Bottling Imported Wine Gives Owens-Illinois U.K. Boost

Owens-Illinois Inc., the U.S. supplier of bottles for Carlsberg beer, said a trend to bottle wines in the U.K. imported from as far away as Australia and Argentina is providing a pocket of growth in Europe’s otherwise stagnant $11 billion glass-container market.

The U.K. is becoming a preferred destination for bottling New World wines and that’s boosting orders for glass bottles, Erik Bouts, president of operations in Europe for Owens-Illinois, the world’s largest glass-container maker, said in an interview. Half of the wine consumed worldwide is now shipped in bulk instead of being bottled where it’s produced, said Rabobank analyst Stephen Rannekleiv.

Owens-Illinois, which also provides bottles for Bacardi and Jaegermeister, predicts its total European business to be little changed in 2014. Next year may also be “difficult,” Bouts said, as a near-stagnant euro-area economy and political tension with Russia curbs consumers’ willingness to invest.

“Overall the European food and drinks market will be stagnant but there are pockets of growth and you have to find them,” said Bouts. “That’s why you have to be close to the market and have a flexible asset base so you can tap into those opportunities.”

In a mammoth version of the bag-in-box wines on shop shelves, large producers can now ship wine in 40-foot vinyl bags inside containers to save as much as $3 in costs per case of wine, Rabobank’s Rannekleiv said. For supermarkets, it also is a way to develop private-label wines.

Bag-in-Box

“It does seem to be a boom for them in the sense that more of the bottling is happening in developed markets where they have a presence,” said Rannekleiv. “It’s not an appropriate system for every wine brand, you’re not going to revamp your bottling system for a wine brand that sells 3,000 cases or something.”

To reduce costs of transporting heavy glass, Owens-Illinois has 35 plants throughout Europe to be close to customers. Last year, it spent more than 25 million pounds ($39 million) upgrading its bottling site in Alloa, Scotland, to cater to whisky brands including Cutty Sark.

It’s too early to tell how big the seasonal increase in demand for bottles will be this Christmas, as makers of beer, wine and food are leaving it later to stock up on supplies, said Bouts.

Christmas Season

“The Christmas season kicks in later and later,” said Bouts, who is president of the European Container Glass Federation. “People used to start stocking up in October and November. Supply chains are getting more and more professional and supply lines are being shortened.”

Owens-Illinois has adjusted operations to meet the needs of customers such as top beermakers, which can forecast their needs on an hourly basis, as well as the less-demanding requirements of the wine industry, which is characterized by smaller and often family-owned businesses, said Bouts

The U.S. company, which makes about 40 percent of its revenue in Europe, is cutting about $80 million in costs in the region and investing about 140 million euros ($174 million) annually to make furnaces more energy-efficient and upgrade production lines to be more flexible to changing customer demands, said Bouts. The company competes with Cie. de Saint-Gobain SA’s Verallia unit and Ireland’s Ardagh Group.

The premium craft-beer market and demand for baby-food packaged in glass rather than plastic are other standout markets in a region where confidence in the economy has ebbed, Bouts said. The company’s European sales fell to $709 million in the third quarter from $733 million a year earlier.

Distribution Challenges

Owens-Illinois’s shares fell 27 percent in New York trading this year, giving the company a market value of $4.3 billion.

The top three bottlemakers currently account for as much as 70 percent of the market. Of the smaller suppliers, those that aren’t focused on niche markets or aligned closely to a long-established client may be vulnerable without the economies of scale in buying raw materials such as sand and soda ash, Bouts said.

This year, Ardagh acquired Verallia’s North American operation for $1.7 billion from Saint-Gobain, which is withdrawing from packaging to focus on markets including construction materials and flat glass used in cars and building.

“There’s still room for consolidation in glass, but major moves? No,” Bouts said. “Smaller-scale consolidation is possible.”

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