Margin madness?

Balancing volume and value has always been a dilemma for the port trade, but can it ever change? Chris Orr reports

AT FACE value, sales of port over 2002 don’t give much cause for celebration. For the third year running total sales volumes fell, from 10.5m 9l cases in 2001 to 10.43m cases.

However, while volume has taken a hit successively, the good news is that the real value of port sales has increased year on year overall – even if it is a rise that is carried by one or two markets only. In 1999, despite higher volumes of 10.59m cases, the worldwide port market was valued at 396.1m, with an average price per litre of €4.15. In 2001 total value had risen to €407.7m and €4.29, despite a 0.2% drop in overall volumes.

And in 2002 the same figures hit €428.6m and €4.56 – a rise of 4.9% and 6.29% respectively, despite a fall in volumes of 1.2% over the year.  These figures illustrate not only a trend in value versus volume terms, but also the rather perverse nature of port sales globally.

A quick look at market share versus value and sales of port type give an indication of this.  In terms of overall sales of port wine, the country that dominates is France, with 3.1m 9l cases of wine sold over 2002, valued at €100.1m.

That represents a 2.9% drop in volume and a 0.04% drop in value. If it seems odd that volume drops significantly, but value doesn’t, that’s perhaps explained by the average price paid per litre, which is just €3.58.

There isn’t much lower to which price paid for a litre of port in France can actually drop and port producers have been slowly but surely trying to claw some margin back despite the decline in sales, thereby reducing the loss incurred.

Likewise, Holland and the Benelux countries, where volumes are high (but in decline, see table), and price per litre is as low as €3.50.

The common denominator with all these countries is that they are dominated by the lower priced categories of port, and have a hefty slice of the Buyers Own Brand market (BOB). In contrast, the UK and the US, between them dominate the premium port market, both have average bottle prices of €5.66 per litre and €10.45. It’s an indication of three things essentially.

First the difference in value terms between the UK, US and the likes of France, second, the growth potential of the US, which is a relatively new market for the trade and third the pressure that the UK market is under in price terms.

In the case of the latter, the UK has always been seen as the major market for premium port sales – and a must for port producers that are keen to make decent money. 

But the figures for premium port sales over 2002 indicate that margins are being squeezed tighter than ever, and many port producers fear that the UK market is heading the same way as France and the Benelux countries, with a greater emphasis on price rather than quality.

More than 62% of all port sales in the UK are classified as premium (vintage character, reserve or above). In 2002, of the 1.046m 9l cases sold in the UK, 650,000 cases were in this category, accounting for €39.4m, out of a total value of €53.2m.

The average price paid for premium was €6.74 per litre – significantly higher than France, but not great compared to the US.  The latter saw 269,000 cases sold as premium, of a total of 407,000 cases – but total value was €31.75m and €13.12 per litre.

"The UK is an incredibly tough market at the moment," says Adrian Bridge, managing director of Fladgate Partnership, owners of Taylor’s , Croft and Delaforce (Taylor’s has a 15.6% share of the UK off trade, MAT to Jan 03).

"And it’s made tougher by the supermarkets using big brands at low prices to increase footfall in their stores. Just as an example, our LBV is currently selling for just under £10, which is exactly what it was selling for ten years ago.

"Over the past decade, we’ve made improvements in technology, improvements in costs. We’ve been helped by the Portuguese currency joining the EU – we’ve had all these factors in our favour, and that’s helped us maintain that price and meet the demands on margins being called for by the retailers.

Now, currency is flipping the other way, labour costs are going up, and we’ve made all the systems and structural changes that we can to save costs. Frankly, the reality is that there is no where else to go.

"There are essentially three major companies left in the UK port market [Cockburns, Taylors and Symington Group], slugging it out for volume and market share and, to be honest, it’s a question of how many rounds they’re all willing to go."

It’s a view shared by Miguel Côrte-Real Gomes, commercial and viticultural director of Cockburn Smithes & Ca shares (Cockburns has 25.7% share of the UK off-trade as of MAT to 03), although he insists Cockburns will be one of those left.

"Over the last few years we’ve had, at any one time, between 26-30% of the UK port market, and we intend to keep it that way. Our Special Reserve usually accounts for 20% of the entire market in the UK.   To be frank, our main focus each year is not to produce 5000 cases of great vintage port, but rather to produce 200,000 cases of great Special Reserve."

However, Gomes is likewise concerned about the pressure on margin from the supermarkets. "You know we have very controlled costs.  If it’s a case of fighting a price war, we can, but I don’t think that’s in anyone, other than the supermarket’s, interest. It certainly isn’t in ours and it certainly isn’t in the consumer’s ultimately, because quality will suffer.

Take two years ago, there was intense price fighting in the LBV market. We changed our packaging, changed the label, improved the blend, all of which depressed our margin, but we kept our LBV at a civilised price, and twe saw increased sales of our LBV without actually lowering the price.

"It’s perverse in a way, that we’re a part of a big multinational company, trying to say to the competition, that price isn’t the way to go."  "It’s is a challenging market," admits Paul Symington, managing director of Symington Group Ports, who is a little less confrontational than his peers, but is similarly concerned about the state of the UK market – his Dow, Graham and Warres brands have 27.8% of the off-trade market (MAT figures to Jan 03).

"At the moment one in four bottles of premium port sold comes from our family of companies, so it’s an important section of the market for us, and it is being progressively squeezed."  He feels that attracting a new audience, expanding the horizons of port, is the way forward, rather than battling over price.

"We’ve tried to attract a new younger market for our ports, through redesigning the packaging and making it more appealing. It’s not been difficult, but we have had to be careful not to shock our core market."

However, while the three major shippers of port to the UK are all keen to reverse the current trend for supermarkets to put increasing pressure on straightened margins, they also see the US, and the new markets in Asia, as being the long term solution to growing trade.

Last year the US saw a 37% rise in value terms on growth of 20% in volume. At the moment, the only country in the Far East to hit the top 20 was Japan, which saw a rise in value of 20.5% on volume growth of 23% – and many believe it’s neighbours are likely to follow such growth trends.

"The US has taken 30 years to build but now it is showing incredible growth," says Bridge. "And it will be interesting to see how the Asian markets – China, Hong Kong etc develop over the next 20 years as they stabilise and the economies, grow.

It’s a gamble, of course, but it’s worth putting the work in now to ensure that if it does take off, we’re ready to take advantage of it.  "After all nobody could have predicted quite how well the US and Canada would do but it’s now a core market for most premium port producers."