just-drinks' State of the UK Nation 2011 - Part I
Presented earlier this month at the London International Wine Fair, here, for just-drinks members, is a bonus briefing for May, just-drinks' State of the UK Nation 2011 survey. Here's part one of four.
Prior to the wine fair, around 500 wine industry executives were contacted and asked to fill in the survey, which contains 15 questions concerning the current state of the wine market in the UK. We also sent the survey to visitors of pages containing wine stories on just-drinks. A total of just over 200 responses came in, with the results being collated into this briefing, offered in four parts to members of just-drinks.
It’s always been arguably the most eye-catching question in our annual poll on the state of the UK wine market: “The UK is often described as the most important and dynamic wine market in the world. Is this still true?” And this year, it will attract more attention than ever.
Because, for the first time in the five-year history of this report, the collective answer was “no”. In the halcyon, pre-recession days of early 2007, about 80% of people still thought the UK was the place to sell your wine; now that response rate has nearly halved, eroded by four years of growing supermarket dominance, tax increases and promotion-driven pricing strategies.
Put simply, it’s becoming harder and harder to make money in the UK, and suppliers are increasingly eyeing more tempting destinations: the US, Asia-Pacific, the Nordic countries.
As such, it’s no surprise to note that last year’s surprising relative optimism has been tempered and qualified by market conditions, as government cuts start to bite, creating fears of increased unemployment, falling consumer confidence and lower spending.
These issues – the state of the economy, the continuingly strong role of price promotion tactics, the consolidation of the retail sector – have overtaken concerns over rising taxes as the prime worries furrowing the brows of those who do business in the UK wine market in 2011.
The flipside to this pessimism is that, lest we forget, the UK remains a high-volume, diverse and very open wine market when compared to many rival destinations – always assuming that you can live with narrow pricing structures, retailer power and the ongoing pressure of tax increases.
These broader pricing concerns have eclipsed to a great extent (for the moment) fears over the growing influence of the anti-alcohol lobby: plans for minimum pricing (or more accurately, a ban on selling wine below the cost of duty plus VAT) will do little or nothing to affect pricing since the vast majority of wine products are totally unaffected by them.
Perhaps surprisingly, some respondents would welcome a more stringent minimum pricing regime, believing that it may be the only way to restore decent margins to the market – and despite the possible impact on consumption levels, with the potential to price casual wine drinkers out of the sector altogether.
In this scenario, it comes as no shock to register growing levels of pessimism among our respondents, brought about by fears over the economy and the impact of austerity measures over the next 12 months.
Where will growth come from? According to our answers, wines in the £5-8 price band, the continuing success of rosé (although some are beginning to question this), and Champagne/sparkling wines. Even so, some still believe that more growth will come from sub-£5 products, despite the increasing tax burden.
Our straw poll of the countries likely to enjoy growth over the next year results in a shuffled top six, led by the South American duo of Chile and Argentina, followed by a resurgent Italy and Spain, with South Africa and New Zealand dropping down the pecking order this year.
And, while screwcaps continue to elicit high levels of positivity, natural cork has staged a slight recovery in the popularity stakes this years, to the detriment of its artificial rival, which has seen its support slump.
Finally, the changing way in which consumers receive information about wine is reflected in a couple of new questions: it’s clear from the responses that the role of online media, social media in particular, and bloggers, is assuming an ever greater significance, particularly following the decline of the newspaper wine column in particular and of print media in general.
However, how far the “new media” is influencing consumer buying decisions and rates of sale is an issue that is ripe for continuing debate – and one that no doubt we will be tackling in future editions of this report.
I: Are you optimistic or pessimistic about the prospects for the UK wine market over the next 12 months? Why?
- Optimistic: 42% (2010: 48%)
- Pessimistic: 25% (28%)
- Neither/don’t know: 33% (24%)
We see a slight softening of last year’s relatively optimistic picture, enforced perhaps by the fragility of the economic recovery, coupled with the government’s austerity measures and their likely knock-on effects on consumer spending.
The figures also slightly disguise the nuances present in the responses: where optimism is exists, it is rarely unqualified and often based more on the respondent’s thoughts about their own business, rather than about the market as a whole.
In part at least, this is conditioned by the sector of the market in which people operate: those selling wines at relatively high prices exhibit greater levels of optimism than those at the volume end, where margins are already paper-thin and being eroded further by excise duty increases, the weak pound and tough pricing negotiations with multiple retailers.
“Pessimistic. Consumers clearly have less money to spend and we are yet to see the impact of public sector cuts on consumer spending. Wine is and has been affected by this, and the market is static/in decline. Any value growth is really being driven by duty and VAT increases and not by real value to the market. Suppliers who have been trying to manage price increases are at breaking point and need to pass on cost of production increases and retailers continue to squeeze margins. It is difficult to see how this cycle will break during the next 12 months.” - Lynn Murray, marketing director, Hatch Mansfield.
“At Laithwaites, we are very optimistic … Our customers are continuing to explore different wines, regions, styles and are definitely prepared to trade up when they see the extra wine they can get for their money. As a market, the UK obviously has its difficulties, but if you are engaging with the consumer directly as we are, then you are in a very strong position indeed.” - Becca Reeves, wine buyer, Laithwaites.
