Rabobank warns of changing tides in tackling US market

The US wine market is still one of the fastest-growing and dynamic export markets, but growing competition and wholesaler consolidation means it is becoming increasingly difficult for smaller producers to gain a foothold, Rabobank has warned in its Wine Quarterly Q2 2017.

In 2016, US wine imports rose 1% in volume and 3% in value, with imported wines maintaining their market share, representing 33% of total US wine consumption.

While using an importer has traditionally been the most common route for foreign wineries, Rabobank says that as the US market has shifted, more producers are seeking out alternative routes to market to achieve greater penetration.

“While this traditional relationship is still the most appropriate go-to-market strategy for many wineries and brands, the growing interest of many foreign wineries to build a stronger presence in the US market is leading some to consider alternative or incremental strategies, and there are a growing number of companies emerging in the US that offer various services to meet these needs.”

One obvious disadvantage for foreign suppliers in using the traditional importer model is that they are unable to sell direct to consumers (DTC) the way that domestic wineries can. In 2016, DTC sales increased by 18.5%, and has been a critical channel for small domestic producers to grow sales and improve margins, said Rabobank.

“Foreign wineries are obliged to use an importer to access the US market. This is not meant to disparage the role of the importer, as they offer a valuable service, but being obliged to go through an importer creates some distinct disadvantages for foreign suppliers. First, and most obviously, it means that imported brands face an additional layer of costs (i.e. the importer’s margin) to enter the US market, that domestic wineries do not pay.

“Second, the importer acts as an additional filter in the communication between the supplier and the ultimate client (e.g. the retailer). Finally, and perhaps most importantly, is that most major importers are increasingly demanding an equity stake in any brand they agree to represent. This is a stipulation that many brand owners may find unpalatable.”

HORSES FOR COURSES

Approaching the US market as one market in itself is not always the best course of action, as it is in fact a composition of (at least) 50 different markets, says Rabobank, each with “different demographics and vastly different structures and laws governing the sale of wine”. Consequently, more producers are seeking out alternative routes to target individual markets.

Contract import services for example offer importers a ‘pick and mix’ range of services, from basic import and logistics services to accounting and finance support. Likewise, contract third-party and marketing support offers importers with additional sales support in various markets and raise its profile. The downside is that results are not guaranteed, and given the cost involved.

For larger producers, with capital to hand, a common methods has been to acquire a US winery as a distribution platform, as was the intention of Treasury Wine Estates’ with its purchase of Beringer in 2000, and also a likely factor in Viña Concha y Toro’s acquisition of Fetzer in 2011.

“The rationale for this strategy is obvious, and we view it as a viable option, but making it work is not a simple task,” said Rabobank. “Given that this strategy depends on acquiring brands that currently enjoy distribution strength in the market, it is a strategy that will require a significant amount of capital to implement and it exposes the owner to some operational risk in a new market.”

Other options include acquiring your own import company within the US, as was the case for Grupo Mezzacorona from Italy and Sogrape from Portugal, providing a direct relationship with wholesalers, or securing a distribution agreement with a larger wine company.

“A large domestic winery will have more clout with the wholesaler, but the agency brand competes at some level with the other brands in the domestic winery’s portfolio for attention and support,” says Rabobank. “Ultimately, there will always be more incentive to support its own brands.”

While alternative routes to market are gaining in popularity among some producers, Rabobank concedes that despite its limitations the importer model is “still the most critical ally in the market for many foreign suppliers”, but that the decision of which model to adopt was ultimately “horses for courses”.

“Many brand owners see this as a good time to re- evaluate their route-to-market strategy as there are new companies emerging, and new options evolving,” said Rabobank. “There is no one right strategy or perfect solution—each option has advantages and drawbacks—but it is a ‘horses for courses’ analysis, in which the appropriate structure will depend on a variety of factors, including the scale to which the brand owner aspires, how much capital is available to be invested and the owner’s tolerance for risk.”

SLOWING MARKET?

Generally, the volumes of wine imports into the US have slowed in recent years. In 2016, US wine imports rose 1% in volume and 3% in value, with imported wines maintaining their market share, representing 33% of total US wine consumption.

However Rabobank analysts pointing out that the market’s slowing volume growth was in fact the result of declining volumes of less profitable wine, priced below $8/bottle, while the most profitable wines, priced above $8/bottle, steadily rising. Wines priced above USD 11/bottle are growing by double-digits.

“The US market offers scale, growth and attractive margins for those that can effectively penetrate it,” the report stressed. “This is not a new phenomenon, but the rebound in the value of the US dollar, as well as increasing challenges in other markets (e.g. the weakness of the British pound and uncertainty around future trade agreements with the UK in the wake of Brexit), make the US wine market increasingly more attractive by comparison. Over the course of the past year, we have had numerous conversations with foreign clients looking to increase their presence and penetration in the US market.”

Italy remains the largest source of imports, growing 4% in 2016, with the growth of sparkling wines (29%) and vermouth (17%) compensating for a mild decline in bottled still wine shipments. Imports of French wines grew by 9% overall, supported by strong growth of both still bottled wines (10%) and sparkling wines (6%).

Imports of bottled wine from most New World producers to the US were down during the period, including Australia (-6%), Chile (-6%), and Argentina (-3%).