Accessing
the UK wine market
The
implications for consumer choice
Editor's
note: this is a piece I wrote for UK trade journal Harpers
in May 2004, but which I thought I'd make accessible on the
internet. Sorry for the delay...
So there I was, sitting in the pub
after a hard game of 5-a-side, and one of the guys asks me the
question—one that invariably crops up when I say I write about
wine. ‘Can you tell me which of those hundreds of bottles on the
shelf in the supermarket I should buy?’ I couldn’t give him the
answer he wanted. My response was a rather long-winded ‘I
wouldn’t start from here’ sort of comment, and we moved on to
other topics. Interestingly, he, like most consumers I’ve spoken
to, isn’t interested in changing his buying habits. People don’t
want advice on where to shop; rather, they want purchasing advice
based on the retailers they already use. And in the modern
marketplace, for most people wine is a convenience purchase, with
bottles picked up on the way out to dinner, or with the weekly shop.
Presumably, this is why the supermarkets in the UK are now
responsible for some 70% of off-trade sales. It is the way people
shop that has driven change in the marketplace.
Most punters really are bewildered
by the choice of wines available in even modest-sized supermarkets.
How can they hope to choose intelligently? A large, diverse range
makes sense if you have some way of helping customers make their
choice: ideally, hand selling based on retailer expertise. But in
supermarkets, guidance is limited to label information, the
occasional critic’s recommendation and previous experience (which
will for most be quite limited). This isn’t enough to give people
confidence to explore, or trade-up. No wonder that so many tend to
limit their purchases to discounted lines on the gondola ends.
Indeed, number crunchers have shown that wine is one of the most
‘price elastic’ commodities carried by supermarkets. Reduce the
price by a pound and the bottles fly off the shelves, with sales
rocketing up. The supermarkets presumably aren’t too worried:
promotional activity is funded by producers, and wine sales overall
are high. But for producers trying to sell their wines, the UK
marketplace is an increasing source of frustration.
Where is all this leading? In this
feature my goal is to attempt to dissect the state of the UK wine
market place, and discuss the implications for both retailers and
producers looking to sell their wines. In researching this article,
I spoke to a number of trade figures about the changing shape of
wine retailing in the UK, the role of agents, and what it takes for
producers to succeed.
Consolidation
at both ends
‘The wine world is consolidating into two distinct
models’, says Bibendum’s Dan Jago. He outlined the
characteristics of each. First there are individual, unique, high
quality wine producers and retailers. These businesses are more
expensive to operate with high costs, and limited product
availability. There is a pull rather than push for products. They
are not scalable and keep the pull going on the basis of quality and
availability. The other model consists of high-volume, low cost
businesses. They make extensive use of subcontracting, with limited
production assets. Products are sold by push, with small margins and
high volumes. In this scenario, to use some business jargon, wines
are treated as FMCGs (fast-moving consumer goods).
The downstream effect of this
consolidation process is going to have severe implications for those
who don’t fall into either category. ‘There are lots of
producers stuck in the middle’, says Jago. Sainsbury’s Allan
Webb also mentions consolidation as a key factor in the changing
wine scene, and from the retailer’s perspective this has mirrored
the split into two models, with the supermarkets taking a dominant
position in the off-trade and a resurgence among the quality
independents. In fact, while the specialist wine merchant sector has
lost market share of late, it is the multiple specialists who have
largely taken the hit: the quality independents are ‘doing rather
nicely’, as Webb puts it.
Along with retailer consolidation,
producer consolidation is more or less inevitable. Sainsbury’s
Webb is keen to emphasize that they still have ‘several hundred’
wine suppliers. ‘We feel we need a diverse supply base’, he
says. ‘We’re not rationalizing our supply base like some others
are.’ But the lure of a rationalized supply base is one that is
hard for most supermarkets to resist, and increasingly giant drinks
companies have worked on developing their wine portfolios so that
they can offer one-stop drinks solutions. One way they have done
this is to buy-up successful independent wine producers who have
typically worked on a non-scaleable estate model basis (where they
have owned their own vineyards), and turned them into scaleable
brands by using bought-in grape supplies. The result is a portfolio
with a wine brand at every price bracket, from bargain basement to
super-luxury. As supermarkets, with their powerful grasp of the
off-trade business, consolidate suppliers and turn increasingly to
large drinks companies for sourcing their lines, smaller producers
will inevitably be jostled out of the market at all price points,
even if their wines are demonstrably better and more authentic than
the larger brands. Thus it is incorrect to see the two wine
models (or ‘cultures’) merely in terms of cheap versus expensive
wines. The danger for producers not part of this wine-as-FMCG club
is that when consumers choose to trade up from the sub-£5 brands,
they won’t turn to authentic estate-bottled £10 wines offered by
specialist independents, but they’ll stick with the supermarkets
and opt for the £10 brands.
