DEBATE – JAGO v MORAMARCO: Decompression Chamber

What can be done to reverse deflation in the UK wine market? The UK’s largest retailer and biggest wine supplier went head to head. Patrick Schmitt reports

Power is nothing, they say, without control, which explains why two of the most influential men in the UK wine trade are finding it hard to halt, let alone reverse one of the drinks industry’s greatest challenges – price compression. Faced with a global oversupply of wine and the need to deliver returns to demanding shareholders, both Dan Jago, category director, BWS at Tesco and Jon Moramarco, CEO, Constellation Europe, could be described as caught between the proverbial rock and a hard place. But can they see a way out? A technique to raise prices, increase volumes and generate profit for the wine industry?

We thought it was about time to find out, so we put the two head to head at an event organised by The Institute of Masters of Wine and the drinks business. Gently stirring the speakers into action was Patrick McGrath MW, chair of the debate. “Since January 2000 the average retail price point has only gone up by about 32 pence,” he began. “If you factor in inflation and duty increases it’s clear that we are in a deflationary market in terms of wine.

“I believe passionately that this is a situation that can’t continue for the long term – especially if we are to build a sustainable wine market in this country and meet the needs of being socially responsible.”

However for Moramarco, an American who is relatively new to the UK, the British market has advantages, which he emphasised by drawing comparisons with the US and the past. “Over the last 20 years, per capita wine consumption in this country has doubled. If you looked at what was on the shelf 20 years ago and today there has been enormous change. What we are providing the consumer today is much greater value for money.”

He continued: “There are 46 million adults in the UK and 32m drink wine, so that’s 70% penetration. In the US, only about 30% of legal drinking age adults drink wine. One thing we need to be aware of is that the research says only about 5% of people have a broad knowledge of wine. But let’s be fair and say around 10% (or 3m) have a broad knowledge. That leaves 29m people in the UK who don’t know a lot about appellations/regions of the world, etc. How do you get them to trade up? It’s not going to be done by talking about the romance of a small château or estate.”

Analysing the retail make-up, Moramarco pointed out, “ACNielsen is under-reporting the total market by about 20%.” For this reason, he reckoned that the multiples have a 46% market share, not 60%, which is closer to their share in the US at 32%.
Taking the comparisons further, Moramarco added that, “In the US, with the weak dollar, gross domestic product per capita is about the same [as the UK]… However, home prices are 60% higher than in the US, gas prices are about double.” He also pointed out that,  “consumers pay on average 22% more for wine than what they pay in the US.”

Taxing issues
While about £2 in a £4 bottle of wine goes to the treasury in the UK, that figure is 32 pence in the US according to Moramarco, “So a major problem in UK is the tax regime and I don’t know how we are going to break that.”

He then compared the two markets by segment in the multiples. In the UK the value segment (below £3.50) accounts for about 42% of wine by volume. In the US it is also around 42% (tax adjusting pricing). Fighting varietals/mainstream (£3.50–£4.75) is 40% in the UK and 20% in the US. Premium (£4.75–£7.25) is 15% in the UK, 19% in the US; while ‘super-premium’ (over £7) is 2% in the UK and 20% in the US.”

In other words, “the US has effectively developed a better ladder of pricing.” And as Moramarco admitted, “In the UK, we do have price compression – too much wine is sold at too narrow a price brand.” The solution, he said, will come by both developing “widely recognised premium brands” and “moving away from the half price bogof mentality”.

Surplus concerns
To deal with the latter issue first, Moramarco told the audience, “The big driver of half price deals right now is the Australian surplus, but that surplus will go away.” However, he asked, “How will we become efficient enough so we don’t replicate the same demon when the next surplus comes up somewhere else in world?”

As for brands, Moramarco stressed that both the on-trade and retail specialists need to be convinced that “brands are not bad, and big is not ugly.”

He also made the point that when it comes to multiple retailers, “there are about twice as many grocery stores per 100,000 people in the US than the UK. What that means is that the UK grocers are much heavier traffic builders. You get much more pull off those shelves.

“And all of them – but Tesco specifically – are partly grocers, but they are actually more logistics operations. Think about what they need to do to get product in that store, get it through to the consumer and get it replenished. They don’t have the flexibility that US retailers do to have as many price promotions or to have as many cross merchandising displays because of the logistics of maintaining that store.

