Carson & Murphy – Double Jeopardy

06 August 2004 By db staff writer

d=”standfirst”>They’re the biggest names in the UK wine trade,  but they sit on opposite sides of the table. So how much  do Constellation’s Christopher Carson and Tesco’s Mark Murphy have in common? The drinks business reports

Tesco is the world’s biggest retailer of wine. Constellation is the world’s biggest wine company. So presumably they have a lot in common? Presumably they are each targeting the same consumers, and have a relationship based on mutual, friendly, and perhaps even profitable co-existence? Well, the drinks businessgot fed up of presuming and decided to get it from the horse’s mouth, or mouths, so to speak. We invited Mark Murphy, category director for Tesco’s Beers, Wines and Spirits department, and Christopher Carson, CEO of Constellation Europe, Tesco’s largest wine supplier, to sit down in one room and discuss the future of the wine industry – preferably without resorting to fisticuffs. But obviously in the hope of a few fireworks along the way. 

So where do the two think the future of the wine industry lies? More importantly, do they think the wine industry in its current guise has much of a future?

“Of course it does,” says Carson, clearly not fazed by what many in the trade have described as a very challenging past 18 months. “I think you’ve got to consider what’s been going on over the last year and a half. In areas such as France there have been significant increases in the cost of goods and operations; in places such as Australia and South Africa there have been significant problems with the currency. At one point, as an example, on a 12-month spot, the Australian dollar had moved by something like 25%, and the euro had moved 15% against us. That is a huge amount of money. What we have seen is both retailer and supplier coping with that  – and remember there hasn’t been a flood of price increasing going on from either side. And so, when people talk down the future, I kind of think we should actually be giving ourselves a pat on the back for having got through everything we’ve had chucked at us.”

“I absolutely agree,” says Murphy. “And I think the challenge now is to think about the future. We should applaud ourselves as an industry. Chris is quite right. However, the long-term health of the industry depends on whether we find the time or not to look at how we are going to keep growing and how we are going to address customers’ needs.”

So does this mean they’re both positive about what lies ahead for the wine category? “Well, I think if the future is going to be bright there needs to be more attention paid to the current customer dynamics,” says Murphy. “And by customer, I mean my consumer – the person that comes into my shop every day. We need to ensure  that we have the best understanding of our customer base today because, I’ll tell you, I think a lot of people just take it for granted that they know what that is. But we all need to get closer to what the customer actually wants.”

“I think looking at what the consumer wants is something we all need to work harder at,” agrees Carson, “and not focus on what the industry needs to get rid of. I think from a marketing point of view that’s a sin we’ve all been committing for far too long.

“As a category I believe we are going to continue to grow, probably at around 45% which is not as good as past figures, but then we’re a more mature market now. But we are going through a period of change in the industry, and I think we have a tendency to look at the glass as half empty rather than half full. We should be looking at the changes as a host of opportunities rather than a host of problems. We have to be more proactive as an industry and, frankly, I think there’s definitely too much whingeing and not enough action.”

For Murphy, that “action” should encompass a world of innovation. “If you look at any mature industry the key to continued growth is innovation and having innovation in the pipeline,” he says.

“I think innovation is key,” says Carson, “but we’ve also got to simplify the offer. And there’s a lot to be done there that can still make a big difference. If you walk down a wine aisle today it is still very confusing, very difficult for the average consumer to get their head around. 

“I think you have to look at the reality of the situation. Which is that if we are going to grow and if we are going to get the return on capital investment that our shareholders and the industry as a whole is looking for, we can’t just look at forcing the same product down consumers’ throats. We need to look at bringing in new consumers and I think we need to have a closer interaction with consumers, whether it be tastings in-store at somewhere like Tesco, or in a gardening centre, or at wine fairs – wherever it needs to be. And we need to have an educational programme. I think education on wine is of paramount importance.”

