Many of you have inquired about the tariff situation and how it will impact our portfolio. Let’s take a look at what we know, the good news, the bad news, and our plan moving forward.
Any non-sparkling, non-flavored, non-fortified wine labeled 14% ABV or lower arriving into the USA in a package 2L in size or smaller from France, Spain, Germany, or the United Kingdom is now subject to a 25% tariff, to be enforced at port of entry by US Customs Agents until further notice. Now there are plenty of exclusions if we think about this – Most notably any/all Sparkling Wine, wine from France’s warm regions (think Rhone), 3L bag-in-box wine, Modern-style Rioja, and Ribera del Duero to name a few – None of these categories are impacted. Other European countries, notably Italy, Portugal, and Austria, are also NOT impacted. Keep in mind the rest of the world (USA, Argentina, Chile, Australia, New Zealand, etc) are obviously NOT impacted.
Global warming crosses paths with Trump policy again here, albeit in a twisted manner, as warm vintages (2018! 2019!) mean ABV’s that are 14.1%+ thus avoiding the tariff. Believe it or not we just shipped 2018 Sancerre with labs that checked in at over 14%! An unintended consequence will be the rise of the 14.1%+ “Cuvee Américain” – Our friends at Domaine Clos des Lumieres, for example, just selected all of their higher alcohol tanks for our upcoming Rosé and Rouge 750ml Cotes du Rhone bottlings, which keeps us tariff exempt at 14.1% and 14.2% ABV respectively! Clos Lumieres Rouge and Rosé in 3L Bag in Box format? Those versions will come from the lower ABV tanks! Silliness. We might as well have a laugh.
I know where your brain is going right now…What about the a legal 0.5% +/- margin of error that has traditionally been allowed by governing bodies on both sides of the pond? The thinking earlier this month was to have wineries pull up their lab analyses on all categorically impacted wines labeled 14% or below, and have them relabeled at 14.1% ABV if their labs came in at 13.6% or higher. Quick thinking importers encouraged this, and dozens went as far as resubmitting TTB label approval requests with new 14.1% ABV levels on anything that qualified this way. Unfortunately this strategy will not work – US Customs is running their own lab analyses against randomly selected 14.1%+ wines, and proceeding with a tariff on anything that shows American lab numbers of 14% or below.
The big losers? Burgundy, Beaujolais, Provence Rosé, most Loire, most lower tier Bordeaux, Southwest France, Alsace, Alsace, traditional Rioja, Rias Baixas, German Riesling, and Natural Wine (pretty much all Natural Wine…).
HERE IS THE BAD NEWS. Initially we hoped the issue would be resolved prior to the October 18th deadline, but as things stand today we see no resolution with nothing apparent in the works. There are a few different thoughts as to where this is going and when it will end:
Cyrus The Optimist: “Trump wants the tariffs to ‘sting’ but not ‘cripple’ and that they will quietly go away in early December once he has made his ‘point’ in Fox’s news cycles.” Colleen The Realist: “Tariffs will be reversed in about six months (this corresponds to the timing of the expected WTO resolution against Boeing subsidies, which is essentially a reverse case of the Airbus related WTO case that opened the door to the current US tariffs, which would in effect create opposite counter tariffs against American wine imported into Europe).” Zane The Pessimist: “Dammit we are stuck with these indefinitely, or at least as long as Trump is in office.” Mary The Alarmist: “Nooo….We will end up in an escalated trade war with Europe and that these could expand into additional categories and push tariffs as high as 100%.”
Our take at Grape Expectations is that we end up somewhere in the middle between Colleen and Zane.
HERE IS THE GOOD NEWS. Compared to most of our peers our business will be minimally impacted. Why? First off, we only have 200 items in the impacted categories out of the 1,200+ items we stock. Most importantly, we import almost all of the wines in the impacted categories directly. Why do tariffs make direct-importation a larger advantage than ever before? Let’s break out the calculator on an impacted bottle of cool-climate French wine we import, which also happens to be carried by a well-known national importer in the states we don’t operate in ourselves:
Let’s say you have a national importer bringing in a bottle of 13% ABV French wine from a well-known producer, who after exchange rate is paying the winery $4 USD per bottle. This company would pay roughly $1/bottle freight and tax, bringing the landed cost at their warehouse to $5 per bottle. This type of national importer has a standalone corporate office, a marketing budget, a National VP Sales, a team of Regional Sales Directors, and some Area Sales Managers for the major markets. Add to that the associated travel and entertainment that these employees bill on company cards, and all in all this means the company needs to add about a 25% margin to cover costs, plus 5% in additional margin so that they can end the year with the customary 5% net income that the Board of Directors expects their well-compensated CEO to generate. This means the importer sells to the distributor at 30% margin or $7.14/bottle. The distributor pays about $0.50/bottle in freight and state tax, takes its (very necessary to survive) 30% margin, and we are looking at a $11.19/btl wholesale price point for the retailer. The retailer takes a 30% margin and prices this wine at $15.99 for the consumer. The consumer happily buys this wine from coast to coast where it is a leader in it’s high-volume category.
