Mean, Unpleasant Land ?

Apparently, the margins are minuscule and suppliers are expected to jump through hoops. Is the UK still a nice place to sell wine? asks Patrick Schmitt

Last month branded wine was in the dock, accused of being bland and poor value for money. This month it’s the UK market, charged with being too competitive, consolidated and unprofitable. Is Britain guilty? And, if so, who’s to blame?

Although it may seem ridiculous to put our green and pleasant land on trial, we at the drink business are noticing a worrying and growing trend in wine producers from around the world intimating that the UK is no longer a viable place to sell wine profitably. The result, sadly, is that some are considering redirecting resources to markets where margins are believed to be higher.

The issues in Britain affecting returns include a hugely consolidated wholesale and retail environment, an increase in price discounting as a sales mechanic, higher retailer margin expectations and a greater number of wines vying for shelf space in the face of proposed range reductions in some supermarkets.

Getting on the shelf is tough, staying on the shelf is tough, and making money is tough. In particular, some believe the retailers, in a drive to increase profits, have unfairly squeezed suppliers into an unsustainable price position, and the agent and producer network is too fragmented to do anything about it.

But is the retailer really such an uncompromising force? Certainly retailer margin expectations have “gone up significantly in the last five years”, according to Dan Jago at Bibendum. “There are other markets which are more profitable,” he adds, “but these markets have other complications.” He cites, for instance, the much-hyped Scandinavian market where, before reaching the consumer, you must get past the state-run monopolies.

Other commonly mentioned higher-margin markets include the US and the Far East, but, as Michael Cox, Wines of Chile, says, “Yes, the average export price could be higher, but producers must look to the medium to long term where the opportunities in the UK are very rosy.”

Furthermore, there are plenty of examples of companies making a success out of British retail. Jago draws attention to the number of McGuigan Simeon lines on the shelves of Tesco. And most suppliers concede, in fact, that British supermarkets are clever in the way they manage the wine aisles, are innovative in their product choices, and conscientious in their approach. As Mike Paul, Western Wines, asks, “How many markets have retail buyers actually coming to producer countries looking for new things?”

“Not every supermarket deals with just container load after container load,” says Cox. “There are opportunities to sell much smaller parcels at higher prices through supermarket websites, speciality stores, fine wine sections and clubs. It is not just the volume drivers that are getting listings.”

On a more general note, the British market is a hugely healthy one for wine. “The fact is that the UK market is still growing at 5% a year and it is a 130 million case market; which means six million cases are added every year,” says Paul, “and, crucially, people are trading up. The fastest growing sector is over £5, albeit from a small base.”

Then there is the independent sector to consider. “The multiple retailers may have over 70% of the market but that still leaves some 30m cases to fight over. And then there’s the on-trade,” comments Cox. “The opportunities away from the supermarkets are growing.”

Success in the UK market is dependent, not only on finding a niche and exploiting it, but on building partnerships with retailers. However, in an attempt to improve the retail/supplier relationship, there is evidence that suppliers are nervous of openly criticising supermarket buyers, and the demands of British retailers have, no doubt, become tougher. Not only are retailer margin expectations higher, but so are the burdens of logistics management, new product development and ever stricter audit standards.

Nevertheless, the UK market is dynamic and diverse, and the message from most is, neglect it at your peril.

Insider opinion
“The UK is one of the three major markets for imported wines in the world. The New World has proven to be a success in the UK. Profitability will come with growth and competing in the branded sector. The current strong Chilean peso and the existing rise of the wine costs will make the short term financially difficult and critical for some players, but we have to work on long-term profitability. This has to be supported by good projects with clear strategic targets as I believe the wine market will be more consolidated and less fragmented.”
Anibal Ariztia, President,
Santa Rita

“I certainly know a number of producers around the world that are very happy not to be part of the UK market, but although it is difficult, it is not impossible to make a good return here as a producer. The best countries I work in for sales are ones that have import tariffs. The industries in India and Turkey, for example, can thrive due to the prohibitive costs of imports. I know this is not PC and is not very global village-y but it is certainly a good environment to make wine in.”
John Worontschak,
winemaker, Douglas Green

“My view is that the importance of the powerful distribution capability locked up in the multiples and specialists and also the wholesale distributors is vital for wine producers.
As for profitability, it costs the same to produce wine from good grapes or average grapes. If one, therefore, produces wine that cannot command a decent price point, naturally your profitability will suffer. The UK market is a sophisticated one and the buyers are astute and insist on decent price/quality ratios. I have found the same to be true wherever decent volumes of wine are consumed. To enter new markets and build them to a decent market share will be costly and to neglect an already established market such as the UK, would be very foolish indeed.”

Vernon Davis, MD,
Winecorp

“We would obviously be happier making a higher margin in the UK but it is even worse on the continent! If you are selling direct to the retailer and you understand their needs, and if there is a balance between promotional discounting, added-value promotions and off-promotion sales, then it can be and is profitable, otherwise nobody would be doing it and the whole market would collapse.
There is a transition taking place at the moment and there is no doubt some suppliers will have to move to markets outside the UK to sell their wine. This is especially true, I think, for agency suppliers who perhaps cannot make the same margin they once enjoyed due to retailers becoming more demanding and the whole industry consolidating. In summary, the UK is still viable and profitable but for fewer companies.
Bill Rolfe, marketing director,
United Wineries

“While the pressure on producers to sell wine profitably in the UK is ever increasing, the South Africans still recognise the very great importance of this market. The producers realise that there is great potential for South Africa to significantly grow sales above £5 where the margins are more profitable. We have yet to tap into the higher value on-trade category in a major way, and in the multiple grocers sector we are seeing buyers trade up their South African offering.”
Sophie Waggett
Wines of South Africa