Thursday, January 06, 2011

Is the UK the wine world's Afghanistan?

A column that appears in the December 2010 edition of Meininger's Wine Business International

The notion of the unwinnable war is far from new. The difference today, since the later days of the Vietnam war and the beginning of hostilities in Iraq and Afghanistan, is that it has become acceptable to talk about unwinnability without automatically being accused of wanting to demoralise the troops. There is a parallel with business. In wars and sporting encounters, it is customary to grit one’s teeth and fight until the bitter end. In the world of making, buying and selling, however, it is acknowledged that, when the numbers cease to add up it is quite proper to sell up or close down. In recent weeks, the biggest example of this kind of acknowledgment has been the decision by Constellation Brands to sell its Australian and UK operations to a Sydney-based private equity group. The sale, and its financial implications are significant. The US giant paid AU$1.85bn for these businesses in 2003; today, it is offloading 80% of its shares in them for a mere AU$290.

With admirable understatement, Rob Sands, Constellation’s chief executive described the sale as “tidying up” its portfolio in the face of "challenging market conditions." It is no coincidence that brands like the Canadian Jackson-Triggs, and Inniskillin, New Zealand’s Nobilo and California’s Robert Mondavi and Ravenswood were not subject to this kind of early spring cleaning. These, of course, are labels with a successful record in the US, while the brands that were sold all depended heavily on the UK.

Constellation is far from alone in feeling disenchanted with the British wine market. The renaming by Foster’s of its historically UK-focused wine business as Treasury Wine Estates and its hiving off have widely been seen as a prelude to a sale. Pernod Ricard also set up a separate fine wine division in 2010, giving rise to rumours that it might sell off Jacob’s Creek and Brancott Estate, the New Zealand brand that was formerly known as Montana. The French firm may indeed be intending to hold onto these brands, but there are certainly questions about how committed it is to the UK market. The renaming of Montana, after all, was driven by the need to make the brand more palatable to US consumers who were unready to buy Sauvignon Blanc they thought came from a sparsely-populated state in the north of their country.

If Pernod Ricard is not pulling out of Britain, it is certainly pulling back from the games UK retailers have asked it to play. Along with the similarly disenchanted Gallo Family Estates, it has made it clear that loss-making discounting is not an activity it wishes to pursue. And if this means losing market share, so be it.

Diageo, the other giant of the wine world, has wisely, consistently and revealingly, declined even to try to sell its premium US wines in Britain. Instead, it has restricted its vinous efforts there to Piat d’Or and Blossom Hill: non-regional products with low production costs.

So, is the simple conclusion that the British wine market, for the moment at least, has become the Afghanistan of the wine world? Is it the market where the battles are too costly and thoughts of capturing hearts and minds now seem to be too ambitious?

Or is there a bigger question? Was Philip Bowman right when, as CEO of Allied Domecq, he openly wondered whether ownership in the wine business was really more appropriate for families and cooperatives than for investors looking for short- and even mid-term returns. The spirits business is far from easy, but it ticks many more boxes for anyone watching quarterly and half-yearly results. Scaleable major brands can be launched and built, and value can be added to them in ways that winemakers can rarely dream of. Just think of Hendricks gin and Grey Goose vodka. Of course many fail - as do many films - but the hits succeed so much more dramatically than any wine. The week that brought news of the Constellation sale also brought an announcement from Brown Forman that it was ready to offload its Californian Fetzer and Bonterra wine businesses. These are not Australian brands retreating from being battered by UK retailers; they’re US brands selling in North America.

I wish the private equity buyers of Hardy’s et al well, but I wonder how much fun they are really going to have with the extravagant Christmas present they have bought themselves.


  1. Every closed transaction has a willing seller and a willing buyer, a balance of fear and greed.

    We understand the "fear", but it would be great if we could have a peek at Champ's (the private equity firm) spreadsheet.

    What assumptions do they have for the wine market for the next five years? For they went into this, I assume, looking for more than 25% return a year....

  2. (Excuse my ignorance...) What is it about the UK market that makes it so bad for all these producers, relative to other countries? Is it that we spend less per bottle as consumers? Or is it the supermarkets' dominance? Or other factors?

    How does the UK wine market differ from, say, that in the US? Or other similar countries with healthier markets? Wondering what it is about the UK that makes it Afghan in this respect...

  3. In my view, the supermarkets carry far too much of the blame. French supermarkets are very dominant - but they sell lots of premium wines in their Foires a Vins and increasingly in their fine wine aisles. UK supermarkets are beginning to do the same - online, to the small segment of the UK market that is prepared to buy them. In brutal terms, the average middle class Brit does not have serious wine aspirations. Especially not when compared to Australia or New Zealand. The US is more complicated, but consider this recent statistic: In the UK only 2.8% of wine sold in the off trade costs over £8. In the US, 22.7% sells for over $12,with 4.8% selling at over $20. In the US, people who can afford it tend to buy better bottles, while some of those who can't still feel tempted to splash out. (Bear in mind that some of those over-£8

  4. Is it not a bit too easy to blame the supermarkets? As Tai-Ran New says: in every transaction there is a buyer and a seller.

    If the British public was interested in buying better quality wines then surely the supermarkets (or someone else) would sell it. You can't expect them to carry a wide range of premium wins that are never carried home by a shopper.


  5. Per & Britt, I agree 100% - as you can see from my response to Tom. The key to understanding supermarkets lies in their name: super markets. If there's a demand - for anything from premium olive oil to out-of-season fruit - and a margin to be made, they'll supply it. It's not their role to create demand. That's the responsibility of the original producer/brand-owner.

  6. "Excuse my ignorance...) What is it about the UK market that makes it so bad for all these producers, relative to other countries?"


  7. Not sure what it is about the UK market. Perhaps it is a question of concentration in a few big players?

    there are some tendencies that are similar to what one can see on the Swedish monopoly market.

    the UK supermarkets are not monopolies of course, but they are quite dominant and not very many, is that not so?


  8. CJ & PK. The simple problem is that the UK, like Holland, has a history of liking bargains. While an American might tell his guests that the wine he's pouring is a Parker 90-point, the brit happily says that his bottle was picked up at half price at the local supermarket. Showing off is a social crime, in any case, so opening an overtly great bottle can actually be counter-productive. In fact, buying premium branded products is relatively recent here, compared to, say, the US. This is still a country where the Marks & Spencer chain sells its own-label underwear to rich women and quite possibly its suits to their husbands.Premium wine is not a generally aspirational product (though, obviously, for some people, it is).