“Optimistic. Why? Because there are always opportunities. New wines to sell to new businesses, new markets opening up, the Olympics will stir up interest in the UK and bring people in to the country. There is always something going on. The UK is a vibrant market, so it would be a shame to be anything other than optimistic.” - Richard Nunn, director, Louis Latour Ltd.
“Difficult to say. We have been performing quite well the last months. However, we are quite realistic that many indicators have now switched to red due to the changing exchange rates of the pound and the VAT rise which might have negative effects on consumption.” - Caroline Defaut, director of marketing and communication, Champagne Nicolas Feuillatte.
II - What is the most important issue facing the UK wine market in 2011? What should be done about it?
- Retailer pricing policies: 32% (2010: 25%)
- Consumers’ disposable income: 24% (19%)
- UK economy: 22% (19%)
- Duty increases: 16% (32%)
A marked change from last year, when the issue of the government’s continued use of the duty escalator was top-of-mind among our respondents. It’s not that this issue has gone away, but with many in the industry there is an air of resignation that there is little that can be done to change the situation.
Concerns over the pricing of wine in the retail sector, especially among the multiples, has regained top place here, reflecting concerns that the fierce competition between these companies is making the wine offer to many consumers a far more narrow affair, with little margin for those in the supply chain, from grower to UK agent.
It’s also noticeable that there are growing worries over the disposable income of consumers, as well as the general state of the UK economy – two issues that are inextricably linked.
That, in turn, is connected to concerns over the continuing fragile state of the economy, exacerbated by ongoing cuts in government spending, fears of increasing unemployment and their knock-on effect on consumer confidence and willingness to spend.
“The disappearance of the middle sector between supermarkets and the independent specialists. Not sure what can be done to arrest it as with the exception of Majestic nobody seems able to trade profitably from high street locations. The independents can and should seek to attract more of this level of business by offering interesting wines of individuality.” - Alun Griffiths MW, wine director, Berry Bros & Rudd.
“The most important issue facing the market in 2011 is the continued rise of duty and VAT, putting pressure on suppliers and retailers alike to continue to over-deliver on the quality/price ratio across all key price points.” - Paul Schaafsma, general manager, UK and Europe, Australian Vintage.
“How to break the deep discounting cycle that has been created. I saw some data recently which indicated that consumers’ perception was that they bought wine on offer around 62% of purchase. The reality is quite different to this. They have been so well trained they don’t realise that they are buying wine on promotion.” - Lynn Murray, marketing director, Hatch Mansfield.
“The temptation is to say taxation even though it’s unlikely to get better and there’s not much we can do about it. More serious in my opinion is the shrinking of the offer in the off-trade through a combination of range restrictions in the multiples and fewer multiple specialists in the high street.” - Anne Burchett, MD, Sopexa
III - The UK is often described as the most important and dynamic wine market in the world. Is this still true? Why (not)?
- Yes: 42.6% (2010: 56%)
- No: 43.4% (33%)
- Unsure: 14% (11%)
Here’s your headline: for the first time in the five-year history of this survey, a majority of our respondents now believe that the UK is not the most important and dynamic wine market in the world. Four years ago, 80% of people still believed it still was, despite some reservations.
The reasons for this gradual decline in the UK’s perceived significance are persistent and, in most cases, seen as growing in their influence: consolidation of the market into supermarket sales; ongoing duty increases (plus VAT going up); the transformation of many wine lovers into promotion junkies who buy predominantly on price.
These and other factors conspire to narrow margins for distributors and producers, leading many to rethink their global strategy and target their wines at other, more receptive, markets such as the US and countries in the Asia-Pacific region.
All of that said, the UK remains a large and mature wine market, in which the lack of a large-scale domestic production base creates an openness not seen in most other major wine-consuming countries. The size and diversity of the UK wine market is not in question; its ongoing viability in economic terms for a growing number of wine producers, however, is.
“If you had asked me this question say five years ago I would agree. Any new producer’s prime objective was to sell into the UK. Now, with over 82% going through the multiple grocers and the constant need to support promotions/listings etc, there is no longer the ability to make enough profit for some producers to justify their presence here on the UK market.” - Nick James, managing director, Pol Roger portfolio.
“It’s the most varied – not sure about dynamic. Until the balance between brand-building and discounting activity is re-addressed, dynamism will not return.” - Lisa Duckenfield, group marketing manager, Cellar Trends.
“The UK still holds a prominent position in the world of wine, we have some of the world’s most highly regarded wine critics, powerful retailers, adventurous consumers and a capacity to adapt well to new trends, but we have to be aware that countries like the US offer strong competition.” - Maria Jose Sevilla, director, Food & Wines from Spain.
“The UK remains the key export market for Australian Vintage and Australian wine in general. There is no question that the UK is challenging market, but it is also fluid, dynamic and full of opportunity.” - Paul Schaafsma, general manager, UK and Europe, Australian Vintage.
“Less and less so. This market’s focus on price, combined with punitive taxation, is putting so much pressure on margin and quality that wine ranges have been seriously diminished and there’s little opportunity to take risk, which is having a negative effect.” - Becca Reeves, wine buyer, Laithwaites.
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