PORT: Port with problems

Times are hard for Port, with rising production costs and crippling exchange rates. Patrick Schmitt considers the future for Portugal’s famed fortified wine

“Something has got to give.” That’s the conclusion of Paul Symington from Symington Family Estates upon looking at the present-day Port industry. Referring to cost increases in Portugal and retailer price pressures in key markets, he adds, “we have reached the end of the road of being able to supply quality Port at current prices.”  

His analysis centres on a handful of potentially crippling issues for the Douro, including some that affect the wider wine industry in Europe – the rising costs of fuel and raw materials such as glass – and others that are exclusive to Port: expensive mountain viticulture and, crucially, the rising cost of fortifying brandy. Then, exacerbating these problems, is the strength of the euro relative to the pound and dollar – which is taking a further large chunk from margins out of those who export to the UK and US.

Is there a way out? What could give? Either prices must increase or costs must be reduced. The former, however, will result in volume reductions, or require innovative approaches on the part of Port producers – and there’s evidence of the latter already.

But let’s first touch on some of the supply-side cost issues, in particular the latest blow to fast-eroding Port margins – the rising price of brandy. According to Adrian Bridge, managing director of The Fladgate Partnership, “For this year, the cheapest standard spirit is E1.35 cents/litre compared to E0.93 last year.” This rise he ascribes to “a short harvest across Europe which has meant there is less wine available for distillation – the price of wine in some regions went above the price of a subsidy for distillation, so distillers had to pay more for their raw material”.

And it is a trend he expects to continue due to the restructuring of EU-wide subsidies for distillation. “We expect some movement at the end of July when the individual countries announce how they will spend their European envelopes,” he says, “Will they cut subsidies or not in the first four years?” If they do, he predicts a rise in spirit prices from E1.35 cents/litre to as much as E2.20. For the commodity end of the Port market this could have a dramatic effect: “In the short term it could lead to a whole market reposition.” Or as Symington says, “Cheap Port is no longer viable”.

Aymeric de Gironde, sales and marketing director for AXA Millésimes’s wine portfolio, which includes Quinta do Noval, is similarly concerned by rising spirit prices. “They are up 50% in 2008 and we have been told to expect another 50% in 2009 – it is a big strain as we are in an inflationary period worldwide. However, we have to be very careful in passing on costs. Would the consumer pay £1 more? Certainly the UK consumer won’t be sympathetic about the EU ending subsidies… we will have to go up little by little.”

Currency woes
Adding fuel to this margin-consuming inferno are exchange rates. In particular, the strength of the pound relative to the euro is worrying Symington. “From July last year to now the pound has devalued by just under 18% and no Port producer makes that margin. Not many seem to have woken up to the fact that the pound is worth 18% less since last summer – either we must put prices up by 18% to maintain prices or cut overheads – but do I tell my staff I have to put salaries down? Glass and carton prices have gone up, as have the cost of brandy, but price-wise, nothing has shifted as massively as exchange rates.”

However, Gironde appears less panicked. “We are taking the hit,” he says of the value loss for the pound and dollar. “We are hoping and expecting the euro to drop and the problem with the dollar has existed for the last four years, so we are used to it, and I don’t think it is possible the US will maintain such a low currency. As for the pound, we think the euro is overrated at the moment so while we don’t expect the pound to go up, we think the euro will come down, so we won’t be modifying our prices strongly.”

However, Noval is hardly operating at the entry-level end of the market, and as Bridge sums up, “The UK supermarkets have already negotiated out almost all the margin in the category so a 10% reduction in the currency results in a higher price of supply. The retailers will decide on how much is passed on.” Symington explains: “In the medium term the stronger promotions won’t happen. That will mean Port won’t stand out as much at Christmas because there will be slightly less volume, but I see no alternative – selling at below cost is a suicide mission.”

