Message in a bottle
The South African government has an ambiguous attitude towards the alcohol industry. During the Covid-19 pandemic, it has demonstrated a puritanical dislike for the sub-sector, banning sales and public consumption four times (totalling over five months) and, outside the bans, restricting alcohol retailers to very limited trading hours. During the bans, alcohol purchase for home consumption was entirely prohibited.
The rationale was that the bans would prevent hospital emergency admissions facilities being overwhelmed during Covid-19 surges. The debate over whether this measure was effective or not remains contested, although accident-related hospital emergency admissions were lower during the Delta-variant surge (December 2020-January 2021).
On the other hand, the alcohol value chain in South Africa is an exemplar of local beneficiation with strong export linkages. The industry takes local agricultural produce and adds value. South Africa has the seventh largest wine industry in the world and exports nearly 40 percent of production. There are multiple linkages into glassware, packaging, labelling, marketing, transport, distribution and retail. This value-adding pattern is precisely what the Department of Trade Industry and Competition says it wants to see in the economy more generally.
Yet government neither consults with nor supports the industry. CEO of Business Leadership South Africa, Busi Mavuso, argues that the bans on alcohol sales were ‘own goals’ which could have been avoided by better consultation. The alcohol industry itself estimated the loss to GDP as a result of the bans to be R60.7 billion. This lack of engagement appears to be coming home to roost in 2022 with a developing shortage of glass bottles.
This is bad news for local alcohol manufacturers who may find themselves scrabbling for the packaging they need to get product to market. It is likely to force changes to their business models and will be a considerable headache for the country’s strong wine export industry.
The problem is not only international supply chain imbalances. Indeed, the supply chain problem – a hurdle to resolving to resolve the shortage by importing bottles – is only one more blow to an industry which has been struggling for several years. It has partial origins in the Covid-19 alcohol bans but has faced other headwinds for several years.
In the middle of the first alcohol ban, South Africa’s dominant glass bottle manufacturer, Consol Glass, was forced to cancel plans to build a new US$100 million plant in Nigel, east of Johannesburg. 85 percent of the company’s sales are to big alcohol makers, including AB Inbev (which owns South African Breweries), Diageo and Heineken (which now owns Distell). Not only was there an immediate drop in consumer demand but at least two of the big alcohol producers cancelled expansion plans. During these bans, Consol, like other, smaller glass manufacturers in South Africa was forced to keep its furnaces running to avoid molten glass solidifying – which may have caused permanent damage. The cost of running a maintenance operation was R8 million a day.
The industry has faced not only supply chain disruptions but also a decade-plus (600 percent) surge in energy prices compounded by unreliable supply. The problem kicked in, unexpectedly, less than two years after a consortium organised by local private equity fund Brait acquired and delisted Consol Glass in 2007 and has been pervasive ever since. South Africa’s Council for Scientific and Industrial Research found that, despite lower demand related to the pandemic restrictions, 2020 had seen the most intensive load shedding since 2015.
The technical recessions in both 2018 and 2019 also impacted consumer and thus container glass demand. The industry responded by increasing glassware exports into the region (up 31.5 percent by value in 2018). The prospect of exports into sub-Saharan Africa is one of the few areas of promise in South African glassware and is presumably the reason why one of the international giants, Ardagh, announced last November that it was to buy Consul for R10 million. Brait has been trying to exit its investment since at least 2018 when an initial public offering (IPO) was cancelled.
The alcohol sales ban also affected South Africa’s trade obligations. The country is a major wine exporter with the right, in terms of the 2016, Economic Partnership Agreement with the European Union, to export 110 million litres duty free. A five-week government ban on wine exports threatened sales of South African wine to the European Union, valued at R9.1 billion in 2020.
The likely impact of the glass bottle shortage in South Africa should not be overstated. The biggest customer for South African bottles is the domestic beer industry (77.7 percent of alcohol consumption by volume) and 70 percent of beer bottles are multi-use (up to 30 times). But the bottle shortage is a threat to producers who contribute to the 136.5 million litres of ‘packaged’ wine exports to Europe. This may well prompt a shift to more bulk exports via European bottlers. Wine bottling is a seasonal activity in Europe and bottlers are known to actively seek imported supply to fill what would otherwise be idle times.
On the surface South Africa shares a problem with the US which is also currently experiencing a shortage of glass bottles. But, aside from the global supply chain issue, which obstructs easy solutions through imports, the two cases are underpinned by distinctively different dynamics.
The US glass bottle shortage is, like other shortages in that country, a product of an unanticipated surge in demand during the Covid-19 pandemic. Manufacturers and wholesalers had expected demand to drop as it usually does during economic crises. Instead, a wave of new demand, fuelled by both social grants, intended to soften the impact of the pandemic, and the reallocation of household spending from leisure activities like eating out and holidays, saw spending on durable goods surge.
In the US, spending on households and home offices – renovations, appliances and electronic goods – increased from US$1.5 trillion in February 2020 to US$2.1 trillion a year later. Increased spending on alcohol was part of this pattern of increased household expenditure. According to the US Bureau for Economic Analysis, spending on alcohol rose 13 percent (wine) and 14 percent (spirits) between the first quarter of 2020 and the third quarter of 2021.
The US’s glassware crisis is a result of an imbalance between supply and demand which is likely to be resolved as the issue plays through the system. Unfortunately, South Africa’s issues are more deeply embedded in domestic investment climate issues. The current glass bottle shortage is one more wake up call to a government that has been tardy in implementing much needed structural reforms.
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