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Producing, distributing and selling wine and/or spirits in a global recession – November 2009

31 Aug

The global economic crisis together with falling value of the pound has had a significant impact on the UK wine market.

This essay aims to explore what challenges have UK retailers been faced with and the subsequent surviving tactics that they had to establish in order to continue trading and to keep UK wine market growing. So is it all just gloom and doom or is there a light at the end of the tunnel for UK retailers?

Introduction

UK wine market is ruled by multiples with 74% of share (2008). This will be the key focus of this essay set in the context of the wider retail marketplace. -There are many factors that influence how multiples trade but the two main considerations are their customers and suppliers. Suppliers include importers, producers or other distributors that supply directly. -The UK population is ageing and there are 500k fewer wine drinkers than 10 years ago. There are around 23.5 million regular drinkers who represent 95% of the value to the industry which was translated into 135 million cases of wines drunk in 2008. Almost forty pence of every pound spent on alcoholic drink goes on wine. However, UK wine drinkers are comparatively modest consuming 27 litres per head as opposed to the biggest drinkers Italians who consume 56 litres per head. It is Australian wine that is our favourite tipple and taking over France position well ahead of US, Italy and South Africa in that order in both value and volume. Chardonnay is the most favourite grape variety with Pinot Grigio the fastest growing style and Rose wines the only significant wine growing category (ref 1). -Suppliers together with retailers have been working hard to follow the current trends and offer enticing wine range in the right price. However, the relation between retailers and suppliers is becoming strained as the fight for survival forces many companies to consolidate. One of the recent casualties is Somerfiled merger with Coop and HwCg being acquired by PLB. -Despite the current tough times, there are some positive signs in the UK wine market growth. Off-trade annual sales translate to £5 billion in value which is 6% up from the last year (2008) and 98 million (9ltrs) in volume (ref 1). The major players are Multiples who account for almost three quarters of both value and volume (ref 1). It is Londoners who account for the highest consumption within UK drinking up to 14% of the total volume.  -UK retailer’s structure is diverse and grouped into specialised sectors. -In 2009, there were circa 45,000 off-trade outlets in total of which 7,000 are Multi Grocers (Multiples and Multi Specialist) and their large share continues to grow via their out of town formats (this is particularly relevant to Multiples). The rest is split between Impulse including Off-Licences, Convenient Stores, Independents and other Impulse. -The big players are Tesco, Sainsbury’s, Asda, Morrison’s, Cooperative (ex- Somerfield), M&S and Waitrose, sharing sales worth £3.5 billion with 70% primarily based on branded sales (ref 2). In addition, there are discounters such as Aldi, Lidl and Netto whose strategy is not that dissimilar to multi grocers in volumes and range they offer. Nielsen Homescan (ref 4) revealed that 60% of households now shop in discounters where Aldi has attracted the most new shoppers. -Impulse traders are loosing some of its sales to multi grocers. The wine annual sales are now worth £475 millions (ref 2) with volume sales down 9 % to 7.4 million (9ltr) (ref 1).  -The wine market is fragmented and different players in the market are affected by the recession in different ways. The following Discussion describes the lead up to the recession, the challenges the recession has brought and the tactics that companies have adopted in response.

