Recent news reports indicate that the US and EU may be nearing a trade deal that would impose a 15% tariff on EU goods entering the US. A few reports suggest that Spirits, and possibly wine, might be excluded from these tariffs. This means that the uncertainty continues.
Much work has been done across the industry on how individual brands will address tariffs. Understanding the impact on volume sales due to price changes is challenging to calculate. The below assumes that a 15% tariff is imposed on EU wines. The wine category can be described as:
- Extremely fragmented. TTB approves over 100,000 wine labels a year. Labels only need to be submitted for new products or labels that have material changes. This implies that there are likely between 300,000 and 400,000 wines available in the US at any given time.
- There are no must-have brands in the Wine category. When examining the back bar in a restaurant, one will find a few brands that are commonly featured, such as Jack Daniel’s and Tito’s, among others. When one looks at the Wine List, there are no brands with distribution anywhere near that of key Spirits brands.
- The key determinant of the impact of price changes is not the consumer, but rather the market. In the Off-Premise, the buyer will make decisions on continued distribution, frequency of promotions, or displays. In the On-Premise, the buyer has 1000’s of options for substitution. They can easily make decisions about alternative products to maintain a price point for the consumer while maintaining their margins.
BW166 has archived wine scan data for almost twenty years. We have examined scan data from food stores to estimate the volume impact of price changes. Food store data was used, as we have the largest archive of food store data. In addition, most food store data is sourced from actual scan data as opposed to sample store data extrapolated to a market.
- Data from 2012 to present.
- Reviewed price changes and volume changes for each SKU included.
- Only included SKUs that sold 10,000 9L cases in the year evaluated. This resulted in a dataset of just over 4,000 individual data points.
- Only table wines priced between $10.00 and $50.00 per 750ml equivalent were included.
The result is shown in the following scatter diagram. Most items have not experienced a material price change during the period. This results in a mass of data at the center of the chart.
The black line represents a linear regression of the percent volume impact based on the price change. Given the fragmentation of the Wine segment, one cannot definitively say that a specific price change will deliver a particular percentage change in volume. The analysis provides the directional risk.
Based on the directional risk, the table below indicates the binary choice an EU wine producer may face between absorbing the tariff or passing it on to the market. Certain assumptions have been made, including:
- An item selling for $20.00, per 750ml wine bottle.
- Assumes an annual volume of 5,000 cases, although the results are proportional depending on actual volumes.
- Assumes retailer margins of 33%, distributor margins of 25%, and importer margins of 25%. These margin rates will vary significantly for multiple reasons.
- Freight, tax, and duty are assumed to be $10.00 per 9L equivalent case, may be understated depending on whether the product is brought in D.I. versus being warehoused in the US.
- The analysis examines the gross profit margins of two different producers, at 50% and 25%. These rates will vary significantly.
- For domestic margins, we have assumed that 100% of the volume is sold Off-Premise. The domestic margin will be higher for the portion sold On-Premise.
The table shows the following:
- In this model, the tariff will be $12.38 per 9L case. If 100% of the tariff is passed on, the retail price will increase to $22.69 per bottle.
- Using the regression line above, the $2.69 price increase for a bottle will result in a 52% decline in volume. This is a directional result; however, the outcome may vary.
- If the producer has a 50% gross profit margin:
- Passing the tariff on will result in a theoretical 52% reduction in gross profit, or from $206K to $99K (52% decline). The producer will need to decide what to do with the existing inventory. Additionally, the margins may be reduced due to the need to allocate fixed overhead across fewer cases.
- If the producer absorbs the tariff, the gross profit margin will decline to 43%. Total gross profits will decrease from $206K to $152K (26% decline).
- The result is better than passing on the tariff, but the 26% drop in gross profit may cause the producer to transition from a profitable entity to a loss-making company.
- If the producer has a 25% gross profit margin:
- Passing the tariff on will result in the same 52% drop in volumes. Total gross profit will decline from $103K to $50K. While this is still a52% decline, it is likely far more impactful on the viability of the business.
- Absorbing the tariff has a similar impact on total gross profit as passing on the tariff.
Passing on or absorbing the tariff will create significant challenges for the producer. In both cases, the result might be a business that is no longer viable for the long term.
In addition to the impacts on the producer, the tariff changes can have a significant effect on entities in the US. In this model, the producer has a gross margin from $103K to $206K. The domestic margins for importers, distributors, and retailers combined are at a minimum of $737K, 2.6 to 6.2 times the margin at risk in the EU.
A 15% tariff will have a significant impact on many entities in the wine business. Ideally, the recent indications that wine may be excluded from the 15% tariff become a reality.
Queries on custom analysis can be directed to admin@bw166.com