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Profit or what?

Published:  23 July, 2008

Sounds simple enough. You're a wine producer, you want to break into the UK market and you're heartily fed up with the big, bad multiple retailer. He hogs all the margin while you practically have to mortgage your winery and sell your grandmother just to get a listing. Then fund a 2 price-off.

So what do you do? You turn to the on-trade, that's what. You punt your wine around enough pubs, bars and restaurants, grin helplessly and smugly at the mark-up, then sit back and just wait for the cash to roll in. Job done.

Realists won't be shocked to hear that the scenario depicted above is about as likely to happen as Togo lifting the World Cup on 9 July. Illusory' is the preferred word of Brian Howard, director of business development at wine research company Wine Intelligence. There's no golden pathway to quick profit anywhere,' he adds. And yet it's amazing to hear wine companies talking in barely more realistic terms than those outlined above. It's like some kind of business-related urban myth - or perhaps it's so rooted in the history of the wine business that it's acquired the status of a mantra.

That's what Robert Mondavi did 40 years ago, turning up at restaurants with his wine in a suitcase,' points out Howard. But that was 40 years ago - now the world is very, very different.'

Indeed. Or, as Concha y Toro UK managing director Cristin Lopez puts it: That's sort of a simplistic approach - "There's no money in the retailers, so I'm moving onto the on-trade." It's not as simple or as opportunistic as that.'

Of course, it all depends on what sector of the market you're going for. If our notional wine producer is consciously ignoring the multiples in favour of pubs, bars and restaurants, that implies that he or she has some volumes to shift. And this is where the big reality check hits.

Don't expect the major pubcos and restaurant chains to have a mentality especially different to the fabled big, bad supermarket buyer. They will be looking to maximise margin on every component on the list, from alcoholic beverages to snack foods and more formal meals,' points out Howard. Hey, guess what? They're in it to make money - and not necessarily for you.

Indeed, if you expect your product to be a high priority of some of these companies, you could be in for even more of a shock than if you talk to Tesco, Sainsbury's or Asda. Wine is fairly low on the agenda or radar,' says Howard. What's on their worry list? It's trading and cashflow week to week. It's trading outlook for the next quarter, because most of them have private finance investors to satisfy, or they're plcs.

They will be worrying about the issues that can affect their business, like anti-social behaviour, the enormous problems of staff, and meeting the latest regulations on hygiene and health and safety. Where is wine? Probably number five or six - and most of them will be worrying about the top three issues.

Wine is probably just above toilet rolls and other necessary supplies. And the Doomsday scenario is that it might be the same person [buying both].'

Gulp. It's worth adding that these national outlets are, by their nature, much more likely to be brand-led: while regional independents might deliberately shy away from supermarket regulars to preserve a point of difference, national accounts are more likely to appreciate their level of consumer recognition.

But what do you expect? These are big businesses with margin expectations that mostly want to deal with single suppliers and treat wine - like food - as another commodity to be bought and sold with the best possible price/quality ratio.

So do they increasingly resemble the multiple grocers in behaviour and expectations? Yes, of course, and probably rightly so,' says Lopez. In that sense, it has very similar criteria and philosophy. But it's not all about price discounts, which gets a little bit boring. But in the national on-trade, yes, you have to support your brands. You have to do the push, but also the pull. It's about investing in the end consumer and in the account base.'

OK, so let's say our wine producer doesn't need to sell big quantities, but he's got a quality wine that he wants to see in all the right places - and at all the right prices. Yes, he's after the fabled white tablecloth sector or, as Howard puts it, the top restaurants with glistening white tablecloths and even more glistening Michelin stars'. Reality check number two: Even if you can get a listing, a listing doesn't equal sales and a listing might be only one case,' he says. You're selling less, it's more labour-intensive in that it's a smaller volume to more outlets.'

Who needs a drink? It's very complicated,' admits Lopez. Once people get into it, sometimes they say: "What did I get myself into?"'

But. There has to be a but - and there is. Before we all slit our wrists with our waiter's friends, there is a definite reward at the end of all that labour-intensive toil and heartache. It can become a much more profitable sector [than the off-trade],' says Lopez, before (naturally) adding a caveat.

When we talk about profits, there are percentage margins and there are cash margins. You can make a lower percentage margin, but sell, say, 20 times the volume and make more cash margin with the multiples. In the on-trade, you can double your percentage margin, but if you sell half the volume, then your cash margin is the same.'

But the nature of the on-trade - especially the independent, regional on-trade - is such that your eggs are in lots of different baskets. Fragmentation may be hard work for the sales team, but it's less likely to blow up in your face. As Lopez says, you can do big business in a short time with the multiples, using fewer human resources in the process - but there's a snag. You can sell 10,000 cases with one retailer, but you're very fragile and who owns the brand then?'

The difficulty with the independent on-trade is that it takes time. Concha y Toro, for instance, is still reaping the rewards of years of hard slog from previous agency Cheviot, as Lopez freely admits. It took them a long time to develop the regional and independent on-trade, but it's a very valuable channel - one that we should really nurture.'

You want a short cut? You could talk to Wine Intelligence, who will assess your product - wine, USP, background, packaging, volumes - and report back on what channel it might be best suited to, providing a long list of possible partners to help work the market. That could cost anything from 3,000 to 6,000, including several stages of reporting and a final action plan.

Or you could adopt the DIY approach and track down a partner by yourself. Volume players might talk to the big guys like Matthew Clark, WaverleyTBS or possibly Percy Fox, Bibendum or Enotria, whereas the field might be wider for medium-sized operations. According to Howard, only the really niche - 10-plus per bottle cost price, low thousands of bottles produced a year - can afford to take the wholly direct approach.

And he offers this advice (for free): you can make money from the on-trade, but you have to decide what particular layer of it suits your business best, identify and align with the best route to that particular market, and seek out the best, proven partner for whom your wines are a realistic opportunity. And that's when the hard work starts.