Wine Evolution - Consolidation, globalisation and pricing
A week ago, the great and the good of the wine world gathered in Paris for the sixth annual Wine Evolution conference. Chris Brook-Carter appraises some of the major debates that surfaced over the two days.
With news of the Foster's bid for Southcorp still so fresh in everyone's mind and the presence of Constellation Europe's CEO Christopher Carson among the delegates, the theme of consolidation inevitably dominated talk both inside and outside of the conference room at this year's Wine Evolution in Paris.
"The Wine Business, like any other agricultural commodity business, is in a permanent state of over-supply. In the mean time, global consumption is flat. So consolidation represents the only way to increase synergies in production (dry goods, grape contracts etc), and first of all, to consolidate margin in distribution," said event organiser David Skalli at the beginning of the second day.
Consolidation, of course, has been an ongoing theme within the wine industry for many years. However, the sheer pace of events of the last 12 months has altered the perception of M&A activity amongst the trade. There were clear indications from speakers and delegates last week that winemakers were now accepting the global and imminent consolidation of their industry as inevitable.
Constellation Europe CEO Christopher Carson said: "The pace of consolidation has been amazing and, frankly, I don't see it slowing down. It will be interesting to see the Old World join in, they can benefit from maximising the efficiencies in the routes to market."
From retail consolidation to oversupply, the factors driving consolidation have been well documented. However, there was more urgency to the arguments this year than in the past.
Arend Heijbroek, senior analyst of wine at Rabobank, Holland said : "The brand is a winning model in industry, it is important. They do matter.
"Distribution power is based on a full range of innovative brands, which requires strong financial power and knowledge of wine," he added. "Few companies have this. We have not yet seen the end of consolidation as companies try to build this model."
But if the vast majority now accept that consolidation is here to stay, there is still considerable debate as to how it will affect the industry. The great fear, particularly from the Old World, is that globalisation is synonymous with standardisation.
It was a claim Carson was keen to reject. "I think if globalisation is the standardisation of wine, we [Constellation Brands] don't fit into that. We are not a global business, we are a multinational business that recognises the needs of different cultures," he said, before adding later on: "The new world does have some terroirs, there are some great wines coming. It is not just about mass production."
If Carson's defence is true, then it is important to wrestle back the word globalisation from those who use it to justify their concerns of continued consolidation. As speakers from Singapore, Japan, Poland, Scandinavia, the US and the UK demonstrated, globalisation, at least at the consumer end, is having enormous benefits to the wine trade.
The growth of wine consumption in non-traditional markets has been outstanding and, as delegates kept pointing out, the US and UK will soon be the world's number one and two wine markets respectively. Both will leapfrog France in the standings by 2010.
"We now can tell that the US market will become the number one wine consuming country in volume and in revenue by the end of the decade," said Skalli. "Asia is growing, but though the future is bright, the present is still non-significant on the map. However, the EU will stay by far the largest area of sales."
Clearly with good reason, producers were in buoyant mood with regards to the US. "Wine is becoming more part of the culture in the USA," said Marc Engel of research group BRS.
Heijbroek concurred: "The US wine industry has been a sleeping giant when it comes to the global market, now it has woken up."
The wine industry has been preparing for the arrival of the US and UK markets at the top of the consumption ladder for some time. The future for developing markets - Asia and Eastern Europe in particular - is far less clear. Again the message was one of overall optimism, but it was tinged with a degree of caution and uncertainty.
Japan aside, delegates felt China and India had surpassed all the other South Asian markets in both wine knowledge and exposure primarily because both have their own vineyards.
"In a way you don't have to preach to the converted," said Ch'ng Poh Tiong, the Singapore-based editor of The Wine Review. "You just have to compete with them."
However, he added: "If China is complex, India has more obstacles to overcome. India is a much more controlled market than China. Distributors are ready to build brands but they are waiting for orders from higher up to see how the market will evolve. If I had limited reserves and if I were strictly just a businessman, I would export to China first. If that doesn't exhaust your patience, I would then try India, but only go for the on-trade."
Speaking of the Chinese market, Brendan O'Toole, managing partner of Summergate International, suggested that producers need to prepare for a long battle, although the benefits could be considerable. "The real prize is 30, 40 perhaps 50 years away - there will be a million cases wine brand in China in that time."
Eastern Europe was represented by a presentation from Krzysztof Apostolidis, president of the Polish wine importer Partner Centre - again the message was one of cautious potential. "Historically we were a vodka culture, then in the 1990s we became a beer culture. Probably in the future we will become a wine culture," he said "Wine sales increased by 6% from 2003 to 2004 in both its value as well as quantity."
Interestingly, the debate sparked by the Poland presentation focussed on fears from winemakers that the country may follow in Germany's footsteps and develop into a discount driven arena. "Don't ask about margin," Apostolidis warned. "The question is to be or not to be."
Indeed the question of pricing cast the largest shadow over proceedings for the entire two days. Unsurprisingly it dominated a whole morning as speakers and delegates debated how best to make money in Germany.
"In comparison with other European countries, the German consumer is outstanding in terms of price sensibility," said Marion Kopp, the international director for Racke Group.
He continued: "One has to criticise not only that German retail clearly defines itself on the price, but that a differentiation through product quality and service delivery is strongly neglected."
David Cox, managing director of Brown-Forman Wines said: "I still believe that Germany represents a big dilemma in the boardrooms of exporting wine producers around the world. This country could present itself as a wonderful investment opportunity but there are too many factors hindering this. The low retail prices for wine is only part of the problem but I think things can and must change."
However, fears about falling margins were hardly confined to Germany and were apparent across the board.
"So many players (in the UK) still compete on price. A disproportionate amount of time is spent on trading consumers down rather than up. We lose sight of the true value of the product we are selling," said Mike Paul of Western Wines. "Don't strip out the mystic."
Meanwhile, Paul Pacino, CEO of Australia's Simon Gilbert Wines warned that whilst exports continue to grow, some of the premium work that had been done in building brand Australia was being undone. The volumes being done at the lower price points from Australia do represent a risk, he said, before asking: "Will we get to a point where Australian wine equals cheap wine?"
It is a thought that should concern the whole sector, because if Australia, with its well-oiled, brand-building machine, cannot maintain reasonable margins, the whole wine industry is in for some tough times.
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