Source: SevenFifty Daily, by Andrew Kaplan


The pandemic exacerbated problems plaguing beverage alcohol warehouses, especially those around major ports. Are there any solutions in sight?


Container ships lined up for miles at American ports might be the most iconic supply chain image to emerge from the pandemic, but another issue plaguing beverage alcohol supply chains has been playing out more quietly, with little comparable attention.

It has been taking place on land, in the warehouses where the products on those container ships eventually arrive. The pandemic exacerbated a weakness that has been troubling beverage alcohol companies for a long time: a shortage of warehouse space. According to experts, that shortage grew acute during the pandemic and remains at elevated levels as we enter the busy 2022 holiday season, threatening more inventory disruptions across the country.

“There’s more demand than there is supply of beverage alcohol warehousing space,” says Gabe Barkley, the CEO of MHW, a beverage alcohol importer, distributor, and service provider. “We’re still having to work very closely with warehouses on what product is coming in when to make sure they have space for it.”


A Bottleneck at Major Import Hubs

According to Elly Hartshorn, the director of last mile and business systems for Hillebrand Gori North America, nearly all of their network of 87 warehouses around the country as well as all their third-party warehouses have experienced shortages. “Generally speaking, there is not enough warehouse space available in the U.S. for the storage demand and warehouses cannot be built fast enough,” she says. “This is felt nationally, with especially tense pain points in all major port cities and major inland distribution hubs and is not isolated to a specific industry.”

The warehouse space shortage is not just a problem here in the U.S., but across Europe as well. “We offer freight forwarding services in addition to distribution services locally, and freight forwarders are delaying pickups due to full warehouses,” says Alexi Cashen, the cofounder of Elenteny Imports. “That product is sitting at a winery and not getting picked up because there’s no capacity to cross dock it.”

Today, Elenteny has 70 percent more inventory in warehouses than it did before the pandemic hit in 2019. “We definitely recognize the significant swell there,” says Cashen.

According to Barkley, in the U.S. the problem is mostly localized to port areas on both coasts. “We’re not seeing the same type of thing at distributor warehouses around the country,” he says. “They have been able to manage their inventories. Where we see a lot of the bottleneck is in the major import and consolidation hubs in the U.S. where those distributors are going to buy product from. So, New Jersey being one of them, California being another.”


A Problem Compounded by the Labor Crisis 

Ironically, part of the reason for the shortage has been an industry success story: the explosion in the number of new beverage alcohol products over the past two decades. But then came the pandemic. As consumers did more of their shopping online, companies like Amazon encroached further on the already tight supply of warehouse space in vital port areas like northern New Jersey.

“Propelled by the pandemic, ecommerce has exploded across industries,” says Josh Jacobs, the cofounder and CEO of Speakeasy Co., which facilitates ecommerce sales for beverage alcohol brands. “Within beverage alcohol, ecommerce is still nascent, but the growth in other verticals and need for expansion has been eating into storage and larger players from outside beverage alcohol have been taking priority.”

Those same ecommerce companies like Amazon are also competing for a dwindling supply of warehouse workers, exacerbating the impact of the Great Resignation (the pandemic-era economic trend which saw employees voluntarily resign from their jobs en masse) on beverage alcohol warehouses.

“There’s [also] been a cultural shift,” says Hartshorn. “People don’t want to work in warehouses anymore. It’s very hard to recruit and find people. And that goes for industries beyond alcohol. We’re going to have a huge issue on our hands.”

She continues, “Many warehouses rely heavily on tribal knowledge of key staff to operate, and when staff were out with COVID-19 or quit, these warehouses’ lack of process documentation and technology was exposed and resulted in disastrous service failures.”

Brooklyn-based PM Spirits is one of those companies that has experienced firsthand the “disastrous service failures” to which Hartshorn refers. Today, the company’s owner, Nicolas Palazzi, says while from his standpoint the warehouse labor issues seem to have settled down, things have yet to improve overall. One of the continuing issues he sees is containers of product not being emptied onto warehouse shelves as regularly as they were before the pandemic’s supply chain disruptions began.

“This is not getting better compared to last year,” he says. So many products kept getting lost in warehouses, along with the many other disruptions last year, that Palazzi decided to hire a full-time manager to try to stay ahead of them. “We are organized to face it, but nothing is smoother. We’re just more used to the chaos, that’s all,” he says.


An Inventory Overload

Further exacerbating the warehouse space shortage is that rather than be caught flat-footed, companies are filling up warehouses with extra inventory. “Many distributors have responded to lengthened and unpredictable lead times by taking on more inventory,” says Hartshorn. “Those who were able to keep product in stock through the past few years have benefited greatly.”

Steve Melchiskey, the president of USA Wine West, an MHW importer, says third party logistics company (3PL) warehouses have been particularly challenged, simply because of the complexity of their operations, and the fact that there are a limited number servicing the industry.

“You have to remember that the operation of a 3PL warehouse requires enormous capital and enormous organizational skills. The barriers to entry are very high,” he says. “If you’re with a medium distributor or a smaller distributor, they’re relying on these 3PL warehouses, which is why it’s an industry problem. It trickles all the way through.”

