Dry Goods – The Bad And The Ugly

When bottling, sealing and labelling a bottle of wine it pays to compare costs as even the smallest difference will transform your bottom line, says Penny Boothman

This wasn’t an easy piece to research. Eyes glaze over and yawns are stifled when you start asking people about dry goods, and there are a surprising number who don’t know, don’t care or won’t comment. Which is strange, really. Labels, bottles, closures and cartons may be the last things you’re thinking about when you raise a glass to your lips, but it represents a significant slice of what we’re all paying for. This subject comes a close second to logistics in the competition for the least glamorous sector of the drinks industry, but these costs are fundamental to the profit potential of every brand. How do costs differ between popular and premium price points, and what does this mean for value?

There is also the question of the difference in costs between producing countries. All the wines end up on the same price point on the shelf, but can this really mean that the cost of production is equal all across the world? If new world producers have to pay more for their dry goods, and then ship the wines thousands of miles across the sea, how are they remaining so competitive against old world producers who are just across the channel? Firstly, we need to discover if there really is a difference in costs between the old and new worlds. It would stand to reason that a larger producer such as Australia, would have better access to a larger range of dry goods than a smaller producing country.

“In general, I believe it would be true to say that the costs in New Zealand are more than in other wine producing countries simply because we do not have the economies of scale,” says Fabian Yukich, national wineries manager, Villa Maria Estate. “For instance, the size of our country only supports one glass manufacturing plant which has a monopoly for wine bottles produced here. In Australia there a number of competing glass manufacturers and wine companies have opportunities to join buyers groups to bargain for the best deal, not only for glass but also other packaging materials.”

Direct Wines visited Chile specifically to investigate the quality and availability of dry goods and to analyse costs. Its findings were interesting. “It has changed considerably in the last decade as the Chilean wine industry has developed and been very successful in new markets. More suppliers have emerged and created competition and economies of scale,” says Anne Linder, general manager for wine, Direct Wines. “Quality has also increased as suppliers have been able to invest in technology, thereby sharing other advantages hitherto only available to other countries. Generally, not only has the quality, technology, and availability of all dry goods in Chile improved immeasurably in the last five years, but, more importantly, the costs are very competitive with the old world.”

Bottle monopoly

Direct Wines found that printing and labels are often cheaper in Chile than elsewhere, and there is very little difference in the costs of synthetic closures and natural cork, but although bottle prices are generally competitive, the choice of styles is somewhat restricted as there is only one principal bottle factory (Cristal Chile) in the country. Consequently, many wineries are swallowing higher unit costs and buying in bottles from Argentina and Italy in order to get more distinctive styles of glass.

Argentina’s slightly less than stable currency puts added pressure on producers as most dry goods have to be imported and costs depend largely on which currency they are purchased in. For example, natural corks have become more expensive as the euro has gathered strength against the American dollar, and the price of glass has increased 16% this year alone according to Federico Boxaca, of the Wines of Argentina Committee. “Any price fluctuation in the cost of dry goods has a significant impact, particularly at the £3.99-£4.99 price bracket,” he comments. This means that exchange rate fluctuations have a direct knock-on effect on profits if cost prices to importers and retailers are to be maintained.

Currency issues are, of course, entirely beyond the control of producers, but some importers have strategies in place to minimise their impact. “In the volume wine business it is true that a large part of your success or failure outside of the product itself will depend on how good a currency speculator you are,” explains Greg Wilkins, director, BrandPhoenix. “We actively transfer ‘best practice’ ideas across all of our supply base with regard to production costs. The worldwide market for labelling, capsules and screwcaps is highly competitive and to run the business properly you need to be constantly evaluating your costs and leveraging growth in your brands against cost of production to keep efficient. If producers are willing to listen and take advantage of cost information that is gathered globally they can improve their costings and profitability significantly.”

Shipping costs

Playing it smart can definitely reap rewards and this is prompting some producers and importers to take action to give the consumer the best price, and keep themselves a decent margin at the same time. Not paying for shipping glass around the world can help to mitigate other price rises. “Generally speaking, the new world costs up to 15% more than some old world countries. The variability of costs between regions, and shipping cost increases due to rising oil prices and world demand, have encouraged the practice of UK bottling of entry-level products,” explains Neville Harris, commercial manager, Stratford’s Wine Agencies. “Savings in transport costs from the new world regions by shipping wine in bulk can offset costs in other areas, as well as the reduction in CCT charges for UK-bottled products.” The competitive market for commercial price-point wines means that any saving is worth making. But there are other reasons for shifting one’s bottling operations.

“There is simply more diversity of glass production in Europe,” comments Ed Adams, Western Wines. “Glass prices are that bit cheaper, generally speaking, than in the new world and our take on it is that if you pack in the UK or in Europe it gives you a bit more scope in terms of creativity; you can spec-up the packaging for the same price. We’re doing it with bag-in-box at the moment but we are looking at bottling some wines over here as well. It’s undeniable that there are savings to be had, but we look at it as being able to improve the general package rather than taking an extra margin for ourselves. There are lots of different bottle weights, self-adhesive instead of wet-glue labels, longer corks, all these sort of things. Packing in Europe gives you the greater advantage; you’ve got a bit more leeway with the packaging.”

