Feature / Port: Port pipes down

In an attempt to increase prices, the Instituto dos Vinhos do Douro e Porto has reduced yields for 2006. But is lowering production really the way forward for Port? Richard Woodard reports

Glass half-full or glass half-empty? The challenges facing the Port industry in 2006 are creating a clear division between pessimists and optimists in the Douro Valley. Those wielding “The end is nigh” signs point to escalating costs, declining volume markets and the near-impossibility of pushing through price rises amid retailer consolidation in countries like the UK. But those with a sunnier outlook instead indicate the continuing buoyancy of North America, the promise of Scandinavia and Asia, and the impact of recent consolidation on the industry.

And then there is the beneficio, Port’s production safety valve, the limit on production in a given harvest, set by interprofessional body the Instituto dos Vinhos do Douro e Porto (IVDP). Again, this divides opinion: for some, the beneficio has preserved the Douro from the kind of boom-and-bust economics that have blighted the Sherry industry in recent years; others, however, are sceptical. One leading industry figure confided to me that he thought the system was “utterly mistaken”.

Growing shortfall
This year’s beneficio news is hardly likely to dampen the controversy. At 123,500 pipes, it is about 8% below projected sales for 2006 – making it the fifth year in a row that production has lagged behind sales. The overall shortfall since 2002 is now more than 4.5 million cases – the equivalent of nearly six months of global Port sales.

So why is Port apparently producing less than it needs? IVDP director Jorge Monteiro points out that the 123,500 pipes limit is, in fact, 6.25% above the predicted demand for young wines this year (although this does not take into account increasing demand for older wines like aged tawnies and LBVs – which were all young wines once).

But the real reason is falling grape and finished-product prices: the logic says that, if the Douro produces less Port, by the logic of supply and demand, prices will rise. “The average price is something that the Port wine sector is well aware of,” says Monteiro. “In the past few years, the beneficio has been lower than the equivalent of total sales. The price paid to production has fallen more than the FOB bottled price. The sustainability of both the trade and the Douro producers may be at risk if the negative tendency of prices is not inverted with care.”

George Sandeman, Sogrape director, agrees: “I think if you look at the statistics – particularly in terms of the younger wine sales – they’ve been driven to some degree by the lowering of prices. It’s not a question of ‘let’s create the shortage and get the prices up’. The reality is that it’s not sustainable to keep producing at this level – a lot of farmers will be going out of business.”

Similarly, Miguel Côrte-Real, commercial and viticultural director of Cockburn’s, says, “What the IVDP is hoping to avoid is the situation that is happening across the world where supply is far greater than demand. By setting a realistic figure that ensures supply is in line with demand, the IVDP is looking to ensure long term sustainability of Port producers.”

The logic is clear enough – and few would disagree with the need for firmer pricing, both at the commodity end and in mature markets like the UK. But those most closely acquainted with those markets have concerns about the potential shortage of younger Ports that another low beneficio will bring. “This shortage will inevitably result in some cost increases, both for grapes and, therefore, for Port on the shelves in the main export markets,” says Paul Symington, joint MD of Symington Family Estates. “But this may not be such a bad thing after some years of effective price reductions and excessive price promotions.”

“It’s unlikely to cause prices to decrease,” says Adrian Bridge, managing director of the Fladgate Partnership. “The shortage at the commodity end is becoming a more serious concern and that will drive up prices of commodity Port, and it should eliminate Port being sold at €1.95 a bottle.”

Port sales by volume and value, principal markets, 2004-2005

Price resistance
Bridge points out that there is very little Port for sale in the Douro at the moment, but he adds that it is “perfectly possible” that wine will be left unpurchased at the end of the 2006 harvest. “You would imagine that you would end up with a very short market, and prices will push up – farmers would like to see it. In reality, that can’t be pushed through to the consumer. The market is not ready for price increases, but they might be able to accept less discounting.”

This is the nub of the problem: effective price deflation in Port’s major markets must be stopped, but powerful retail buyers are mostly unwilling even to see marginal price increases. The UK is the clearest example of this: a strong, stable Port market, but one dominated by seasonal trading in the pre-Christmas period at multiple retailers. And Christmas, of course, is the season to be jolly generous with price-offs and deals designed to drive footfall into the supermarkets.

This has almost spiralled out of control in recent years, with LBV – for so long, Port’s premium-priced champion of the shelves – also being drawn into the dogfight. “The ongoing disappointment in the UK over the past few years has been the price war between a couple of major groups on LBV,” bemoans Christian Seely, managing director of Quinta do Noval owner AXA Millésimes. “[LBV] is, I believe, one of the best value-for-money propositions in the wine world
right now. Price wars have not done the Port trade any good.”

