In mid-2007, Citigroup’s Andy Bowley correctly identified that Australia was absolutely ripe for expansion of own label.  No other major market on earth (with the possible exception of Portugal and New Zealand not shown of this chart) has such concentration of buying power amongst its leading supermarkets. At the same time, the penetration of private label in the packaged alcoholic beverage category was much lower than in most other markets.

Source - Citigroup Research

From that point forward, private label rapidly increased its share of packaged alcohol. 20% of Off-Trade sales were private label by April 2011.

 Where wine is concerned, however, private label penetration seems to have palteaued as at around that 20% figure.

This is an almost identical situation to the UK where, after dipping to as low as 18.7% in 2009, Private label pushed back up over 20% again in 2010 in response to the GFC.

This is a vastly different number to those which are so often lauded over perspective suppliers to Tesco, Sainsburys and Mark & Spencer and the like. Whilst some chains have claimed as high as 60% of sales as own label in the past, one 5th of sales seems to be the natural equilibrium. The US, led by Costco, is moving toward that same level.

As discussed in the Wine Paper 18, private label is out performing many of the major companies but not the mass of other smaller competitors.

Why is this so? The market is rapidly “premiumising”, smaller players are much better competitors than large at premium price points and consumers of these wines do not want private labels. They want to know that their wines were made by “real” people from a “real” place. The chart below substantiates this.

Supermarkets will aggressively push for more private labels because they make more money.

What must medium sized companies do? Are “Gear Up” or “Get Out” the only choices?

"Gear Up" – develop competitive scale and supply chain efficiencies so as to become a cost competitive supplier. Warburn Estate has chosen this model. They now have one customer – Woolworths. Whilst there are some considerable risks associated with this approach, their growth has been nothing short of phenomenal. Their imports of NZ wine alone amount to nearly 1 million cases. Their situation now is not unlike suppliers of potatoes to McDonlads.

“Get Out” meaning;

 -         Forgetting about selling wine below $15 per bottle retail,

-          Focusing on leading regions as the source of fruit and

-          Developing brands with strong regionally based identities and distinctive personalities.

There are, of course, other options. WBS client Beelgara made over $2million in EBITDA last year pursuing an innovative multichannel approach. Grant Burge is another WBS client who has been highly successful through using innovation to evolve their business to best take advantage of the new paradigm.

Perhaps the current drive to “break up the supermarkets” in Australia will succeed. Probably it will not. The argument is, in my view, yet another distraction full of politicking and misinformation that, for smaller producers, has practically no relevance.  Medium sized producers need to be evolving their competitive strategy rapidly both as good discipline and in any case.

I was recently invited to give a key note speech at the Bragato Conference in Auckland. I was asked to sum up global supply and demand and to give a view as to when the oversupply situation might correct itself.

Probably the most poignant moment in the conference for me was seeing the somewhat anguished look on the Chairman of New Zealand Winegrowers (Stuart Smith’s) face when hearing the answers to the question he put to the ‘leadership panel’.

He asked - “What is the one big, hairy, audacious idea that will take New Zealand forward?”

One of the panellists wanted to improve the way New Zealand produces wine, another wanted to protect it and a third wanted to do that sustainably. No one was nominating market driven initiatives that might result in a change in the offer – some new ideas, in other words.

From my perspective at least, New Zealand’s opportunities are both obvious and immense. If we consider those three key target consumer groups so often referred to in the Wine Paper and in our workshops then some things that can be done immediately to build on current demand are as follows:

Aspirational Consumers – Brown Brothers were in the press recently claiming that according to their research, 60% of wine drinkers don’t like the taste of it. There is a great weight of evidence showing that for this audience - lighter, whiter, brighter, pinker, bubblier and sweeter work.  Not all at the same time of course and not in the same simple, cheap and sometimes nasty way of past incantations.

Rose, Sparking and Moscato wines are going through the roof and New Zealand is ideally placed to produce high quality, sophisticated versions of these styles, to package them to world’s best standard and to market them at prices that make sense both for producers and consumers.

Wine Appreciators – New Zealand has made a serious fist of tackling red burgundy but at some point has forgotten about doing the same for the white equivalent (with a few very notable exceptions like the wonderful Chardonnays of Michael Brajkovich at Kumeu River).

There is a massive opportunity, I believe, if more producers stop making “New World” style Chardonnays to sell at commercial price points and focus instead on creating wines with cool climate elegance and complexity that express a unique sense of place to sell at much higher price points.

