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There is an attractive simplicity to pure capitalism. Mr A produces or buys a product, adds a margin and offers it to the market. The challenge for Mr A’s competitors lies in reducing their costs and margins, or changing the product. For much of Europe’s traditional wine business, this model still applies, but it is becoming increasingly sidelined by more complex systems that are driven by distribution. The first product to break away was Champagne, which is now part of the luxury goods market, where prices are based on what the market will bear. More recently, a limited but growing number of Châteaux from Bordeaux have followed a similar path, along with cult wines from Tuscany, Priorat and California. All markets are price sensitive, but there is no question that mature ones like Germany and the UK, where large supermarket multiples hold enormous sway, are under greater price pressure than newer ones like Japan or China. In Germany, it is the sheer force of the discounters that is responsible for the price compression. In the UK it’s the buy-one-get one-free mentality that, coupled with high duty rates, complicates life. Crucially, these trends have led to a world in which conversations often begin with the retail price and work backwards. Both producers and importers often have formulae ready on their spreadsheets to speed up negotiations. Traditional producers, struggling to deal with costs and volumes that vary from vintage to vintage may have difficulties with this trend – especially when retail prices and margins tend to remain fixed. As one retailer wryly noted, the British consumer only has one loyalty when it comes to wine – and that is to the £3.99 price point. Dealing with volume wine as though it were soup can be highly profitable for New World brand owners and more dynamic European companies such as Grands Chais de France, set up to trade in this way. But it’s much more difficult for smaller producers to survive.
In the UK, for example, consumers could choose between four Riojas that originally carried the same FOB price tag of, say, €3. Rioja A was imported by a traditional wholesaler who has taken the risk of paying for its shipment and warehousing without any sale guarantee. For this, he aims to take a margin of say 15-20%. If he sells this directly wine to a specialist merchant, that company will take a further 35-40% (including 17.5% VAT). After shipping, warehousing and duties, the retail price is £6.99.
Rioja B was imported by an exclusive agent that not only distributes the wine but is involved in brand-building. For these efforts, it might take 20%. Among its customers will be a regional wholesaler who will take another 20%, before selling the wine to a retailer whose margin might be between 30-40%, resulting in a shelf price of at least £7.99. Rioja C might have come into the UK via a wholesaler who deals exclusively with big retailers. These chains prefer to do business with a UK-based intermediary rather than with |
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the producer, but these brokers work on a margin of 4% to 5%. This low figure is explained by the fact that, unlike the wholesaler of Rioja A, the intermediary takes no risk. He does not order the wine until he gets a sale from the retailer – who will then take a margin of 27-35%. In the case of a higher volume wine, the margins will often have to be calculated on two prices – one for the almost eternal on-promotion at £3.99 during which the producer could charge on €1.45 and one for the short off-promotion period at £5.99. As importer Charles Hawkins says, “calculating the average price and likely volumes between these periods is one of the trickiest tasks for an importer. And the job isn’t made easier by having to factor in the costs of contributions to the retailer’s promotional campaigns, inclusion in his printed material and so on."
Rioja D might have been imported directly from its producer by a mail order specialist such as the giant Direct Wines, which aims to make an average margin of just over 50% on all wines, apart from mixed cases offered at low prices as an inducement to consumers to sign up for monthly deliveries. Despite its name, Direct Wines does not exclusively buy directly, so its 50% may be added to an importer’s 5%, resulting in a delivered price of £5.49.
The buyer’s view
As Julian Jenkins, owner of specialist Flagship wines, says, “For me to compete with the bigger retailers, I have to do a certain amount of direct buying myself”. The only problem is that such merchants tend to stock wide ranges of wines and the total number of cases of any specific one is likely to be limited. At a rough guess, there are probably a maximum of 150-200 high quality merchants that perform a similar role to Flagship in the UK, which is not good news for regions where 300 to 400 producers all make wine under the same regional designation.
Pricing at work in Germany
Consolidation has largely left Germany in the hands of a small number of large chains. Branded wines are much less powerful than in the UK, but high volume, low-price examples still crowd out the smaller producer. Heiner Lobenberg from Gute Weine in Bremen is one of the wine merchants who have profited from the disparities. “I’m often looking for estates that want to sell only five or ten thousand bottles in Germany. I buy and collect directly, using a simple formula, ex cellar times two,” he says. “In that way, a wine that I buy for €5 will be sold to the consumer by mail order for €9.95 including all transport costs, warehousing and 19% value added tax. In promotion I might even go down to €8.95. Of course, I can’t do that with a bottle that costs only €2 ex cellars. On the other hand, more expensive wines may appear even cheaper in my catalogues.
This model, however, is an exception to the general rule. Elsewhere, the three tier |
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system prevails, with all of the mark-ups this implies. As managing director Thomas Gerhard of Ardau, a Spanish specialist in Troisdorf near Bonn. explains, “with all the costs of transport, warehousing and shipping to the retailer included, a bottle of wine that sold for only €5 ex cellars hits the shelf at €14.95 if all of the intermediaries want to maximize their profit. In promotion, that might fall to €13.50 or even €12.95. If, however, I sell the same wine to a supermarket, which transports the goods directly from the producer, squeezes my margin and sells with a smaller profit, the same wine may cost only €8.95. That is the way the market works.” The only solution for the brand owner and importer is to place different labels in both channels, even if the content is the same. The problem is that supermarkets want the wines sold in restaurants, but sommeliers do not want the wines sold in supermarkets.
For larger producers, there are three options. They can try to find an importer, can retain an export manager who speaks German and knows the market,though such people are few and far between, or they can employ a broker who, on commission, will bypass the classical importers and go directly to the wholesalers, retailers and restaurant. As broker margins are lower, warehousing by-passed and shipping limited to one stretch, retail prices can be more aggressive. The validity of this system is dependent on the quality of the broker. The worst solution, employed by far too many estates, is to sell to all comers, yielding little long term benefit to either buyer, seller or brand. The consequences for producers are clear. Based on size and business model, they must decide where and how to sell. Supermarkets bring volume, but squeeze margins and potentially damage brands. Distribution through fine wine stores may add lustre to the brand, but at a higher shelf price and with no guarantee of volume. In short, there are few routes to market assured of success.
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