Production-led
or market focused?
Perhaps this shift towards brands at every level is an
inevitable consequence of wine production becoming more market
focused. Modern retailing has developed, and so must wine
production. ‘People making wine have to be far more focused on who
they are selling to’, says Webb. ‘They need to think about who
is the target customer before they crush the first grape’.
Traditionally, wine has been a production-led industry, and to some
European countries it still is. That is people make the wine first,
and then worry about who to sell it to. Witness the near farcical
subsidy system that still operates in the EU, where governments buy
fantastic quantities of unsaleable wine from producers for
distillation each year rather than face economic realities. This is
in stark contrast to the almost ruthlessly market-focused approach
of the new world, which has been tremendously successful in making
commercially astute wines. However, even savvy market-focused
producers can come a cropper in the UK marketplace. Witness the
difficulties experienced by Southcorp last year. Part of the reason
for the ‘merger’ with Rosemount was to take advantage of
Rosemount’s expertise in creating brands that weren’t based on
the capital-intensive ownership of vineyards, and which were
released to market very soon after vintage. Yet Southcorp has
struggled to be profitable in the discount-driven UK off-trade,
where a staggeringly high proportion of their wines were sold on
producer-funded promotions. Is being market-focused enough?
Division of power
Southcorp’s problems, and those shared by many other producers,
stem in part from the dominant position held by the supermarkets in
the UK off-trade. If a producer wants to shift significant
quantities of wine, then they need a listing with a supermarket.
Inevitably, they need the listing more than the supermarket needs
the wine. It’s an unequal relationship that means that producers
are negotiating from a position of weakness. And getting a listing
isn’t the end of it. ‘The onus on getting sufficient throughput
is with the producer, rather than the retailer’, says Jago. And
with price-elastic wine, the way to shift the wine is to discount
it. This promotional activity is funded by the producer, taking away
from profits. The consequence is that many consumers have become
bargain junkies, buying whatever happens to be discounted at the
time. After all, they’ve got little else to help them in their
choice. This is likely to have a number of implications. Unless
supermarkets begin to use aspirational marketing and come up with an
effective way of helping punters to make informed choices – which
would give them the confidence and desire to trade up a bit – then
the off-trade won’t be able to shake its reliance on the sacred
price points of £3.99 and £4.99. In this case producers will find
life increasingly difficult because cost will remain the key factor
in consumer choice. Another scenario is that supermarket wine ranges
will be slashed and reduced to core mega-brands in an attempt to
drive costs out of the system and make consumer choice simpler.
There’s a sense in which wine
doesn’t fit very well with modern retailing with its reliance on
scaleable brands. Wine is different to other drinks, in that it is
not primarily a manufactured product, but an agricultural one: the
grapes are not just a starting point in a manufacturing process, but
intrinsic to the quality and appeal of the product. This confers a
unique sense of place and cultural identity on wine that has ensured
its wide, enduring appeal. Because of the link between wine and the
vineyards it comes from, it is not easily scaleable. Vintage
variation, a source of endlessly renewing interest to keen
consumers, is an unwanted hassle for the branders and large
retailers, who long for product consistency and continuity of stock.
The complexity and diversity of wine, among its most positive
attributes, are a source of frustration to the modern retailers who
try to iron these complications out. The consequence is that wine
has been rather awkwardly squeezed into brands and the FMCG model.
With wine scale also matters:
smaller is almost always more beautiful. Big companies are not
usually the ones making the most interesting wines. Yet modern
retailing can’t cope well with smaller producers. It needs volume
to keep costs down and increase profitability, and so outside of the
specialist independent niche, smaller producers and agencies are
finding themselves without a place in the market.
