NEWS ANALYSIS: Pressing Issue

Price compression in the UK wine market has created a situation where bottles prices are at rock-bottom – and even the best efforts to raise them will fail until the global oversupply situation is addressed at all levels

Wine producers, under pressure to boost margins in an increasingly competitive market, have fallen into the trap of selling too much wine in a very narrow price band.

Now, after a decade of rapid growth, the overall market for wine in the UK has slowed down with red and white wine sales more or less flat. Yet prices still fail to reflect market reality. In fact, UK consumers are paying less for their wine than before. Since 2000, the average UK price point has gone up by a mere 32p, failing to take inflation or rising duty into account.

This deflationary wine market is often blamed on UK shoppers’ love of a bargain or Gordon Brown’s duty hikes.
But it is really due to an imbalance between supply and demand. At a recent press conference, Federico Castellucci, secretary general of the International Vine & Wine Organisation, said consumers have a wide choice of wines at very reasonable prices due to the global oversupply of wine.

Despite reports of possible falling yields in Australia, which has driven many promotional deals in the UK market thanks to its nine million hectolitres surplus, the global oversupply shows no signs of abating. OIV statistics reveal that total world wine production is expected to rise by 3m hl to around 280m hl this year. This increase bolstered by wine left over from 2004, when total production came to nearly 300m hl, which means that there is a current world surplus of around 43m hl. Retail wine prices are therefore unlikely to rise any time soon. 

Much has been made of recent harvest reports from Australia with optimists claiming that poor weather conditions mean the end of the Australian oversupply. Although this is good news for the wine industry as a whole, one vintage is unlikely to resolve the problem for good, given the volume of wine that is left over from previous vintages. Although Australia is working hard to move away from its cheap image by using some of its excess output to produce quality wine, it is important that the Australian surplus is not replaced by an oversupply from another country such as Chile or South Africa.

Building a sustainable wine market and breaking consumer spending patterns is going to be quite a challenge and it
certainly doesn’t look like it’s going to happen before Christmas.

Tesco’s price list shows half-price deals for the likes of Kumala and Hardys running into January 2007.
Concern about the aggressive pricing policy used by UK retailers is not new and it is obvious that the industry needs to move away from the current BOGOF mentality if it is to build a sustainable business model for the future. However, blaming retailers will not solve the problem and producers must take responsibility for offloading their excess product on the
UK market.

There has been much debate within the industry regarding how to get consumers to trade up and pay more for their wine. Now is the time for less words and more action.

INSIDERS’ OPINION

Arend Heijbroek, Senior analyst, Rabobank Food & Agricultural Research
“Declining consumption in traditional wine-drinking markets such as France, Italy, Spain and Argentina has had an enormous impact on the industry. Although supply has been more or less flat in countries such as France,
Italy and Germany, it has started to increase again in Spain and in New World countries.

Oversupply is not just an Australian issue, it is a global one. Opinions vary as to the importance of this year’s climatic conditions and their impact on the wine glut. The general view is that Australia’s oversupply is caused by a structural problem and it will take several years before the problem is solved. It is likely that harvest yields will be lower this year, but then there are the Chileans and the South Africans, who are queuing up to sell their wine.

We have a few challenges ahead of us. We have to remove the poor quality wine from the market – as there is no longer any demand for it – and make wine more appealing to younger consumers.

At the moment, consumers are trading down, particularly in Germany. The challenge is to convince consumers to pay for better quality wines and acknowledge that a £4 wine is better than a £3 wine.”

Emma Nichols, Head of buying, Oddbins
“Price compression is due to an increasingly competitive market and a massive oversupply, although consolidation among retailers and wine producers are also contributing factors. As a producer, if you’re not part of the bigger production bodies there can be a huge pressure to dispose of your wine. The market in the UK is so reliant on promotional mechanics and discounting that producers are placed in a position where they either sell their wine for very little or they can’t sell it at all.

Australia is obviously a big part of the problem but other categories also have a massive output. Australians won’t be able to put up their prices because otherwise people will just buy from Chile, South Africa or France instead.

The Australians are trying to break the cycle by producing more premium products but there could be oversupply problems in countries such as France and Spain where the industry is more fragmented and producers have a less coherent business strategy. So far, the steps that have been taken to control production have been ignored. In France, it’s not just a question of too much but also an issue of producing substandard wine. If these producers continue to ignore the need to make quality wine this will become a problem for the industry as a whole.”

David Cox, Managing director, Europe, Brown Forman Wine Division
“There is no doubt that prices have been kept down in the UK off-trade. You only have to look at the amount of wine on promotion, and the level of duty levied on alcohol to see that consumers are paying less for their wine than before.

Price compression is mostly due to oversupply and some brands looking to increase their market share. Increased supply will always put pressure on price points and there will always be producers willing to take a less profitable view on supply.

We don’t think there will be a dramatic change but hope that there will be a reduction of promotional activity as it is not sustainable. Obviously, producers cannot afford to just walk away from promotions altogether but we have to get value back into their brands. Hopefully, some producers will spend more on communicating with their customers and persuading them that higher prices are justified.”

© db December 2006 / Fionnuala Synnott