If you add a 25% tariff to this, you end up with a landed cost of $6/bottle, an $8.57/bottle price to the distributor, a $13.29/btl price to the retailer, and an $18.99 price to the consumer! Yikes.
But, you ask, what if you are a distributor who imports most of their wine themselves? That you work at our humbly appointed office space and import this same exact wine? You would pay the same $4/bottle to the winery and the same $1/bottle freight and tax for a landed cost of $5 per bottle. You would add the customary 30% distributor margin plus, say, maybe 10% extra margin to account for the financing/additional warehousing footage associated with direct importing, and you would sell this bottle for $8.39 to the retailer who would sell it at $11.99 to the consumer. Cool.
If you add a 25% tariff to this and keep everything else the same, you’d end up with a $10.49 price to the retailer who would sell it at $14.99 to the consumer, which still leaves you below the EXISTING pre-tariff national retail price for this item and this is with zero help from the winery.
What if we were to tell you that these are exact numbers on one of the best selling wines in our portfolio?
You mean to say Grape Expectations tariff-impacted prices will the same as or better than much of the pre-tariff status quo? Yes – Our ability to source directly puts us at a relative advantage as our West Coast Distribution pricing on own-imported products is generally 25% lower than similar quality (or in some cases exactly the same) products carried by national importers.
On a macro level this situation will mean fewer products in market. Many products carried by “old-model” national importers, small and large, will simply price themselves out of the market with these tariffs, if they stick around.
WAIT AREN’T WE ALSO NATIONAL IMPORTERS NOW? What does this mean for our distributor partners? We set up our “National” arm with current market conditions in mind (i.e. that margins would continue to compress in our industry), and therefore we are able to operate our National Portfolio at razor thin margin compared to industry standards (10-15% out of CA, and sometimes as low as 2-3% in the case of volume DI orders). Our offices and warehouses are paid for, and we reject the idea of a large national “sales team” instead assuming that our distributor partners prefer to manage their own sales internally, with the above-mentioned compressed pricing model used in place of “ride withs” as the recipe for success.
THREE LARGE QUESTIONS REMAIN:
1) Will the volumes of our country’s larger national importers and retailers allow them to renegotiate prices with suppliers in this time of political chaos and end up at a competitive advantage compared to smaller firms? This sounds interesting, but thus far we don’t see that happening. We are seeing the opposite this week actually, with massive reservation cancellations from major importers and retailers. There just does not seem to be enough room to budge when you look at the realities of the 2019 vintage in many tariff impacted regions (Macon saw 40% lower yields in 2019, for example). Bordeaux will be an exception here, where yields were very high in 2019, with backstock also at record highs.
2) Will this sort of increasing populist wave continue to push downward pressure on the Euro for an even more favorable exchange rate? This is very possible – Think about Boris Johnson and his drive yesterday to push Brexit through by Halloween. A weaker Euro Zone economy will push exchange rates lower than the already delicious 1.13 rate, negating much of the tariff induced price pressure (remember, just a few years ago we were at a 1.35 rate).
3) Will bulk bottling European wine within the United States become a “thing”? It just might – Wine importers in China, for example, deal with their own autocracy and tariffs, and bulk bottling is common practice in China to skirt these. Bulk bottling is already the norm now here in the United States with grocery-category New Zealand Sauvignon Blanc due to the insane price of dry goods within New Zealand (i.e. it is cheaper to ship giant bladders from New Zealand to California and bottle stateside). Remember, anything crossing customs in a package 2L or larger is exempt! We will likely have a go at bulk bottling assuming the appellations in question allow it (some will and some won’t). Several of us here have done this already in the past.
HERE IS OUR PLAN. New shipments of many of our tariff impacted items will arrive stateside between now and the end of the year (we turn inventory fast and often over here). These items will see, on average, about a 15% increase in price effective November 1, with our hope being that we will be able to negotiate a 10% discount on most impacted items with most our winery partners, thus covering the 25% tariff in aggregate. As I mentioned earlier in many instances this means that our “new” price will still remain lower than what you’ve seen “pre-tariff” in states serviced by other companies on these same items. Have we been spoiled in Grape Expectations-land all these years? Yes. But use your imagination and plug some of your favorites into Wine-Searcher to see what we mean.
Items stocked from impacted areas by our national importer partners will remain at the same price through the end of the year as these are purchased from stock already in the USA, and have a more sensitive baseline price due to the national importer-related margin economics mentioned earlier. It is important to note that none of this talk is intended to implicate our fine partners on the importer side – The importers we do work with (it is a short list) are firms who share our lean philosophy, bring us wines at sensational value, and we project similar 15% increases on their items as they negotiate pricing with their suppliers and receive new loads from Europe Q1.
Hopefully this clarifies the subject for you a bit. Here is to living large without tariff-related anxiety and to a strong finish to 2019.