Discussion

Wine sales have been steadily growing year on year over the past 10 years showing retailers’ flexibility to adapt to changing trends and customer demands. Even during the last recession in 1990/91, sales increased as consumers spending actually grew about 10%. On the other hand, margins have been decreasing with retailers changing strategies balancing the demand and supply ratio. As Mike Paul explains: ‘Arguably the tipping point was the explosion in Australian supply in 2000-2001 that let to the market-leading and value-chasing brands of the 1990s being forced down the volume route’. Oversupply shifted the balance of power even further towards the retailers, leading to a spiralling down of margins and value-added marketing investment.’ (ref 5). Since then Australian wine has been losing share continuously to South Africa which is emerging as one of the biggest threats with other ‘value countries’ such as Hungary and Bulgaria. -A couple of years ago, the wine trade has turned to trading up – to get customers to drink better quality wine and educate them by offering wider range of wines. Some major distributors such as Diageo and Pernod Ricard growth strategy was driven by premiumisation where moving customers to trade up provides higher margins for retailers and overall bigger profits for those in supply chain. ‘Eighty-three percent of suppliers questioned in an OLN poll said encouraging customers to trade up is essential, with many saying it is more important than ever in the current economic climate.’ (ref 3). -However, the hard times brought by the recession have changed everything. David Williams hits the nail on the head when he says: ‘’Today, most suppliers are happy to trade at all, let alone to get their customers to trade up. The new buzzword in PowerPoint presentations and sales pitches, on retail shelves and wine lists, is the rather more down-to-earth value’’ (ref 10). –  -A similar story applies to the multi grocers where previously they had genuinely exciting ranges praised by many journalists. As an example Tesco added an extra 360 new lines within 2007 with a number of these wines dedicated to their fine wine range. However this changed when (as Nielsen reported) 250,000 households stopped purchasing wine in 2008.  -The recession brings challenges for the whole supply chain from winegrowers and producers who are at the most risky position as they need to predict future trends to reflect their decisions in the vineyards, through suppliers who are forced to cut costs on every level, through to retailers whose margin demand keeps increasing and putting ever more pressure on their suppliers all in order to offer ‘value for money’ to their customers.  -The main problem brought by the recession is the drop in consumption of wine where customers are trading down, tightening their purses and focussing on own labels as they perceive these are more value for money. This is increasing the already strained relations between suppliers and retailers. On top of this retailers are faced with duty increase (Excise Duty per 75cl in France is £0.02 compared to the UK at £1.61) which together with VAT represents about 50% of the retail price of a £4.99 bottle of wine. The government’s role is significant with a likely further increase in drinks taxes as well as possible extra regulation fuelled by the anti-drinking lobby – for instance introducing a mandatory code that bans certain drinks promotions (already in place in Scotland). Adding to these has been the deterioration of the value of sterling against other currencies, notably the Euro. Inevitable job losses are predicted. Some 300 jobs have been lost so far and further casualties are expected amongst major distributors such as Constellation, Foster’s and Pernod Ricard. -High street stores such as Majestic Wine and First Quench Group are also suffering through the economic downturn but their further issue is cash flow reduction and credit refusals from their suppliers.  -Despite the sales decrease there seems to be a new opportunity in online retailing which is picking up sales. Laithwaites, the UK’s biggest online home-delivery wine business and other rivals such as The Wine Society are amongst those taking advantage. Alan Lodge reports that ‘’Consumer sales at TheDrinkShop.com are up by 9% and sales to its trade customers have increased by 22%. This growth is attributed to an increasing customer base rather than to higher individual spending’’ (ref 15). The reason why web purchasing is becoming more and more successful is its delivery efficiency, price competitiveness (especially if one is prepared to buy by case), ease of use for the customer and low overheads (no need to worry about shelf-space).  -Another new growing trend is a shift from out-of-home drinking to at-home entertaining and drinking which has a significant influence on trading up and shifts sales from on-trade to off-trade. This is reflected in wine sales in pubs and restaurants which has decreased 1 %, the equivalent of 12 million bottles. All this has not come unnoticed by the big players who have been taking advantage of this trend. M&S offer‘ £10 Dine in for Two’ meal deals, Sainsbury’s can ‘Feed your family for a fiver’ and Morison’s is ‘Helping you cut the cost of your weekly shop’. -There is also a new kind of ‘big player’ who seems to make the most of the current market. These are big discounters such as Lidl, Aldi and Netto who have been around over 10 years but it is now that these retailers, socially more acceptable then ever, are benefiting from selling wine to bargain hunters. Being able to sell big volumes at low prices is what it is all about these days and these three major discounters have mastered this efficiently, increasing their market share. Offering smaller wine selection in basic palletised display and therefore minimising staff makes them more competitive with lower retail prices than supermarkets. Another advantage of their strategy is a focussed range that provides them flexibility. But their strategy has some similarities to supermarkets – offering good quality wines at good value prices such as Echo Falls at £2.99 or Jacob’s Creek at £3.99.  -Retailers answer to attract more sales is 3 for £10 and BOGOF promotional offer which has spread like wild fire across multiples and has major presence in Asda and Tesco. Supermarket buyers are trading down and focusing short term on value wines whilst many producers have been working hard to reposition themselves and seeing their future in the upmarket wines. Further supplier misfortune is the loss of brand loyalty and as volumes through promotions are higher then ever, retailers also require higher margins on promotions, averaging 25% across multiples. The multiples are very powerful as they can demand below cost pricing and can offer very competitive prices to customers. The Wine Report 2009 reports that the main outlet from which wine for drinking at home is bought is Tesco. 65% of wine shoppers rate Tesco as the best place to buy wine for convenience, wine choice, value for money and promotions. ‘’Sainsbury’s and Asda come next, then Morrisons, Waitrose and M&S, while the Coop, Bargain Booze, Threshers and corner shops lag behind.’’ (ref 2). -Supermarket buyers tell us that their aim is to bring value for their customers but I wonder what kind of value we/consumers are getting when one can buy 3 wines for £10. As if this was not enough, Threshers are now offering 3 for £8 – madness. How can anyone produce wine like these and still make any profit at all? It seems that high volumes seem to compensate somewhat for tiny profits but it is obvious that only certain producers/importers are set up to cope at a sub £3 market. -Retailers’ tactics for surviving the downturns are to offer more and more extreme promotions and discounts while stressing the value of these products and this technique seems to be successful. It is attracting those bargain hunters who are then willing to do their weekly shopping in exchange. Also value lines such as ‘Sainsbury’s basics’ or ‘Waitrose’s essential’ are experiencing strong growth with a real threat to brands. -Tesco’s response to the current wine trends is to reduce their range to 900 permanent lines by trimming some of the fine wine lines but creating more space for rose and sparkling wine. Also their current promotional offers reflect the customers spending. -The latest Marks and Spencer’s marketing stunt to attract more customers was to offer a one-off 1p sale to celebrate its 125-year anniversary and the famous ‘Two dine for £10’ which has also been adapted by other retailers such as Waitrose and Sainsbury’s. -However, the promotions driven market is only a short term solution to the recession, and the only way to survive is to develop a long term decisions and relationships. -The wine industry should join forces in a mission to make wine more aspirational through the creation and promotion of premium brands. The focus should move from heavy discounts to good quality wine in wide price range so that all parts of the supply chain have sustainable future. Being more innovative – providing clever products that deliver against more than one trend. Changing the way wine is perceived by customers – less snobby and serious and more relaxed but with sophistication. Targeting a younger audience and educating them about wine and the effects of alcohol. Spending less on traditional advertising and focusing more on wines that have medals from wine competitions such as Decanter, IWCS and IWC in order to earn credibility. Each retailer has to develop their own individual tactics to survive the downturn.

