Britain’s historic role as the heart of the global wine trade has been increasingly challenged in recent years with the ascendance of US critics and the shift in the fine wine market to Hong Kong, following the 2008 removal of import duties and sales taxes in the former British colony. The ‘Brexit’ decision by 52% of UK voters to take their country out of the European Union seems set to deal further blows to the British wine market.
Currency woes
The fall in the value of sterling in the wake of the Brexit vote to its lowest levels since 1985 has inevitably raised the spectre of significant price rises for imported wine. In October, Miles Beale, chief executive of the UK Wine & Spirit Trade Association (WSTA) issued a statement that “We should be under no illusions that wine prices are likely to increase. In the current climate, [this] could lead to a bottle of wine going up by 29p.” Costs of importing wine from the EU would, Beale estimated, rise by £225m ($280m) if volumes remained at their current levels.
The relationship between the pound and other currencies is equally concerning. On November 15th, Neil McGuigan chief executive of Australian Vintage, producer of the fourth biggest wine brand in Britain, told Sky News that the weakness of the UK currency against the Australian dollar was likely to cost his company A$1m ($746,526.00). Australian Vintage is particularly heavily exposed to the UK, as it ships 40% of its wine there.
Like other producers, McGuigan is hoping that retailers will collaborate in making the price increases "palatable" to consumers. But professionals with experience of the UK market will know that scope for this is limited. According to Kingsland, one of the UK’s biggest bottlers, over 50% of imports are already shipped to the UK in bulk, rising to 85% for wines from Australia which still holds the largest market share. Savings from UK bottling have been matched by moves towards lighter bottles and cartons. There are very few costs left to cut.
Impact at the cash register
Britain’s biggest retailers – the giant supermarket chains Tesco, Sainsbury, Asda, Morrisons, Co-Op, Waitrose and M&S – are also all painfully aware that any efforts they make to raise prices will be constrained by competition from the German discounters, Aldi and Lidl,whose market share has grown to over 10%, thanks to their low-cost model and readiness to accept far lower margins.The toughness of UK market conditions was clearly reflected in the announcement by Britain’s biggest premium wine specialist retailer, Majestic Wine, of half-yearly figures that showed a 10.6% rise in sales, but a pre-tax loss of £4.4m. While optimistically stating that his plans for the company is driving it back to sustainable profitability, Majestic CEO Rowan Gormley frankly concedes that the UK is a“very challenging market”.
This is the background against which Philip Hammond, the new British Chancellor of the Exchequer, is trying to fill what the Financial Times calls a “£100m Brexit hole”. Wine was the only alcoholic drink to see an increase in excise duty in the 2016 pre-Brexit budget presented by the previous Chancellor, George Osborne, and there are fears that Hammond will follow his predecessors’ example in raising so-called ‘sin taxes’ on tobacco and alcohol.
Beale, together with leading UK wine industry figures, is not only lobbying hard against any rise in duty, but arguing forcibly for a cut, given the difficult conditions caused by the weaker pound. In particular, the WSTA strives to point out the vulnerability of some of the 170,000 jobs in the UK wine trade, and of the English wine producers who have invested in a doubling of vineyard acreage over the last seven years.
While the current outlook for the UK wine market looks gloomy, even stormier times may lie ahead if David Bloom and his team of analysts at HSBC bank are correct in their projections for the value of sterling. By the end of 2017 they foresee the pound hitting parity with the euro and sliding to $1.10 against the US dollar. British drinkers looking to drown their sorrows in a glass of red or white wine may find paying for it even more of a struggle than it has been in the past.
Robert Joseph
