Wine review 2008 - Wine industry buffeted by economic storm

Not surprisingly perhaps it is the effects of the global economic downturn that have dominated the wine pages of just-drinks over the past year. Richard Woodard reviews a difficult year for the international wine business and assesses the chances of things improving in the immediate future.

For the wine industry, 2008 was not a year of huge deals and seismic shifts in the corporate landscape. Instead, the global economic downturn made its presence felt from London to Los Angeles, accentuating pressures already affecting businesses all around the world.

There was, however, some relatively minor M&A activity, beginning early in the year with Diageo's US$105m purchase of Zinfandel specialist Rosenblum Cellars in January. Meanwhile, Constellation elected to streamline its US wine portfolio, selling brands including Geyser Peak, Buena Vista, Gary Farrell and Atlas Peak to wine start-up Ascentia. Constellation said the move would eliminate brand duplication and excess production capacity.

Otherwise, deals involved a little judicious portfolio-tweaking, notably from Pernod Ricard. In February, the company sold a range of Sherry brands, including La Ina, to Osborne, and New Zealand producer Framingham to Sogrape. The Portuguese giant also added to its South American range by purchasing Chile's Los Boldos at the same time.

Chile was the scene of further M&A activity as the industry continued to grapple with the pressures of a strong peso and weak dollar, which have conspired to shrivel profits in the past few years.

The most notable deal was the merger in July of San Pedro and Tarapacá, but there was also the acquisition of Fairtrade and organic specialist Los Robles by Cono Sur in November. This move strengthens the hand of parent company Concha y Toro in the UK in particular, where Fairtrade-accredited wine sales were expected to grow by 46% this year.

But the biggest wine industry deal of 2008 was the one that didn't actually happen - the disposal by Foster's Group of its wine assets. The company began a review of the business back in April, the results of which are expected early in 2009. Analysts have speculated that a sell-off of wine brands including Penfolds, Rosemount and Wolf Blass is inevitable. However, reports in November suggested the sell-off might be put on hold because of the global economic crisis. Foster's has said that all options remain on the table.

Foster's difficult year also saw the abrupt departure of CEO Trevor O'Hoy in the summer, to be replaced by Ian Johnston. A mammoth A$602m write-down of the company's wine business led to an 88% drop in net profit for the year to the end of June.

The state of the world economy had a demonstrable effect on companies throughout the wine industry in 2008, and on the markets in which they operate. As well as possibly compromising the Foster's wine sell-off, the economic conditions put paid to the multi-million dollar bid by Reybier Investments, owner of Bordeaux Château Cos d'Estournel, for Napa Valley's Chateau Montelena in November.

Nowhere was immune to the effects of recession, rising unemployment in key markets and plummeting consumer confidence. Even Champagne - an industry which has enjoyed unbroken growth since the millennium overstocking fiasco - has seen sales in marked decline among its major markets during 2008.

Laurent-Perrier's plight is a prime example. Like many Champagne houses, the company had used the dynamics of the market - rising demand and finite supply - to justify large-scale price increases and engineer a new market positioning.

However, the timing of this move just as the wheels came off the global economy could not have been worse, resulting in a 26% sales fall in the six months to the end of September, coupled with a 35.3% plunge in profits over the same period.

One of the major factors behind this dramatic decline was the depressed condition of the key UK market, which spent 2008 being assailed on all sides by economic gloom, an anti-alcohol backlash from the health lobby and repeated duty increases.

Even early in the year, fewer than half of respondents to a just-drinks UK market survey said they believed the country was the most important and dynamic wine market in the world - way down on the 80% figure recorded in the 2007 survey.

The poll was conducted in the wake of the 14p per bottle duty rise announced in March, but events during the rest of the year would have done little to encourage a change of heart.

The industry was upset enough at the prospect of alcohol duties rising by 2% above inflation for the next four years, but it was then hit by a further bombshell in the Government's Pre-Budget Report in November which announced an 8% rise in duty to offset the reduction in VAT from 17.5% to 15%.

The increase was all the more devastating, coming as it did on the eve of the crucial pre-Christmas trading period, with suppliers already facing shrinking margins and falling sales as retailers in particular tried to entice consumers through their doors by slashing prices. How prophetic were the words of Constellation Europe CEO Troy Christensen in September, when he told just-drinks that Christmas trading was going to be "bloody".

If the wine industry is looking for glimmers of hope on the horizon in 2009, perhaps it should shift its gaze from the beleaguered UK market to the dynamic wine destinations of tomorrow, including both Russia and the US.

Recession and rising unemployment may be afflicting the US market today, but a report released by Wine Intelligence in November pointed to huge long-term potential in a country where annual wine consumption still languishes at about 11 litres per capita.

And the same organisation described Russia as the most exciting new wine market to emerge in the past five years. A growing number of middle class Russians have developed a taste for quality wine, the report said, with the Russian wine-drinking population poised to double by 2020.

But even this optimism is geared towards the longer term, and both markets could suffer setbacks in the immediate future, thanks to the global downturn. All the indicators suggest that wine companies will need to batten down the hatches and prepare for a stormy year ahead in 2009.

For more information on just-drinks' review of 2008 or any other management briefings, go to www.just-drinks.com/briefings

---