Conclusion

While the global economy appears to be stabilising, there is still plenty of uncertainty in the UK wine market and some predict that 2010 will be even more challenging for some. However, there are also some positive predictions voiced through The Wine Report 2009 where 38% of participants of the recent survey announced that they feel very confident and 49% feel fairly confident that sales will grow in the coming year compared to only 4% who are expecting sales to fall (ref 2). -The outcome from Wine and Spirit Trade Association annual conference in September 2009 is that within next year off-trade will recover, however on-trade will still be trapped in the downturn as it is not perceived as good value for money. Online retailing is predicted to be the upcoming new star as the fastest growing sales channel according to Wine Intelligence. The market strategy will be to continue to build mid-market brands through premium offerings and focus on value rather than volume growth. Efficiency savings are crucial and any investment needs to be with a long term view. Many multiples suggest that the future priority will be on saving money, cutting waste and investing in discounts brands with the focus on new smart product developments such as lower alcohol wines, new format packaging in 50cl, Tetra Pack, bulk wine and innovative new merchandising approaches. -There are many more challenges ahead but global wine production is expected to rise by 4% to 3 billion cases in the coming years reflecting the rise in consumption coming from China and Russia. It is also predicted by International Wine and Spirit Record (IWSR) that Rose and sparkling wine will continue being the fastest growing style of wine and that UK wine consumption will increase by 20 million cases by 2012. -There will be winners and there will be losers. Big brands such as Hardy’s, Blossom Hill, Gallo, Jacob’s Creek and Wolf Blass will grow in a mutual relationship with supermarkets. Which brands will do well in the future depends primarily on the promotional offering they are able to sustain. -All in all, it seems that the sector is armed with a number of strategies for not only surviving the current down-turn but prospering in the years to come. –