Jacobs notes that one of the consequences has been that companies without the volume to pursue their own space have been hit the hardest.

“Are we all concerned? I would say that the part of the industry that does not have their own warehouses, are very concerned all the time about their ability to continuously supply their customers into the future,” he says.


A Warehouse System in Need of an Upgrade 

The pandemic disruptions also laid bare another issue facing beverage alcohol warehouses: many of them rely on legacy systems. “Some are still reliant on paper and haven’t adopted game-changers like hand-held scanning devices,” says Hartshorn. “I’ve heard warehouse people refer to something as muscle memory—the idea seems absurd to me that you would expect somebody to just memorize where thousands of different SKUs of wine would be stored in a warehouse. But I think there’s this romance of tradition: ‘Well, this is how we’ve always done it.’”

Cashen points out that many of today’s alcohol warehouses do not offer the type of client-facing, real-time technology to communicate delays, mispicks, or inventory discrepancies to their customers. Instead, each of these issues has to be resolved by multiple people on both the customer and the vendor side. “So, we’re still emailing and texting to resolve issue by issue,” she says. Elenteny data shows that for two to ten percent of last mile orders something goes wrong, such as delays or mis-picks.

Cashen has seen the warehouses embrace some new technologies, such as better picking and routing solutions which have boosted efficiencies. There have also been some investments in customer-facing platforms that allow customers to see where their shipment is. She points to Hillebrand’s last mile service in California which allows Elenteny to track deliveries. She would like to see more of this done across the industry. “There’s still that customer service investment that is missing,” she says.

Lack of that investment has meant a lot of extra work for a company like USA Wine West. “It’s the interfacing that is hard,” says Melchiskey. “We have four warehouses that we deal with and each one has a different system. Some are good at their technology, and some are less good at their technology. But each time you must have your tech people interface with a different system. So, I think the problem is lack of common platforms that are used across the industry.”


Possible Solutions

To solve this, Hartshorn would like to see “a shift to a supply-chain centric view.” She adds, “Rather than start with one party’s perspective, I think we need to look at the buying and the selling, the fulfillment of those orders and the delivery process as an end-to-end interdependent series of activities.”

She sees today’s “fractured system” as a consequence of the three-tier system, where the industry is configured from either the buyer or seller’s perspective, but it doesn’t account for other participants. For example, she says logistics providers, like warehouses, function downstream of the purchase and selling activities, and they are often unaware of the terms and conditions of the sale leading to service failures, rework, and increased expenses. “I think if we can move to a single interface that looks to each party to participate based on their role in a transaction we could really be able to run more efficiently,” she says.

Given the shortage in warehouse space, a question naturally arises: why not just build more? It’s one of those things that is much easier said than done. “When inventory exceeds historic levels, many warehouses do not have the ability to procure more space (Amazon has scooped up so much of it),” says Hartshorn. “And for others, even if they can procure additional space, the lead-time to negotiate a lease, equip the space with climatization, racking, proper security, and qualified staff is longer than the market demands.” In addition, outfitting a warehouse is subject to the same supply chain disruptions and labor shortages faced across the industry.

In the meantime, some companies are finding ways to work around the system’s limitations, or, like PM Spirits, they do the best they can in adapting to the new reality and hope things gradually improve.

At Speakeasy, Jacobs says they have tried a two-pronged approach. “First, we leverage models to project when additional warehousing will likely be needed, and then budget the proper timeline to ensure we can secure the necessary space. Secondly, we operate in areas where warehousing has been more available compared to the major hubs,” he explains.


New Technologies on the Horizon

Some cutting-edge technologies are making it into warehouses, which could also help, such as warehouse drones. “Imagine an inventory team of drones that cycle count and scan product throughout the night—like a robot vacuum that keeps floors clean when you’re not home,” says Hartshorn.

Paul Condron, the senior account executive of strategic solutions for warehouse solutions company Fortna, says even robotics in the form of mobile robots “are being considered and deployed” in warehouses owned by some of the larger alcohol distribution companies today. But they tend to be more suitable to high volume caseloads.

On the horizon, Condron says, are more nimble robotic systems that could pick individual items. “There’s a real drive with robotics to try to get to that unit level, like a bottle level,” he says. “So robotic picking for one is going to be a game changer.” Such sophisticated robotics could eventually help allay the warehousing industry’s labor problem, especially when it comes to that challenging last mile part of the business.

As Barkley points out, there are some things that make alcohol distribution uniquely challenging. “There are some really sophisticated systems in some of these warehouses that are really impressive in terms of what they enable the warehouse to do,” he says. “But beverage alcohol is a heavy product, it’s a specialized product, and it can be a challenging product to fully automate.”

And then there is the hope that a continued easing of the pandemic-era setbacks will eliminate some of the pressures on the supply chain and the warehouses.

“I am curious to see how this plays out over the next six to 12 months, as we’ve seen maybe a shift back to pre-pandemic behaviors,” says Barkley. “People are going out to shop, they’re not necessarily buying everything online anymore, and we’ve seen Amazon push pause on several warehouse development projects recently. Those are all positives for beverage alcohol warehouses and importers and distributors to have better access to cost-effective space in the future. But that hasn’t happened yet.”