TOP STORY: A punishing time for plonk

With increasing costs, rising duty and a weakened pound, wine retail prices have had to go up. But in the current economic climate the consumer is not prepared to pay more. Patrick Schmitt considers the outlook for the UK market

It seems fitting, in an issue devoted to UK wine retailing, for the top story to focus on the exact state of the country’s off-trade, including those supplying it. Although Britain has for some time been viewed as a profitable growth market for wine, it is immediately apparent that 2008 has been a punishing time for the trade. Already, UK wine importers, plagued by increasing energy and raw material costs, have been hit by a 14p duty increase and virtually crippled by sterling’s slide against the euro, as well as the Australian and New Zealand dollar. Now, halfway into 2008, British retail is starting to reflect rising overheads, and, not surprisingly, on-shelf price increases are having a negative impact on sales. After all, it could hardly be a worse time to pass on some of the wine trade’s inflated costs to the consumer – who is both cash-strapped and far from confident about the future.

Notably, according to analysts Nielsen, in mid-July, the four-week average price paid for a 75cl bottle of wine reached £4.40 (£4.24 for all bottle sizes). The month earlier, June, the four-week average was £4.31 (£4.17 for all bottle sizes), proving the pace of price increases – a year prior, for June-July, the four week average price paid for a 75cl bottle was £4.11.

In short, prices have risen almost 30p compared to last summer, and nearly 10p in the latest four-week period. “The pressure on prices has really come through in the last few weeks and we anticipate there is more to come,” explains Steward Blunt, wine analyst at Nielsen. “In the short term prices are always influenced by offers and promotions but there is no doubt that things are moving upwards,” he adds, noting that “the budget has yet to take full effect.”

This price situation, among other factors, is resulting in a volume sales decline for wine in the UK off-trade. Nielsen records a drop of around 800,000 cases in the 12 weeks to mid-July compared to the same time last year, and, as Blunt says, “The decline is beginning to get significant considering the recent history of growth – it is a sign the brakes are on.”

Essentially, it is believed that shoppers, unable to downtrade due to the increased cost of wine, are simply buying less. They may also be consuming wine amassed at home from promotions earlier in the year.

Is there a solution for the trade? Certainly producers and importers have already struggled to absorb rising raw material and energy costs, then a marked duty hike, so the cost of a weakened currency has, in most cases, had to be passed onto retailers. As Adrian Bridge told the drinks business last month, referring to Port, “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.”

Or, as Thierry’s Matthew Dickinson says, “The pound to euro has fallen from 1.45 in 2007 to less than 1.25 today, and it is having a dramatic effect on prices. If this added cost was coming in a year when raw material prices were soft then we would be less worried… and there’s also the cost of duty, energy and the economic downturn – it is a conspiracy of factors.” Meanwhile Allan Cheesman, who has over thirty years experience in wine retailing, describes the current environment as “a perfect storm”.

The issue of currency appears to be of particular importance, not least because of its large impact on margins – the pound appears to have lost over 15% of its value relative to the euro and Australian dollar since last summer – but also because of the long-term nature of the problem. After all, the Bank of England is holding interest rates steady in an attempt to curb inflation, not stimulate the economy, and many agree with Dickinson who sees “the pound remaining weak for the foreseeable future”.  

One of the few countries not affected by the sterling’s slide is South Africa, whose own currency, the rand, has weakened significantly, explaining to some extent the renewed promotional emphasis on this country in UK retail. Californian wine is also benefiting from the weak dollar.

However, for most wine importers to the UK, currency cost increases will have to be passed on to the consumer to avoid commercial suicide. The trade can only hope that news of oil price reductions will alleviate at least some of the inflationary pressure on the UK economy in the future.

db © August 2008