So Asda, how low can you go?

25 July, 2008

When the billionaire trader George Soros calls the current

downturn the "most serious financial crisis of our lifetimes", you know that the British economy is in deep doo-doo. The FTSE 100 is in freefall, unemployment is rising, the housing market is collapsing and inflation is at its highest

in 11 years. Cheerful times ...

Where does wine fit into this? Against a background of escalating food prices - eggs, bread and milk have gone up by 37.1%, 16.8% and 19.4%, respectively, over the past year - you might expect wine to follow suit. But you'd be wrong. According to the latest Nielsen data, the

price of a bottle of wine has risen from £4.12 to £4.24, but when you factor in a 14p duty increase, all of it trousered by the government, and the current rate of inflation, what we are looking at is falling prices in real terms. This, remember, at a time when production and transport costs are higher than ever, and the pound has lost ground against the euro.

Wine isn't the only thing that is paddling against the economic tide - now is a good time to buy electrical appliances, women's clothes and CDs, apparently - but this doesn't make what is happening any

less depressing.

Who is responsible for falling prices? There is no one single culprit, but I'd point the finger at several retailers. The discounters (Aldi, Netto and Lidl) are depressing the bottom end of the market.

Asda has responded to the discounters with its three-for-£10 offers and Tesco has

followed suit by introducing a raft of value wines. These retailers are not alone - promotional activity in the multiples has risen by 60% since the Budget - but they represent the core of the problem.

They don't see it that way, of course. Phillipa Carr at Asda says : "We are giving our customers what they want and it's working for us, too. Three-for-£10 keeps things simple." At Tesco, meanwhile, Dan Jago agrees that "more customers are saying that they want more entry-level wines. It would be madness to tell people that they should be spending more on wine. Wine is seen by many as an affordable luxury, but we have to keep it that way, rather than driving them into lower-cost alcohol."

There's no denying that people are looking for ways to save money at the moment. Places like Aldi used to be shunned by the British middle classes, but now their car parks are full of posh cars, just as they are in Germany. In austerity Britain, people are happy to talk about trading down. Indeed, buying

on the cheap seems to have replaced house prices as the prime subject of well-heeled dinner party conversation.

But does good wine have to be this cheap to get people to drink it? I believe not. In the current climate, the on-trade is suffering far worse than the off, as people cut back on eating out. In such circumstances, they are more, rather than less, likely to spend money on a decent bottle of wine. This may explain why the market appears to be polarising, with significant growth above £5 as well as between £3 and £3.50. Not everyone wants, or can afford, to spend more than £5, but this sector now represents more than 14% of sales, according to Nielsen data. The £4 to £4.50 and £4.50 to £5 categories are expanding, too.

Rather than consumers, the primary beneficiaries of all this promotional activity are the retailers, who are using wine to drive footfall into their stores. Asda wouldn't tell me what

its profit margins were on the brands it sell at £3.33 a bottle, but they must be in single digits or lower. What I can confirm is that, according to the majority of suppliers I talked to, the decision to sell their wines at such low (and possibly unprofitable) levels is the retailer's and the retailer's alone.

What Asda is doing has enabled it to buy market share, but at a cost. Its average bottle price (£3.71) still lags way behind those of Waitrose (£5.39), Marks & Spencer (£5.27), Sainsbury's (£4.24) and Tesco (£4.01). Of all the multiple grocers, Asda has the lowest price, below even Somerfield (£3.79) and Morrisons (£3.93), neither of which appeal to punters with cash to burn. It has deliberately and cynically used wine in an attempt to boost its overall business.

The problem with this tactic is that it is not sustainable. It denies brand owners the opportunity to invest in the quality of what they produce and ultimately it short changes the consumer.

I've said this before, but it's worth repeating: if retailers keep forcing the supply chain to cut costs, they will damage the long-term health of the wine industry. Agents and importers will go out of business, while producers will bottle inferior wine or be forced to cheat. Another major wine scandal gets closer by the month.

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Is blended Scotch overshadowed by single malt in retailers?

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