UK RETAIL: Under the weather

With the UK economy entering a sharp downturn, the wine trade faces challenging times. Clinton Cawood investigates the impact on the retail environment

There may be very little else good about it, but the current economic situation in the UK is certainly unifying. While the credit crunch of a few months ago only really affected a percentage of the population, as times get tougher financially, everyone is beginning to feel it in some way or another. The effects are quite vivid, both to businesses and to consumers, and the wine trade is no exception.

Wine is in an interesting position in this respect. It generally occupies a place in the consumer’s mind somewhere in that nebulous region between necessity and luxury – not a basic requirement, but not dispensable either.

The result is that while UK off-trade sales of wine continue to grow, many of those in the industry agree that the current state of the economy is, and will continue to be, the greatest factor affecting the industry. Wine sales in the UK, according to Nielsen, are still in growth, with annual sales increasing from £4.45 billion to £4.77bn in the last year (MAT 28.06.08), a rise of 5.5%.

PLB’s managing director, Peter Darbyshire, predicts: “We’re going to see an increasing migration to below £5 [per bottle]”. He adds: “We’ve been anticipating that purchases would migrate to the value end of the scale – in all retail sectors. Consumers are migrating rapidly – more than we anticipated. Consumers will carry on buying wine, however, because it’s a consolation purchase, or a reward purchase, that’s imminently affordable.”

Overall, Matthew Dickinson, commercial director at Thierry’s, agrees that the most important factor that will affect the trade is “how the consumer reacts to the economic environment”. Fratelli Martini’s Roberto Pinetti agrees that “the element that will affect the wine market the most at the moment is economic climate”.

Change in strategy
As president of Marqués de Cáceres, Cristina Forner, explains, “If people are forced to tighten their belts, as a luxury product rather than an everyday necessity, wine sales could suffer.” Dickinson adds that “wine growth has been consistent – people thought it was recession-proof. I don’t subscribe to the view that growth is a given”. Dickinson believes that “wine probably will become more discretionary”. Bottle Green’s Richard Hitchcock agrees: “Wine is a relatively discretionary item and therefore some consumers are likely to trade down in price while others may reduce the amount they consume.”

For Félix Solís Ramos of Félix Solís Avantis, “Wine will always be a discretionary purchase, however set it may seem on the consumer’s shopping list. In these times, the public are looking to save money, so they may not buy less, but will be buying cheaper and will be more offer-focused.”

Dickinson believes that retailers are “going into batten-down-the-hatches mode, saying ‘consumers aren’t going to trade up, so let’s go for key deals and key price points’”.

Just a year ago the overriding goal in the trade was to drive value, targeting the above-£5 price point. Volume had begun to plateau after many years of growth, but value growth was still well within reach.

The argument now goes that, as consumers feel the pinch, they are more likely to look for cheaper wine than to leave it out of their baskets. This, of course, goes against the rhetoric from the trade for the past few years about encouraging consumers to trade up, and the perception that consumers were drinking less, but better. Derbyshire is pragmatic, saying: “Consumers want choice, but in a narrower band. The idea to trade them up is going to have to wait a few years.”

Dickinson also takes a realistic approach to this: “There are a lot of conflicting interests in the wine trade. If the consumer wants something though, it’s our duty to provide that, even if it’s conflicting. It’s disappointing when trying to get consumers to spend more, to get them interested, but ultimately we’re in business to make money, not to see how much Alentejo we can sell.”

Bottle Green managing director, Jon Eagle, adds to this idea of conflicting interests: “Retailers all see the potential growth for wine and are driving it hard at a time when there are also increased price pressures. The result is that the consumer is getting some great deals but the industry is under margin pressure.”

Compounding factors
This suggests that entry-level wine may currently be at an advantage, but Forner believes that there are other factors to consider. “Government proposals to reduce the consumption of alcohol and increased duty rates may affect wine sales. Those at the lower-priced end of the market may suffer more, for their commercial policy and profitability are based on large sales volumes, whereas quality wines produced in more limited quantities may be faced with a less serious situation.” Eagle, comments, however: “With future duty rises now outlined, plans can be put in place.”

Forner believes that there are other trends that will benefit higher-priced wines in the off-trade. She cites a Euromonitor report that suggests that “British consumers buy discounted wines for home consumption during the week, but are prepared to spend a few pounds more when it comes to the weekend, or when purchasing wine as a gift.”

For Gruppo La-Vis owner, Fausto Peratoner, the overall shift is likely to be toward lower-priced wine. He believes that consumers will still purchase wine “because the UK is a modern wine market in wine consumption. What could happen is that consumers will be more interested in lower-priced wines”.

Ramos also believes there are other factors to consider. “As a downturn in the economy is on the horizon, it is these economic challenges that underlie other pressures. Duty’s up, the exchange rate’s down, and then there’s the health lobby to contend with. Although these changes seem to affect the UK worst, it can be just as hard as a supplier from outside the UK to weather the storm.”

