Wine facing another tough year, says CEO of Wine & Spirit Trade Association

Wine facing another tough year, says CEO of Wine & Spirit Trade Association

The CEO of the UK's Wine & Spirit Trade Association has said that tough conditions in the country's wine industry are likely to remain in 2011.

A rise in value added tax (VAT) in January will set the tone for more hardship in the wine sector, according to Jeremy Beadles. "It's going to be another very tough year for businesses and consumers," he told just-drinks today (22 December).

He said that the increase in VAT, which will jump from 17.5% to 20%, together with tax rises on wine of more than 25% in the last two-and-a-half years is "all adding up to a significant tax burden". Duty tax on wine, spirits and beer is scheduled to increase by another 2% above inflation in the Government's 2011 Budget in March.

At the same time, many consumers are expected to have less money in their pockets due to the Government's austerity measures. Beadles said that the value of wine sales appears to have "reached a plateau" in the UK.

A global oversupply of wine and volatile foreign exchange rates are adding to the pressure. Investment bank Rabobank said last month that wine companies' difficulties in the UK will damage global wine industry profits. "Aside from being the largest market for many suppliers, the UK market has also traditionally offered some of the highest average unit prices," said Rabobank. 

Its figures show that supplier returns on a GBP4 (US$6.4) bottle of wine in the UK have halved in the last eight years. Rabobank said that the rise in VAT in January will have "essentially the same effect on consumption as an increase in excise duty".

Wine suppliers could find themselves further squeezed as multiple retailers attempt to resist price increases in a depressed consumer environment.

PricewaterhouseCoopers (PWC) said in a note that the rise in VAT will lead to a 2% rise in the price of goods and services, if it is fully passed on to consumers. However, it added that "this may not apply in the most competitive, price-sensitive sectors", with retailers indicating that they will "re-engineer" their product line-ups to maintain pricing in some categories.

Multiple retailers account for more than three quarters of all wine sold in the UK by volume and some are seeking to gain greater control over supply to create more value in the sector. The UK's second-largest supermarket chain, Asda-WalMart, has said it is building up its own supply operation, which will include a wholly-owned bottling facility. 

While much of the UK's wine sector remains under serious pressure, Beadles pointed out that several companies, such as Majestic Wine, Bibendum and Direct Wine, have continued to perform well. Majestic, which operates a six-bottle minimum purchase, last month reported sales and profits up by 10% and 18% respectively for its fiscal half-year.

"They've got good business models and high calibre teams," said Beadles, of those companies currently outperforming the wine sector.