CHAMPAGNE GREY MARKET – Tactical Play

Parallel trading is being used by retailers as a bargaining chip to secure allocation and keep prices down, writes Andrew Catchpole

Parallel traders in Champagne and other goods are a peculiar, publicity-shy bunch. On the one hand they consider themselves skilled brokers, acting entirely within the law, sourcing and facilitating the sale and distribution of goods across borders where uneven duties, disparate wholesale prices and limited allocations conspire to encourage such trade. “Paralleling”, argue the retailers benefiting from this practice, encourages fair trade and transparency by acting as a price levelling mechanism underpinning the free market.

On the other hand, parallel trading operates in a clandestine world fronted by anonymous mobile phone voicemails and outsourced operatives working on behalf of retailers, all of whom chorus “no comment” when asked to discuss the mechanics and scale of their business. Informed guestimates from senior figures in the regular trade suggest that grey trade accounts for between 3-4% of the total 38 million bottles imported annually into the UK market alone. Whatever the true figure, the term “grey market”, with its shadowy connotations, seems particularly apt.

Of course, there are good reasons why grey market trade is a sensitive issue, especially with Champagne. From a brand owner or agent’s perspective there is a loss of control over regular channels of distribution, potentially undermining a whole host of carefully calibrated strategies including brand positioning, pricing, allocation, focused marketing and provenance or quality control.

“This is a highly sensitive issue,” agrees Bill Gunn MW, managing director of Pol Roger UK. “[Grey marketers] recognise only too well that the effect of their business is detrimental to the producer and regular agent or supplier.” Gunn argues that grey market purchases affect brand integrity, raising questions of provenance, quality control and consistency and thus negating the efforts made in regular distribution channels to ensure a Champagne reaches the consumer in prime condition. 

“There was a case a couple of years ago at a Champagne tasting organised by a reputable wine magazine where Pol Roger NV showed poorly,” remembers Gunn. “As we had not forwarded the wine ourselves, we made enquiries and discovered that the bottle was part of a consignment that had originally been shipped to equatorial Africa.” The retailer in question escaped mention but Gunn’s point is clear.

“It may be cheaper to source in an alternative market but we swallow mammoth costs through sitting on bottles in bond for an extended period before releasing them to the UK market,” Gunn says. “The British taste is not for Champagne straight out of the tap, as it were.” Houses such as Billecart-Salmon, Bollinger and others also stress the benefits of extra bottle age “at little extra cost to the consumer” with regard to regular UK consignments of their NV Champagne.

A management issue
In addition to potential bottle age variation, there is also the less widely discussed issue of Champagne houses tweaking blends for different markets which can also trip up retailers buying grey market goods and confuse the consumer. “Grey marketers tend to deal by snapping up small parcels so bottle variation in a grey market consignment is a high probability,” concludes Gunn.

Parallel trade in Pol Roger increased following a relaunch of the brand post-millennium, re-stimulating demand and unsettling a finely tuned framework of allocations. With a finite amount of Champagne to go round and a growing global market, managing allocation well is one of the best weapons Champagne houses have in suppressing grey market trade. Several representatives of large Champagne houses, including Moët & Chandon, Veuve Clicquot and Bollinger, declined to comment on grey market issues but Patrick McGrath, MD of Hatch Mansfield, representing Champagne Taittinger, agreed that the problem comes down to managing limited stock.

“Parallel trading is not too much of a problem for Taittinger at the moment but it does affect brands when retailers simply cannot get hold of stocks and there are imbalances around the world,” says McGrath. “Taittinger is very good at policing its agencies around the world and can check that they aren’t taking stock and then flogging it on, but parallel trade is best prevented by having long-standing relationships built on trust.”

Olivier Giraudière, Lanson’s export director for Europe, reinforces these points. “Parallel trading is not an issue for us as it was a few years ago because we have been improving our price positioning throughout Europe and placing allocations more cleverly,” he states. “In the past we had an imbalance between France and our export markets and the main challenge has been to address this to ensure we gain control of global positioning in terms of price and image.”

Giraudière, Gunn and others – while all refusing to be drawn on figures or volumes – agree that parallel trading from Europe to the US and elsewhere in the wealthy industrialised world has diminished due to the relative weakness of the dollar against both the euro and sterling. “Currency oscillation is a clearly a factor,” says Gunn.

