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CALIFORNIA: Sugar but no spice
d=”standfirst”>California appears to have reached saturation point in the UK. Perhaps its offering needs to extend well beyond the sweet rosé that is has become famous for and incorporate a much wider variety of brands, styles and varietals, says Fionnuala Synnott
For over a decade, California has grown its market share in the UK, mostly thanks to a combination of strong branding and the unprecedented popularity of rosé. However, Nielsen statistics show that the US category has failed to increase its market share in the past year, reaching a plateau of 15.9%. According to Clare Griffiths, vice president of marketing, Constellation Europe, the figures have to be looked at in context: “The slowdown in the category is in line with the total market slowdown.” John MacLaren, UK director of the Californian Wine Institute, agrees: “It looks bad but not if you consider the huge growth of the category in the past 10 years. Ten years ago, California only had 2% of the UK market.” Meanwhile, Jane Hunter, director of marketing, Western Europe, E&J Gallo, thinks California’s sluggishness can be attributed in part to increasing competition in the rosé category.
MacLaren feels that one of the biggest barriers for California is the lack of shelf space given to the category in the off-trade. “Our average merchandising is worth 16% of the market but we never get 16% of the shelf space. From a retailer’s perspective, California is a rewarding space as they manage to squeeze 16% out of a small amount of facings.” But James Griswood, US product development manager, Tesco, thinks you have to dig deeper into the figures and assess the strength of sales across all products within the category. “Large volume growth from a small number of products has been driving this performance and given California its current level of market share. Shelf space should only be allocated where there are products that fill current and future potential customer needs. At present California just does not offer the UK market enough depth of brands or wine styles that would warrant taking its full market share shelf space.”
Market leaders
In fact, California’s growth has largely been due to the power of brands such as Blossom Hill and E&J Gallo. According to Nielsen, “Brand USA” is responsible for driving 14.6% of volume sales in the category, putting it just behind Australia when it comes to brand reach. But feedback from the trade suggests that California will have to look beyond these brands if it is to grow its market share. Griswood describes California as a “one-trick pony”. “The recent phenomenal growth rates we have seen from this country are on the whole driven by two brands. Within these brands sales tend to be driven by a small number of wines from within their whole range. These styles of wines are very much targeted at a specific consumer and taste profile. There will be a natural ‘saturation point’ where sales of this style of wine will start to slow. I believe that this point has been reached. It now requires current successful brands to diversify, new brands to offer choice, and new styles of wines to interest a different consumer type.”
MacLaren thinks California needs to show its diversity on shelf. “There are some brands that have little traction here that are big in California. Brands such as Beringer, Mondavi and Ironstone have to establish themselves here in order to demonstrate what California can do in the mid-range. Buyers have to realise that if they show California’s diversity, the category can work for them.” But the cost of obtaining a multiple listing in the UK market makes it difficult for smaller brands to compete. Ironstone is therefore focusing on listing its reserve wines in the independent sector, although it is not excluding the multiples. “A lot of mid-priced, family-owned wineries have struggled, particularly in the multiples, because it is so expensive to get listed. We can get the product on shelf but we don’t have the same ad or promo spend as the big brands. There is
more consumer loyalty in the independent sector, where there are real margins involved”,
explains Joan Kautz-Meier, vice president of international operations at Ironstone.
Adding value
It’s no secret that, until now, California’s success in the UK has been driven by the £3-5 end of the market. However, this is beginning to change, albeit slowly. 20.7% of US wine in the UK is priced between £3.01 and £4, making it number two after Australia. But there is less US wine in this bracket than there was a year ago. Meanwhile, the amount of wine priced at £4.01 and £5 has increased from 22.8% to 23.5% (Nielsen MAT w/e 01.12.07). But just17.9% is priced between £5 and £6, while only 6.1% sells between £6 and £7. Simon Legge, European marketing director for Brown-Forman Wines, comments: “In the past three years, California has increased the volume of wine priced above £5 from 7% to 10%.”
Although the average 75cl bottle cost has risen from £4.04 to £4.10 (MAT w/e 29.12.07) there is still room to inject value into the category above £5. “California is now very creative between £6 and £10 but this is not apparent on shelf. For us, it is important to even out Californian sales so that we don’t just have wines selling for £4.99 or £30. These extremes do not reflect the shape of the industry today”, observes MacLaren.
According to Legge, producers are aware of this and greater efforts are being made in the “Holy Grail £5-£10 category”. He adds: “Companies such as Gallo have introduced the Turning Leaf brand while Constellation has focused
on Mondavi. But progress is frustratingly slow. You don’t see journalists writing about California and, historically, the trade has fixated on Gallo, Blossom Hill and Constellation. Six years ago, only 1.4% of Californian wine was priced over £6, now it is 1.8%. This may not sound like much but at least it’s moving in the right direction. Having said that, 4.5% of all wine is priced over £6 so California is clearly behind.”
