 |
| April 20th 2008 |
|
| The uncertainty of the UK market |
by Robert Joseph
Thanks to high street consolidation, excise hikes and calls for innovation in packaging, the UK market is undergoing a major change, finds Robert Joseph. Could the end be nigh for the once unmoveable £3.99 price point?
|
|
|
Justin Howard-Sneyd, head of the wine department of Waitrose, notes that “at the beginning of every year one of the trade magazines says that ‘this is going it be a watershed year for the British wine trade’. Well this time it may actually be true!” Howard-Sneyd is almost certainly right in thinking that the UK wine market is in one of its most uncertain states in living memory. The simple explanation for this was the 12 March imposition of a 14p hike in excise duty. At a stroke, Britain’s wine drinkers became the most highly taxed in Europe. From 16 March, every 75cl bottle is subject to duty of £1.46 ($2.88/€1.83), compared to £1.39 in Eire, £1.21 in Denmark and £1.08 in Finland. A hike like this might have been expected to lead to surprise and widespread protest; in fact, both were muted. The resigned way the UK industry accepted the duty rise can be partly attributed to the famous British stoicism, but also to the fact that the UK media has been full of coverage of binge drinking among the young, and alcohol abuse among the middle class. UK wine distributors and retailers were also left with mixed feelings about the new tax. Perhaps, thought some, like influential commentator Tim Atkin MW, it might finally bring an end to the love affair between the British consumer and the £3.99 price point.
UK pricing in flux
In theory, the average price should rise from £4.01 to £4.18, simply to cover the increase in duty and value added tax (VAT). To this should be added another 10-15p to cover UK inflation, the rise in the cost of glass and the fall in the value of sterling against the euro. While many, including myself, doubt the average price will rise to £4.30, there are those, including Stewart Blunt of retail analysts Nielsen, who believe the owners of the important big brands may have the means to move wine prices upwards.
Their secret weapon is their much derided ‘half-price’ offers. British supermarket shoppers are used to seeing wines with price tags of £7.99 on semipermanent sale at £3.99. Today, as Blunt has already noted, some of those same wines have reportedly been repriced at £8.99 so they can be discounted to £4.49. That 50p price rise, if widely applied, should have a significant effect on average prices, but it may also be used – thanks to reduced margins – to fund the continued sale of £3.99 wines produced by the same brand owners.
Interestingly, Labour politician John Grogan called for a ban on below-cost retailing three weeks after the new duty was imposed, because “the evidence is that there has been no increase in super- market prices since the budget”. An understanding of price points is crucial to anyone seeking to sell wine in any volume in the UK. One of the positive aspects of the current Nielsen statistics is the19% growth in the sale of wine at over £5 in the last year. Unfortunately, as |
|
|
|
|
|
|
|
|
Blunt acknowledges, this phenomenon is partly explained by the (albeit limited) sale of “fully priced” £7.99 wines, most of which are normally bought at half price. Just as important is the discounting on higher priced wines; for example, reductions from £8.99 to £5.99. In other words, the growth in the £5+ market is not necessarily a reflection of a growth in the readiness of UK consumers to buy interesting single estate premium wines.
Those who would like to see these kinds of wine doing well will be disappointed to see that the US has finally drawn level with France in the off-trade and should overtake it during the summer, largely thanks to the explosion in demand for branded Californian rosé. The success of California in the UK is notable for the limited number of brands – Gallo, Blossom Hill et al – behind it. One reason why US sales growth may slow this year is the long-expected decision by Diageo to follow the lead of Lindemans, Blue Nun and Mateus and turn its Californian Blossom Hill into a multi-national brand. From this summer, UK consumers will find themselves buying Australian and Chilean wines under the Blossom Hill label. Most, it is believed, are currently unaware of, or uninterested in, the brand’s nationality.
According to the figures for December 2007, the top 20 brands, almost all from the New World, now represent nearly two out of every five bottles, up from 34.4% in 2005 to 38.6%. Even more striking is the fact that that the top five brands – Hardys, Gallo Family, Blossom Hill, Stowells and Jacobs Creek – between them account for nearly 25% of sales. By comparison, other brands and ‘own label’ wines both lost market share, by 1% each.
On the shop floor
Eighty-five percent of Britain's wine retailing is in the hands of a small set of supermarket chains: Tesco, Sainsbury, Asda, Morrisons, Somerfield, Marks & Spencer and the Co-op, and four ‘specialist alcohol retail chains’, Thresher and Wine Rack (both under the same ownership), Oddbins and Nicolas (which belong to Castel) and Majestic. Beyond these, there are two mail order/online specialists, the Wine Society and Direct Wines, which includes Laithwaites, Averys, The Sunday Times Wine Club, Virgin Wines and a long list of other retail brands. There is also a set of generally small but vibrant independents.
The most obvious change in the market has been the dramatic shrinking of the once inspiring Oddbins chain. Its owners, Castel, are evidently keener on building their Nicolas brand, which offers higher margins, thanks to its greater focus on unbranded European (primarily French) wines. Spokesmen for Oddbins have taken pains to dispute claims that morale is low and the chain unloved, but visits to the shops and conversations with the staff reveal a different picture. Shelves once packed with an eclectic range of international wines are now decidedly lustreless, thanks to the |
|
|
|
|
|
|
|
|
scaling down of the UK buying department. Today, the brightest light on the high street remains Majestic, the profitable chain that sells exclusively by the 12-bottle case. Critics point out that here too, shelves reveal unadventurous buying; McGuigan was, for example, recently disproportionately well represented in the Australian range, but the chain has announced its intention to increase its sales of ‘fine’ upmarket wines.
