"Short supplies may be changing the face of the bulk wine market"

Wednesday February 14 2018 by Sharon Nagel

Rafael Del Rey, director of Spain’s wine market observatory OEMV.Rafael Del Rey, director of Spain’s wine market observatory OEMV. - Photo credit : DR
This year’s scarcity of wine is having a knock-on effect on pricing across the major producer countries, but it is also generating new opportunities, particularly for trading up. Rafael del Rey, director of Spain’s wine market observatory OEMV discusses the key aspects of this year’s marketing campaign.

How would you describe the bulk wine market this year?

Probably the most important issue this year is the scarcity of wine following the low harvest in the top producer countries, and therefore the knock-on effect on prices on the supply side and how they will be reflected in the market over the coming months. The trouble with the 2017 harvest is that virtually nobody has enough wine so shortages cannot be overcome by blending. It’s true that Portugal perhaps has a little more wine and parts of Germany are all right but in general terms, there is scarcity all around.


Would you describe the situation as favourable for the wine industry in general and Spain in particular?

It depends on how the markets react. One year of shortage is not that big a problem. You still have wines from previous harvests and we will have wine from the next harvest. History has shown us that whenever you have two subsequent harvests, that are either very low, or very high, that’s when the problems start. So this year could become an issue if 2018 has a similarly short crop. Based on the information we have now, which is relative scarcity compensated a little by relatively large stocks at the beginning of the agricultural year, the problem is not that big. Could it be an opportunity? Yes, particularly for Spain where there is an obsession with generic wines and generating large volume sales. This is a key problem for the Spanish wine industry. Considering there is no excess supply, it is a good opportunity to replace some of the wines and look for the best clients to generate more value, provided that is part of a medium to long-term strategy. If it is just a one-year phenomenon, it probably will not offer that much of an opportunity.


Do you think it offers a realistic opportunity for premiumisation for the bulk industry or is that just wishful thinking?

Definitely it could be an opportunity for premiumisation. When you have a shortage situation, you need to make a better selection of your trading opportunities. Average prices are normally up. There are some markets and some clients that you cannot reach because of the prices and scarcity. Those are the rules of supply and demand. But again, the opportunity for premiumisation can only be seized as part of a strategy. It is not only about prices, it is also about the quality of the wines, the type of consumers you are selling to, the image of your wine and the services you provide. These all go hand in hand with prices.


What is the stock situation in Spain?

At the end of July, we had more stocks than we had at the same time in 2016. They were a little below the last ten-year average but higher than the previous year. There is wine around. Obviously the supply situation is a combination of the harvest, stocks and imports. The problem this year is that imports cannot really be increased.


Spanish wine producers talk of a 30/40% increase in prices this year whereas buyers say prices are doubling.  What’s the truth?

It’s quite a delicate issue. The truth is probably an average of both. Depending on the wines, experts are talking of a 55-60% increase. But we need to know whether they are talking about the same wines as the previous year – sometimes they are, sometimes they are not.


Italian buyers are coming to Spain for wine. Do we know how much and what they are buying?

What we do know is that in August, September and probably October, a lot of movement was for previously contracted wines and was delivered during those three months at prior prices, agreed upon before the harvest. The activity is for 2016 wines and export figures for these three months will probably be quite high. The point is, what will exports for 2017 wines be at current prices during the coming months. One of the things that will happen is that the bulk wine trade among producer countries will probably decline for two reasons. Firstly because when prices go up, buying cheap wine from other countries is not such a profitable business - it’s difficult to find cheap wine. Secondly, when there is relative scarcity, producers look for better opportunities and these opportunities are better in final consumer countries than in producer countries. So the shortage may affect low price bulk trade among producers more deeply. That doesn’t mean there won’t be any exports between Spain, France, Italy, Germany, Portugal etc. There will, but they will probably be lower than in previous years.


Do you think the reduction in trade between producer countries will be a long-term trend?

Yes I do. Another reason for this is that producers will learn how to sell their wines better. There is a process of learning. The easiest thing is to sell your wine to agents who are buying it for other producers in say France or Italy. When you start looking for better marketing opportunities, you consider bottling some of the wines, changing the style, looking for better prices, revenues and new clients. In the long run, as a result of the learning process, that part of the bulk trade among producers will be reduced. The other part of the bulk wine trade, to final consumer countries, will probably increase.


Do we know why bulk seems to have plateaud in volume at the moment?

