By Caroline J. Beck September 29, 2009
Any producer of olive oil can attest to the rapidly rising costs of packaging in the past few years. The impact of double-digit increases in material and transportation costs has been felt by artisanal suppliers as well as the biggest distributors.
Packaging is particularly important to sales of domestic olive oil because justifying value for higher-priced domestic oils is a challenge, especially in today’s economy – and image often makes the difference between strong sales and surplus inventory. Packaging is responsible for brand identity, product content description and, most importantly, protecting product quality. To date, no other form has been as effective as the glass bottle to transport extra virgin olive oil from the producer’s harvest to the consumer’s home.
In the past few years though, the glass industry witnessed an increase in raw material costs, a decrease in capacity and depressed dollar/euro evaluations. In turn, specialty bottle manufacturers passed those problems on in the form of higher prices and reduced availability.
Some California olive oil producers kept costs at bay by decreasing bottle size while maintaining price point (a strategy employed by many larger package goods manufacturers) or changing bottle specifications in order to secure capacity or reduce costs.
While the last quarter of 2009 may present some positive news in capacity, a complete turnaround in the trend of continued price increases is unlikely. Estimates now point to a flat or slight increase in 2010. Understanding why involves four key areas: currency valuations, capacity constraints, raw material expenses, and energy costs.
Improved Currency Valuations
The strength of the U.S. dollar in EU countries has moved in a positive direction since mid-2008. From a high of $1.60/1 in April 2008, the dollar/euro exchange rate has moved favorably to $1.45/1, representing a valuation increase of roughly 9%. And although the rate has bounced around during 2009, if the dollar’s “strength” continues, its primary value will most likely be to help offset increases in other areas.
One approach to avoiding roller-coaster exchange rates is to use domestic glass, but most olive oil producers want high-end specialty bottles to set their brand apart, and that means going overseas. “The exchange rate is one major factor and so is supply and demand. As much as the factories hoped to continue their price increases due to stricter available supplies, now those supplies are sitting in the warehouses without a home,” said Erica Harrop, President of Global Package in Napa, a supplier of imported glass.
“And this is not due to alternative product introduction, it’s just that no one [in the wine business] is bottling. This recession is more difficult than originally expected. What I know for sure is that all countries are as bad off as their neighbors,” added Harrop.
“The high-end olive oil business uses imported bottles. And the origin of almost all specialty glass is in Italy and France. Their industries are extremely well developed in this category.”
Production Capacity sees Strong Gains
Another positive factor is that the problems of capacity constraints appear to have dissolved. “The short answer is that capacity is there now. In fact, there is a surplus. Prices, though, are both up and down. It’s a manufacturer to manufacturer factor,” said David Schwandt, Director Sales and Marketing, of Demptos Glass in Benecia, California.
Jay Jessup, Food Sales Manager for California Glass, a Demptos’ sister company that specializes in servicing the food trade including olive oil, sees capacity concerns and long lead-times as issues of the past few years, but not for the remainder of 2009 and into 2010.
“In 2008, lead times were at their zenith. In order to ensure supply, buyers had to make decisions 6-7 months out. That’s now shrunk to 1 month,” said Jessup. “Of course, there are always exceptions, dependent on glass style, color and manufacturer, but in general there is excess capacity.
“While pricing has not come down to reflect that yet, if bottle production stays on the same course, we may see prices soften a bit,” added Jessup.
Additionally, Jessup mentioned that improved quality standards in countries like Taiwan and Korea have opened up greater sourcing options. And while China has not yet achieved the same QC consistency, it is not far behind.
But Harrop warns about sourcing the lowest cost product. “Stock is not difficult to find, but lower end products are being more readily made. Since prices are depressed I would be careful about low end products at low end pricing. The quality may reach the least common denominator as well. Beware of new entrants into the glass supply market who know little about glass making and may get hold of poor quality glass to sell at those very low prices,” said Harrop.
Falling Crude Oil Prices Benefit Olive Oil Producers
One of the biggest costs in packaging is the cost of energy. It is a factor in production, but more importantly in transportation. Fuel surcharges and transport costs throughout the entire production chain have a huge impact on the bottom line profit for any olive oil producer.
With the recent drop in crude oil prices, some of those expenses have seen reductions – especially for buyers sourcing imported bottles over domestic ones.
Raw Material Costs Soar
The raw materials involved in the creation of glass bottles include sand (silica), soda or pot ash, limestone and cullet (recycled glass). Glass producers in every country around the globe are witnessing sharp price hikes in these basic industrial costs.
“The cost of raw materials is still very high and expected to be so for the foreseeable future. This year, for the first time ever, sand and soda ash increased dramatically. And while glass producers made major adjustments in the past few years to keep pace with the true costs, it is not over,” said Harrop.
Prices Still Expected to Move Forward
At some point, logic would say the industry should be ready for some relief in the price hikes of the past few years. “It contradicts everything we’ve learned to rely on; capacity has opened up, energy prices have dropped and the dollar has strengthened, but prices continue to rise,” said Jessup. “There could very well be another price increase in the fourth quarter. And it is all based on the soaring costs of raw materials,” he added.
Harrop too expects glass prices to increase, but she sees the favorable exchange rate as a real bonus for imported glass buyers. “This year, the exchange rate has come way down which makes it much more attractive to source imported bottles. The capacity is there and fuel surcharges will not be as steep,” said Harrop.
Like the wine industry, glass bottle packaging remains the material of choice among domestic olive oil producers.
Average packaging costs for the larger wine market represents roughly 4% of the final retail cost. But, for most small-midsize olive oil producers, that percentage can range upwards of 10-20%. The difference is due in part to specialty bottle premiums and lower volume factors. For the remainder of 2009 and into 2010, while availability can be considered a problem of the past, raw material costs can be expected to continue to rise and have an increasingly important part of the overall manufacturing expense.
Excess capacity may eventually lead to a buyer’s market and improve pricing negotiation, but the smartest approach for any domestic olive oil producer today is to work with your distributor, discuss sourcing options and stay alert for changes in the core factors that make up bottle pricing.