Meanwhile, Majestic, whose chief executive Tim How has just retired, may face stiffer competition from a high street neighbour. Vision Capital, owners since 2007 of the biggest retail chain Thresher, have revealed plans to expand its upmarket Wine Rack chain – to a predicted 300+ stores – and introduce more exclusive, regional wines which, as at Nicolas, offer higher margins than the branded fare that has become the speciality
of the supermarkets. The most immediate change is the end of the ‘three-for-two’ offer that Thresher and Wine Rack pioneered. It remains to be seen what effect this move will have on margins and pricing.
Among the supermarkets, Tesco has expanded its wine range by some 300 wines and added eclectic own-label offerings such as Albariño and Grüner Veltliner, while Asda (the UK Wal-Mart brand) has been talking about ‘rationalising’ or shrinking the number of wines on its shelf. Tesco’s move has won it great critical praise; unfortunately, this has yet to be matched by enthusiastic buying by customers. Christmas 2007, the first big test of the bigger range, proved to be an unusually poor one for Tesco, while classic discount specialists Morrisons did well with more mainstream fare. It is worth pointing out that any kind of failure is a surprise for Tesco whose profits remain impressive, while Morrisons’ success is part of a return to form after a period of indigestion following the purchase of rival chain Safeway. However, pessimists wonder how long Tesco’s bean counters will allow the chain to persist with its ambitions to be seen as the ultimate wine retailer if they are not reflected in profits.
Suppliers to UK supermarkets, and those wanting to supply them with own label and other high volume wines, will be interested to hear of a move towards an ‘open book’ policy, where all production and packaging costs and margins are revealed. This trend is expected to grow following the recent duty rise.
Online in the UK
Optimists had hoped that the stranglehold the supermarkets have over the UK wine market might be remedied by competition from online specialists. In fact, it has not only lagged behind, with only 6% being sold in this way, compared to an overall grocery figure of 15%, but the online market is dominated by traditional wine retailers. Fully half of all Internet sales are handled by four companies, led by one – Tesco, predictably – who sell over one bottle in every four that are bought online. The |
|
|
|
|
|
|
|
|
others include two other supermarkets (Waitrose, under its Ocado brand and Sainsbury) and the mail order giant Direct Wines, along with its subsidiary Virgin Wines. Marks & Spencer, a latecomer to online selling has recently launched its own operation which will, it is planned, offer some 150 different wines. Interestingly, given its history of selling only own-label wines, the wines to be offered on the M&S website will all be branded.
Chris Murphy, long-time head of the wine department, explains that the Internet will give him the chance to work with new suppliers, from whom purchases might be only a few pallets. While these online operations at Marks & Spencer and elsewhere are naturally welcomed by distributors of limited production wines, it should be noted that M&S’s online ambitions currently run to a range of just 150-200 SKUs.
On-trade
Australia's ‘Directions 2025’ strategy document sets great store in the potential growth of UK restaurants and bar sales, currently dominated by France and Italy – so the strategists will presumably be disappointed to see a 7% drop in their sales in this sector in 2007, as tracked by Nielsen. It will come as no consolation that France and Italy also saw a drop, by 8% and 6% respectively, even in a year when the aisles of Pinot Grigio might have been expected to give Italy a boost. Overall, Nielsen's tracked sales in the on-trade fell by 4%, with the
downward trend being bucked by the US (up by 8%), Chile (5%) and Spain (2%). Both Portugal and New Zealand saw an increase of some 39,000 cases between them, but this was trifling when set against the loss of 880,000 cases of Australian, French and Italian wine sales in 2007.
‘Green innovation’
This year's newest new thing is the arrival on British shelves of the PET wine bottle. Early examples of this alternative package suffered from short shelf lives, as oxidation could set in after six months, and an unappealing appearance. The latest generation, however, look better and offer up to 24 months of safe storage. The big supermarkets like Tesco, who have already introduced carbon units onto the labelling of all their products, will claim that the switch from glass to PET is driven by a desire to save the planet. But those same retailers also know that the potential savings on bottling (up to 50%), and shipping will be a major incentive for everyone concerned. Those who question the readiness of the UK public to accept wine in what are effectively plastic bottles might do well to consider the speed at which screwcaps penetrated the market, despite the heavy initial resistance spoken of by specialist consumer research company Wine Intelligence. British consumers, it seems, have faith both in brands and in their retailers to decide on the best way to package their wines.
Back to smuggling
Unless of course, those same consumers are so bargain-focused that they like to do their shopping on the duty-free, southern side of the Channel. Estimates vary of the amount of duty free wine that comes directly from France, but most observers set the figure at between 10-15% of the total off trade market (the equivalent figure for cigarettes is 18%). This figure includes imports carried in by individuals, who can legally bring in unlimited amounts for their own consumption, and bootlegged batches that are sold unofficially at car boot sales and on housing estates. If the price of the very cheapest wine available in the UK rises, as is expected,
to £3.20, it is likely that imports will rise significantly from Calais, where retailers like British-owned Eastenders offer own brand-wines such as the Dog's Bollocks for €1.45. All of which, would indeed contribute to 2008 becoming a watershed year for the UK industry.
|
|
|
|
|
|
|
|
|
