The two-speed UK market

The UK market continues to defy easy analysis, says Richard Woodard. On the one hand, consumers are still looking for cheaper wines, which the wine trade is finding unprofitable to supply. On the other hand, the fine wine market is booming.

UK wine imports 2000-2012
UK wine imports 2000-2012, Source: HM Revenue & Customs, Alcohol Bulletin

Would the real UK wine market please stand up? Depending on your chosen commentator, in late 2013 the UK is one of two things.

Alternative number one: a stagnant, static market where consumption is in slow decline, retailer dominance is almost all-encompassing and the relentless, drip-drip effect of excise duty increases is eroding any hope of a healthy profit margin for all concerned. The goose may not be cooked, but it’s plucked, trussed and ready for the oven.

Alternative number two: the UK wine market remains one of the most important in the world, with an insignificant domestic­ supply base and a population thirsty for wine in new styles and from new places; where the days of “cheap-as-chips”, £3.99-a-bottle plonk are numbered, ushering in a new age with the focus on that linguistically inelegant, but financially lucrative, neologism: premiumisation. It’s not in recession and the housing market is on the up. Rejoice!

Somewhere between these two extremes lurks the truth. Talk to those at the coalface of selling wine to the great British public and they will, almost to a man or woman, say the same: it’s tough, but there’s a living to be made, if you don’t mind working harder than ever before, and for less money.

But let’s look at the facts.

The trends

With the exception of a slight dip in 2006, UK wine imports chart a steady upward curve from 1995 to the third quarter of 2008, as HM Revenue & Customs figures show. Cue the ­collapse of Lehman Brothers in September 2008, a slump in 2009 and a correction in 2010. So far, so textbook – but since then, a slight, steady overall decline has set in, despite increasing imports of sparkling wine.

Studies point to a variety of causes, inclu­ding the UK’s long, drawn-out and fragile emergence from recession, low wage increases and a consequent impact on consumer confidence. The same would apply to grocery or clothing sales, but with wine there is an additional ­factor at play: excise duty. Ten years ago, this stood at £1.19 ($1.90) for a 75cl bottle of still wine (or £1.65 for most sparkling wines; £1.59 for fortified wines); today it’s £2.00 (£2.56/£2.67).

So wine sales have suffered from the ­impact of the recession first of all, and then from the UK Treasury’s need to raise extra taxes in ­order to reduce the deficit. For many obser­vers, this explains the slow decline of the past few years.

At a time when optimism is beginning to ­return, house prices are rising and the Chancellor of the Exchequer, George Osborne, is ­using phrases like “turning a corner”, is the wine sector edging towards recovery? The signs are mixed.

According to the most recent report from the Wine and Spirit Trade Association (WSTA), the hot summer helped boost retail sales of beer and cider, but did little for wine in the off-trade, with volumes down 3% in the 12 weeks to 17 August, and down 2% over the year. Value rose, but only by 2%, accounted for by the most recent duty increase.

Only sparkling wine remained in volume growth, both for the 12-week period and for the year to 17 August, but Champagne suffered the steepest decline, falling 13% in the short term, and 4% over the year.

Sales of South African and Spanish wine grew at the expense of Italian wines due, says global market researcher Nielsen, to “supermarkets’ shift in focus as prices from Spain and South Africa are more attractive to consumers”. New Zealand ­declined, the victim of price rises enforced by the small 2012 harvest.

CGA Strategy figures for the on-trade show-slight volume growth for still wine, both in the short and long term thanks to a return to growth for red wine, up 7% in the quarter. Sparkling wine volumes were stable, while Champagne was up 6% on the year – but ­posted a 1% quarterly decline.

For WSTA chief executive Miles Beale, it’s a disappointing overall picture, and he pins the blame firmly on “ongoing duty increases and squeezed consumer spending”, calling on the government to end the duty escalator to provide relief for struggling pubs, bars and restaurants.

Price is everything

Meanwhile, Nielsen figures show that sales of wines below £3.00 per bottle fell 40% to ­virtual non-existence in the period, while those below £4.00 dropped by 19%. Not consumers trading up, notes drinks supplier Bibendum in its summer report – simple economics as duty hits £2.00 a bottle. “There is no money in selling­ a wine that costs £3.99, and very little in one costing £4.99,” according to the company report. “The future lies in convincing as many people as possible that a really good bottle of wine is worth paying a pound or three extra. With duty at £2.00 per bottle, produ­cing a pro­fitable, drinkable wine under £4.00 is becoming practically impossible, leaving only loss leaders at this price.”

But survey evidence suggests that 20% of UK adults still expect to pay less than £4.00 for a bottle of wine – and the fear is that, if they can’t find it, they’ll migrate to other categories such as beer or cider.

Nonetheless, Bibendum points to recent ­figures showing retail sales of wine priced £8.00 to £9.00 per bottle up 21%, adding that 30% of drinkers are now willing to spend £5.00 to £7.00. “Tax rises do not tell the whole story and the growth of £8.00 to £9.00 shows a burgeoning market for high-quality wines in the UK, and a growing demand from consumers to find out more about the subject,” the company argues.