European advantage

This may seem like the perfect solution, but packaging costs in Europe have also been on the rise, and there are other threats to the European advantage of cheaper dry goods. “Packaging has improved dramatically in the last 10 years, but this has come at a price, and the cost of dry goods in proportion to the total cost of a bottle of wine has increased a lot, especially in the last five years,” comments Anne Burchett, MD, Castel UK. “The cost of dry goods is €0.30 to €0.40 for a basic product and can be twice that for a more sophisticated and premium product. The bottle is the most expensive packaging element at around €0.15 apiece.

Since 2000 glass manufacturers have apparently been putting French suppliers under huge pressure to accept price increases, with the justification that the rising cost of transport, energy and manpower under the French 35-hour working week law is driving up their costs.

However, not all costs are going through the roof. “Surprisingly enough, if you consider the rising cost of paper (+25% in 2002 alone), ink (+13% in 2002) and the impact of the 35-hour working week, the cost of labels has increased slower than the rate of inflation in the last five years,” says Burchett.

Fortunately for the trade, none of this seems to bother the consumer. Many will consider the look and feel of the pack, (and even in some cases whether it’s sealed with cork or screwcap) when making their purchase, and they may also take some of these points into account when judging the wine’s apparent quality, but rarely when they’re considering its value for money. Should they be? Costs predictably rise for higher value wines – for your premium wine to look like a premium wine you would have to bump up the cost of the pack a little. “A wine at £9.99 would have a higher packaging cost because you’ll go for a heavier weight bottle and all that,” says Adams. “Bottle prices can vary; you can easily pay double the standard entry-level bottle cost for a mid- or heavyweight bottle.”

However, the pricing of premium wines means that even if the dry goods are more expensive, they will still represent a lower percentage of the overall cost. “For Nobilo Wine Group wines which fall into the £5 retail bracket, such as our Five Fathoms Sauvignon Blanc, the cost of dry goods is around 33% of the purchase price,” explains Tom Maling, European business development manager, Nobilo Wine Group. “For wines in the £10 price bracket, such as our Nobilo Icon Sauvignon Blanc, our dry goods cost is around 25% of the total purchase price.”

A better deal

It would seem that the consumer is getting a better deal with more premium wines. As the battle at the lower price points continues, many producers are being forced to adopt a more professional approach to these costs, as anyone who doesn’t is simply damaging their own profits. Currency fluctuations and shipping issues mean that there’s more to dry goods than the hard items themselves, but it all forms part of the expense of getting a wine to shelf. These costs remain a vital part of the whole, and margins can be managed by smart sourcing and thinking outside the box – or carton, if you will. They’re dry, yes, but they’re also the goods.

ESTIMATED COSTS FROM AUSTRALIA

If you’re a large player, economies of scale can make it easy to get the most favourable price for dry goods, but premium or boutique wineries have to factor in the costs to their different wine ranges. “Keep in mind that the really large suppliers have special arrangements with suppliers so they would definitely get cheaper prices than we do, and costs vary hugely depending on the quantities you order,” explains winemaker Toby Barlow of Michelton Victoria. “And that doesn’t include setup costs for new designs on labels, etc.”

Bottles
Standard claret bottle: 40 cents
Riesling “Hock” bottle: 50 cents
Heavy “sommelier” bottle: AU$1.60

Screwcaps
Varies according to how many thousand you order, but for a standard colour with print, approximately 20 cents – can be as low as 15 cents if you order large volumes
Corks
Hand-selected 49mm: up to AU$1.10 per cork
Technical 2plus2 or 38mm lowest-grade can be as little as 10-15 cents

Capsules
PVC capsule: approximately 10 cents Tin capsule: 20 cents

Labels
Approximately 20 cents for standard labelling (front and back) but digitally worked special labels can be as much as AU$1 a set

Cartons
Hard to estimate an average, between 80 cents and up to AU$5 for a pre-print process.

Carton liners.
Half height: 0.15 cents Full height: 25 cents Heavy cardboard matchbox-style would be significantly more

ESTIMATED COSTS FROM ARGENTINA

Product finished with natural cork: Dry goods represent 48% of total cost Cork represents 27%
Product finished with twin-top natural cork:
Dry goods represent 37% of total cost Cork represents 12%
Product finished with Supreme Corq: Dry goods represent 33% of total cost Cork represents 6%
Product finished with screwcap: (Pechiney type, printed in four colours) Dry goods represent 35% of total cost Screwcap represents 9%

ESTIMATED COSTS FROM A UK AGENT / IMPORTER

Average dry goods costs for Brand Phoenix’s operations in South Africa, Chile, Argentina, France and Australia
Lightweight Bordeaux bottle: 13.3p Cork (synthetic): 4p Capsule: 1.3p Label: 3p Total: 21.6p
Lightweight Bordeaux bottle: 13.3p Screwcap: 6.5p Label: 3p Total: 22.8p