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INCREASING PROFITABILITY

How can the wine trade increase its profitability? By not cutting each other's throats', said Harpers' editorial director, Tim Atkin MW (quoting Joseph Berkmann), in his introductory remarks as chairman of this year's Harpers Debate at the LIWSF. Worldwide consumption of wine is static,' said Atkin. In traditional wine-producing countries it is declining and we have a surplus of approximately 56 million hectolitres. While quality is undoubtedly improving, new vineyards are being planted and new wineries built. Who is going to drink this wine and how are the producers, suppliers and retailers going to protect and enhance their profit margins?' Dan Jago, joint managing director of Bibendum, kicked off by looking at the trends affecting profitability - namely, global over-production; consolidation of retail distribution; the rise of grocer market share; the rising cost of being a specialist/high street retailer; and the FMCG-isation' of the wine industry. As a supplier, Jago felt that with margins being squeezed, there was pressure upstream, from producers increasing their scale of production to meet volume targets, while downstream, retailers wanted their price points met. The result, he said, was that consumers had never had it so good', but they had become promotional junkies'. Jago called for an abandonment of basket matching' pricing policies by the multiple retailers. They need to reduce dependence on deep promotions,' he argued. They need to allow prices to rise; improve consumers' wine knowledge; develop in-store theatre to encourage experimentation and trading up; and develop the on-trade for trial.' Russell Burgess, the Thresher Group's commercial buying director, said that consumer focus groups' feedback had revealed fragmented producers, hundreds of labels and few generic brands. The consumer cannot remember what they bought last time,' he said. There is an increasing percentage of wines bought on promotion and an increase in branded share.' In response, Thresher has launched Origin, a consumer-focused brand', to drive profit and give its customers what they are looking for - a quality product which has a USP (unique selling point) and an ESP (emotional selling proposition)'. Burgess said that, for the consumer, Origin: gets rid of the gamble; provides a smart' choice, which is better value; is easy to choose and easy to discover; spans the world of wine; is independent of country, producer or vineyard; and is targeted at the key Thresher segment: stylish singles and high income families, who constitute 20% of all UK households. For Thresher, Origin is exclusive, provides differentiation, focuses staff, provides a higher margin for the company and, according to Burgess, is on course after approximately eight weeks to be a top ten UK brand. Marian Kopp, president of the leading German producer, Racke International, demonstrated the difficulty in enlarging the size of the profit cake' in Germany, as the apparently inexorable growth of hard discounters' has created a market where people drive a Porsche but shop in Aldi'. They [the German discounters] are scaring the pants off us,' he remarked. Kopp said that with so much to choose from, consumers were less loyal and tended to stroll the value corridor' between good and bad value and quality, choosing OK prices and OK quality'. Kopp added that there is also a business corridor, between being not profitable for the manufacturer' and not appealing to the retailer'. In the middle of the corridor was average benefit and average cost', while at the lower extremity was offers "value" at lower costs and lower benefit levels', while higher up was good value, despite above-average cost'. Kopp speculated as to what consumers will be looking for in the next few years. What will the Red Bull' generation be after? Will wine drinkers be bored by fancy labels, New World versus Old World discussions? Would consumers want the sweet wine from Chteau X-men at an everyday low price [EDLP], with two nights for free in the chteau's fun park, where they can view the grapes growing day and night, while cruising the vineyards in e-scooters'? David Cox, vice-president (Europe), Brown-Forman, suggested that the debate could be a defining moment for the trade. Yes there is a global wine surplus, he said; unprecedented competition; discount mania'; and retailer and producer consolidation. Yet wine consumption in non-traditional markets is rising, quality is improving, consumers are improving their drinking repertoires, more vineyards are devoted to premium varietals, and the New World is on a roll'. Meanwhile, the Old World is waking up' and there is packaging innovation - so what is the problem?' asked Cox. He argued that the needle is stuck' and that producers and retailers must remove the fear factor, invest and educate. Cox believes that this is the dawn of a new era' and appealed to the trade to stop knocking brands - We'll never become like Coca-Cola,' he said. Cox called for radical thinking, a review of ranging and merchandising, a balance between promotion, PR and advertising, and seismic innovation in the on-trade [to] turn consumer ignorance into discovery'. He also called for more dialogue with the consumer, including tastings, more information, more in-store theatre and more packaging innovation. He suggested the trade should target universities - not elitist wine clubs - on the basis of the old adage start 'em young'. He concluded with a virtuous circle': the idea that if you start with good cost management, that will lead to quality improvement and brand investment, which in turn will mean higher prices and more profit. Patrick Sandeman, managing director of independent retailer Lea & Sandeman, said he started off with the objective of selling the wines that he and his staff enjoyed drinking, and making a good living out of it. I cannot understand the logic of investing in brands and then discounting them at Christmas, for example. We get seven for six on Mot,' he said, so everyone expects a deal on Champagne and brand loyalty counts for little. We need to stop wine being sold as a discount item like hi-fis on Tottenham Court Road. Certainly, wine in the 6 to 10 a bottle range - the top two to five per cent - should be sold with a greater degree of pride, delivering quality, value and satisfaction. It need not be discounted,' he stressed. I am in the small but profitable side of the wine trade, where there is a greater sense of choice and quality, and that is at a handsome margin to me.' Allan Webb, Sainsbury's general manager, beers, wines, spirits and tobacco, began by pointing out that his employer had 20% of the UK wine off-trade. His straightforward answer to the debate's title was sell more, improve retails [retail prices] and reduce the cost of doing business'. He also argued that as only 60% of the UK population drank wine, there was still plenty of potential. The supermarkets had brought a new generation of consumers to wine, but who was bringing in the next generation? Half of Sainsbury's wine sales were own-label, so there were opportunities, but according to Webb, it was clear that wines were presented to his buyers with no thought as to who was going to buy them. Looking at the means to sell more', Webb listed: customer targeting; retail ranging; channels to the consumer; promotional strategy; availability; expertise/ advice at point of sale; power of advertising; and importance of third party endorsement. For improving average price per bottle', he recommended giving clear advice as to what the difference is between a 6 and a 9 bottle of Burgundy. He also emphasised the importance of advice and tastings; of the wine delivering satisfaction; good merchandising and promotions. As to cutting the cost of doing business, Webb said that costs are and still need to be taken out of the supply chain with a move to just in time' (JIT), thus removing stock from the chain. Suppliers also need to have a strategy to cope with currency fluctuations. Regarding complaints, Webb said they were expensive to deal with, but Sainsbury's had reduced many of its returns by moving away from traditional cork closures.

