246 | Transporting alcohol is a double-edged sword

“REGRET NOTHING”– This is what the state should be able to say as we become more accustomed to the pandemic. However, it is difficult to say how the sequence of decisions came to fruition. Perhaps getting the timing right could get the alcohol industry and related supply chains out of the congestion.

Why ban the transportation of alcohol into February? It is important to separate consumption from production, and perhaps have a threshold specific ban on the transportation of alcohol, just enough to release pent-up supply. 

However in truth, the ban slowly impacts the supply chains as it ripples upstream—farms, wineries, distillers, brewers, transporters, storage, forwarders and the like. 

The dynamics are a balancing act that if timed correctly could reduce the lag effects of the production line, enabling the industry to pick up pace almost as fast as consumer demand. 

Both edges depend on a hilt lined with socio-economic, pandemic, and supply chain dynamics–collateral damage seems inevitable as bottlenecks cumulate.

Separate consumption from production

Every beverage has externalities, or unintended consequences. Sugar in juices and carbonated drinks has been linked to obesity and has prompted a global wave of sugar taxes. This changed the supply chain dynamics of the beverage industry. 

Alcohol in beers, wines, spirits and others has been linked to trauma and road fatalities. It endures an ever-increasing sin-tax which contributes on average R2.5bn per month to the fiscus to account for its impact. This sin-tax changes the profile of the alcohol supply chains by adding 20% at production (11% to wine, 23% to beer, 36% to spirits) to place downward pressure on demand in order to reduce certain behaviours that are harmful to society.  

As a result, the true scale of the liquor supply chains is much smaller than what it could be if the sins associated with liquor consumption were not represented in the price point. 

Banning the consumption of alcohol is justified only by the impact it has on the healthcare system’s capacity—making more room for the treatment of COVID19 patients. However, many are beginning to question the economic cost. This is a broader human life and poverty debate, beyond the scope of this note. 

While much of the debate has circulated around the difficult contentious side of the alcohol market, I’m concerned about the raw material (farms), production and domestic distribution side of the issue because exports faired well

Slowing down alcohol beverage supply chains 

Much of the transportation of alcohol in South Africa takes the bulk-liquid form, from wineries, and other input suppliers to breweries and back. There are reports that there is an excess of 300 million litres of wine, limiting the space for the new harvest. Navigating the “glut” mid last year meant considering moving to the juice market, converting wine to hand sanitizer (which would need a subsidy to remain competitive), or discounts. 

The importance of this continuous flow of unloading liquid bulk loads of liquor is to release the capacity requirements for new bulk loads of raw material to enter the brew. Particularly because they are part of a broader network of farmers with wine, wheat and barley who are facing a massive yield in the first half of 2021—bringing a surge in supply capacity. 

For some, there is room to diversify: leaning into non-alcoholic production lines is down the pipeline and not an immediate transition. While others had running contracts, tailored to a client but now face standing fleet at a significant cost. 

Much further up, the excess supply grips bottling and packaging companies from tapping into an opportunity to use the raw materials, equipment and staff for this purpose. Rendering lower utilisation rates, and possibly placing on job cuts there too. 

Then there is the stockpiling opportunity cost which is lost to the market due to the bottlenecks at the bottom end of the value chain. So all in all, conveyor belts have stopped in the middle and freighters are forced to meddle in new waters with producers that are agile or whole new customers. 

Opening the freight side by volume not one size fits all

However, when the market opens up again, a brief gold rush might face a dip in retail prices as higher stock keeping units, or volumes, pile up. That’s if the move is on time. If it is untimely, one could easily find limits to raw material supply shifted to other beverages, changing the broader typology of the beverage market in general. 

In essence, it is much more reasonable to argue that consignments above a certain volume are permitted—particularly industrial volumes, to relieve the blisters has the next harvest creeps in. This should get supply chains moving and allow stocks to pile up, but the excise tax debacle needs to be resolved as a lever too. 

The apparent downside of stockpiling would be a need to clear it rapidly—that would not need lower prices as the chances of excessively pent-up demand is likely. Thus, while stockpiling will come at a cost, once the consumption side opens up it enables the industry to refill its eroding revenue base. If the consumption side is closed for too long, the costs of production and stockpiling could for some firms become unbearable. Timing is key. 

For now, after the festive season, it should be okay for the transportation of alcohol to be permitted just to save the industries it serves. Alternatively, the ban may well continue in fear of excessive increases in operating costs for companies that are not making their usual sales revenue—thus potentially accelerating the pressure to cut jobs—or worse, capacity. 

Unfortunately, the raw materials are natural materials, they grow and require specific processes in order for them to be ready in the next production cycle. With a lack of coordination, product positioning and agility, many farmers and producers are faced with difficult choices in uncertain times. At first the ban in April was reasonable, but it has become clear for business that the 165 000 jobs and broader industrial impact reflects deeper ties with short-term planning over long-term planning that “will enable us to withdraw those and spur the economy back onto a growth path”.

Both edges depend on a hilt lined with socio-economic, pandemic, and supply chain dynamics–collateral damage seems inevitable as bottlenecks cumulate. One edge is sharpened by three major efforts: certainty about time, thresholds about volumes that can be transported and financial levers to cushion costs, if not revitalise business. The damage could be marginally avoided. 

The other is for transporting alcohol to open up, get supply chains moving, find any available capacity to relieve the outputs and volumes upstream. This could gear the industry for a timeous opening with untangled bottlenecks and little to no lags if the timing is right. 

This article was published on Fin24, on the 25th January 2020. Thank you for reading.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s