While uniformity of pricing can reduce the impetus to parallel trade, so too can the obstacles of differing blends, labels, packaging and discount or pricing packages aimed at a specific market. The cost of repackaging and relabelling a wine to meet different legal requirements can generally be prohibitive to large-scale parallel trade between EU and non-EU countries.

However, within the EU a wine label carrying the correct information for its legal sale is equally valid in all member states and so offers little protection against cross-border intra-European trade.

Another factor to consider is that despite talk of greater price harmonisation in European markets, most retailers insist that they buy via the grey market not to make savings but to cover stock shortfalls. These purchases, or the threat of such purchases, are also used to apply pressure to leverage greater allocations from suppliers.

“We do buy small parcels, mainly from companies in Europe, but it’s not generally about cost, more about availability as there are limited supplies of a number of key Champagne brands,” says Jason Godley, category manager for wine at Tesco. “With grey market goods a restaurant, with its higher mark-ups, is likely to profit more than a multiple.” Aside from the cost of the wine itself, added costs include transportation and setting up systems and codes in warehouse and stores to cope with the incoming and typically smallish batch of wine. Despite this, grey market trade remains a regular aspect of life at the multiples.

Tesco has its own team specifically to buy grey market goods across all categories while Sainsbury’s outsources the work to a small team headed up by Ian Parker who declined to comment beyond describing his team as  “grey market specialists on behalf of Sainsbury’s.”

Sainsbury’s Champagne buyer Melissa Draycott was more forthcoming. “With stock that is all on allocation we, as a retailer, will watch product availability in other markets and, if the price is good for our customers and we can get legitimate product then we will occasionally buy grey market goods,” she says. “It is down to the supplier to get allocations right and if there is surplus stock elsewhere in Europe we will buy it.”

Both Tesco and Sainsbury’s stress that they buy on the grey market as a last resort, playing down any cost savings in favour of the line that their first priority is not to disappoint their customers. However, the big retailers are well aware of the clout they wield and also the fact that intra-European parallel trading, at least, is legal precisely so it can act as a free trade, price levelling mechanism. And these same buyers are not afraid to pull the levers. 

“We use the possibility of parallel trading more as a threat than a regular way of buying,” Justin Apthorp, managing director of Majestic Wine Warehouses, revealed when last questioned on the subject. “The big problem is finding anything in enough quantity, but if we do see something cheaper on the Continent we can use the threat of parallel trading to beat down the prices of our suppliers.”

Free market in action

The retailers’ argument is a powerful one. A producer may understandably want his brand to be seen in various markets and have a broad presence across Europe, but if that wine is then making its way back into the UK – sometimes at a higher price – then the distribution does look a little skewed. Conversely, it could also be argued that it is a producer’s right to sell to whomsoever he wishes wheresoever he wishes.

Whatever the rights and wrongs, as David Hesketh, managing director of Laurent Perrier, puts it: “I have to say I have nothing against parallel trading as it is the free market in action.” He could also have added that attempts to distort free trade within Europe are of dubious legality, which is why producers can only do so much to encourage their brands to be distributed down preferred channels.

For large retailers at least, parallel trading is more a means of ensuring customer demand is satisfied and a potential bargaining chip when dealing with suppliers than purely a pricing issue. This leaves smaller retailers as the most likely beneficiaries of parallel trading – often companies which cannot compete as keenly with the purchasing power of the large multiples in the first place and ones better placed to work with smaller consignments of goods. Parallel trading is also usually a last resort and, as such, does not constitute a major upset to the traditional chains of supply and distribution.

All the anecdotal evidence points to a recent reduction in parallel trading in Champagne, the practice having peaked after millennium overstocks upset the balance in the market place. Taittinger’s McGrath, however, sounds a word of caution.  

“With an increasing squeeze on the limited supplies of Champagne people will have to be prepared to pay a decent price in the future,” he says.

“And this will become an issue if Champagne can’t achieve a high enough price in other markets around the world.” As intra-European parallel trade drops off, further reaching global movement of grey goods could increasingly take its place.

© db June 2007