The education topic is the first point at which Carson and Murphy appear to disagree. “I think you have to be more specific than that,” explains Murphy. “I think one of the crucial things we’ve learnt from talking to customers is that it should be education for those who want to be educated. We have to be very careful of who wants what and the different needs of the 60m people in the UK.

“What’s been rammed home to me in the different focus groups we do, is that different people want different experiences. There are some people who go on to the internet, who want to attend wine fairs and exhibitions to find out more. But then there is another group for whom buying wine is a purely functional activity – they are buying a functional product and they are absolutely not interested in education.”

“I am sure that’s right,” says a diplomatic Carson, “but I do a number of tastings personally every year, and you start off doing the wines at £3.99 and then work your way up the price ladder. And, I’m telling you, as soon as you give a customer, no matter how unused they are to wine, a product worth around £8-£10 and put them in a situation where they are drinking quality wine, they say, ‘Oh, now I understand why it’s that price.’ And that happens so regularly to me.  I think the industry talks a lot about selling products above £7, but if we don’t get the consumer on board, you don’t stand a chance. That’s what I mean about education.”

Is that perhaps a policy adopted more from the need of brand owners and suppliers like Carson to increase their sales of higher-margin products and move away from discounting, rather than a reflection of reality? “Well, anyone that thinks price promotions are going to go away is in cloud cuckoo land, frankly,” responds Carson. “There’s a retailer that works on the basis of Every Day Low Prices, and for a long period of time were not doing any promotional activity and that retailer lost market share. Every sector does promotions. I can’t think of a single store on the high street that doesn’t – with the exception perhaps of the Post Office.”

“Customers like promotions,” interjects Murphy. “We must never, ever forget that fact. It often gives them a good reason to try a wine they may not have tried before. However, I would say I think there are too many promotions and I think it’s a challenge for the industry to cut back on them because too many promotions exacerbate the inefficiencies that we see all around the industry.

“With more targeted promotions you have a much more efficient value chain. I’d like to see us all work much more cleverly in terms of promotions, running fewer but with much more volumes on those promotions, and having situations where you’re not running out of stock on them, and then looking at how we can reduce the tail of wines behind promotions. We have to be careful here, when I talk about the ‘tail’ of wines. It’s not about taking our top-end wines out of the equation because they don’t sell as much, but rather about duplication – and by that I mean there’s not much point in promoting four or five Shirazes all at the same time. It just creates confusion. I believe if you target the wines correctly within a proper hierarchy, you would potentially have huge financial and supply efficiencies. But this is an industry-wide issue and the industry as a whole has to drive it forward.”

“It’s very difficult,” says Carson, “with these deeper-cut promotions. What volumes are we going to need? Who does the forecasting? How do we get it right so the retailer is neither understocked nor overstocked? I do, however, believe the situation is changing subtly. If you look at what has been happening recently, there are reasons behind the more aggressive promoting that’s occurred. First, the market is getting more competitive and second, there is a greater depth of stock, surplus stock if you like, and third, there are some countries where the exchange rate is far more beneficial and suppliers and retailers alike are taking advantage of that. 

“I’d like to see the market become less aggressive than it is. And I guess I would say that because I have shareholders who expect me to make more money for them. But then the retailers are also looking to do exactly the same. I think we have to make sure we don’t go down the route that has been taken by the cider industry, where essentially everything is on BOGOF, and that sort of stuff just rips the guts out of the profit in any category.”

If Carson and Murphy both believe that the promotional side of the business is here to stay, does that leave much room for the more creative side of the business in marketing and selling terms? Jacob’s Creek, for example, spends far less of its time on promotion than other major brands, and spends far more above-theline. Is this a possible solution for other brands?

“Well, for me, it’s about having balance in your marketing plans,” says Murphy. “If you’ve got a marketing plan that is 99% based on promotional activity, then it’s going to be very difficult for that product to ever sell at full price – especially if it is a new product to the market. And that’s because you will always have your like-for-like challengers. Now I don’t expect this to change overnight but I do think people should be challenging their marketing plans. Promotions should be part of a wider, rounder, more encompassing marketing programme.”