Bibliography & References

1. AC Nielsen MAT TO WE 13.06.09 -2. The Nielsen Company (Report May 2009) -3. The Nielsen Company (Report May 2008) -4. The Nielsen Global Liquor Symposium, United Kingdom, Gavin Humphries, Nielsen Liquor Services UK 2009 -5. Off licence news, March 27 2009, Volume 40, No 6 -6. Off licence news, February 27 2009, Volume 40, No 4 -7. Off licence news, February 13 2009, Volume 40, No 3 -8. Off licence news, January 30 2009, Volume 40, No 2 -9. Harpers Wine & Spirit, February 2009, Issue n.1 -10. Harpers Wine & Spirit, August 2009, Article: ‘Why value really does matter’, By David Williams+-11. Harpers Wine & Spirit, August 2009, Article: ‘Tesco recession proofs range’, By David Williams -12. Harpers Wine & Spirit, August 2009, Article: ‘If you can’t beat them…’, By Claire Hu -13. Harpers Wine & Spirit, August 2009, Article: ‘How low can they go?’, By Simon Woods -14. Harpers Wine & Spirit, April 2009, Issue 5 -15. The Drinks Business, Issue 84, July 2009, Article: ‘Wine sales click into space’, Written by Alan Lodge -16. The Drinks Business, Issue 84, July 2009, Article: ‘In high spirits’, Written by Patrick Schmitt -17. The Drinks Business, Issue 85, August 2009 -18. The Drinks Business, Issue 87, October 2009 -19. http://www.Telegraph.co.uk, April 2009, Article: ‘Wine sales plummet in recession’ -20. http://www.independent.co.uk, January 2009, Article: ‘The recession shouldn’t affect wine sales too badly. The world will not stop drinking wine’, Written by Anthony Rose -21. http://www.decanter.com, May 2008, Article: ‘Consumers will carry on drinking wine despite recession: survey’, Written by Richard Woodard -22. http://wineeconomist.com/2008/10/25/trading-down/, October 2008, Article: ‘Trading Down: Wine and recession’, Written by Mike Veseth -23. http://wineeconomist.com/2008/10/04/how-will-the-economic-crisis-affect-wine/, October 2008, Article: ‘How will the Economic Crisis affect Wine?’  -24. http://www.harpers.co.uk, May 2009, Article: ‘Mandatory code blow for industry’, Written by Eamonn Houston -25. http://www.harpers.co.uk, June 2009, Article: ‘Sticking with wine prices pays off in downturn’ -26. http://www.talkingretail.com, July 2009, Article: ‘Drinks industry pledges £100m to responsible drinking campaign’ -27. http://www.thedrinksbusiness.com , August 2009, Article: ‘Is premiumisation on its way?’  -28. http://www.thedrinksbusiness.com , September 2009, Article: ‘Off-trade to recover but on-trade set to struggle’, By Alan Lodge -29. Off Licence News, July 2008, Wine Report 2008 (Sourced from Nielsen’s Scantrack Service) -30. Off Licence News, July 2009, Wine report 2009 (Sourced from Nielsen’s Scantrack Service) -31. The Wine Intelligence (website search) -32. Wine & Spirit Trade Association (website search)

 
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Posted by on August 31, 2011 in Wine Market

 

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