With margins squeezed to death, can suppliers increase their take?

27 March, 2009

In the first of a new series, industry experts Angela Mount and Mike Paul combine their

experience of selling and supplying wine to debate the big issues in drinks retailin


Within the context of all the other issues facing our industry - health, social and environmental - the subject which rears its head higher

than any other is the current pressure on margins.

Sadly, w e have

seen too many redundancies and

business closures

, as suppliers batten down the hatches, retrench

and avoid selling at a loss.

The classic no-win scenario of suppliers needing to increase prices, while retailers are interpreting the mood of

their customers, by focusing on lower retails, value goods, and a refusal (in many cases) to accept price increases, is reaching breaking point.

One of my

criticisms is that as an industry, we are still not looking for long -term planning strategies, as we bemoan the current apocalyptic state of the market.

Suppliers also don't make the effort to understand their customers sufficiently - not the consumer, but their customers:

multiples, specialists and independents.

The supermarkets, the "big boys", invariably take the blame and become the hated customers who control

more than 70% of all off-trade wine spend,

while reaching out to the majority of the wine-drinking mainstream.

What is frequently forgotten by suppliers, whose entire focus is wine, is that wine in supermarkets is just one sector of a multi-billion-pound retail set-up, and that the corporate strategies set apply to wine also.

Gone are the days of the maverick wine buyer who could get away with breaking the rules

and working around them. Wine teams now work to a process

and one of the first key performance indicators will be the need to maintain margin. Fact. So if you don't want to play in the big poker game, walk away. Focus your energies on specialists and independents. But here also, as the consumer continues to look for value for money, the focus and energy has to be on the bigger picture and long -term gain.

It's the suppliers and producers who develop long -term trading strategies and investment plans

who are going to be here in a year's time

- as the survival of the fittest gets even tougher. How many suppliers are considering short and mid-term investment

for long -term benefit?

In the end, regardless of the maelstrom of negative issues, the industry will recover , but it will take the combined partnership of retailer, producer and supplier to achieve this.

Realistic approaches to ranging,



encouraging consumers to diversify

are some issues that need to be worked on.

My recommendation is not to point the finger too accusingly at retail, but to focus more positively on developing strategies which will enable key suppliers to develop closer, and ultimately more profitable, trading plans.



As suppliers contemplate the prospect of perhaps two duty increases,



in about 14 months , a weakened sterling, a radical change in

retailer strategy and other issues

affecting profits and cash flow, one can't help feeling that the current business model, particularly of those suppliers selling to the major retailers, has reached crisis levels.

Margins, of course, have been declining for some while now. Arguably the tipping point was the explosion in Australian supply in 2000-2001

that led to the market-leading and value-chasing brands of the 1990s being forced down the volume route.

Oversupply shifted the balance of power even further towards the retailers, leading to a spiralling down of margins and value-added marketing investment.

To illustrate the margin decline this century: in the 1990s the increase in wine's average retail price (£1 per bottle) comfortably covered the duty increase in the period (34p). Since 2000 the duty increase of 41p has matched the price increase.

As a rule, the supplier base has

attempted to compensate for declining margins by driving volume while holding on to distribution at all costs. This approach, to be fair, has served some suppliers well - and only

18 months ago, with the increased focus on trading the consumer up, the model appeared to have been given a new lease of life.

But recent events have exposed its fundamental fragility, and it is difficult to argue with those who say that suppliers who could not even maintain margins in the boom years will find a recession, coupled with increased government pressure, very difficult to handle.

What's the answer? Well, in theory it's brutally simple - to increase profit

either cut

costs, increase


- which implies sacrificing volume

- or improve

the mix. In practice, though, the problem is that in a relatively lean industry, cost reductions are unlikely to take one far enough. And as for price - well, let's face it, the industry mindset appears to be to debate every other possibility to death before getting around to price.

Chasing volume either appears a strategic necessity (if one's parent has a surplus) or a cultural fixation. As the adage goes, the difference to a buyer between a spirits pitch and a wine pitch is that the spirits pitch ends with the deal on the price, while the wine pitch starts with it.

And while I am not for one moment suggesting that increasing prices (or improving the mix) in the current climate is either easy or simply about culture, I am saying that when the dust has settled we will need a way forward that puts adding (real) value an awful lot higher up the agenda.

Bookmark this

Site Search


English wine: a happy harvest for Christmas

All across England and Wales, vineyards are being harvested. Down winding country lanes come armies of welly-wearing conscripts wielding secateurs and buckets, ready to reap the rewards of our vines. Happily they come, their cheeks ruddy with pride. Half an hour later they’re crawling over muddy clods with lacerated hands, drenched in claggy juice and cold sweat, as if ploughing through an endurance race.

Click for more »
Upcoming events


Is blended Scotch overshadowed by single malt in retailers?

  • Yes
  • No
  • Don't know