Major changes in the structure of the wine retailing sector over the past 20 years mean wine producers have to adapt to survive. A recent report from the management consultancy, KPMG, highlighted some of the changes and recommended steps that producers can take to prosper in a transformed marketplace. Olly Wehring reports.

Small and medium wine producers must adapt to a rapidly-changing marketplace in order to survive, according to a report from KPMG. The report, "Shelf space… is there room for me?" highlights how the retail side of the wine market has changed drastically in the last 20 years, and focuses on how the grocery channel has changed the landscape for wine producers forever.

"Over the past 20 years wine retailing has altered dramatically, principally due to the growing pervasiveness of the grocery channel," says the report. "The greater complexity is in turn making more distinct the separation between small, medium and large wineries, their routes to market and the opportunities available."

The areas the consultancy recommends small and medium producers focus on include improving their understanding of market segmentation and the profit implications of their production capability. Greater awareness of consumer pull strategies is also urged, as is down-sizing of volume aspirations with a focus on direct wine sales and on-premise; effective asset utilisation; resource sharing allowing a reallocation of working capital to brand and market investments; and producer consolidation.

Adapt or die seems to be the theme, with the report even questioning whether the classic structure of many small and medium-sized wineries is truly effective in today's transformed marketplace. "The current market evolution makes us question whether the vertically integrated winery model, pursued by many small and mid-sized producers, remains as relevant today," the report says.

This evolution of the marketplace, the report says, must first be understood before changes are made. Considering specifically the UK, US, Canadian, Australian and New Zealand markets, the report shows how great the effect of the 'convenience' approach to retailing has been on the wine market as a whole.

"A three-dimensional model is materialising," it says, "overlaying the traditional on/off premise market perceptions." More relevant now is the polarisation between 'convenience' and 'destination' purchase points. As consumer lifestyle has changed in the last 20 years, and consumer sophistication has increased, so the grocery channel has grown in dominance in the off trade while there has been parallel consolidation in the pub, restaurant and hotel sector in the on trade.

"The deregulation of liquor retailing permitting wine sales through the grocery channel has been a positive for the wine industry," the report says. "It has broadened the consumption base, particularly… in the UK." The effect of this on the industry as a whole, however, is far-reaching and powerful. "The growing strength of this channel is transforming wine distribution and its impact is being felt across the value chain." The area affected most by this change is the 'specialists'. "The specialist channel can no longer be perceived as 'one size fits all' with respect to brand offering and servicing."

According to a Euromonitor study in 2000, the grocery channel controlled around 50% of wine volume sales. This percentage has climbed over the ensuing four years. Supermarkets, hypermarkets and discounters are benefiting from the concept of one-stop shopping, a buying scale which permits competitive pricing, a trend towards increased at-home consumption and a rise in female purchasing, where women find the grocery channel less intimidating than traditional liquor retail.

This polarisation of the wine trade throws up one change of tack KPMG recommends. "For large and mid-sized producers with the capability to service both… markets, development of differentiated brand portfolios may increasingly become the norm." By pitching two different product ranges at two different markets which are looking for differentiation from each other, the bigger players should maintain their positions near the top of the heap.

Lucky for them, but what of the smaller fry? An understanding of this differentiation, says KPMG, is vital from the outset. "Fast moving consumer goods (FMCG) dominate grocery sales. Brand owners will increasingly have to adopt FMCG marketing and selling techniques to survive and thrive in this environment. Small and mid-sized players, with no defined market niche, are most at risk."

The "Why do I buy?" factor has already come to define the 21st century shopper. The majority of consumers are price- rather than brand- loyal. Consumer pull and awareness is becoming an imperative for brand owners. In this area, in particular, money talks. Advertising in print, on radio or television is a costly business. The report recommends a more 'homely' approach for the smaller players. "Small and mid-sized producers with limited budgets can lift awareness via targeted event-driven promotion such as wine-writer tastings, sommelier dinners, in-store tastings and retailer newsletters."

While brand owners have their work cut out for them, brand agents are also being affected by this shift towards the grocery channel. The role agents play is up for reassessment, whether they like it or not. "Our recent market discussions highlighted that several major grocers were in the process of supply chain reviews," says KPMG. "These reviews have the potential to drive further rationalisation both for brand owners and brand agents." Now more than ever, an agent will need to justify his, or her, existence - not only to retailers, but also to brand owners.

As the grocers grow stronger and target efficiency gains, so the margin paid by producers to brand agents becomes a greater issue. At the moment, this margin can be up to 30%. "The principal implication for brand owners is the potential for distributor margins to be recut on a fee for service basis," says the report. This could be lower for grocery account management, while higher for on-premise and destination accounts.

The grocery and convenience channel's needs are becoming more complex, and both brand agents and owners need to redraw their role and approach accordingly. At very least, says KPMG, both parties must have access to and relevant interpretations of scan data; national account management capabilities; supply chain management and order fulfilment ability; and management information systems with the ability to interface with key account systems.

Moving forward, KPMG asserts that small and mid-size producers, with their limited resources, would do well to seek assistance in the process of adapting to the demands of the grocery channel. Also, brand agents should be selected on their ability to deliver against grocery channel criteria. This may involve a partnership arrangement where producers and agents share equity in those brands with the potential to seize increased market share. If KPMG is to be believed, both owners and agents could be toasting their own success with brands better adapted to the changing market place.