December 5, 2019

Why Your Favorite European Wine/Cheese/Whisky/Coffee Is About to Get Pricier

Thanks a lot, Mr. President.
By Craig Manning | Nov. 30, 2019

If you’re planning to put imported wine on your holiday table this season, it could cost you.
 
Thanks to a series of tariffs imposed on select products from the European Union (EU), U.S. consumers are likely to pay more for Scotch whisky, Italian cheeses, German coffee, and more. On the list of products affected by the tariffs are all French, German, British, and Spanish still wines (e.g., not sparkling) that are under 14 percent alcohol by volume (ABV) and sold in bottles or boxes smaller than two liters. The tariffs, which went into effect Oct. 18, could have a significant impact on wine distributors and retailers in the United States — as well as on the prices that U.S. wine enthusiasts pay for varietals from renowned wine regions like Bordeaux and The Rhône.
 
Wine and Planes: How a Battle Between Two Aerospace Giants Triggered a Trade War
Ryan Rozycki, a certified sommelier and assistant manager at Traverse City’s Blue Goat Wine Shop, says the tariffs — which add 25 percent to the cost of the aforementioned products at customs — are Trump Administration retaliations against the EU for subsidies granted to the European aerospace company Airbus.
 
“I don’t understand the logic,” Rozycki said. “I don’t understand how the taxing of this stuff would affect Airbus.”
 
As it turns out, this particular set of tariffs is the latest shot fired in a long-running war between Airbus and its United States-based rival, Boeing. For years, each company has argued that the other was receiving government subsidies that were noncompliant with World Trade Organization (WTO) rules. In 2004, the U.S. filed a complaint against the EU with the WTO, alleging that government subsidies from EU nations were giving Airbus an unfair competitive advantage over Boeing. Soon thereafter, the EU filed a similar complaint against the U.S.
 
In 2010, the WTO ruled that both the EU and the U.S. were guilty of granting illegal subsidies to their respective aerospace giants. That ruling was followed by years of appeals, with both countries claiming to have become compliant with WTO rules and subsequently challenging one another’s assertions.
 
The squabble has come to a head over the past two years. In 2018, the WTO ruled that the EU had failed to halt a practice of granting illegal low-interest government loans to Airbus, and that the EU’s noncompliant practices had unfairly cost Boeing at least five key sales campaigns between 2011 and 2013. Then, this past summer, news broke that Airbus was positioned to pass Boeing as the world’s biggest plane-maker.
 
The WTO ruling opened the door for the U.S. to impose tariffs on EU countries as a retaliation for the lost Boeing sales. Those tariffs were authorized by the WTO on October 2 and affect $7.5 billion in European goods. Some of the tariffs are on Airbus parts and products specifically, but those only add an extra 10 percent at customs. The 25 percent tariffs have been reserved mostly for consumer goods, such as cheese, olive oil, and wine. (The WTO also ruled this year that the U.S. was still granting Boeing at least one illegal subsidy, which could lead to EU tariffs on U.S. exports as early as next year.)
 
The Impact on Wine
Even without a 25 percent tariff, the wine industry’s three-tiered system for import and distribution means that the customer ends up paying considerably more for a bottle of wine than what the winery spent to produce it. First, a supplier or importer arranges the shipment of wines from foreign wineries and pays the shipment costs to get them to the United States. Second, a distributor purchases the wines from the importer and works to sell them to restaurants, wine shops, and other retailers. Third, the retailer purchases the wine from the distributor and puts it on the shelf (or on the menu) to sell it to the customer.
 
