Licensing and Regulatory Affairs
Although out-of-stocks have been an issue that everyone can relate to, circumstances of the COVID-19 pandemic have intensified the problem. The Commission is keenly aware of this frustrating situation that is adversely affecting you and your business. Because out-of-stocks have become a top issue, the Commission has looked into it, and feels it is important to make you aware of what’s going on in the U.S. and global marketplace due to the pandemic. Here are several factors that the Commission has been made aware of that are affecting out-of-stocks:
Suppliers simply cannot keep up with demand. There has been a huge increase in alcohol consumption during the pandemic. Producers can only bottle 24 hours a day, so there is a limited amount of cases they can produce. As demand exceeds their capability, they have no way of catching up. Most distilleries in the European Union shut down in early 2020 due to the pandemic, causing a large backlog of orders in the U.S. Consequently, brands from Europe have been hit the hardest. Some manufacturers of domestic goods where there’s been strong growth are having trouble keeping up. Many producers are limiting production / or eliminating production on lower volume sizes or flavors to make sure the primary volume brands are able to be maintained. This approach is similar to what is happening in the soft drink industry. There has also been great demand for seasonal, limited production products, but these are not to be considered out-of-stocks.
Significantly greater and shifting trends. Since March when the pandemic started, overall sales volume is up 23%; off-premises is up 35% in Michigan. Certain categories are way up especially in global and premium brands (e.g., tequila, +54%; cognac +62%; bourbon +35%). Ready to drink cocktails have seen a huge spike (+70%) as people are home consuming these easy to serve brands. Manufacturers have not been able to keep up.
Product aging requirements. Tequila brands that are produced in Mexico have seen an explosion in the Añejo tequila category (wood-aged). Due to the many months of aging that is required, available inventory has been running out. Production has increased, but it will take a year for inventory to catch up with demand. Bourbons also must age and some are limited supply items that are also out-of-stock.
Overstocking. Retail stores here in Michigan are overbuying several weeks’ worth of brands as they become available (that were previously out-of-stocks), limiting inventory for other accounts.
Tariffs. Prior to the pandemic, the tariff issue greatly impacted some countries. U.S. wholesalers bought heavy, taking all warehoused and existing inventory pre-tariff, leaving distilleries with no goods on the floor when the pandemic hit. Wine and spirits trade associations have submitted statements to the U.S. Trade Representative (USTR) urging an end to tariffs on spirits and wine from the EU and UK, and American whiskeys, and to forego imposing any additional tariffs on beverage alcohol products. In August 2020, a bipartisan group of 13 U.S. senators asked the USTR to remove the 25% tariffs imposed in October 2019 on European Union food, wine and spirits.
Port and transit delays. Warehouses in Southern California are holding onto containers and chassis an average of 7.4 days, almost twice the normal “street dwell” time, prolonging a chassis shortage that is disrupting the delivery of cases shipped. The concentration of imports in Southern California has stressed the supply chain from the ports to the warehouses, as well as to the eastern half of the country. The trucking/transport industry is working on the issue. The import surge that is fueling the chassis shortages is expected to continue into the fall.
Aluminum can shortage. With bars and restaurants closed during the pandemic, more people were drinking at home and consuming more products available in cans. The supply problem prompted brewers to cut back on the breadth of brands they sell and exacerbating concerns of out-of-stocks. Another factor is the hard seltzer trend which has spurred shortages in the tall, slim varietals of the 12-ounce can, which has become a popular format for alcoholic sparkling seltzers, light beer and some craft brands. The demand for canned wine has also exploded in the past year. Canned cocktails and wines are in shorter supply, and so are other spirits to some extent. Can manufacturers have struggled to keep up with demand. New aluminum can factories are coming online and the industry is slowly responding to the demand. The two major U.S. suppliers of aluminum beverage cans, Colorado-based Ball Corp. and Pennsylvania-based Crown Holdings Corp., have announced major investments in new canning lines and production facilities amid the surge in demand; new production is expected in 2021.
Carbon dioxide shortage. The shortage in carbon dioxide and subsequent rise in prices for CO2, could be especially dire for smaller-sized brewers. Big companies can capture some of the carbon dioxide with expensive equipment, but it’s something that most craft brewers, for example, can't do. Given the significant drop in ethanol production, it could become serious situation.
Out-of-stocks in spirits, beer and wine are all affected by these issues in varying degrees. Again, the Commission realizes that licensees are experiencing difficulties and hardships brought on by the pandemic. Please visit the MLCC website at www.michigan.gov/lcc for updates and information.