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Economics of on-trade supply have “hit a brick wall”

Published:  10 July, 2020

The Covid-19 crisis has stripped bare the precarious economic situation of the on-trade and its supply-side, with a correction in the market necessary to improve profitability.

This was one of the stark warnings from the panel at Harpers’ Harnessing the Crisis for Change webinar on 9 July, where it was agreed, in the words of Bibendum CEO Michael Saunders, that: “Things will change, because the direction of travel at the moment is totally unsustainable”.

“Finding a way to work that is commercially viable - politically, legally and within our own trade - is going to be absolutely fundamental,” Saunders added, saying that the trade had been talking about this for years, but that commercial pressures in the market has kept everybody in “the same space, where there is stress in the system”.

The onslaught of the pandemic and subsequent shutdown of the on-trade has now brought this to a head, with Graft Wine Company’s MD Nik Darlington developing the theme.

Darlington agreed that the wine supply chain, particularly in the on-trade, had “a real problem, even before the lockdown”, with the crisis laying bare just how “businesses were barely breaking even before, and that’s every link in the chain”.

Darlington described both a supply side and a demand side problem, saying that the supply side had “hit a brick wall”, with restaurants, and particularly those in urban centres, likely to be quiet for quite some time.

“Rents are too high, rates are too high, and the taxation regime, [so] suppliers get squeezed in all manner of ways, and too much margin is sacrificed at every stage of the chain,” he said.

“And then on the demand side, the public needs to readjust, to maybe paying more, but I’m not sure that will happen, because there are always people offering something for less, so the solution will be a market correction on the supply side of running restaurants”.

With the rent pause simply “kicking the problem down the road”, as the industry does re-emerge, and with early reports that on-trade operators that have opened are running on average at 45% of normal trading, landlords will be faced with a choice between failed businesses and empty units, or reducing rents to help businesses survive.

Darlington said that the crisis had delivered a crossroads.

“We have to improve profitability for the likes of us, so that we can engage in healthy competition, but all still make a decent living and be able to pay staff and grow and make wine an interesting category. Or, it keeps going in reverse, where every day is a struggle to fight for more market share and more margin."

Acknowledging that “this is a long term situation, and we are not going to revert back immediately to where it was”, Enotria & Coe’s CEO Troy Christensen said that despite “a very tough competitive side to the market, if we go back to slugging it out and ripping margin out of the value chain - and ignoring the consumer - then we’re going to lose out again to the beer and spirits guys” as the crisis lifts.

Notwithstanding Enortia’s heavily on-trade dominated customer base, Christensen referred to what he saw as “a little bit of a silver lining that we could take advantage of” - namely the fact that with so many drinking at home, and sluggish return to the on-trade predicted, wine sales had remained more robust than those of spirits and beers.

Responding to Saunder’s comment that, “we’ve got to find ways collectively and individually to bring the consumer into this world that we all love”, Christensen said “let’s take this little bit of a [wine] uptick and make the most of it to benefit the category”.

One possible route to currently achieve this may, he said, could come from the “significant shift” to home drinking, with lockdown increasing “throat for wine at home”, favoured by a lack of beer-drinking oriented sports and less of a home cocktail drinking culture (excepting G&Ts) than in places such as the US, which opened up the possibilities for further engaging consumers with wine.

Saunders agreed that the collective wine trade has failed to take consumers on what he described as “the interest journey within wine”, thus encouraging people to buy wines that have value for everybody in the supply chain, and not just the people buying and selling those wines.

“We have failed comprehensively, when you look at what most people are drinking most of the time - it’s not surprising that we are losing young people to other categories where there is more excitement, entertainment, great visuals, and it's in our own interest to solve this,” he said.

Fergal Tynan, MD of Alliance Wines, spun the focus onto the need for a more business-like partnership between suppliers and on-trade operators, suggesting there is much room for improvement by placing more emphasis on the business of wine in the relationship.

“Too many business meetings are about wine, rather than sitting down together and talking about money, about how we can change the way we work to make it better, to make more money”, he said, adding that the crisis would certainly deliver much change.

Asked whether the financial crash of 2007-2008 had delivered any longer term positive correction in the market, Tynan said not, but that he believed cutting costs would clearly no longer be an option this time around in the face of another harsh recession.

“[The 07-08 financial crash] was quite the opposite, sadly, values got thrown out of the window, margins were squeezed and everybody reacted by doing what they normally do, saying they needed to make savings, therefore get costs down,” he said.

“It’s a line that you can take for a while, but eventually you reach the end of that road and I think most people here would concur that were we are fairly close to the end of that road in terms of cutting costs out of our side. Most people have probably seen their turnovers triple or quadruple over the last decade, but I don’t think their profits have done any better than stayed where they were 10 years ago.”

What all agreed is that there is no question – no matter how painful it may be – that the trade will necessarily have to evolve to survive.

A fuller report of this webinar will appear in this July-August print issue of Harpers, with a link to the video of the webinar going up online soon.




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