Plenty in reserve

Aged Rioja Reservas are fuelling growth for thepre-eminent Spanish wine region, and what’s good news for Rioja is great for Spain, says  Patrick Schmitt

A LITTLE like adding too much ice to a glass of water, recent sales surges of Rioja have helped the whole of Spain spill into the positive after an extended period of decline.

Spanish wine in Britain has risen by almost 5% in volume and 8% in value (ACNielsen MAT to end of December ’04) and posted 12% and 20% increases in Rioja volume and value sales respectively over the same time-frame.

Such a boost can be attributed to Rioja because it represents at least a third of all Spanish wine sales in this country, and, as history has clearly shown, only the smallest of supply fluctuations from this famous region can affect the price and subsequent promotional activity of its wines on the UK retailers’ shelves, and the sales figures for Spain as a whole.

Thankfully, the effects of large price shifts for grapes are disappearing into the distance as though they were warning signs in the rear-view mirror of a fast-moving car.  Furthermore, ahead lie strategies to prevent their recurrence.

And what’s also interesting about Rioja’s current performance, in the UK at least, is that it’s not the youngest element of the DO’s produce that’s powering growth, as has been the case in the past, but rather the oakand bottle-aged Reservas, usually a more quality-focused offering.

Nevertheless, whatever the quality level, discounting still appears to be the driver, and, as is well documented, this is not the most sustainable of solutions.  Firstly, however, to consider the different levels of Rioja and their role in the region’s growth, it appears Reserva increased by almost 71% over the course of 2004 (using figures until the end of November).

Following this are Crianza Riojas with a near- 25% leap, Sin Crianzas which are up 10%, and then Gran Reservas, down almost 2% in volume. Of course, this must be considered in relation to each of these quality-levels’ share of the UK market, and it’s the unaged, or Sin Crianza wines which account for some 50% of sales, although the rise of the Reservas has knocked their share by 6%.

Crianza and Reserva, then, both have around a 24% share, and Gran Reserva a near-3% share.  So what’s the secret behind the rise in Reservas? Well, as Faustino’s international communications director, Roberto Alonso believes, sales of Rioja, and in particular Reservas, "are up because of new promotions in the UK.

Certain brands are doing bogoffs and Tesco has been doing 50%-off offers with its own-label, leading to Reservas being priced at £4." Similarly, PLB’s Alex Canetti notes that, "The supermarkets have discovered Rioja Reserva and have really pushed it, and have been, for instance, taking an £8.99 wine and selling it with, let’s say, £2 off."

The cause of such promotions is, according to Alonso, due to production.  "There’s more than enough wine, that’s the problem," as he sees it.  In fact, looking at the overall figures for Rioja in 2004, exports to the UK were up almost 24% to over 21m litres, but a little over 19% in value, to €87.5m.

Divide the value by the volume figure, and you et an average price per litre of just over €4, which is a decrease of almost 4% on 2003.  As Alonso says, "The average price per litre is down, and the net income of those wineries running promotions is lower.

We are the biggest family-owned company in Rioja, but others have to make targets for shareholders, and the main concern may not be profit, but volume," he says, rather pointedly. Certainly, looking closely at the off-trade performance indicator for Rioja by brand shows some interesting statistics.

For instance, Bill Rolfe, international marketing director at United Wineries, draws attention to the company’s Berberana Rioja, and in particular to its 12- weekly volume percentage increase of almost 220%.

As he candidly explains, "This was due to a promotion in Sainsbury’s with Berberana Reserva in the last 12 weeks of last year to coincide with Christmas sales."  This could explain Campo Viejo Reserva’s surge over the same period, as well as Faustino VII’s.

"We haven’t been engaging in deep price cutting," says Matthew Hudson, ADUK.  "Our promotional strategy has not changed since the previous year these figures look at."  The buoyant sales he believes are a combination of Campo Viejo’s strong branding, as well as repackaging of the product 12 months ago, although discounts, even if not deep, no doubt played a part in attracting the shopper.

But back to Rolfe, who also makes the point that Marques de Grinon doesn’t show rocketing growth figures in the last 12 weeks because during the same period in 2003, the brand was involved in a promotion, which it didn’t repeat in 2004.

Furthermore, the company’s lowest promotional price for the Grinon brand was higher in 2004, and Rolfe attributes some of the sales success of Reserva wines not to discounting, but to the absence of extremely cheap Rioja.

"Remember that the most important name on the label is Rioja," he notes, "so if you see £2.99 Rioja, £3.99 Rioja, £4.99 Rioja and then Reserva £7.99 Rioja, you’ll sell a limited  amount of the latter.  Take away the £2.99 and £3.99 and you’ll sell more Reserva as a ratio of the Riojas, so the increase in Reserva sales is partly due to promotions but also because we’ve taken away the draw to trade down."

