotion and the first negotiations with international distribution. We need a turnaround, which net of all the technical issues requires a return to some optimism, which would serve to revive consumption, give more impetus to companies, which would have more energy and resources to invest, and in the long run we would get all the numbers back on track”.
If this is the view of the big companies, it does not change much the thinking of those at the helm of absolutely prestigious but smaller wineries, reflecting how times are not easy for anyone. “For the wine world, what is coming from the economy is not good news, and in particular for those who produce ageing wines, such as Brunello, Barolo or Sagrantino, which have rather long average ageing periods, on which the cost of money will be reflected, going to erode margins - according to Marco Caprai, at the helm of Arnaldo Caprai, a winery that has relaunched Sagrantino and the Montefalco territory in the world - inflation remains quite high, starting with gasoline for those who go on vacation, and many other goods that move accordingly. The ECB is trying to cool down the economy to bring down inflation, but this is adding to the discomfort, and leading to a new flare-up in prices such as fuel prices. We are not economists, but we have some doubts about these measures. Then there is the issue of what the government put on the plate for the industry to give up the increases, and consequently for the large-scale retail sector to do so as well. And in an era of the free market, eventually, the problem will fall on the companies. And in an era of a free market, eventually, the problem will fall on the companies. This season was supposed to bring big investments in agriculture, between Pnrr and other measures that the sector could access at this time, and instead, in the face of an enormity of resources made available, perhaps farms will not have credit to be able to make them. The situation is not the best, and this year’s harvest will be brought down on that, but of all the ills it may have, it could rebalance stocks, but it cannot be downy mildew that will stabilize the wine markets, we need a defined program”.
“At the market level, in the high end, we do not yet see any negative effect”, Giampiero Bertolini, CEO of Biondi-Santi, the “cradle” of Brunello di Montalcino, now owned by the French group Epi, of the Descours family, and which also owns Isole and Olena, in Chianti Classico, observes for his part. “For credit, in the medium term, the way we have dealt with the situation up to now has been to reduce any need for it, while until recently we have managed to have good fixed rates. On the trade side, in the coming months, from the signals that are already coming from countries like the U.S. and the U.K., we expect a slowdown for wines in the middle range, more than in the high range. For the moment we are quite wait-and-see, not negative, and we are staying at the window waiting to see how things go between now and October, and we are very cautious about what we will plan for next year because we expect the trend to change by the end of the year. Even assessing price increases as inflation would lead us to do is not easy to plan for right now. Increases that today we are absorbing and holding in our bellies, because you will not be able to make them as in the past. At least we will be able to cover inflation with prices, but then the market commands and we will have to figure out what happens. Like Biondi-Santi the product is allocated, and like Islands and Olena almost all of it is. From an analysis we have done on the wines of the world, starting with the great French wines in Live-ex, as early as October 2022 there is the first sign of a slowdown in growth, but it is not negative because they are settling back to the levels of past years”.
“We are not pessimistic. It’s certainly a time of higher rates, but it’s also a phase in which producers’ price increases have been somewhat digested by the system”, explains Alessio Planeta, CEO of Planeta, who marked the renaissance of Sicilian wine, “we worked for so many years in a low rate world, now we work in a high rate world so we have to review the way we act as entrepreneurs. It’s definitely not a bright moment, but it seems to me early to start worrying, because we can’t do it as soon as there is a small signal. Let’s see what happens after the fall. The world moves differently, there are markets that are still doing well, and others that are a little more tired, but in general, we are in line with last year’s growing sales, and we expect to finish the year that way. The harvest is not plentiful, we all know that, but there are good years and not-so-good years. And even if tourism slows down, it does so in an upward trend”.
Awareness of the difficulties, but no panic, also comes from the cooperative world.
“The economic-financial situation impacts wine and consumption in an important way, both in terms of overall volumes handled and types on the consumption front”, says Marco Nannetti, president of the Cevico group, a cooperative winery with its heart in Emilia Romagna, which represents 5,000 members and has just celebrated its 60th anniversary, “and inflation that has persisted for a year and a half now and has also touched double digits, combined with the increase in rates by the ECB, means less money in people’s pockets, and where possible wine is being given up, or the purchase postponed. On the corporate front in a well-structured reality like ours, the situation is manageable, but by making adjustments, which means changes to investment plans and on strategies with respect to financial hedging. Those who invoice hundreds of millions of euros clearly have significantly higher financial charges than in previous years, and that impacts the value of the grapes that we can then liquidate. We hope for a change as quickly as possible on the ECB’s economic-financial policies, knowing that the process of returning inflation is not simple and short, but long and articulated. However, we must start at least by freezing if not reducing interest rates. This is to allow those with normal families a more constant consumption of wine. In the horeca channel, this summer, even restaurant operators have been forced to raise prices, sometimes making access to private dining a problem for families with these costs, and therefore with effects on the supply chain more generally absolutely worrying and on the consumption front also of wine. The figures of the last few days of -30 per cent of Italian tourists in Italy speak for themselves, and they cannot be underestimated, but they should make us think”.
“We are halfway through the year, and for the moment we are only registering a very slight downturn”, says Hans Terzer, the winemaker and manager at the helm of the cooperative in San Michele Appiano, one of the stars of Alto Adige. “Looking to the future, on the harvest we are intervening as we do every year, going to thin out and decrease grapes where necessary. We have our margins and we continue to follow them, for any overproduction with us we don’t pay anything, our winery policy is very strict and our conferring members go all out. We will go forward as we always have, always giving a lot of weight to quality in the vineyard and rewarding it. I don’t think much will happen in the market, we are very established and even if we have a 2-3 point drop, we will survive. Looking at costs, glass has not decreased, slightly so are energy and packaging, while we have raised salaries. Working well, in short, the economic situation does not scare us. Certainly, there is not the euphoria that was felt a year ago, even in the tourism business at this time, and we have to be very careful not to do the wrong things, such as offering wines at bargain prices”.