Vincent Norguet, export manager at Chamarré, also highlights the currency issue. “The euro-pound exchange rate directly impacts on margin. The first effect is on promotional support. For the European supplier, this becomes more important. This has a huge impact, as so much wine is sold through promotion. When you have less budget, it means less discounting and less gondola-end activity, which means less volume. It’s not about Old World versus New World – it’s euro countries versus dollar countries.”

Promiscuous consumers
The breadth of choice, in terms of both product and price point, is a distinguishing factor for the wine category, and one that is usually seen as a positive aspect. For Darbyshire, however, “wine is at a disadvantage in marketing terms – the wine consumer is more promiscuous – they’ll experiment. A spirits consumer will have maybe two or three gin (brands) they drink, and for beer maybe half a dozen, but certainly not hundreds like you get in wine.”

As Gonzalez Byass marketing director Jeremy Rockett puts it, however, “How long will retailers stock 600+ wines when only the discounted ones sell in any number?” He believes that discounting activity is the most signficant pressure on off-trade wine sales. “It’s there when the economy is booming, it’s there when things are tough.”

Discounting may be a significant factor affecting the trade, and one driven by the multiple-grocer sector, but the market share of discount retailers is rising, and this will undoubtedly change the industry as well.

Dickinson describes this rise of discounters such as Aldi and Lidl as “a great achievement”. He explains: “It’s very straightforward. There’s operational simplicity. The objectives are the retailer’s and no one else’s – it’s a very simple model. Contrast that with the more mainstream retailer, who’s trying to hit quality and price buttons, and going, ‘Have we got an Albarinho?’”

The discount retailer’s role, according to Marqués de Cáceres’s Forner, is as “a starting point for some people who are beginning to drink wine, such as younger consumers or others who are just looking for an everyday wine”. Eagle notices, however, that “early signs are that discounters are gaining grocery share, albeit from a low base. This would certainly drive average bottle price down”. Dickinson explains: “Over 20 years we’ve built a discount model for wine. When there’s an economic downturn we can’t expect consumers to trade up.”

Deep discounting
This has already begun to manifest in practical terms within the grocer and discount retailer sectors. Both Asda and Tesco are making use of a three-for-£10 promotion, with a number of multiples offering 50% discounts. Further to the three-for-£10 at Asda, the retailer has also reduced its range and stopped two-for-£10 activity.

Tesco recently announced plans to add wine to its Value range by the end of the year, with speculation that these will retail below £3. Sainsbury’s already includes wine in its Basics range.

The majority of UK wine sales go through the multiple grocers, meaning that activity like this has the potential to have a significant effect on the industry, on average bottle prices, and even on consumer trends. However, the structure of the UK off-trade does offer a significant amount of choice for consumers. As Peratoner of Gruppo La-Vis  comments: “The UK off-trade structure is complex. The diversity within this sector allows us to operate on different levels with different brands.” Bottle Green’s Eagle believes that this structure “helps cater for different knowledge levels, from three bottles of branded Chardonnay through to choosing top-quality wine requiring some specialist advice and consideration before purchase.”

Rockett of Gonzalez Byass is more cynical. “What’s difficult about the current structure, and the huge share of the multiple grocers, is to do anything that adds value to a brand in the trade. The grocers are excellent at shifting fast-moving product to the mass market, but when you’re selling your product on the same shelves as bleach, baked beans and loo roll, it’s difficult to make your product look good.”

Survival of the fittest
Dickinson, however, remains positive. “In terms of retail, the choice is fantastic – local wine stores, chains or independents, premium wine shops, discounters, supermarkets – where you can buy wine of every hue and price point. But the supplier structure is fragmented. There are lots of different interests. It would be beneficial to the industry as a whole if it was more cohesive. On the supply side, consolidation would be beneficial.” For Ramos, this is likely. “There may well be further mergers within the industry,” he says.

Norguet agrees. “For me, only the big players will be able to work in the future of the UK market.” Chamarré is, of course, one of these big players as far as France’s production is concerned. One benefit, Norguet explains, is that the brand “will continue to have high promotional support. We’ll maintain promotions because we have to”.

Fratelli Martini’s Pinetti is also a proponent of this promotional activity. “The way the off-trade works in the UK has helped us to build the brand. One of our project’s fundamental elements was, and still is, promotional pressure,” that he believes encourages consumer trial. “Only with the UK industry’s modern distribution and commercial aggression could this be possible.”

Peratoner sees the situation as potentially more complex. “We have an interesting comparison between duty on the one side, which could move consumption in the direction of wines with lower prices, and consumer trends that show major attention to wines with high quality. This means that promotional activity could represent a very important propulsion.”

If nothing else, the UK wine trade has proven itself to be ever-changing, and the coming months will bring more pressures, as well as new opportunities. In this kind of dynamic market, those producers, distributors, agents and retailers that prove to be adaptable will undoubtedly come out on top.

db © August 2008