PORT: Caught short

With global demand for Port down, coupled with below-cost selling and an extension of the Douro’s area under vine, many producers are experiencing pain. But category innovation provides cause for optimism, writes Tom Bruce Gardyne.

In December 2007 the late lamented Woolworth’s launched Britain’s cheapest Champagne. Sold under their “Worth it“ label at £5 a pop, it threatened to undermine the image and credibility of the world’s preeminent sparkler.

Luckily for the French it was just a stunt involving a pallet-load of wine to generate a shed-load of publicity. Yet sustained low-pricing can tarnish any category, as Paul Symington, head of the Symington Port empire, explains. “If you have something saying it’s Champagne at £5, and it genuinely is Champagne, your brand at £26 is going to be damaged sooner or later.”

European Port prices hit rock bottom late last year. A battle for market share between Dutch supermarkets involving Albert Heijn, and the German discounter Aldi, saw prices drop as low as e2.99 a bottle. “If you deduct VAT, duty and transport costs from Portugal to Holland, it was obviously below cost,” says Symington.

The Dutch are the second biggest consumers of Port on the planet with a 13.5% market share. For Symington, whose firm supplies Albert Heijn with its Euro Shopper Ruby, it was not just bad for the Ports involved. “Probably much more important was that at e2.99, it meant the brands at e7 or e8 were left completely isolated.”

Adrian Bridge, CEO of the Fladgate Partnership, which own Taylor’s, Fonseca and Croft, believes: “Some Port companies have run their businesses for cash flow rather than profit. In economic terms this is normally a short-term situation where either balance sheets are repaired or the  business fails.” He adds that up until now the European banks have “tended to over-support the Port industry as it has never lost money”.

That said, even profitable businesses which are not dependent on friendly bankers, find there is little they can do if retailers are determined to use their products as ammunition in a turf war. According to Symington, one major Dutch supermarket was losing over e800,000 (£668,710) a year on its Port sales. The good news is that prices have risen in the last few months. Today the cheapest bottle of ruby or tawny will cost you e3.50 in Holland.

In neighbouring France, which accounts for a staggering 29.5% of all Port sales, below-cost selling is technically illegal. But French supermarkets, just like those in Britain, would have been monitoring the Dutch market with interest. It clearly suggests there is an oversupply of Port, which the buyers can gleefully exploit.

With global demand for Port down by a million cases in the last decade, the powers that be might have considered reducing supply in the Douro. Instead, according to Bridge, they have allowed the area under vine to increase by 23%.

These are vines within the “beneficio” system – ie with the rights to produce Port. “I chair the largest Port company and I’ve never been asked by the authorities what our view is of where we’ll be in five or 10 years time,” says Symington. “While planting licences were being granted nobody consulted our company or anybody else. It’s stark raving bonkers!”

Seeing the impact on the growers, especially the larger ones, one can understand his frustration. While many are so called “weekend growers” with less than a hectare of vines and who run the local garage or cafe on the side, those who do it full time have nothing to fall back on. “There is very great pain in the Douro at present,” says Paul Reynolds who owns the 10 hectare Quinta de Macedos where he produces premium Douro DOC table wine.

Under the rules, Port shippers have to have a three-to-one ratio of stocks to sales. This tends to exaggerate the good and bad times for the growers in what is known in the region as the whiplash effect. With a lowering of the beneficio paid, and a reduction in demand from the shippers, many of the larger farms are clinging on by their finger nails. The Symington Group has been offered various vineyards recently, and Symington is not remotely surprised. “The economics of farming in the Douro do not make sense right now.”

In terms of more premium ports there is “absolutely no problem of over-supply”, says Aymeric de Gironde, sales director for AXA Millésimes, owners of Quinta do Noval. Here he is talking of the A-grade vineyards from where Noval buys grapes to supplement the quinta’s 150 hectares. “The future for this region lies in quality wines, be it Port or table wines.” Given the dramatic topography of the Douro he clearly has a point. Steep terraced vineyards with yields as low as 20 hectolitres per hectare all picked by hand, hardly seem an obvious source for big-volume low-priced wine.

Rigged system

And yet many big shippers complain the market is rigged by the beneficio system, which in a sense subsidises table wine production. For Symington it “means you can find Douro DOC wines in Portugal at e2 or e3 a bottle – and that’s simply not sustainable if it wasn’t for the fact the farmer is selling his Port grapes at a much higher price”. Bridge agrees: “The reality is that this is one of the most expensive regions to grow grapes in the world and Douro DOC would find it hard to survive with a free market for grapes. The Port industry is worth nearly e400 million a year while Douro DOC is about €60m.”

The view from Quinta de Macedos is rather different. “The Douro is a patchwork of fabulous table wines, and what makes the region so exciting is the range of different terroirs and grape varieties that exist here,” says Paul Reynolds. His wines are imported into the UK by his brother Raymond Reynolds who also handles the niche port shipper Niepoort.

For Raymond the advent of premium wines has encouraged producers to consider the diversity of sites in the Douro. “What some people are finding is that there are some sites that made pretty average Port, but that can make some very decent red table wine.”

While sixth in overall volume, the UK dominates the “premium Port” market with a 32% share. The Fladgate Partnership and the Symington Group compete head to head with their brands while simultaneously controlling the lion’s share of own-label Port which accounts for a third of retail sales.

Until recently, the big buyers were happy to make hefty margins on their BOB Ports which helped sustain prices for the likes of Taylor’s and Dow’s. Now the gap is widening and the shippers are concerned.

“I guess they are stuck between a rock and a hard place,” says Johnny Powell of Stevens Garnier which imports Sandeman, a brand that has so far refused to play the BOB game. When Sogrape bought it from Pernod Ricard in 2002, it was, to quote Powell, “an iconic brand with no distribution, apart from a few cash & carry’s on the back of Jacob’s Creek”. Today, partly due to some residual awareness among the over 45s, Sandeman has become a 10,000-case brand in Britain and is beginning to build a presence in the on-trade through Matthew Clark.

The recession has clearly taken its toll on Port with shipments down nearly 12% in the last two years. “But that’s not bad compared to Champagne, and so far, this year, they are up a couple of per cent,” says Symington. Meanwhile, Taylor’s claims to have had double-digit growth for its “special category” Ports in the UK despite increasing prices.

In America “shipments into the market declined as distributors, wholesalers and retailers reduced their stocks”, says Bridge. In his case it appears US shipments bounced back in the first quarter of 2010.

“The strength of Port is the strength of the big brands,” says Raymond Reynolds, who feels 2007 – the last declared vintage, – proves his point. “Niepoort is doing quite well in the UK, but the ‘07 wasn’t particularly successful. In the teeth of a recession most people fell back on known names – on brands with historical strength.” It was certainly a good campaign for Taylor’s and Graham’s.

New entrants

Meanwhile, the Port trade continues trying to broaden the drink’s appeal and spread sales a little more evenly around the year. “I think Otima has been great at breaking down barriers,” says Johnny Powell, of Warre’s 10 and 20 year-old Tawny which has been promoted chilled and with ice.

Sandeman has been targeting the pre-dinner drinks market with its aptly named white port Apitiv.
In January Quinta do Noval launched Noval Black with the aim of bringing new customers into the category and de Gironde sounds delighted with the response.

“Current sales are well beyond my wildest dreams.” Last summer Fladgate went one better and created a whole new category with Croft Pink. Add in Maynard’s, the new Port brand launched by the Van Zeller family this April, and it seems Port is positively buzzing with innovation compared to the past. A generation ago, it was either Port and lemon or vintage Port with nothing in between.

Tom Bruce Gardyn, July 2010