This could also explain the average price increase of Rioja 2004 versus 2003 of 6.6%, from £4.76 to £5.08.  But beyond branded increases it is worth noting the importance of own-label sales in Britain.

Alonso reckons they account for some 50% of exports to the UK, or over 10m litres of wine. As he says, "If you think the top five supermarkets all have ownlabel Riojas, each selling around 150,000/ 200,000 cases, then it’s a big market."

And Rolfe reckons over 20% of those sales are of Reserva or Gran Reserva Riojas, hence any emphasis by the supermarkets on promoting their own-label Rioja Reservas could have a significant impact on sales overall and average prices.

And should this be considered a bad thing? Not necessarily.  As Tom Perry, managing director of the Rioja Wine Exporters’ Group, and others point out, "It’s better for the image of Rioja for people to be interested in Reservas than young wines."

And certainly, for the British consumer, Reserva "rings more bells", according to Alonso, which is no doubt the reason for the wines’ success on promotion.  Though Alonso fears the upmarket image of these wines is being spoiled by repeated discounting.

Aside from the promotional mechanics behind Rioja’s growth, it’s worth noting that the figures are also positive because they are relative to a more stable pricing situation for Rioja, not the situation 18 months ago when supermarket prices were extremely low for the  region’swines, and volumes were high.

This meant much of last year’s data was compared with an earlier year of anomalous growth, hence the less than rosy picture.  However, Rioja must attempt to prevent future supply inconsistencies to avoid devaluing this regional brand through the influx of cheap wines, or the delisting of its wines in years of shortage and sudden price increases.

Currently, according to Perry, the only mechanisms in place are the imposition of maximum yields by the regulatory council, as well as control on the percentage of grapes made into ine.

But although both these techniques help curb excess supply, what is currently being studied is what to do when the harvest is significantly small.  Some sort of wine reserve has been proposed, but as Perry notes, "This does imply cost, for example the cost of warehousing."

Nevertheless, while the supply of Rioja in the past may not have been exactly consistent, Christine Forner, managing director of Bodegas Marquès de Caceres, believes quality and stability of the overall product is key to the acceptance of Rioja in key export markets, but this is compounded by fickle consumers "always looking for the next thing."

However, she does believe that those who are loyal, remain so to Rioja, "with its traditional but stable and constant image".  International markets A quick glance at the main markets for Rioja outside Spain reveals the UK topping the charts with over 21m litres of exports, and by more than double its nearest rival, Germany with 10.1m litres.

Switzerland is the third largest, and also half the size of Germany, or a quarter as big as the UK market, with 5.3m litres.  Closely following this, with 5.2m litres, is the US and then Sweden with 3.2m litres, a market in marked decline for Rioja.

Looking at these markets more closely, it appears that Germany, although number two in volume, is not an entirely healthy market, with a low price paid per litre, if a rising one, at just above €3.

This low price is due to the fact that unaged Riojas account for almost 70% of the market, although this is falling.  Also, Perry points out that "Crianzas and Reservas are performing well" in Germany with a 250,000 litre increase in the former, and 100,000 litre rise in the latter (November 2004).

Nevertheless, "Germany is pretty much controlled by the discount supermarkets, and if they can’t hit price points because of costs at source, then they buy less.  This happened in 2004 with young Rioja," says Perry.

Switzerland, on the other hand, has an average price paid per litre similar to the UK at over €4 per litre, although this represents a decrease on 2003 of some 5%.  This is because, although Switzerland shows increases in volume sales of Rioja byover 8%, much of this has been in young wines, which are up some 45%.

There’s even a slight dip in sales of Crianza and Reserva wines.  Next, the USA, is showing a healthy average price per litre of €5.5, up over 3% on the previous year.  Alonso even believes the USA could currently be Rioja’s third largest export market if it wasn’t for the strength of the euro versus the dollar.

Lastly, Sweden, with a 20% decline in volume sales, has an average price per litre of almost €4, and almost equal decreases across all quality levels. This is mostly explained by the  surge in bag-in-box sales in Sweden, and across the rest of Scandinavia in fact.

Rioja has to be bottled in glass and in the region (meaning its market in Sweden) is some 50% smaller than it otherwise would be, as over half of sales in Sweden are in bag-in-box formats.

"If you consider the Swedish wine market in glass bottles is only half what it was, Rioja has pretty much retained its share of wine sales," comments Perry. 

Lastly, as Carlos Latas, export director for Bodegas Paternina sums up, "Exports are incredibly strong with growth continuing in traditional markets such as the UK and the USA, and in smaller markets like Switzerland and Holland which are proving incredibly profitable especially for Crianzas and Reservas."

Furthermore, he argues, "One of the most interesting regions for us over the past two years has been Eastern Europe and the Baltic states."