Likewise, the hottest ticket in town right now is elegant, spicy, Rhone style reds. Some producers are still trying to make Australian style red wines when those styles have long since fallen from favour. A collective approach and better distributors in Australia in particular should see Hawkes Bay wines doing much better than they are currently.

Connoisseurs - Becoming collectable is the key to creating luxury wine brands, getting the price of top end wines up and strengthening the image of your country brand. Whilst New Zealand might have the highest average FOB price for its wine of any country, France has 38% of its wines listed at over £40 in UK restaurants where New Zealand has only 13% according to our Wine On Premise UK research.

Not having a widely recognised classification system for old and rare New Zealand wine is part of the problem. I spoke to Andrew Caillard at Langtons and his feeling is that New Zealand needs to create its own classification. It can be done in the same way the Langtons do in Australia but in his view it needs to be for and by New Zealanders. New players are emerging in the wine auction space. One of them will doubtlessly take this idea forward.  

From March Issue of Wine Business Monthly.

There is no doubting that the last 2-3 years have been a veritable “perfect storm” for the wine industry. A number of our clients have done extremely well during that time whilst some of their competitors have suffered the humiliation of very public announcements about profit downgrades etc.

What have the best performing businesses done to weather the storm ?

We canvassed clients widely on this. Some of what they told us was what we expected. (You would hope so given that this is what they pay us for). Some provided us with fresh insight, once again proving the value of having a good network.

The best performing wine businesses, in WBS’ view after talking to successful clients, are the ones that:

Have a very clear but adaptable business plan. This might sound like we’re spruiking for work but these are our clients’ words not ours. Forecasting tools for the wine industry have become a lot more accurate and sophisticated. Those using them can adapt quickly, responding to opportunity, adjusting inventories and avoiding waste.

If sales slow, operating overheads get adjusted. Those that simply sell off bulk wine and keep spending soon find that their margins erode and their cashflow / business value gets heavily impacted.

Understand their optimal size. It is critical to right size your business around its oppourtunity and not pursue growth for growth’s sake. One of the best ways to stop bleeding cash is to stop growth and raise prices. You can’t shrink to greatness but the most important decision you can make is around – “where are we, what do we do here, how much wine is that, how much of that can we expect to own for ourselves, what resources do we actually really need to make that happen and will all of that make us happy?”

Have only pursued business that can be done at sustainable margins. It amazes me that people I meet still fight the Deloitte benchmarks because the sample isn’t statistically significant or whatever. It is not the benchmark that matters. There is a common sense reason why the number is 50% across your business (unless you are producing more than about 100,000 cases after which your operating overhead costs you less by proportion). If you can manage 20% EBITDA, you are going to have to pay 4-7% (most likely) to the bank and the tax man is going to take 30%. That barely leaves enough to cover most business’s cost of capital. We do have clients that run very low overheads and don’t need that 50% gross margin. If any deal leaves your business with less than 20% EBITDA, however, it's then time to “just say no”!

Have paired back inventory and operating costs. This is always the hardest part (letting go of your beloved winemaking creations at hard to swallow prices or saying goodbye to people) but it must be done and the earlier this gets addressed, the better.

Have paid down debt and are not beholden to their bank. Most of us, in taking money from the bank, are not thinking about paying it back but that is, after all, what the bank expects. Those who do not have a plan in place to show the bank how they will do this put their business at great risk. The banks, generally, have no appetite for extending credit to the wine industry whatsoever. In some ways this is a good thing as it will reduce competition from new entrants. You don’t want to be on the wrong side of the bank at this time, however.

Are not dependent on government rebates for survival. This is a controversial one but all of my best performing clients are taking the WET rebate as a bonus and are investing it in things that will help their businesses in the long run. They are not using it to fund gaps in cashflow that the business would sink without.

Know how to do business with multiple retailers if they have to. Coke does it, Kelloggs do it and Colgate Palmolive does it too. You can dance with the devil. You just have to be extremely smart about not letting him take your soul.

Have channel strategies that strike the right balance between achieving sales and protecting brands. I still run into people every day who believe what supermarket buyers tell them. Even the biggest companies fall for this. For example, I was told that 7 people in the UK buy 92% of wine. My question was 92% of what wine? Supermarkets are 80% of Off-Premise sales which constitute 80% of the market. That leaves you with about 60 Million cases of imported wine that those guys are not squeezing suppliers to death for…

Run strategies that reduce reliance on individual customers and place as little business as possible with multiple retailers. In times of oversupply, retailers are always going to have the upper hand. In markets like the UK, Australia and New Zealand where large scale wine retail is relatively new to supermarkets, those buyers are not letting suppliers make money. In Europe and the US where they’ve been doing this for longer, it is possible to find multiple retailers with a more long term view of client relationships. Diversified markets mitigate currency risk. Diversified channels will not only reduce risk but help build your brand if well implemented. A diversified offer gives you flexibility but that must never be at the expense of focus.

