Blog written by Charlie Jermyn (Copywriter at o9 Solutions) & Alison Crawford (Director of Global Product Marketing at o9 Solutions)
‘The Champagne is drying up!’
While this phrase may engender an image of a harried servant in Versailles sprinting through the gold-embellished halls on a life or death search for the last drop of bubbly to satiate a party of raucous ancien régime nobles, it’s actually the current rallying cry of beverage retailers across the world. The 2021 Christmas and New Year holiday season is facing a global supply shortage of Champagne.
Hard and unseasonable frosts and increases in mildew devastated the vineyards of France, resulting in 80% of the county’s vineyards being damaged. Once summer arrived, the weather swung to the other extreme as wildfires—some of the worst in decades—spread through the vineyards. These events significantly impacted the yield of the grapes used to make champagne.
The Comité Champagne, the official trade association of the luxury beverage, announced that close to 60% of the region’s yield might already be lost due to this year’s extreme weather conditions. That is on top of a production cap of 230 million bottles, down 25% percent from the previous year, mandated by the French government.
Champagne has supply chain challenges, too
Fast forward to today, with Christmas and New Year around the corner, and the pain of this shortage is feeling more real by the day. The supply shortage is only one part of the Champagne industry’s problem, however. Covid-19 driven demand shifts are taking the supply and demand imbalance to new levels.
Consumption trends are rising and recent sales figures suggest a rebound is on the horizon. As reported in Fortune: “Champagne sales were up 88.5% in March compared to previous years, according to data insight firm NielsenIQ. Moët Hennessy—which includes Moët & Chandon, Dom Pérignon, Ruinart, and Veuve Clicquot within its Champagne portfolio—reported a 22% rise in Champagne sales for the first three months of 2021 compared with the first quarter of 2020.”
This is a result of the correlation between sales and vaccine rollout: as more restaurants and bars reopen and gatherings become more frequent, demand goes up again. But even before restaurants reopened, people turned their living rooms into cocktail bars and amateur mixologists ordered more Champagne to spruce up their lockdown experience. The pandemic surge of e-commerce and delivery apps allowed consumers to order Champagne directly to their door. These factors are all contributing to the rebound of the industry. However, the supply and production difficulties may mean it’s too early to celebrate. Will there be enough to go around, or will it lead to the consumers becoming sour grapes?
Stopping the spillage when supply shortages meet demand spikes
The region and producers say no one should be worried. That is not what the rest of the market is saying. Their objectives are different. The winemakers care about the quality of their wine, while the other parts of the supply chain care about inventory, so solving this disconnect and aligning objectives is essential.
There needs to be end-to-end communication from the vintner to the retailer. Supplier collaboration allows all parties to be aware of issues, even supplier’s suppliers. The vintner sells to a distributor who sells to a retailer. Each node needs to be aware of the situation to plan effectively. Ultimately it’s the retailer that will face the wrath of unhappy customers that can only buy two bottles at a time—if there is any left on the shelves at all. So proactively identifying the right path to please as many customers throughout the network is essential.
To understand the scale of the impact, for the 2020 harvest, 231 million bottles of Champagne were produced by 360 Champagne houses. Of these, about 30% cannot be consumed as they are currently at sea, stuck on a ship, or in warehouses and not on the shelves. This means there are 69 million bottles of Champagne that will not generate any profit for this holiday season.
To put this into financial terms, with the average price per bottle at $44 and retailers generating 30-50% profit margins, this means that this shortage and inventory congestion will cost the market roughly $1,219,680,000.
Or, for the visual thinkers out there, the average bottle is 75cl, so that means roughly 50 million unpopped liters of Champagne will not make it into holiday parties this year, the equivalent of the volume of water cascading over Niagara falls every 2 minutes.
To prevent supply and demand misalignment of such epic proportions, CPG companies can rely on two technology-enabled capabilities: demand sensing and scenario planning.
Demand Sensing provides companies with localized insight of demand patterns in a specific market or product. This can be coupled with the historical demand patterns of known events like Christmas and New Year to further refine the forecast. This allows companies to create a more accurate forecast and prevent a fulfillment catastrophe of Niagara proportions.
Scenario planning is the capability that allows users to better understand the tradeoffs, and the ensuing outcomes, when a production hits a snag and needs to pivot to try and salvage a deteriorating situation. Here it is important to update the production picture with the information on supply. The ability to have a digital copy of a physical supply chain (a “digital twin”) and change variables like costs of shipping, switching raw material supplier, import regulations and restrictions, provides companies a level of security to evaluate all options and select the most beneficial one.
For example, let’s say you have 1000 bottles of Veuve Clicquot in Des Moines, Iowa, but consumers aren’t going to buy all of it for New Year’s Eve. However, you know the demand of a raucous crowd in Las Vegas will continually be popping open bottles for not just the night, but for several days before and maybe even afterwards. Rather than allowing the Des Moines inventory to gather dust on the shelves, you run a scenario that recommends moving inventory to fulfill unmet demand in Vegas and drive a certain 26% profit after costs for expedited shipping, rather than a potential 34% profit if it stays where it is and no guarantee that the bottles will be purchased by Dec. 31.
Through scenario planning, powered by AI/ML technology and state-of-the-art algorithms, companies can maximize profit and reduce inventory costs, creating a net positive for the business. A worthwhile endeavor for any CPG company.
A Supply Chain New Year’s Resolution
As things begin to open up–bottles of Champagne included– there will be more celebrations, festivities, and parties; however, there will be fluctuating weather from climate change, blockages at ports, geopolitical crises, and shifting consumer demands. Vintners producing Champagne and all planners in the CPG industry will have to embrace new technologies, leverage AI/ML, Scenario Planning, and Demand Sensing, or else see their consumers wither away like grapes dangling on a frost-covered vine.