Wine Report 2007: Reality check: how the trade survives

13 July, 2007

Every year OLN's wine report questions more than 40 wine suppliers about the issues that most affect their business. Here's a round-up of the results.

Spend, spend, spend

Suppliers are spending the same amount as last year - some 22 per cent of their marketing budgets - on above-the-line marketing.

Spending on price promotions soared from 66 per cent to 82 per cent in 2004, then dipped to 76 per cent in 2005 before levelling out at 78 per cent in 2006 and 2007, according to our annual Wine Report survey.

Distributors recognise the value of TV and press ads, but they have much more faith in sampling campaigns.

Concha & Toro is embarking on its first screen ad campaign for Casillero del Diablo, which will run in art-house cinemas in October , backed up by print ads, POS and PR.

Sales director Simon Doyle says: "Our tasting roadshow is in its sixth year and has proved an invaluable tool in reaching new consumers, getting out and about educating and enthusing. We are absolutely convinced that getting tasting samples in hands is much the best way to get people engaged with our brands."

Cellar Trends has invested heavily in consumer activities such as wine tasting events and attending county shows with Wines from Spain. Marketing manager Lisa Duckenfeld says: "We have decided our budget will have the most impact where we can directly interact with our consumers."

Hatch Mansfield marketing director Lynn Murray adds: "The majority of spend continues to be invested in price promotions. With this requirement and the fact that the trade still struggles to pass on duty increases to the consumer, above-the-line support is the first to be hit and the level of investment for true brand building continues to diminish."

Mentzendorff managing director Andrew Hawes says his above-the-line spending has dropped from 50 per cent 10 years ago to 30 per cent now, "but there is a level below which we would not allow consumer marketing expenditure to drop for our major brands".

Maintaining a balance between above-the-line and below-the-line expenditure is critical for long-term brand health. 10 International's Bill Rolfe says: "The traditional marketing spend areas are being questioned by modern marketers. No longer is it enough to place an ad in a glossy and expect to sell your wine. Brand owners need to be more agile and creative in their marketing strategies to succeed."

Up close and personal

Two-thirds of suppliers seem pretty happy with their dealings with retailers. "The atmosphere at Tesco in particular seems less hostile and aggressive than it has been in the past few years," says one. "We put this down to the Dan Jago Effect."

Gary Greenfield, managing director of Distell Europe, adds: "The relationships are good and strengthening all the time. They recognise that we are making a strong commitment to work with them to build the category as well as their sales."

Alex Canneti, sales and marketing director of Moreno Wines, says: "We feel we have a very good relationship with retailers. Their requirements on margin and quality are a reflection of trading conditions and the needs of the market. It is up to us to adapt to the marketplace."

But tensions do remain. Simon Doyle, sales director of Concha & Toro, says: "It's sometimes quite difficult to have a dialogue about long-term plans for the brands and to get beyond price promotion.

" But there seems to be a move from some retailers towards a more co-operative way of working with suppliers and we wholeheartedly welcome this . Retailers are increasingly demanding in their selection criteria - not just margin requirements but ability to supply within a timeframe, adherence to specific retailer packaging specifications etc."

Mentzendorff managing director Andrew Hawes says: "There is a global oversupply of wine, it's a fragmented industry with comparatively few significant consumer brands and we're all trying to sell to a handful of major retailers who are themselves in a very competitive market. It's not a surprise that the business is tough at times."

Another supplier adds: "The domination of brands continues to have a big impact on trading and ranging, as does the recent proliferation of half-price offers which, with current duty levels, cannot be sustainable."

Others voice their own concerns. "The bond between existing suppliers and retailers gets stronger every year, and to break through is becoming harder ," one claims. "Once you do break in the pressure begins on margin and costs. The retailers do appear to follow their own rules when it suits."

Another adds: " Everyone is so stretched it is not always easy to achieve the best outcomes, especially on the retail side."

Price point barriers

Suppliers seem ready to embrace a new pricing system. Lynn Murray, marketing director of Hatch Mansfield, says: "Moving away from such rigid price points would really help the trade pass on duty increases to consumers and give retailers and suppliers the opportunity to invest in the actual product and provide a much healthier trading environment."

Mark Tinsley, off-trade sales director for Gallo, agrees: "As duty increases year on year it would be easier for the wine industry if retailers moved away from 99p and 49p price points."

Myliko marketing director Nish Kotecha adds: "Wine is now an everyday commodity in the supermarkets. If other products can be at odd prices, so can wine. Is there anyone brave enough to try it, though?"

Andrew Lamberth, national account controller for grocery at WaverleyTBS, says: "It would be helpful if we could begin to wean consumers off the beloved psychological barriers, for the simple reason that it causes agonies at Budget time when we have to decide whether to reduce our margin even further to maintain the 99p price point, or break it and risk a delist if the rate of sale drops."

Another supplier says: "Sticking to these price points is one of the main causes of tension between retailers and importers - a more fluid system would be beneficial to all."

But some who support a new approach in principle can see difficulties.

Simon Doyle, sales director of Concha & Toro, says: "If each SKU was allowed to be at its own defined price the wine aisle would be even more confusing. Perhaps we could do with a couple more tiers in the price ladder."

It's a view echoed by Colin Cameron, marketing director of Percy Fox. "It would help alleviate pressure at Budget time, but also lead to a pretty messy fixture, probably leading to even more confusion in the wine aisle," he says. "We could probably do with perhaps four accepted price tiers in the pound."

Demanding margins

There is a perception that margin demands are increasing and our survey backs up this suspicion.

Anne Burchett, managing director of Castel UK, says: "The squeeze on what is left of suppliers' margins is increasing with ever-growing retailers' margins and rising duties, but looks like it may have reached its natural limit if only because there is nothing left to give.

"The consolidation of dry goods suppliers, notably glass and cartons, can only lead to increasing costs and the price of bulk wine can only go up now. "

Some suppliers prefer to stay anonymous. "It gets tougher every year - demands on us are increasing all the time," says one.

Andrew Hawes, managing director of Mentzendorff, says: "I always find these margin discussions slightly spurious as they seem to be based on an assumption that prices to the consumer can't move, and therefore more margin to the retailer must always mean less to the trade.

"Clearly this is very often the case but it is not an iron law. It can surely be possible to increase prices and therefore profitability within the context of enhanced margins."

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