To be fair, shippers like Fladgate and Symington have recently shifted their price-driving emphasis from LBV to alternatives. Symington introduced Graham’s Reserve this year, described as a high-quality reserve ruby sitting below the house’s LBV bottling in price terms (and exclusive to Sainsbury’s). Such new products will drive down LBV volumes now, but they should also preserve the category’s value in the longer term.

The key to deseasonalising Port consumption in the UK – besides consumer education and sampling – has long been seen as the development of the tawny market. Impressions vary greatly here, with some, like Seely, dubious as to whether there has been any significant upturn.

Others, including Noval’s importer, are more positive. Marni Laurent-Trammell, junior brand manager at Paragon Vintners, says she has seen “quite an increase” in sales of Noval 10-year-old Tawny – music to Seely’s ears, as he has been laying down greater stocks in recent years.

A summer promotion with Waitrose, stationing Noval 10-year-old in the chiller cabinet with a 20% discount, led to a 130% sales increase, simultaneously helping to deseasonalise sales and educate consumers on how to get the best out of the product.

At Mentzendorff, fortified brands manager Sarah Woodward says that retailers are increasing their ranges and distribution of aged tawnies in particular, and she notes an encouraging trend of “premiumisation” of Port lists in the on-trade too.
Ben Campbell-Johnston, communications manager at Symington Family Estates, scents “greater awareness” of tawny in the UK, with the company’s Warre’s Otima registering only 54% of its sales in the September to December period last year – well down on the industry average of roughly 70%.

But he strikes a somewhat more worrying note in describing Otima’s success. “What we found initially with Otima was that our sales soared. We thought that would distinctly impact the overall market. It didn’t, really, but it succeeded in stealing market share.” In other words, innovations like Otima and Graham’s The Tawny may be good at keeping existing Port consumers interested, but they don’t appear to be recruiting as many new drinkers as producers might have hoped. Perhaps further innovations, like Fonseca’s newly introduced Terra Prima organic offering, will be more successful.

Receptive American market
The UK stands in stark contrast to the US, which has embraced aged tawnies with alacrity. Seely reports especially strong demand for Noval’s colheitas, a style that struggles in the UK through lack of understanding. “Americans are just very open to new ideas, so if you make a great wine, it gets a good write-up in Wine Spectator or wherever – whereas in England, I find that people are less willing to experiment with a new idea in what they consider to be a traditional category,” he says.

Recently, the US and Canada have been joined by Scandinavia as international markets to watch, in Seely’s eyes. But he reserves particular optimism for Asia, an area in which he has travelled extensively to promote AXA’s Bordeaux wines. “They say: ‘Is this wine sweet?’ I say no. They say: ‘I want something sweet and red and strong.’ They like the taste of Sauternes and they would like red wines to be sweet.”

Assuming Château Suduiraut doesn’t start producing red stickies, the area is clearly of long-term interest to the company – and to the industry at large. There’s no disguising the problems in Port’s volume markets in 2006. France, Belgium and the Netherlands – plus Portugal at the lower end – are suffering amid an ageing consumer base and cripplingly low prices.

Bridge hopes that continuing consolidation – with Barros now part of Sogevinus with Cálem, Burmester and Gilberts, and Cockburn’s assets bought by the Symingtons – will help tackle this. He believes that commodity Port prices have been dragged down by companies operating in the short term for cashflow, but adds that, with inefficiently run businesses now changing ownership, firmer pricing could follow. Which is a very polite way of saying that there is less reason for Port stocks to be effectively dumped on markets like Belgium and Portugal.

The realities of these markets, which still account for the lion’s share of international Port volumes, are the true reason behind this year’s low beneficio level. But Seely questions the logic: “It is a very broad-brush approach to the situation and inevitably results in a reduction of production capacity in the higher quality, as well as the other end,” he argues. “It seems to me to make no sense at all to want to reduce the production of high-quality wines, for which there is high demand and which are the future of Port. I don’t necessarily believe myself that the answer to a difficult market is to reduce production. Personally, I believe that the answer is to get out there and sell more wine and tackle the demand, not the supply.”

Seely is speaking as a low-volume, high-value producer, not reliant on selling large amounts of cheap Port in France. But if he is right, then the Port industry needs to beware of becoming too pessimistic in the face of its current challenges. In keeping its production levels down, the industry is in danger of reacting to its problems, rather than seeking to capitalise on its opportunities. In the longer term, it may regret that. 

© db September 2006