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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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