The question and answer session Michael Cox, the new head of Wines of Chile and formerly head of Negociants UK, said he wished to ban the .99p' on every price point. He said when he launched Oxford Landing, it was at 4.99. Thirteen years later it was still 4.99. It's bizarre; nobody dares go over 5,' he said. Russell Burgess said it was a consumer mindset that needed to be addressed. There is no information at point of purchase to say why it is 5 or 8,' he pointed out. Robert Boutflower, of independent agent, wholesaler, importer and retailer Laymont & Shaw, said it was very difficult for small specialists dealing with the multiples when the specialists had to pay 3,000 to an Internet company to normalise' their products for the retailer's website. And if there was a complaint, the specialists would be charged 30 or 40 for the supermarket handling the return of a 4.99 bottle of wine. Helen McGinn, buyer and new product development manager at Tesco, warned against being obsessed with price points, pointing out that Tesco had introduced its premium Finest brand to its own-label wine offering and had instigated initiatives such as the move to screwcap, led by its Unwind range. Angela Mount, Somerfield's wine buyer, said that she believed price points had moved up and that Somerfield was analysing the impact on sales. Paul Symington, of the Symington Family Port Companies, expressed concern that shelf space was diminishing choice. David Cox said that the result of pressure on prices was that wines were being de-engineered' - that the quality of wine in the blend was being downgraded. He said that if the consumer sees Australia as industrial production', that will devalue it in the consumer's eyes. Hew Dalrymple, marketing director at the Waverley Group, responded that brands such as Origin and his own Intro 2 benefited from being able to switch supply of Chardonnay from Australia, where there is a shortage, to California, where there is a glut. Webb disagreed with Coz Kampanaos of the VibrantC Group, who said that suppliers were being squeezed to the benefit of the multiple retailers and their institutional shareholders. He said: That is a sweeping generalisation and I don't agree with a lot of it. We have had 25 years of own-label and some have been with us the entire time. You only have to look at the new bottling halls and the investment in the vineyard to see that that is a generalisation.' Tim Atkin concluded by saying that while the quality of wine overall was going up, it was worrying if the quality and image of branded wines - certainly the established, more premium wines - was being forced down due to deep and sustained discounting. With some of these promotional packages, the goalposts seem to change every week. At the end of the day, consumers are not stupid.'

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