CLOSURES – COSTS: The price of change

For producers, the decision to switch to an alternative type of closure is usually linked to wine quality. But what effect does it have on cost, asks Fionnuala Synnott

With so much emphasis placed on avoiding TCA, oxidation and reduction, it is hardly surprising that the commercial implications of swapping one type of closure for another have been lost in the closures debate. Wine producers’ first concern is to ensure the quality of the wine. George Fistonich of Villa Maria says his decision to swap from natural cork to screwcap was driven by “sheer, absolute frustration” with the high number of corked wines. “At tastings, we had to open two or three bottles to make sure that we could serve one that wasn’t tainted. We found that 8-10% of wines were faulty, while many were inconsistent or oxidised.”

For most producers, product loss is the main motivation behind switching to alternative closures. Retailers also play an important part in the decision-making process. Product loss is expensive for retailers, with some offering two new bottles to replace one faulty bottle. Franco Cocchiara, global wine coordinator at Guala Closures, says, “In order to avoid product loss, supermarkets are increasingly requesting that producers use screwcaps. Our customers tend to choose our product because they feel it is more reliable and maintains the wine quality better than natural cork. Our main concern is that the customer doesn’t return the bottle.”

Few producers are willing to admit to switching closure type solely on a cost basis, but David Pahl, vice president, sales and marketing for Zork, says, “We’re finding cost concerns among retailers and distributors. All wineries, be they large or small, are seeking to gain a competitive advantage over their peers.” Dean Bannister, commercial manager at Oeneo Closures, which produces DIAM, agrees and says, “Most of our customers in Australia and New Zealand are replacing natural cork with something cheaper and technically safer.”

There is no doubt, at least in Europe, that the low cost of synthetic closures is attractive to producers of high-volume, entry-level wine. Bannister says, “Synthetic corks tend to be used when price is a deciding factor.” But, according to Simon Waller, vice president of global sales at SupremeCorq, few companies are switching to synthetic closures based on cost alone and have to have another motivation for making the decision. He says, “Once the decision has been made, price becomes an issue”. Meanwhile, Mark Coleman at Neocork acknowledges that although cost is important, it is not the main driver behind the growth of the closure. He says, “Increasing numbers of producers are switching to synthetics and retailers are using them for their own-label wines. We have recorded a 35% increase in sales for the 2006 fiscal year. Europe is driving most of this growth.”

Of course, not everyone has decided to break away from natural cork. In fact, Carlos Dejesus, director of marketing and communications at Amorim, has noticed an increase in demand for quality cork. He says, “When alternative stoppers began six or seven years ago, it was difficult for people like us to provide cork that was free from TCA at an approachable price. But now, thanks to significant R&D into quality control measures, we can offer all the necessary security benefits no matter what grade the cork.” He adds, “Apart from in New Zealand, few companies have completely moved away from using cork. Large wineries often use natural cork as well as an alternative stopper. It is not as people predicted, science is not pushing out natural cork. Cork manufacturers still have an 83% share of the global closures market.”

Bottling out
In order to persuade wine producers to change their closures, manufacturers have to get past six key decision makers: the winemaker, the logistics manager, the wine marketer, the retailer, the distributor and the consumer. Once the winemaker has decided which closure is best suited to the wine, it is down to the logistics team to check that the new closure is technically safe, and, in the case of screwcaps and alternatives such as Zork, how feasible it is to apply new technology to the bottling line. Bannister explains, “Bottling under screwcap is not a forgiving technology. If you don’t invest in the right equipment it can result in bottle variation or poor application.”

Dejesus says, “For some wineries, the upfront cost of installing a new bottling line is a barrier to changing closure type.” But Cocchiara believes, “A small winery can buy a hand capping machine and produce some quality results. For just €5,000 you can buy a machine with all the safety features. The machinery for a simple line will cost €30,000-40,000, whereas a full line will cost around €700,000.” He adds, “Adapting the bottling line is not an issue for our clients. They probably already have some machinery that can be adapted.”

Of course, it all depends on the size of the winery. Carlos Serrano, export director at Viña Montes, says, “For us, the €30,000-40,000 required to add the machinery was not a significant investment. But for a small winery this kind of investment would make the fixed cost per bottle very high.”

After making the decision to switch to screwcap in 2001, Villa Maria bottled its 2000 vintage using the new closure. The company invested NZ$500,000 (around E268,000) in new bottling machinery, but the biggest cost was buying new bottles to fit the screwcaps. According to Simon Legge, marketing director, Europe, at Brown Forman, changing the bottle entails using a new glass mould, which costs around US$80,000. He says, “[In some cases] the cost will be amortised if you order 100,000 cases per year over three years, but you will have to pay the balance if sales don’t go well. There are also additional designer costs to be taken into consideration if you use embossed bottles.”

Changing closure type can also potentially help to speed up your bottling line. Waller explains, “Using synthetic corks can potentially speed up the bottling line because they don’t produce dust like cork and therefore don’t require cleaning, which means there is less downtime on the bottling line. The harder the closure, the more frequently you have to adjust the jaws of the machinery. With our closure you can bottle 30% more bottles than with other synthetic closures before you need to adjust the machinery.” Suzanne Alardin, communication and PR manager at Nomacorc, also sees speed as one of the advantages of using Nomacorc. “The speed of the bottling line can be increased using Nomacorc closures because the closures are consistent in dimension and performance thanks to the co-extrusion technology, do not produce any dust and do not crumble.”

Price pressure

Unit price is an important consideration for wine producers looking to change their closures. In the case of manufactured products the price varies greatly according to the volume. Natural cork cannot offer the same price flexibility because there are more fixed costs. Coleman says, “There is a lot of price pressure in Europe at the moment. Our prices tend to be based on the market and the volume required and range from €47 to €120, depending on the finishing and volume. Obviously, if someone orders three million closures per month they will get a better deal.”

