The just-drinks interview – Troy Christensen, Constellation Europe

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It is now more than a year and a half since Troy Christensen took the helm at Constellation Europe, the European division of the world's biggest wine company. Given the current state of the European market, and the UK in particular, to call this a tough assignment would be something of an understatement. In this month's just-drinks interview, Christensen spoke with Olly Wehring about how Constellation is addressing the most trying of market conditions.

The lot of the head of Constellation's European unit is surely not a happy one these days. After all, earlier this month, Constellation Brands posted a 30% plunge in reported net profit for its third quarter, with branded wine sales in Europe tumbling by 27% in value terms to US$133.8m, and consolidated sales in the region falling by 24% to $163.3m.

Granted, it may not be easy for many to sympathise with Troy Christensen. After all, many have laid the blame for the prevalent emphasis on volume over value in much of Europe's wine sector very much at the door of Constellation, the world's biggest wine company. But when just-drinks met with Christensen in May 2007, shortly after he'd taken over as CEO of Constellation Europe, the impression was that the company was moving away from the discount reputation it once had. "In the past, I think the viewpoint always started with price points and promotion schedules," Christensen said at the time. "What we need to really focus on now is branded quality, and we believe that consumers will pay for the quality."

It would appear, however, that events have conspired to thwart Christensen's high hopes of almost two years ago. The squeeze on consumer spending was not of Constellation's making, but the irony is now that the 'old' way of doing things is winning out over the 'new' approach.

It's now a month since Christmas, which Christensen last October famously warned would be a "bloody" period for drinks companies in the UK, a country that accounts for about 80% of Constellation Europe's sales. "It'll be another very hard discounting Christmas," he told just-drinks at the time. "We (Constellation Europe) recognise that, but long-term, we're trying to figure out how to get the consumer more interested in GBP5 to GBP10 wines. I know the retailers would love that as well, but right now it's a battleground."

Looking back, Christensen is quick to recognise how successful the 'three for GBP10 (US$14.30)' promotion favoured by many retailers proved to be. "Christmas was late last year," he says. "'Three-for-GBP10' did drive the category, taking quite a bit of volume away from the half-price deals, which drove the market a year earlier."

Christensen believes, however, that promotions can only hold the attention for so long. "The one thing we have done with our consumer research and category management is we've found that consumers get a little bored of a promotion cycle over a period of about a year," he says. "There'll be plagiarism of that promotion mechanic throughout the marketplace, because it's working. But then you've got to move on to the next thing.

"God forbid that the next thing is 'three-for-GBP9', but how do we now get the next promotion mechanic to not just focus on price? What's next? That's what we're trying to work with the retailers on, to find alternatives. Promotion activity - and the space for wine promotions - was up dramatically in the UK in the run-up to Christmas. But the actual value achieved on that was flat to down."

Troy Christensen, CEO of Constellation Europe.

Looking forward, Christensen continues to have a cautious take. "I think next year is going to be just as challenging," he warns.

"For the next 18 to 24 months, the difficult economic circumstances - with consumers continuing to trade down and the Government continuing to tax you and the pound continuing to deteriorate against the US dollar - mean (the UK) isn't a very compelling place to put your investment dollars," he notes. "I think, strategically, instead of investing in marketing and building brands in the short term, we're probably going to have to buckle down a little bit and compete in the lower price points. But we're not going to drive price down, we're going to try to engage back at the price points where we had hoped things were."

And what of the other markets in Europe? Christensen is as downbeat about Ireland as he is about the UK. "Ireland used to be a very big market," he says, "but they're following the Iceland trend of having an over-heated economy, which has really fallen apart and gone to a significant bust after a tremendous boom."

Add to this the introduction of a EUR0.50 (US$0.66) tax per bottle of wine, and Christensen's concerns about Ireland appear more than valid. "If you look now at the strength of the euro, combined with a 21.5% VAT rate and the addition of EUR0.50 on a bottle of wine, you'll understand why the cost of a bottle of wine in Northern Ireland is almost a third of what it is in Ireland," he says. "So you've got people crossing the border in droves to buy wine."

Germany, meanwhile, remains as tough as ever, Christensen says, but it is the UK that takes the brunt of his ire. "In the UK, where our business has been heavily concentrated, the punitive taxation of wine has exacerbated everything," he says. "Even though we've had challenges in other parts of Europe, the use of beverage alcohol in the UK as a politically expedient revenue grower has resulted in us losing quite a chunk of our margins. As brand owners, we need to get out there and invest behind the brand to establish some differentiation. But the Government has taken away our ability to do that - people are focusing on volumes instead of value."

Elsewhere, however, there remain some glimmers of hope for Constellation Europe. "Scandinavia still has some positive margins and dynamics, and hasn't deteriorated at the level many had thought," Christensen says. "A lot of people have been very interested in Russia, but the rouble has fallen quite far, so I think many people are doing a bit of 'wait-and-see' in that market. I still think Russia and Eastern Europe are very interesting. But short-term they've really been stung."

Christensen is of the opinion, however, that some good can come out of this recessionary period. "It does clean up a bit of the market," he notes. "A lot of people are hanging on by their fingernails. At the end of it all, the strongest will survive. Our desire is to continue trying to differentiate our brands and not focus on volume at the expense of value. When we emerge from this whole thing, if wine has been completely commoditised, then it's going to be next to impossible to build it back up, and the category's going to get a bit boring.

"Hopefully people will still be working on branding and innovation," Christensen concludes. "That's what the wine category is going to need."

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