E&J Gallo’s Hunter thinks there is demand for wines over £6. “Turning Leaf is priced at £6.49. We sell over 300,000 cases a year so this is a clear sign that consumers are open to wines from California above a certain price point. There is an opportunity to bring more wine in above £6 and educate people about regional differences and different varietals.” But Griswood thinks it will take a real step change in attitude and focus from Californian producers to specifically target the £6-10 market in the UK. “At that price level customers become extremely savvy about their purchases and demand exceptional quality for the price. California currently just doesn’t deliver on quality at this price level if you compare it with most other countries, especially the likes of Chile, Spain or Australia.”
Education
One of the most obvious ways of injecting value into the category is by making sure that consumers understand what California has to offer. This is not always easy when consumers are buying into the brand rather than California. Griffiths comments: “There is an element of buying into the brand but it is also a question of how you communicate the area of origin. We focus on heritage, particularly when it comes to premium wines such as Mondavi.”
Kautz-Meier, from Ironstone, thinks California’s varietal
diversity should be emphasised: “Chardonnay, Merlot and Cabernet Sauvignon will always be important for California but we need to show what California can do with Sauvignon Blanc, Syrah and Viognier.” Hunter, from E&J Gallo, agrees: “We have seen growth among varietals other than Zinfandel and Pinot Noir. Pinot Grigio has grown by 29%, Shiraz 24%, Viognier by 155% (albeit from a small base) (MAT w/e 26.01.08.).” Constellation is also looking at introducing new varietals. “Pinot Grigio, for instance, is still popular but it is in short supply. We are working on
the taste profile of our wines by bringing in new styles,” says Griffiths.
But MacLaren thinks it is important not to flood the consumer with too much information: “It is possible to bewilder consumers if you say that California has something of everything. One of the reasons New Zealand has been so successful is that it used a simple message.”
Griswood questions whether the customer really needs to learn about California in order for it to be successful in the long term. “Should we be worried about these customers knowing the difference between one vineyard and the next? Australia built its reputation on the back of the success of a small number of brands and varieties not regions. What they then proceeded to do was diversify the offering into a larger number of brands combined with marketing ‘Brand Australia’ and slowly introducing the regional piece. That’s how Australia became the number one country in the UK. Let’s focus on getting a larger number of successful brands from California with a quality of wine that delivers globally and then we can start to talk to the consumer about regionality.”
More for your buck
Unlike European wine producers, California currently has the exchange rate in its favour. With the US dollar at a historic low, producers are hoping buyers will be more adventurous. Ironstone’s Kautz-Meier says: “The weakness of the dollar will hopefully get buyers to California to purchase wine. I don’t think it will be damaging to the category. Hopefully it will do nothing but help.” Legge agrees: “Because of the weakness of the dollar, more Californian wine producers will explore the UK category.”
But MacLaren warns against relying too much on foreign exchange rates to build market share. “So far, the weak dollar has opened buyers’ eyes to California. It hasn’t been damaging as the state is not seen as a producer of cheap wine. The danger of a weak US dollar is that it will enable people to hit particular price points. But if the dollar strengthens the producer may lose its listing.” Griswood does not think the weak dollar has had a significant impact on the category. He says: “Of course it helps, however the strong domestic demand in the US for Californian wines is such that they are willing to pay much higher prices for these wines than the UK consumer is. Even with the dollar at two to the pound the Californian producers can sell domestically, make their margins, and don’t need to bother with export to the UK. It’s an easier life not to export and
until Californian producers are absolutely focused on gaining market share in the UK, the dollar situation alone will not make this happen.”
Relationship building
UK importers have been frustrated by some producers’ refusal to export their full portfolio of wines, preferring to reserve their top-end wines for the domestic market. Simon Legge explains: “In the past, Californian wine producers have been accused of popping over to the UK to do business when it suited them. But they were given a cuff around the ear by the UK trade and retailers. Californian arrogance gave journalists and wine buyers a bad impression. But there is far less arrogance and complacency in the export markets now as they have realised the importance of having a long-term relationship with retailers and greater commitment to the market.” An increase in wine imports from Australia and Chile has also changed the dynamics of the domestic Californian market.