So will the UK consumer be drinking Baileys this Christmas? Perhaps not. As noted earlier, while cost increases will result in some volume loss, innovation in the Port category may make up for some of the reduced sales. In particular, Christmas-time supermarket and brand price wars on Port have focused, in recent years, on the “premium ruby” segment of the sector – taking the promotional heat off LBV but placing it firmly on Cockburn’s Special Reserve and its competitors such as Taylor’s First Estate, Croft Platinum or Warre’s Warrior – and it is here that product revisions appear to be occuring.

Premium Port
As Symington records, premium ruby “is the largest premium Port sector by far and a buyer said to me that this section looks like a mortuary – all the brands look like Cockburn’s Special Reserve which was done in the ‘70s”. So Symington has taken the decision to radically repackage Warre’s Warrior. “We took a bit of a gamble,” he says of the new-look Port, “but we did some market research and the repackage came out with flying colours, which pushed aside any concerns we had that we may have gone too far.”

Also completely revised is market leader Cockburn’s Special Reserve – created in 1969. “We decided to embark on a radical packaging change to be more modern and appeal to a new generation,” says viticultural and commercial director Miguel Corte-Real of the new straight-side bottle, part of a £2 million investment in the brand by Beam Global UK, money he says is being used “to blow the dust off the category”.

The bottle now includes tasting notes on the front and serving suggestions and food matches on the back, while Cockburn’s UK brand manager Janice Moorfield notes the launch of a website “where consumers can discover more about Port, the history of Cockburn’s, as well as our new ‘Fine Disregard for the Rules’ positioning. This is about dispelling some of the many myths and traditions surrounding the enjoyment of Port – which can be offputting”.

A different approach
Another ongoing attempt to increase sales of Port and shift the emphasis from Christmas-time price offers is encouraging the trial of different and new styles of Port during the summer months. Aged Tawny producers have been particularly effective, with AXA’s Gironde, for example, recalling the impact of a promotion in UK supermarket Waitrose for Noval’s 10 year old tawny. “We put half bottles in the cold machine and it was a tremendous success.” Truly groundbreaking for the Port industry however has been the launch of Croft Pink. So far, 40,000 cases have been produced, 25% of which have gone into the UK multiples and a few on-trade listings, such as Balls Brothers wine bars. The rosé Port was the brainchild of Bridge at The Fladgate Partnership in an attempt to “create incremental growth” and not just steal share from other Port styles or brands. As for deseasonalising Port consumption, “We are promoting the fact you can drink it over ice.” And, Simon Gotelee, commerical manager for fortified wines at Mentzendorff adds: “It is gratifying to see that Croft Pink has created a buzz in a sector that wanted it.”

It is also believed other Port houses may create a similar style of Port, which the IVDP seems to be presently terming “light rubies”– “Pink” has been trademarked by Croft. “I believe we will see more pink wines/light rubies in the near future,” says Paulo Pinto, IVDP marketing director, “and the information I have has showed that Croft Pink has sold really well.” Certainly Symington congratulates Croft “for innovating”, comparing the product launch to Warre’s Otima tawny Port several years ago. “We will keep an eye on Pink and if it works we will make one, but we are holding fire, we want to see how it goes.”

In the meantime, aside from such product-based iniatives, Port producers are also looking to develop new, less price-sensitive markets for their products. Symington stresses the emergence of Eastern European markets, particularly the Czech Republic and Poland, and notes that “40% of exports to Germany are re-exported into Eastern Europe.” Then there’s Russia and Asia, which are showing strong potential for premium Port. “We sent an oenologist to Asia for seven weeks to train salesmen,” says Symington. “He went to Singapore, Malaysia, Taiwan, South Korea, China, Hong Kong and Macau. The best way of developing these markets is to train the salesmen with the importers and then work with sommeliers in smart restaurants and hotels.”

Overall, while the margins for Port are “appalling”, according to Symington, and shrinking further in the wake of cost increases, he and others are confident for this historic product’s future. Not only are Port sales increasing in the UK (see box, page 54 and below; TNS, page 58) but new consumers are entering the category, foremostly from mature markets, as a result of new Port concepts, but also from emerging countries, as an expanding middle class experiments with western products. However, like many wine regions, Port needs to focus on premium categories if it is to prosper in the long term.

db © July 2008