Bulk seems to be very stable in volume terms and this has a lot to do with supply equilibrium or even shortage. Obviously when the quantity of wine available is low, the worst affected is the lowest quality. Whether the current volume stability continues will very much depend on harvest conditions in 2018, and a key factor in this is water. Water is an issue everywhere, in Europe of course but also in the Southern Hemisphere. Total revenues will depend on which is the larger of the two – either the increase in the trade of bulk wine to final consumer countries, or the decrease in the bulk wine trade among producers. Which one will be bigger? I think total revenue in the future will increase very slowly.


Will the switch towards greater trade with end consumer countries lead to a change in the type of wines being transported in bulk?

Probably. Bulk is only a way of shipping wine and therefore this change may also depend on the technology for those shipments. There is a drive to be more competitive in the marketplace but also to be more environmentally friendly. For both, bulk is a very good way of shipping all types of wines. Some wines, of course, will never be shipped in bulk: premium wines in glass bottles that have been aged in the winery, for instance. But many others could easily be shipped in bulk and bottled at destination. Who is bottling the wine, in which market and how it is distributed, will be key factors in analysing how the bulk trade may evolve. A similar situation arose a few years ago with boxed wines – were they simply containers for low quality wines? Not at all. It all depends on the market and consumers and the way different consumers perceive the wine. Some high quality wines are sold in boxes in certain countries. The same may happen with bulk shipments.


You mention water as a key factor - can you elaborate on its impact on the supply side?

Irrigation has already been widely extended in Spain. But there are different ways of approaching irrigation. A lot of money has been invested in converting vineyards. We know that you don’t need huge quantities of water to produce good quality wine, rather the efficiency in the way it is used is essential. Depending on how tough the situation remains in terms of water supply, the varietal is important and needs to be looked at. But the underlying issue is the move towards higher quality wines with yields of 8-12,000 kg per hectare rather than low-quality, high-yield wines that require more water. The scarcity of water and more efficient use of water will be factored into the process of premiumisation of Spanish wines in the international bulk market.


Do you think western European bulk producers may move away from entry-level wines and be replaced by Eastern European countries?

It’s an absolutely natural progression. Everyone tries to get the most out of their trade and their commercial relations. Everyone tries to upgrade their opportunities, clients, types of wine etc to get better revenues and be more profitable. The further you go up the ladder, the bigger the hole you leave for someone else. A while ago, I made a comparison between Spain and Italy in the international wine trade, which threw up some very interesting issues. In 2000, the share of Italian bulk wines was bigger than the share of Spanish bulk wines. Italy had 58% of its exports in bulk. Most of the wine Italy was selling in bulk was being shipped to Germany and France. In just three years, from 2000-2003/4, Italy started reducing bulk sales to France and low-priced wine shipments to similar countries, it stayed in Germany, but reduced bulk wines to less than half. Why? Because the Italians found better opportunities for selling their wines and they took advantage of them. When Italy left the French market, Spain stepped in. Before Italy, the position was probably held by countries like Algeria. When Spain finds other clients at better prices and greater profitability in different countries, it will probably step out of the French market and other countries will step in. At the end of the day, everyone will be happy and will be evolving their markets.


How do you see the next few months for bulk wine sales?

Complicated, for everybody. The key issue at the moment is how markets will react to the shortage and to the increase in prices at the supply level. To what extent will increases on the supply side be passed on to prices for the end consumer? Probably not to the same extent because end consumers don’t understand much about what has happened on the supply side. They just want standard quality table wines at an inexpensive price and don’t normally accept high increases. Even if the price increase passed on to consumers is lower than that on the supply side, how will markets react? Will consumption drop? Will consumers continue to drink wine even though it has become more expensive? Will at least some of them switch to other drinks? I think we will continue to see the trend we have witnessed over the past few months which is lower volume sales but higher average prices. Obviously this very much depends on the harvest in the southern Hemisphere, and subsequently the next harvest in the northern Hemisphere. We will get an initial idea around February/March and then in May, we may have certain projections about the harvest in the northern Hemisphere. Price is a very efficient way of achieving balance in the market – if you increase prices, you reduce consumption. The ultimate aim is not to increase them so much so that you lose too many consumers. The volatility in pricing in producer countries shows that wine is a supply-driven rather than a demand-driven sector. It is important for the wine sector in general to increasingly consider the opinions and characteristics of the different consumers and be more demand-driven, even though as an agricultural product, we cannot control climate which is what affects supply.


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