According to MacLaren, attitudes are changing. “Time was that Californian wine producers found the UK frustrating because it was difficult to make money. Nowadays, the UK represents a good opportunity over £20 – California is the only New World country that can really compete with France and Italy at this price. The premium end of California appeals to expats and city boys, who read about it then want to buy it. Some producers who used to sell their wines exclusively in California, New York and Tokyo now want to see their wines in top London restaurants,” says MacLaren. Legge agrees: “In the past, the exchange rate combined with demand in the US meant California wine producers never had to try and export their wines. But, the US is now older and wiser. It has realised that, if you want to have balanced growth, then it has to provide product in the UK.” But Kautz-Meier thinks this trend is likely to continue. “There will always be smaller producers who operate an allocation system. The US is an easier market if you are a niche producer.”
Challenges and opportunities
MacLaren feels that California has got to be seen to be responding to changes in the marketplace. “I have been talking to the market about rosé for years. There is still a huge business for white Zinfandel rosé but as the category welcomes new consumers, new drinkers are looking for something a little more sophisticated in style.” Fetzer and Gallo have recently added a drier rosé to their range in order to meet growing consumer demand in this part of the market.
California cannot afford to lose control of the rosé category. “I don’t think it is possible for California to maintain its market share of the rosé category as it continues to grow but we need to keep leading it. This is a question of being marketing rather than winery led.”
With a weak dollar, strong brands and regional and varietal diversity in its arsenal, there seems no reason why California should not grow its UK market share. Rosé still represents a significant opportunity for the category. Although the rosé phenomenon is far from new, sales continue unabated, growing by 30% every year. Rosé now accounts for 9.7% of total wine sales (MAT w/e 13.03.08). Brown-Forman Wines’ Legge says: “Rosé has been the biggest growth phenomenon in the wine trade in the past 10 years.” This has led other New World countries such as Chile and Australia to increase their pink production. For the moment, the US is still leading the category comfortably with 4.9% of total rosé wines but it must keep innovating in order to stay ahead of the competition and not just focus on entry-level styles. Griswood remarks: “The greatest challenge will be to encourage a brand new set of consumers to drink Californian wine. California has done a great job in the more approachable, off-dry styles, particularly rosé, for one type of wine consumer. What is doesn’t have is the breadth of customer type that is required to build a much larger, successful and stable category.”
“California’s growth under £5 has been driven by white Zinfandel rosé. White Zin is the modern day Liebfraumilch. It acts as an entry wine for many consumers. Because it tastes sweet and is accessible, it appeals to RTD drinkers looking to trade up. Although this style of wine is still a great seller, it is time to see whether the rosé phenomenon has a third tier to it. That’s why Bonterra has launched a £9.99 rosé,”
Legge observes.
Constellation also recognises the importance of extending its rosé offer. Griffiths explains: “White Zin and rosé are still popular with consumers and other categories have seen growth in rosé driven by California. In order to appeal to different consumer groups, we are looking to bring in a variation of rosé and Zin and are looking at dry styles again.” Kautz-Meier thinks there is still room for California to expand in this category: “There are a number of lesser-known rosés, beyond the well-known brands.”
California is also hoping to capitalise on growing consumer concern for the environment. MacLaren thinks this will prove to be an opportunity for California in the long term. “Everyone is talking about carbon emissions and the environment. Other people will make glib statements but California has a reputation for caring for the environment. We are not banging this particular drum yet as there is still a lot to do but it is clearly a long-term opportunity for the category.”
According to Hunter, the challenges facing California are no different to the challenges facing the whole of the wine category. “How do we manage pricing in light of rising duty? How do we inject value into the category? We also have to remain innovative for consumers, especially when it comes to rosé.”
Meanwhile, Constellation’s Griffiths thinks it is all about trading up. “California’s greatest challenge is to grow its premium sector. This has to be a pivotal part of its strategy.” Kautz-Meier agrees: “We need to do a lot of work to get people to trade up because California makes incredible mid-price wines; they are just not as well recognised. This is shame as the product is very diversified.”
Although California’s current growth rate is far from inspiring, it is all relative. France, usually second in the UK marketplace after Australia, has seen its market share drop from 16.7% to 15.9%, (Nielsen MAT w/e 29.12.08), which means that the US category (95% of which is made up of Californian exports) is in with a strong chance of usurping its slot in the UK market. Hunter comments: “Although California is no longer in double-digit growth, growth trends indicate that the US has the potential to overtake France as the second largest category in the UK.” But Griswood thinks there is significant work to be done before California can do this: “California is in danger of being stereotyped by the UK consumer as producing only one style of wine. That’s a dangerous place to be in. The Californian wine industry has to focus on adding additional ‘layers’ of style of product that are going to draw customers in who are currently only buying other categories and ignoring California. If that happens then California really could start to threaten France and Australia for pole position.”
© db April 2008