The Port industry is currently facing a period of considerable change and adjustment. Innovation and evolving a modern, viable industry structure are seen as vital if Port is to compete effectively in today's highly competitive wine market where the retailer wields unprecedented power. Richard Woodard reports.

The dramatic, vertiginous vineyards of the Douro Valley have witnessed one revolution already in the past generation. Only in the 1980s, with the ground-breaking work of Ramos Pinto, Ferreira and Cockburn in particular, did Port companies start to take viticultural issues seriously.

The results are there for all to see. Techniques like clonal research, experimental vineyards like that at Warre's Quinta da Cavadinha, and more rigorous fruit selection are all helping to transform the quality of the juice flowing through the Douro's wineries. But now a new revolution is needed in this most picturesque of winemaking regions.

Port's production model is an anachronism. Farmers who own, on average, a measly hectare each toil in back-breaking conditions to feed an industry which sells more than half its wares to high-volume, low-margin markets like France and Belgium.

As demand for cheap tawnies and rubies stagnates or falls, production costs have risen and many have been trapped in the middle. "The situation has become unsustainable, particularly with the big increases in 2006 of the cost of power, bottles, transport, wages and many 'dry' goods," explains Paul Symington, joint managing director of leading Port producer Symington Family Estates (SFE), which owns Dow's, Graham's and Warre's among other brands.

What is more, falling production levels through cuts to the beneficio (Port's production-limiting safety valve) have indirectly further driven up costs. For the past three years, the Port industry has sold more than it has produced - by as much as 10% in 2005. Something has to give.

However, Symington and others are keen to point out that this is not a crisis but a period of readjustment which will inevitably have casualties. Of the three Port shippers currently hanging 'for sale' signs outside their premises, it's no coincidence that two, Silva and Messias (the other being Barros), have their business rooted in low-margin markets.

Some producers - SFE and The Fladgate Partnership (Taylor's, Fonseca, Croft et al) most readily spring to mind - heeded the warning signs some time ago. For more than a decade, they have sensibly pursued premium products and markets: LBVs, single quinta vintages, aged tawnies; the UK, US, Canada and Portugal's higher price-points.

But even these have felt the pinch as the wine market becomes more consolidated and competitive. LBVs in particular have become a ready target for pre-Christmas discounting in the UK, eroding margins in a sector that has been crucial to Port's recent success.

On one level, this looks simply crazy - a view endorsed by Cockburn general manager Jim Reader, for one - but Port is part of a pressurised global wine industry and prey to a very powerful, consolidated retailer base. Fladgate managing director Adrian Bridge believes it is simply "unrealistic" for shippers to ignore the demands of their distribution channels if they want to retain lucrative listings.

Larger companies like Fladgate and Symington instead employ a policy of 'tactical' discounting, cutting the price of some products to protect the position and margins of others. Thus Taylor's Select might be promoted to preserve the positioning of First Estate and LBV, while Dow's LBV performs a similar role on behalf of Graham's LBV. The risk is that these 'price fighters' start to cannibalise the more lucrative brands.

Pursuing the premium market makes perfect sense, but it comes at a price. In a bid to guarantee fruit quality and have more control over production, producers like SFE and Fladgate have continued to buy vineyards - a cost-intensive process with a slow return on investment. Building up credible stocks of aged wines, too, demands plenty of patience from the bean-counters but, as Noval's Christian Seely says: "You have to have high-grade stocks of wine, and you can't do that overnight."

For some producers, this has been unpalatable or financially unviable, polarising their trading position and leaving them more reliant than ever on the very markets that are in decline and offering the thinnest margins.

All doom and gloom, then? Not necessarily. At least the Portuguese government has recognised the need for change in the industry, giving the green light for a major study to be made on Port and the Douro. "We have been asking for this for some time," explains Paul Symington. "We believe that the trade needs to plan for the future. In particular the productive vineyard area needs to be balanced with likely future demand for Port and DOC wines. The problem of many tiny vineyards needs to be addressed so that they can be consolidated to make the units economically viable."

This is a long-term project, but a more immediate 'positive' for Port shippers is the underlying consumer acceptance of their product. Whatever the difficulties listed above, Symington points out that they are market issues, rather than consumer issues. In other words, people still want to buy Port, but the buying power of the retail gatekeepers is making that marketplace far more competitive.

Innovation is crucial too. Not only do new products give companies more promotional and listing options with retailers, they also 'freshen up' the consumer offer for the whole sector. Consumer education about the breadth of products on offer can accomplish a similar result, but is no easy task.

However, for the moment, consolidation is the most obvious and immediate manifestation of the changes sweeping the Douro. Some of this has already happened, creating big groups like Fladgate, SFE and Sogrape's Port division, some is still under way (Spanish bank Caixa Nova's acquisitions of Cálem, Burmester and Gilberts in recent years), and yet more is still to come (Barros, Da Silva and Messias).

At the same time, Port's production base - its growers, in other words - also needs to mirror this consolidation. A few years ago, a company the size of Fladgate would have dealt with 1,500 growers; now it deals with just 75 professional farmers, and other shippers are beginning to follow suit.

As Paul Symington says, Port in 2006 is not in crisis, but it is in a period of considerable change and uncertainty. What is more, the steps the industry takes now could help to avert a very real crisis in the not-too-distant future.