Carson doesn’t necessarily disagree with Murphy, but is blunt about his “rounder” marketing plan. “I am unashamedly going after market share, and promoting in-store. Indeed, investing in activity in-store has been a much better way of achieving that for me than above-theline advertising. It’s difficult to compare something like, say, Hardy’s with Jacob’s Creek, because the former is a much broader spectrum brand-wise, with prices ranging from £3.99 up to £10 in the main. However, I take my hat off to Jacob’s Creek. They have a very good campaign running, and I am aware that their sales growth is good, but I am also aware that my sales growth is almost double that of Jacob’s Creek. 

“The point of being so blatant about going for market share is that it is critical to increasing profit.  We increase profit by having a larger critical mass, and this in turn gives us the efficiency factors that we’re looking for. If we have lower production costs and higher sales and more efficient value chains, we can then afford to do more in all areas of promotional activity.”

“Actually the value chain is an area I’d really like to see more activity on from across the industry,” comments Murphy. “We need to see more changes in the way we approach and manage our respective value chains. I think it’s important that we get into the frame of mind that we’re running a business. We’ve all got a passion for wine, and there are some wonderful products that deserve our devotion – but we are running a business, and we’ve got to make sure we’re bringing the product to market in the most efficient, profitable and beneficial way we can.”

“Absolutely,” says Carson. “We’re doing various bits of work at the moment that could see us saving several million pounds globally on our supplychain efficiencies – and that’s money that can be ploughed straight back into promoting and marketing our brands.”

Or perhaps into paying increased duty prices? Both Carson and Murphy roll their eyes in exasperation. “This is a government that says it will only increase duty by an inflationary level,” says Carson, getting testily close to raising his voice. “And yet the last rise was, again, over the inflationary level. Now, in many cases, the last rise was absorbed inside the industry. That can’t keep continuing. From an industry point of view I’d like to see us coming to some sort of understanding and agreement with the government that there would be a duty increase that’s every three or four years. One larger one that we can all manage, rather than a smaller one each year that erodes both the supplier and the retailer profit margins.”

“The idea,” says Murphy, broadly in agreement with Carson, “is that we are given the chance to plan better. To have to sit down and wait for the day of the budget and then plan very hastily is unacceptable in business terms. It would help the industry and be best for everyone – customers as well – to have time to prepare and plan accordingly.”

So, having put the worlds of promotions, value chains, supply chain efficiencies and, not forgetting the venerable chancellor of the exchequer, to rights, isn’t there something they’d like to ask each other?

“Like what?” asks Murphy. Well, assuming the drinks businesswasn’t in the room right now, is there anything you’d like to say about the business relationship that you have? “I dare say I’d like to say to Mark that I’d be happy with more profit,” ventures Carson. “But then I dare say he’d want the same from me. I’d like to ask him, and actually retailers in general, if we could work more on a three-year plan, rather than from year to year. After all, you can’t just stick a vine in the ground and start production straight away. 

“I’d like us not to be doing such deep-cut promotions. I think I can say that quite openly. And I’d like us to spend more time on broadening their wine drinking church. They have lots of customers coming into their stores each day that don’t buy wine, and I’d like to be a part of converting them over to wine.”

And Murphy? “Well, if Chris didn’t want to be a part of that, and if they didn’t want to try and understand who our customers are, and what their needs are – I’d find that hugely frustrating. At the end of the day, I want a challenging relationship with Chris. If my suppliers aren’t challenging me or my team, then there is always the potential of complacency, and that’s a word, and state of mind, that frankly, scares the hell out of me.

“Obviously there are issues from time to time. All I’d say is don’t take it personally. We’re just trying to get to a better solution for customers and a more profitable solution for both organisations. Some of the time that will involve tension. But without the tension, I think we’d get a poorer result.”

Tension. Ah ha, one senses fireworks are on the way. “Nice try,” say Carson and Murphy simultaneously. Well, you have to really, don’t you?