Rozycki says standard margins for importers, distributors, and retailers are 45 percent, 30 percent, and 30 percent, respectively. By adding 25 percent at customs, the tariffs could theoretically send prices for all EU-produced still wines skyrocketing, as each part of the distribution system would retain those same percent-based margins. So, if a bottle cost the winery $5 to produce, it would already have increased in price to about $18.55 with the importer, distributor, and retailer margins figured in. Post-tariff, that bottle would be on the shelf for $23.19. The price increases would be larger for more expensive wines: someone accustomed to buying a Spanish wine in the $30s would see the price jump into the $40s or $50s; a German wine in the $70 range would push into the $90s; a specialty $200 bottle of French wine would cost an extra $50; and so on.
 
Rozycki says he’s heard that some distributors are planning to cut their margins and eat some of the cost of the tariffs, at least to start. That would allow gradual price increases on the end-consumer level, instead a quick out-of-nowhere price jump. Since many consumers are likely to be unaware of the tariffs or what is going on, Rozycki thinks the gradual method is the smart approach. “If you just immediately go from $14.99 to $21.99, I think there are a lot of people who are going to say ‘Nope, not going to do that.’”
 
But according to Travis Tache, who works with the Michigan-based wine distribution company Woodberry Wine and holds an Advanced Sommelier certification, there is only so much distributors can do to shield customers from these increases.
 
“This is an industry that runs on slim margins to begin with, so there is not always a ton of wiggle room for an importer or distributor to solely absorb the cost,” Tache said. He added that “keen purchasers are negotiating terms with producers overseas to mitigate price fluctuations, so as to not impact the end consumer at all, or at least as little as possible.”
 
It’s also worth noting that the tariffs don’t apply to any wine that was through customs before 12:01am on October 18. Rozycki says some of these wines are still in warehouses, including high-demand vintages like 2015 or 2016 Bordeaux, or anything produced over the last few years in The Rhône. There’s a race among retailers and restaurants to get their hands on those wines and “stock up,” with hopes of waiting out the tariffs and seeing if the status quo changes. There is a belief, for instance, that a change in presidential administration in the 2020 election might impact trade negotiations.
 
For now, one if the biggest impacts will be on restaurants and retailers that order their wines on a “Direct Import” (or DI) basis. Typically, with wine imports, the distributor will purchase a certain amount of wine and then hold it in warehouses with the goal of selling it on to restaurants and retailers over time. In a DI situation, the distributor approaches wine buyers at restaurants or retailers in advance and essentially takes pre-orders. This model can be beneficial for both parties: the distributor doesn’t end up sitting on a ton of wine they need to sell, while the wine buyer gets better pricing.
 
“The caveat here is that the DI orders come on container ships,” Rozycki said. “You are usually placing your orders around March or April, and then it has to cross the ocean, go through customs, and get shipped to the distributor. Because of how long it takes, some of those wines still haven't arrived yet, and as a result, they are going to be 25 percent more expensive. There are more than a few restaurants and retailers who have straight up said: ‘Listen, I'm sorry, but I can’t afford to pay for these wines anymore’ when the DIs showed up.”
 
Due to the tariffs, both Rozycki and Tache expect that non-EU winemaking regions will grow their market share. Countries like Italy, Portugal, Chile, Argentina, and South Africa are unaffected by these tariffs and are all known as top-tier wine producers. Domestic winemakers – including those in California and right here in Michigan – could also benefit from the tariffs.
 
“There's an opportunity for local wines to start making their way around to other parts of the country,” Rozycki noted. “If someone is looking for a stellar Riesling and they can't get it from Germany, they're going to say 'Well, where else can I get a stellar Riesling?' And Michigan is one of those spots.”
 
However, while Tache acknowledges that higher prices could push consumers away from the wines of European giants like France and Spain, he’s ultimately hopeful that the situation won’t be as dire as many predict.
 
“Some estimates have put cost increases to the end-consumer at 35 to 50 percent higher than before,” Tache said. “I don't believe this is an accurate representation of what will take place. Prices may increase a bit here and there but all levels of the industry are working hard to prevent this, as it's in all of our best interests to do so. This is still a fluid situation we are all navigating, and with any luck, the tariffs will be gone soon.”

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