So what is happening? Bibendum has an explanation for the apparent contradictions. “It seems we are heading towards a two-speed wine market,” the company concludes. “At the entry level, wine is just another drink that competes on price with everything from alcopops to cider. Further up the price scale, it is really beginning to capture the imagination of drinkers who are increasingly spending more money to find something new, exciting and ­delicious.”

If the two-speed market theory is correct, those attempting to feed the lower end of the UK market will continue to face a tough battle to keep costs down and margins intact. But, for those at the premium end, the UK could yet be an attractive export proposition well into the future, especially if and when true economic recovery arrives.


How effective are trade events?

The post-recession era of austerity has made wine businesses question the effectiveness of big, expensive-to-attend trade events as never before.

The London International Wine Fair is the most high-profile casualty: plummeting ­exhibitor numbers led organisers to ­revamp the annual trade fair, dropping the word ­‘International’, ­relocating to Olympia in ­Ken­sington from ExCeL, and promising a cheaper show more suited to the times in 2014.

Meanwhile, generic bodies representing ­Argentina, Chile and South Africa joined forces to host The Beautiful South two-day tasting in London in September. 

Organisers claim success, highlighting visitor numbers of 1,140, above their target of 1,000, a figure said to be 43% more visitors than would have been attracted to a stand-alone tasting by one of the participants. Next year’s event is already inked into the diary for early September 2014.

But a senior executive at one leading UK wine importer, who declined to be named, was less enthusiastic. “To be honest, it was pretty quiet,” he said. “I’m sure it was useful for the wine press, but I’m less certain that very much business was done. I was talking to a colleague and we agreed that, if we needed to attend an event like that in ­order to hook up with our customers, then we weren’t doing our jobs.”

Meanwhile, this October, Wines from Rioja will hold its first-ever UK trade tasting in the UK, with more than 100 of the region’s ­wineries attending, including 20 without UK importers. Ricardo Aguiriano, marketing­ director for the Rioja Consejo Regulador, insists that there is “great excitement” about the tasting, adding: “The genuine ­enthusiasm and appetite for such an event is ­reflected in the exceptionally high number of wineries taking part.”

Less established wine regions are following a similar tack. Vina Croatia, representing more than 30 of the country’s leading producers, holds its fourth generic tasting in London, also in October. The relaxed trading conditions brought by Croatia’s EU entry this year have given a renewed focus on ­exports, and – despite the market’s recent difficulties – the UK is Croatia’s prime ­target. “Our EU membership marks the start of a real commitment to the UK – our key ­export market – and we are looking to develop our sales here by investing in a sustained ­generic presence beyond the tasting,” says ­Elvira ­Belović, Vina Croatia marketing manager.

Importers may question the direct business relevance of such events, but it seems there’s little immediate prospect of the ­generic wine-tasting becoming an endangered species.

Survival of the fittest

The past few years have seen more than their share of blood-letting in the UK wine market. Shrinking margins and a stagnant market have tested the most robust business models, and many companies have had to file for bankruptcy. Meanwhile, others have seized on the ­opportunities offered to snap up assets at bargain prices – bringing about a slow but steady consolidation of the industry. This list of significant corporate events covers the last 18 months.

April 2012: Barwell & Jones relaunched as a pure play wine agency, two years after ­entering administration as Hayman, Barwell & Jones and being acquired by John Coe, of Coe Vintners.

June 2012: Wine distributor Enotria is ­acquired by private equity business BlueGem Capital Partners, the owner of London department store Liberty. BlueGem promises “significant investment” for future expansion.

July 2012: Collapse of D&D Wines International, reportedly owing £10.5m to creditors. The business had been placed in administration three months earlier.

September 2012: Stratford’s Wine Agencies is bought out of administration by FE ­Barber, owner of Kingsland Wine & Spirits and Legacy Wines. Barber pledged “business as usual”, but closed Stratford’s Thames Valley offices by the end of the year.

October 2012: On-trade drinks supplier ­WaverleyTBS collapses after a series of mana­gement shake-ups and restructuring exerci­ses, owing creditors a total of £64.6m.

December 2012: Agency Thierry’s enters administration, owing £5m, and is bought by start-up Watermill Wines. Letter to creditors says Thierry’s had been asked to pay £1.7m in margin support by a major retailer – and was delisted when it refused.

January 2013: Independent wine merchant ExCellar placed in administration. Founded by Simon Baile, ex-Oddbins MD, and numb­ered five former Oddbins branches among its nine shops.

March 2013: Wine importer Boutinot ­acquired in MBO led by MD Dennis Whiteley, along with Michael Moriarty and Tony Brown MW. Founder Paul Boutinot steps down to ­focus on Waterkloof, his winery in South Africa.

June 2013: Wine e-tailer rescued from administration by Oxfordshire wine ­retail and wholesale business SH Jones. London-based Slurp hit trouble with dwindling sales and escalating overheads.

September 2013: German wine group ­Henkell & Co acquires a 60% stake in Copestick Murray Wine Solutions, wine importer and owner of the “I Heart” wine brand. The Mionetto Prosecco brand is now set to be a major focus of the business.

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