“So I look at our responsibility as a supplier and I need to convince Dan and the other multiple retailers, ‘here is a reason why you need to have maybe more promotions at higher price points’.” He continued, arguing this may complicate logistics but it “will help drive business… and we have to help them figure out how they are going to increase their top line, sell more, and how to help them increase margins. The only way we are going to break out of the price compression right now is to start thinking about this as a business and start to break those norms that you maximise your profit at £3.99 on a gondola end.

“There are other ways to do it, across all channels of the trade.”

Flat market
For Jago, the UK wine retail business is proving challenging, not only because of oversupply, but also because the market is flattening. “I was shown a graph by Stewart Blunt of ACNielsen which shows a nice steady incline between 2003 and 2005. But from January 1st 2006 it’s a flat line,” he said. “When I look at my business and I realise that Tesco is still growing MAT to the middle of September by just under 12%, we have some responsibility for maintaining where the wine market is.”

As for oversupply, “We are in a position now where a lot of wine producers have found themselves with a lot more wine than they should have, possibly fewer customers than they thought they were going to have, certainly narrowing routes to market than they ever imagined… and I wonder how many wine producers write budgets saying how much less they are going to sell next year to bring themselves back into equilibrium.

“We have more wine, more deals, more requests for our time. But we have fewer non-promotional opportunities than ever. I cannot remember the last time someone came to our business and said ‘I’ve got a really good idea: it doesn’t involve promoting wine, but we’d like to use that money to try and create some form of impact for this product with customers.’”

He continued, “There is no doubt there is price compression, but it has been generated in the most part by overenthusiastic growers, overenthusiastic producers, overenthusiastic distributors, and companies trying to get rid of the surplus they have created themselves. Because the one thing that’s sure is that unless you have an unlimited budget for building stainless steel you will end up having to empty the tanks before the next harvest comes along.” According to Jago one producer even came to Tesco and said, “We won’t charge you for the wine as long as you can pay for the logistics.”

Discount dilemma
As for discounting, Jago said: “Customers like promotions – there’s no doubt about it. I will point out that less than 10% of the wine market in the UK doesn’t do discounts or deep cut promotions.” Having said that, he added, “I think we have to limit the amount of promotional activity in our business for two reasons. One is that as a business we find it very hard to keep our aisles clear… and we have to make it easy for customers to shop. One of the reasons for trying to limit promotions we do to under 40 a period is because of just this.”

But what about ending price compression? “We are faced with a huge challenge that is going to encourage us to decompress, and that is the anti-alcohol lobby. We, as an industry, have to be ahead of ourselves in terms of understanding how we communicate with customers what responsibility with alcohol really means.” Such communication must also include “showing customers that there is a reason and rationale why they should pay more for a product rather than just asking them to pay more.”

Drawing a comparison with the motoring industry he said, “Those who can afford to buy BMWs rather than Fords do so because we have been told it is a better product, it is worth paying more for, but ultimately it is still a tin box with four wheels and an engine – it does the same job.”

Why pay more?
“Same way with wine. Someone has told us that Cloudy Bay at £15 is worth paying more for than Marqués de Leon, which is our house Spanish wine at £2.11. That’s branding, that’s effective, and this is the opportunity that the industry has got to recognise. “But what I would ask is: bring us innovation, don’t bring us more deals…. When suppliers arrive through the door in Cheshunt [Tesco’s headquarters] and sit down at the table, 95% of them turn round and say ‘I’ve got a deal for you’.

They are actually saying ‘I’ve got a problem with the amount of product I’ve got and therefore I would like to sell it through your business.’ They look at where they can get rid of large volumes of product as quickly as possible and they come knocking on Tesco’s door and we don’t turn them all down.”

Jago added that he was “disappointed” with the wine industry having looked at beer and spirits suppliers. Wine producers, he said, “are relying on relatively out-dated models. Large wine groups should be using the same tools that large companies use which is innovation, R&D, product development, customer research, and very few really do this in depth to be able to come to a retailer and say here is an opportunity to sell a product at a higher price.”

He also asked the audience, “When you target your sales people, do you target them on volume or value?”

Returning to the issue of why consumers should pay more for a product he said, “You must find a way of teaching customers that it is worth paying more for a quality product, that in most cases is created with passion, energy, real commitment by artisans. “Tesco doesn’t get offered that much quality product in a way that we will be convinced that our customers will understand and want to buy it.”

Lastly, “Be professional in your dealings. When you bring us a product, have a well thought through argument about how it will help decompress the wine industry.”

© db December 2006 / Patrick Schmitt