Margins under pressure?

05 March, 2010

With retail price inflation just above 3%, a 6% uplift in wine sales is evidence of a sector that’s in better health than many had dared to believe.

A 3% increase in volumes is also welcome, even if suppliers will perhaps point out that off-trade gains are balanced, to an extent, by on-trade losses.

Probe a little deeper and it will also be revealed that the off-trade landscape is a little bumpier than the figures might imply. The real growth has been taking place in the multiple grocery sector, where value growth reached 8% and volumes were up 4%.

The impulse sector (convenience and forecourt stores) was off the pace, and as for multiple specialists: First Quench’s collapse turned this area of the trade into a disaster zone. The 20% fall is perhaps a figure for trade historians to circle in red ink, but in reality it tells us little about the success, and prospects, for businesses like Oddbins and Majestic. Indeed, both could be expected ultimately to benefit from FQR’s demise.

Over the period we’re measuring, the average price for a bottle of wine in the take-home market has increased from £4.20 to £4.32. Looking at the charts fairly simplistically, it could be argued that the brands which have stayed closest to this market average – and especially those which have kept below it – have been the real winners this year.

Blossom Hill, a brand so resonant with consumers that even high-end independents tolerate it, extends its lead at the top of the table following 12 months in which its average price actually fell, from £4.35 to £4.29. First Cape virtually doubled its volumes with a price decrease of its own (see box), a tactic emulated by Foster’s EMEA with Lindemans (down from £4.43 to £4.11) and Constellation Brands’ Kumala (£4.05 a year ago, now £3.95?).

In all these cases, volume growth outpaced the value increase, leading to the inevitable conclusion that brand owners were making less money. For some, this is a price worth paying: there’s a recession on?, consumers are demanding value for money, and supermarkets have pledged to deliver it. Brand owners may be happy to stomach a short-term dip in margins if it means keeping consumers onside for when the good times return.

But not all brand owners see things quite like that. They would argue that exchange rates, duty increases and rising production costs have to be passed on in the form of retail prices, even if they suffer a temporary dent in sales.

The biggest decline among the major brands this year comes from Gallo, whose sales fell by 25%. Why should this have happened? A 26p increase in its average price, to £4.56, must have had an impact. – as well as a cut in the number of SKUs after a restructure.

Jacob’s Creek is another high-profile brand witnessing a sales decline. Its average price rose 25p to £5.15, making it the most expensive of the top 10 brands. Many in the trade will applaud its resolute response to cost pressures, but the data illustrates what can befall brand owners who hold the line on pricing.

Neil Barker, Foster’s commercial director for the UK and Ireland, believes promotions like three-for-£10 are endangered by spiralling costs. “The marketplace remains exceptionally competitive and there will be significant pressure to run deep deals,” he says.

“With cost pressures growing, most notably from the weakness of sterling, any further duty rises will diminish an already very small margin at this level, thus making the business very marginal for everyone in the industry.

“This level of deal can only be sustainable in the short term.”




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