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Wine in the UK - where to from here?

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The UK market is developing in terms of sales and sophistication. Drawing on up-to-the-minute consumer research, Alex McPhee, Neville Calvert and David Matthews of management consultants, KPMG, examine recent trends and offer some predictions for the future.

Considered a luxury purchase 20 to 30 years ago, today a bottle of wine is perceived more of a British household staple than an occasional indulgence. With this in mind, the outlook for the UK wine market remains positive in the near term.

At KPMG, we used data sourced from TNS's Superpanel, which continuously records the purchasing habits of 15,000 households, to explore future growth opportunities for the sector. The TNS data indicates that wine's household penetration increased by 2.4% during 2004. Today, over 70% of UK households purchase wine, and further incremental gains are anticipated.

Purchase frequency also continues to climb, with consumers buying wine on average once every 18 days. Retailers anticipate frequency will continue to rise.

During 2004, TNS estimates each UK buyer purchased nearly 36 litres - almost 8% more than 2003.

Increased penetration, however, exposes the trade to new challenges, particularly in an environment where the multiple grocers' share of off-trade sales is approaching 70%.

From a grocery perspective, wine is unique. It receives media attention weekly and, importantly, drives footfall. At high levels of penetration however, it is difficult to sustain the 9% to 10% per annum category growth experienced over the past 15 years.

The category is maturing and sales growth is anticipated to slow over the next five years to around 4% to 5%. KPMG believes brand owners and agents cannot be complacent in this environment, particularly as multiple grocers are turning to other non-food categories for growth. In the medium to longer term, brand owners and agents will have to focus on innovation to broaden consumer awareness to stimulate demand and maintain category space allocation.

Given the fragmentation of the wine market, the better capitalised players and unified industries are perhaps best placed to drive innovation and benefit from first-mover advantage.

The consumer preference toward branded wine, as opposed to private labels, sustained momentum in 2004. According to TNS, branded wine grew by 20% in 2004, versus the meagre 3% growth for private label. This is a positive trend for wine as in the broader grocery trade, sales of branded goods have remained static in recent years.

The growing strength of branded wine reflects a combination of trends. First, branded offers dominate the regional categories that are drivers of market growth, notably Australia, while private labels proliferate in weaker regional areas such as Germany.

Secondly, wine remains a nerve-wracking purchase for many consumers, so consumers will tend to fall back to a branded offer for special occasion purchases unless they are confident in their wine knowledge. Wine brands are also gaining awareness via increased advertising and sponsorship investment and brand owners are employing FMCG promotional techniques in-store.

Private label will remain important to multiple grocers and specialists due to its superior margins but we do not anticipate the current trend to brand will alter, provided effective brand investment both above and below the line continues.

In terms of categories, Rosé is the 'hot' growth area. According to TNS, consumer expenditure in the rosé /blush category grew 30% in 2004, which follows 23% growth in 2003. The category is shifting from a summer beverage to mainstream, driven predominately by Californian wines.

We believe the consumer interest in rosé corresponds to the growing consumer interest in lighter white styles. AC Nielsen data highlights above market growth for Sauvignon Blanc, Sauvignon Blanc/Semillon blends and Semillon, while Chardonnay sales remain static. Anecdotally, this trend is supported by retailers.
We anticipate that rosé should continue to grow strongly over the near term.

The challenge for retailers and non-California brand owners will be to encourage consumers to trial non-California rosés. We expect to see this product increasingly merchandised by category rather than by country.

Given market trends over the past 15 years, it is not unsurprising that consumer expenditure during 2004 on 'New World' wines outpaced purchases in traditional European wine offerings, with the exception of Spain. From a growth perspective, New Zealand and California shone. TNS recorded market growth of 52% and 35% for these categories respectively.

New Zealand was able to leverage from the 140% increase in Sauvignon Blanc production post the 2004 vintage. The combination of improved quality, excess supply and a weaker US dollar drove California category growth.

From a market share perspective, however, the major gainers were California and Australia. The California category gained two percentage points over 2004 and its market share by value now stands at 12.6% (TNS).

Despite being the market leader, we believe Australian growth will continue above the market average. Although California will continue to benefit from a weaker US dollar, with supply moving back into balance we question whether recent growth rates can be maintained. KPMG understands the major players, such as Gallo, The Wine Group, Constellation and Diageo, have committed to the UK market but should domestic demand continue to improve, producers may be forced to allocate or raise pricing. Australia continues to have an overhang of red fruit and ample supplies of white and is anticipating a similar sized 2005 vintage to the record 2004. The challenge therefore for the Australian producers is not to become complacent.


This article is taken from this month's just-drinks.com management briefing, the just-drinks Guide to the UK Wine Market, available in print exclusively at the London International Wine & Spirit Fair or online at /membersclub/index.asp.


For further information, please contact:

David Matthews
Drinks Sector Leader
KPMG (UK)
Tel: +44 207 311 8572
Email: david.matthews@kpmg.co.uk


Neville Calvert
Partner
Global Wine Industry Group
KPMG (Australia)
Tel: +61 8 8236 3386
Email: ncalvert@kpmg.com.au


Alexandra McPhee
Associate Director
Global Wine Industry Group
KPMG (Australia)
Tel: +61 8 8236 3343
Email: amcphee@kpmg.com.au


Sectors: Wine

Companies: E&J Gallo, Constellation Brands, Diageo

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