This price flexibility, combined with the wide range of natural cork prices, makes it difficult to make a straight price comparison between the different closures currently available on the market. However, as a general rule, super-premium wines that need cellaring use the highest-quality natural cork. In the premium £5-£7.99 bracket there tends to be a variety of closures. Legge says, “Ten years ago it was all natural cork. But screwcap is winning over plastic in the premium area. Below £5 there’s a lot of plastic.”

Return on investment
As Fistonich explains, “The cost of bottling under screwcap is approximately 10% more than using natural cork. After you have factored in the cost of the bottle (NZ$482 per 1,000 for natural cork, NZ$610 for screwcap), the cost of the closure (NZ$186 per 1,000 cork stoppers, NZ$162 per 1,000 screwcaps) as well as the cost of the capsule (33 cents per 1,000), the total cost amounts to 70 cents for a bottle with a cork closure and 77 cents for a screwcap bottle.”

According to Fistonich, the first five years of using screwcap are more expensive than using cork. After the initial expense of the first five years, it is now cheaper to use screwcap. He explains, “We have seen some savings since
we moved to screwcap as we have had no wines returned. But we are still paying for the appreciation and interest on the initial investments. The loan will be amortised after 12 months so will be able to break even.”

DIAM’s Bannister says, “The price of natural cork varies considerably, from A$300 to A$1,000 per 1,000, depending on the grade. DIAM is more expensive (A$200-A$230 per 1,000) than a 1+1 cork (A$135-A$140 (top price) per 1,000), but is cheaper than a standard natural cork. At A$150 (top price), depending on print and configuration, screwcap is cheaper than DIAM. The cheapest type of closure is synthetic, then 1+1, followed by screwcap, DIAM and natural cork.” Meanwhile, according to Pahl, Zork operates at a premium of 10-20% to screwcaps and gives the same performance as premium cork at a lower price. He adds, “It is less than 50% of the cost of Vinilok. We are currently targeting the A$8-A$25 premium market, although one A$50 wine uses Zork.”

Risk management
Of all the commercial implications of changing closures, the hardest to quantify is consumer reaction. Oeneo’s Bannister says, “It was not an easy decision to stop selling natural cork and it cost us a lot of turnover. But there are too many problems associated with natural cork and we felt it was more important to focus on selling less risky products. In terms of profit and risk reduction [taking this decision] has made us a stronger company.”
He believes that all wineries will go through this risk assessment process in time. “At the moment, people are looking for a catch-all solution, but different wines are suited to different closures. Eventually, natural cork will go the way of the dinosaurs,” he states.

Public appeal
Fistonich adds, “There was a strong element of nervousness when we took this decision. But as a privately owned company we have to be completely focused on quality.” Villa Maria didn’t have any problems with consumer acceptance in the UK, but battled to get US distributors to go into screwcaps. “We were listed in 30 seafood restaurants and lost one listing of 1,000 cases as a result of switching to screwcap. However, we got the listing back 12 months later. In fact, many people who were initially sceptical have ended up becoming passionate supporters of ours.” Viña Montes has actually increased its sales as a direct result of switching to screwcap. Serrano explains, “One of our Australian clients said it would double its order from 12,500 cases to 25,000 if we used screwcap.”

Consumer reaction varies according to the market and the price bracket. Bannister adds, “The US is still really traditional; natural cork is used for premium wine and there is little screwcap or plastic. In South Africa, there is little screwcap and some plastic. The market is still dominated by natural cork, but we are making inroads. In the UK, retailers have a strong influence on what closures are used. Technical managers at UK retailers are a long way ahead of the rest of the world.”

There is room for all types of closure in today’s wine market. Coleman says, “Larger wineries use a range of closures: high-quality cork for wines that need ageing, and screwcap or synthetic closures for other brands. Producers are beginning to realise that there is no one silver bullet.” Zork’s Pahl thinks the debate has moved on from quality, “clients don’t expect failure nowadays and are looking for a closure that can add to their product in other ways.” He feels that wine industry has become myopic and has lost sight of what consumers want. He comments, “Younger wine consumers don’t have the pomposity of traditional wine drinkers when it comes to closures.”

It is clear that consumer perception of synthetic and screwcap closures is less of an issue now than it was five years ago. Cocchiara says, “There are no acceptance issues in the UK or France. In winemaking countries, producers tend to use screwcaps for export products but are more reluctant to use screwcaps in their domestic markets. This said, screwcaps are beginning to gain ground in Italy, and even Spain has some wines under screwcap.” Meanwhile, in countries that are relatively new to wine, such as India, the wine industry can make a complete transition to screwcap as consumers will never have known any different.

According to Coleman at Neocork, closure type is not important to most consumers. He says, “We think it’s a big deal in the industry but it doesn’t matter to the average consumer.” Bannister agrees and says, “The chances are that if someone is buying a wine for £5.99 then they won’t really be bothered about the type of closure as long as the wine tastes good.” How much importance is placed on the price of the closure largely depends on the price range targeted by the winery. Bannister says, “If you’re selling wines at £20 or £30, closure longevity is more important than cost. It also depends what audience you’re targeting.”

Although consumers may not have strong opinions when it comes to what kind of closure is used, quality and safety have to remain at the forefront of producers’ minds. However, in an industry with ever-dwindling margins, cost is a crucial consideration when deciding what closure to use.

From the industry’s perspective, the biggest advantage generated by using alternative closures (even though it is difficult to quantify) and having no bottles returned, is customer satisfaction. Viña Montes’ Serrano says, “It is important not to disappoint the consumer. No matter where the TCA comes from the consumer will always blame us if a wine is corked.”

© db February 2007