Taking Stock in the Douro

News Analysis – Port is consolidating on two fronts, both in the boardroom and in the vineyard, to compete in the ‘ferociously competitive’ market. Richard Woodard reports

At first glance, the two news stories appear to have little in common. First of all, it was revealed that three Port shippers – Barros, Da Silva and Messias – were for sale. And now the drinks business can reveal that one of the Douro’s leading players, Symington Family Estates (SFE), is closing in on a “significant” vineyard acquisition.

In fact, the reports serve to illustrate the changes sweeping Port, driven by an ultra-competitive global wine market and the decline of high-volume markets like France and Belgium. The result is consolidation on both a corporate and vineyard production level. So perhaps the two stories have more in common than you might think.

Export figures for 2005 are steady: volume up 0.9%, value up 1.25% thanks partly to 2003 vintage shipments. But zoom in closer and you’ll find a more troubled picture.

For some time, producers have known that Port’s traditional volume markets in continental Europe are in long-term, if unspectacular, decline. What is more, escalating production costs and diminishing margins have been squeezing shippers still reliant on those markets.

The far-sighted – including The Fladgate Partnership and SFE – have long seen the need to focus more on premium markets like the UK, US and Canada, shifting production towards the likes of LBV, aged tawnies and single quinta vintages. Others, however, are now feeling the pinch.

But in recent years even premium markets have come under pressure, notably with pre-Christmas discounting on LBV in the UK. One of the products most responsible for Port’s continued strength is now seeing its margins eroded.

Regrettable? Yes. Inevitable? Almost certainly, says SFE joint managing director Paul Symington: “The buying power that the big chains have has inevitably had an impact on their suppliers. The changes that have taken place in the Port market are not, as in previous generations, because there is a crisis in Port consumption, it is because the wine market is ferociously competitive and Port is part of the wine market.”

At least the signs are that it is not getting worse. Christmas trading in the UK was good, according to Fladgate MD Adrian Bridge, although he voices some concern about supermarkets investing some of their own margins to drive prices down further.

Nor is France all bad news. Cockburn’s general manager, Jim Reader, points out that a near 3m case market has its share of premium products, with signs that the mix is getting better. And, as Symington says, the underlying demand is still there for Port; it is the market that has changed.

So how does Port meet these challenges and stop the steady process of consolidation from becoming a flood that brings damaging instability?

Symington points to innovation, citing launches like Warre’s Otima and Graham’s The Tawny as ways of freshening up the consumer offer. But Bridge warns that “going premium” is not as simple as it sounds. “Premium takes work. Premium isn’t just talk. There are a lot of people who talk about premium, but don’t then do it. To go and sell it you’ve got to explain exactly why consumers should pay a premium and what they are getting for that premium,” he argues.

Then there is the much-needed consolidation of the production base – the Douro’s farmers – and reform of the beneficio, Port’s often unfairly criticised production safety valve.

Officially, there are 40,000 farmers in the Douro, but Bridge believes that a core of 600 farming more than 10ha each are “the real professional future” of the valley. And perhaps it is this process of consolidation, coupled with the sort of vineyard acquisition now being completed by the Symingtons, which is most crucial to Port’s future.  db February 2006

INSIDER OPINION

Christian Seely, managing director, AXA Millésimes (Quinta do Noval)
“The Port industry has been undergoing a process of consolidation for some time now, and I believe that it will continue. However, I also believe that there is a place – and it is a very good one to be in – for a small, very high-quality niche player like Quinta do Noval, or indeed Quinta de Romaneira as it will become, in this market.

I believe that a small producer concentrating on the fine wine aspect of Port can and will continue to
be able to navigate a small boat successfully alongside (and often ahead of) the larger vessels!”

Paul Symington, joint managing director, Symington Family Estates
“The underlying strength of Port is evident. Consolidation within the Port trade will continue as a result of the ferocious nature of the international wine market.

Innovation and quality are the keys to the future. If we do not innovate, our traditional consumers will disappear. It is not easy to get innovation right in such a traditional sector, but it has to be done and it has to be right.

“The government must tackle the issue of re-structuring the Douro to meet the future needs of Port and Douro DOC wines.”

Adrian Bridge, managing director, The Fladgate Partnership
“There is concentration in terms of distribution, which has made the world more competitive. Companies that are stuck in the middle have got to either grow their business to get scale or shrink their business to become niche.

“What’s been happening in recent years has been that some companies have been selling for cashflow rather than selling for profit. The problem with that is that it’s very short-term.”

db February 2006