For those of you who have already done all of the above and who have the possibility to seize oppourtunity as it presents itself, this should be the ideal time to position your business for profit growth. For those who have not, time to get busy. We’d of course would love to help if we can.

Each year, WBS conducts research into the On-Premise in the UK and other markets. 

This year, as you would expect, the price of wine on UK wine lists has dropped. The average listed price for a bottle of wine is now below £40, down around 10% on a year ago.

There are, however, some huge opportunities in this, the world’s largest On-Premise market. Identifying them is all about segmenting the marketing, looking at who’s succeeding and why.

If we look at Beverage Wine (the wine used for conference functions and by the glass pouring in lower end restaurants etc), Chile has made huge inroads there, mainly at the expense of wines branded South Eastern Australia. In doing so however, Chile has all but given up on trying to position itself as a premium producer and locked itself in as the worlds lowest price supplier, a position it will struggle to maintain if exchange rates move against it.

For the Brand Wines, this year really has been a disaster. The public listed companies have virtually no listings of their major brands in the UK On-Trade reflecting both a will by On-Premise accounts to steer away from supermarket brands and moves by listed companies to move away from doing business with the On-Premise sector. The accountants concerned clearly do not understand the critical nature of On-Premise brand building.

For smart marketers selling to the Aspirational wine consumer, this year has been a bit of a bonanza. Some of you may have seen this press release in TizWine Cloudy Bay the UK's most listed wine brand On-Premise.

Second placed Alpha Zeta also has a Kiwi connection with winemaker Matt Thompson helping importer Liberty to make Italian wines under an easy to remember brand name. A number of these distributor led projects did well in 2010.  

Were the New World (Australia and South Africa in particular) are missing out is in catching the trends that are driving sales to this market segment. Rose has increased its share of listings significantly in the last 12 months as has Pinot Grigio. Prosecco has also become hugely popular. As you would expect, Italy has been the biggest here. Most medium sized Australian and South African wine producers dabble with these styles but are not focusing on creating brands and wine styles for this consumer as a core business strategy.

For the Wine Appreciator segment, many you will have read this story in Daily Wine News Regional Heroes campaign and First Families initiatives get traction in the UK on-premise . For people that want to succeed in any market through promoting their commitment and passion for wine, this is clearly a story that has a willing audience.

For the collector Connoisseur, drinking good wine in a UK restaurant is not only a very expensive way to do it, it’s becoming practically impossible as high priced wines disappear from lists. Listings of wines costing more than £100 per bottle per bottle decreased by over 20% during the last year. Bordeaux First Growth wines on UK wine lists at stratospheric prices are close to being a thing of the past.

WBS's Wine On-Premise UK 2010 report can be purchased here
 
http://www.winebusinesssolutions.com.au/research

When I asked a good friend of my mine the other day “how’s it going?”, his reply - “the worst I have ever seen it” - was no throw away line…

Things are really tough out there.

Large distributors have given away all of their and their clients’ A & P as well as what is left of their margin. The supermarkets are demanding more but there simply isn’t anything left, in a lot of cases.

I believe that for all types of wine businesses, there are forks in the road appearing.

Having had the privilege of mentoring 16 NSW wine businesses over the winter provided some fairly good insight into what those decisions are.

It seems that most small businesses owner are either going to have to get really serious about wine quality (and I mean “region leading” serious) or a whole lot better at providing a wine, food and tourism experience. There are massive opportunities in this area, I believe.

For medium sized producers, the critical thing to be doing now is to retain a “centre of gravity” well above $20. Those companies that have tried to grow their business quickly through volume in supermarket owned retail with products priced around $20 are now typically being forced below $15. Supermarkets know that that is where the big price / volume break is. For medium sized companies, however, there is no profit there unless quality and ultimately the brand are compromised. The best medium sized companies have already developed channel specific offers. They have attacked cost across the business and have taken the WET rebate out of their profitability calculations.

For large companies, questions abound about future ownership and direction. Treasury Wine Estates is up for sale, Constellation Australia has been delisted and Pernod Ricard are denying that their wine business is for sale. It looks like we are moving from the age of the PLC to the rise of private equity. Will they be better stewards of our biggest wine assets? We’ll have to wait and see.