Comment - Wine - European Wine Producers of a Nervous Disposition, Look Away Now
As the festive season approaches, Chris Losh was hoping to give you, dear reader, a heartwarming gift in this, his last comment of the year. But, there's little likelihood that the grim reality on his doorstep will let him spend too much on a gift. No matter how badly you, dear reader, could do with one.
This has been an uncomfortable time to be a European. Watching the Euro lurch from crisis to disaster against a backdrop of collective political cowardice has been, by turns, depressing, inevitable and bleakly hilarious. Rather like watching a sinking boat full of chimpanzees chattering about what colour wood to use to patch up their ramshackle craft, as it sinks beneath the waves.
The effect on the economically-functioning northern European markets has been bad enough. But for wine producers in the 'Basket Case Quartet' - Portugal, Italy, Spain and Greece - the fallout has been punitive.
The (belated) introduction of the various austerity measures may have gone a little way towards soothing spooked money markets, but - no pun intended - it’s come at a cost. Higher tax and VAT added to purges on public sector jobs and rising unemployment have trashed disposable income and altered what and how people are drinking.
The biggest shift is the move from the on- to the off-trade. The trend to eat and drink at home, rather than in bars and restaurants, is on the rise across Europe, but the effect has been particularly marked in the Mediterranean countries.
“Probably, they only eat out twice (a week), as opposed to three times in the past,” reflects Sergio Ardito of Sicilian wine producer Planeta. “They can’t afford to have dinner three or four times a week in good restaurants now.”
Admittedly, eating out twice a week still doesn’t sound like proof of penury, but if it equates to a 30% drop in custom, the effect on restaurants, and, by extension, domestic wineries is obvious. Because restaurants have high fixed costs, drops in footfall quickly translate to cash-flow problems. And, wine suppliers are among the first not to be paid. Restaurants are closing, owing thousands of Euros to wineries that can ill afford to absorb such a loss.
Moreover, the pressure to replace lost accounts with new ones often leads producers to take on supply contracts with outlets that represent a high risk.
The same austerity that is hurting the on-trade is also having an effect on the high streets of southern Europe. Volume sales might be better here, but consumer pessimism means that the Mediterranean’s supermarket aisles have become something of a low-margin bloodbath.
“Before the crisis, Greeks bought wines based on price – the higher the better,” says Manolis Giammiadakis, export director for Semeli Wines. “Now, they appreciate more the value of underpriced wines. The average price is going down.”
Lower prices, however, are not rescuing volumes. Spain, for instance, is down from around 21 litres of wine per capita a year ago to 18 litres this year (compare that to 20 years ago!). And, with unsold stock accumulating at wineries, the scramble to empty tanks is playing into the hands of the hypermarkets, who are stuffing their shelves with newly-created bargain brands.
“Almost everybody now has wines either below EUR6 (US$8.10) retail or is making big discounts,” says Giammiadakis.
Meanwhile, over in Portugal, Continente has responded to the new age of austerity by selling wines over EUR5 only in its Gourmet section. Aspiration, it seems, is yesterday’s buzzword.
The combination of falling demand and ever-lower margins as wineries fight over shelf-space is not a good one. Profits are caught in a downward spiral that will end only when the market picks up (don’t hold your breath) or sufficient businesses go bust to bring supply and demand back into line.
“People are holding on but, come February, the failures will start,” says Adrian Bridge, MD of the Fladgate Partnership. “We will see a great number of bankruptcies in 2012.”
The pain, though, is unlikely to be spread uniformly. While the middle and particularly lower end are hurting, the ‘affordable luxury’ segment seems to be holding up; partly because those with money still seem to have it, and partly because these products are less dependent on their respective domestic markets.
The Symington Family, for instance, exports 90% of its production, and is continuing to invest heavily in vineyards and wineries. “Eventually things get better,” says joint MD, Paul Symington stoically. “And, in ten years’ time, these replanted vineyards will be producing great wine when this recession is hopefully a distant memory.”
In such a turbulent environment, it clearly helps that the company is family-run, rather than answerable to shareholders.
If there is a positive to be drawn from the economic trauma of the last few years for the Mediterranean wine producers, it is the way old barriers and lazy thinking have been simply blown away by the bleak winds of the new reality.
The more go-ahead producers are rushing to digital media to drive business, and selling directly to the consumer. Meanwhile, restaurants in Italy that are prepared to tear up the rule book to offer tastings beef up their by-the-glass range with preservation machines, sell take-home bottles and introduce loyalty schemes, are defying the economy to find success.
It’s true that Europe’s subsidy-addicted wine industry has been protected from the real world for too long, and that it could, as one producer admitted, emerge from the upheaval leaner and healthier than for many years.
But watching it go through a collective cold turkey makes for painful viewing. Even if the chimpanzees are too busy arguing to notice.
- Focus - Edrington's FY Performance by Brand
- Pernod relies on Indian whiskey to crack Africa
- Hail Marie Brizard: But, For How Long?
- 5 reasons why Constellation's Meiomi buy works
- NPD: The Clear Soft Drink Trend is Back
- Comment - Diageo CFO to North America? Do the Math
- Diageo CFO Mahlan to head up N America
- Diageo sells "non-core" Gleneagles
- Diageo lining up Gleneagles sale - report
- Pernod Ricard allays Havana Club shortage fears
- Global liqueurs insights - market forecasts, product innovation and consumer trends research
- Edrington Group in Spirits (World)
- Diageo plc (DGE) - Financial and Strategic SWOT Analysis Review
- The IWSR Company Profile 2014 – Remy Cointreau
- Global Tequila insights - market forecasts, product innovation and consumer trends research