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RETAIL / WINE TRENDS: Myth-Busting

23 January 2007 By db staff writer

“standfirst”>The latest figures for the UK wine market turn accepted wisdom on its head. Is California really about to take France’s number-two slot, asks Hew Dalrymple

The week after the long Christmas break is an interesting but also nervous time for brand managers and sales directors. It’s time to take stock after the hectic December trading. Last year’s bonus has been achieved (or not!) and a new “stretch budget” lies ahead. Then the Nielsen stats arrive and everyone can compare their own performance with that of their competitors.

Commentators are also busy reviewing the year and for the last few years their headlines have been monotonous:

Wine market continues its steady growth
New World takes a greater share
Top brands extend their lead
Rosé the winner!

But in 2006, the dynamic changed and in some rather surprising ways:

This year the wine market has been static. In September, the off-trade MAT was up less than 1% while YTD figures showed a decline of 1%.
The fastest declining country was South Africa (New World) while Italy (Old World) recorded the second largest increase in volume after the US.
Far from continuing their rapid and, until this year, unstoppable growth, the top Australian brands have gone backwards by 2% (year to September).
And while there is much talk about how rosé is driving market growth, the fact is that Pinot Grigio (including PG blends) is growing nearly as fast in absolute terms and twice as fast proportionately (69% versus 33%).

What can explain this about-turn in some long-established trends? Supply and demand and exchange rates are two economic factors that have always had a major impact on the wine market, and this is certainly the case at the moment.

There is no doubt that the Californians have benefited hugely from the extended weakness of the US dollar. Since 2001 when the US$ exchange rate was $1.45, the UK landed cost of Californian wine has reduced by a quarter. Much of that gain has been re-invested in marketing Californian brands to drive market share. Chilean wine companies, on the other hand, have suffered from the increase in their exchange rate (due to the insatiable Chinese demand for their copper), squeezing margins and forcing them to cut back on promotions.

Growth of “pseudo” brands

And, of course, the glut of good value Australian wine is having a massive impact on the market. The real beneficiaries are retailers and consumers. With so many producers desperate to shift their surplus wine before the next vintage, retailers have been able to purchase good quality wine at rock-bottom prices. By shipping the wine in tanker and packaging here in the UK, they have obtained further savings. To add insult to injury, they have stolen most of the branded emperor’s clothes! If you look at the latest designs for own- and exclusive-labels, they are virtually indistinguishable from the leading brands. Tesco’s Australian own-label and exclusive Calloway Crossing look and feel like brands but have been developed here and bottled in Manchester! And they sell for significantly less. No wonder the leading Australian brands are under pressure.

The popularity of these “pseudo” brands also impacts other countries. In the past, if you wanted decent quality at rock-bottom prices, you looked to, say, Italy or France but could not buy the equivalent from Australia. Now you can also buy similar quality wine from Australia or California for the same price.

But economic factors are only part of the story. One of the most interesting aspects of the current market is the impact of the consumer’s changing taste profile. The real winners at the moment are those countries and producers who can offer Pinot Grigio, Sauvignon Blanc and rosé. These varietals just as much as rosé are much lighter and generally more crisp than yesterday’s wines of choice. Interestingly, they are not the cheapest wines on the market. Pinot Grigio generally costs more than £4 per bottle, considerably more than a bottle of Soave which was the Italian white of choice. And Sauvignon also achieves a higher price, particularly if it comes from New Zealand.

The success of California is as much down to Gallo and Blossom Hill anticipating the rosé trend as it is to the favourable economic factors highlighted above. Australia, on the other hand, was slow to pick up on the trend. Looking at reds, Concha Y Toro and some modern Riojas like Campo Viejo are also benefiting from offering wines with the lighter, less oaky flavour profiles that consumers want.

Some 2007 predictions

So will this new dynamic continue and, if so, what will the wine market look like in the next 12 months? There are plenty of reasons why these trends will continue. The Australian wine glut is not going away and current exchange rates look fairly stable. Even more important, consumers’ likes and dislikes evolve slowly and once they latch on to a trend, they retain their preferences, at least in the short term. David Bradley, Western Europe sales director at Gallo Family Vineyards, for one, puts the current retail success of Pinot Grigio down to its on-trade popularity which he first spotted at least four years ago.

So the demand is there for another two million cases of Californian wine which will take the US past France into the number two slot for off-trade volume sold. Another 1m cases of Pinot Grigio is also likely to be sold in the next year – as long as the producers can maintain supply at current prices! Mark Kermode, buying director at Enotria, responsible for a third of all Italian Pinot Grigio imported into this country, sees prices firming but no more. Germany will continue its decline as will France, particularly at entry level. However, most commentators are also pointing out that certain brands, such as Chenet, and some more premium areas like Burgundy, will buck this trend.

And what about South Africa? Dan Townsend, European trading director at Constellation, owner of Kumala, thinks 2006 was a blip and that volumes will bounce back. However, he admits that this will only happen if South African producers are better able to define what South Africa stands for; otherwise consumers will have no clear reason to buy their wines.

Perhaps the most interesting question is how the leading Australian brands will fare. The strategists at Foster’s, for instance, are investing heavily in the relaunch of Rosemount and the repositioning of Lindemans – but is this enough? In the past, Australian brands have benefited from the following wind of brand Australia, but now that may pull them down as retailers find that their “pseudo” brands and even own-label can perform just as well.

All this suggests that 2007 is likely to be as interesting and fluid as the last. Clearly, the January 2008 Nielsen stats will be just as eagerly anticipated as they are this month.