The
changing role of agents
This brings us to the changing role of agents. Jago points out
that the traditional role of the agent – to source the best
quality, manage logistics and help with the management of the
activity of the product — is being narrowed. ‘The agents who are
worth their margin, and who can justify that to the retailer, are
those who can innovate’. Sainsbury’s Webb thinks agents are
still important because he doesn’t have the staff to do all the
sourcing. ‘The wine market is changing all the time’, he says.
‘Agents still have a role in terms of expertise and connecting us
with new producers’. Tesco’s Helen McGinn says that there is
room for different sized agents, but ‘all need to be ahead of
their competitors’. How? McGinn lists four key criteria: (1)
knowledge and understanding of the market; (2) understanding
consumer trends; (3) closer relationship with key retailers; and (4)
understanding how key retailers operate in this market. Jago echoes
that ‘the future is going to be vested in those capable of
understanding the needs of the market and the retailers’.
Bibendum have proved adept at
meeting the needs of the UK market, and their latest move has been
to form strategic alliances with selected producers with the goal of
forming shorter supply and value chains that have just ‘one
margin’. Bibendum has formed joint venture companies with Lion
Nathan and Boisset. These are based in the UK and co-owned by
Bibendum and the producer. Jago reports that these two producers
have ‘a capacity to deliver market needs at all levels’. The
attraction here is that ‘big companies have the ability to get an
audience with big retailers on their own’. Another advantage is
that having a jointly-owned venture where the skills of both
partners are utilized removes the permanent position of negotiation
that is commonly found between producer and agent. Presumably, it is
these sorts of large-scale partnerships that look most likely to
satisfy McGinn’s criteria 3 and 4 above.
Another option for agencies is to
become brand owners. This is a policy that has proved very
successful for Western Wines, with their smash-hit Kumala brand from
South Africa, among others. But creating a successful brand is not
just as simple as buying bulk wine and bottling it with a catchy
label. ‘There are a lot of wannabe “soft” brands in the
marketplace’, points out Jago.
The
producer’s perspective
Where does this leave producers? With the market consolidating
into two models, and a current global oversupply, it seems
imperative that producers know their route to market well if they
want to succeed. The wine buying team from Waitrose offered the
following advice. Any wine that offers ‘overdelivery on quality
versus price, excellent typicity, a point of difference, or a story
to tell’ will be the kind of wine to appeal to a serious wine
retailer. How should producers maximise their chance of a listing?
They made five suggestions. (1) Show their wines at generic
tastings; (2) do their homework –study the retailer’s range,
identify any gaps or areas where they reckon their wines offer a
better proposition, whether on price or quality or both; (3) send a
short bullet point email to this effect direct to the buyer; (4)
employ a consultant; and (5) get their wines listed in their
regional restaurants – buyers have to eat on buying trips!
The
consumer’s perspective
How do the changes in the UK marketplace affect the consumer?
‘The implication is that the consumer has to look slightly harder
for good stuff rather than the available stuff’, says Jago. ‘If
they want real choice they need to look outside retailers’
ranges.’ It’s not as simple as you get what you pay for. It’s
becoming a tough job writing a wine column where you are under
editor’s orders to focus on large retailers, simply because for
most wines retailing over say £6 in a supermarket or high street
chain, it’s almost always possible to find something more
interesting and authentic for the same price elsewhere. Commercial
wine styles show admirable consistency these days, but this comes
with the price tag of increased uniformity. For journalists,
the overriding impression is that kissing the frogs is not as
unpleasant as it used to be, but there aren’t any princesses left.
Concluding
remarks
The overriding picture is of a consolidating marketplace, driven
by the needs of modern retailing which itself is shaped by consumer
buying patterns. But the fact that wine doesn’t fit modern
retailing very well could be cause for optimism. The middle ground
– producers who don’t fit into the wine-as-FMCG or fine wine
categories – is potentially large. Could an alternative route to
market open up for these sorts of products? ‘The internet is
allowing smaller producers a route to market’, says Allan Webb.
Sainsbury’s have begun offering small parcels of wine to customers
via their website. ‘We’re now prepared to buy a single
palate’, he says. ‘It wouldn’t have made sense before to send
100 stores one case each’.
‘The main threats to the wine
industry don’t lie with access to market’, says Webb. He thinks
the greatest perils are the squeeze on disposable income that is
just around the corner together with currency fluctuations. ‘But
I’m not pessimistic about the wine trade. I see a vibrant industry
out there’.
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