‘The Global Wine Shortage’ and What the UK Pays

3 December 2013 by Gavin

 Recently, I presented at a global wine conference in London, called Wine Vision. One presentation was on the ‘trials and tribulations of selling direct’, the other on digital communications, as part of a panel.

There were a few things to be gleaned from the event, other than the obvious networking thing (and, my word, there are some brilliant people in the wine trade):
One, if you want to fill a room, talk about how digital and social media can work for business. Two, that the US and China are the growing markets for wine.
Which brings me onto the news story about the global wine shortage. We’ve had numerous messages from friends who are concerned that wine is about to run out. Don’t worry, it isn’t, but there are some interesting points to come out of the detailed report by Morgan Stanley Research.
The report made the mainstream news because of some fairly startling observations about a ’global shortfall’. Here’s the executive summary:
                         ‘Global wine production peaked in 2004 and continues to decline. In 2012, production declined to its lowest level in 40+ years. Global consumption inflected in 2010 and continued growing in 2011 and 2012.’
                         ‘Global under-supply is at its deepest level in more than 40 years. Data suggests there may be insufficient supply to meet demand in coming years, as current vintages are released.’
                         ‘In the past couple of years, production declines have continued in France, Spain and Italy and new world production has peaked.’
                         ‘The French remain the largest consumers of wine, with consumption maintaining a positive trend since 2010, following decades of decline. The US is now a very close second.’
                         ‘The US and China are the main drivers of consumption growth globally.’
My experience of late, both here in Bordeaux and at the event in London, certainly supports that last point. (China came from nowhere to become the largest export market for Bordeaux in only five years.)
The price the UK pays for wine
What is relevant to UK consumers, and quite striking, is just how cheap wine is – or rather, how little the UK pays for it.
Average cost price per bottle
An awful lot of wine costs less than £1 at source. (Don’t forget, the average price of a bottle in the UK is just over £5, which includes £2.84 in tax. UK duty is a fixed £2 per bottle and VAT is 20%.)
Looking at the high figures for France, I should add that the average price of French wine is skewed by investments in top Bordeaux and beyond, much of which is stored in the UK under Bond before being sold on to the Far East. British wine merchants are smart traders.
UK imports by wine-producing country, by volume
Primary sources of imports are all the major producers. A strong A$ has seen Australia surrender the number one position by volume, having been overtaken by Italy.’
UK imports by wine-producing country, by value
‘The US, Chile and particularly NZ have all experienced strong growth in exports to the UK, both in volume and value.
 UK wine consumption 2000-2013
The UK is the second largest importer of wine in the world by volume, although a weakened economy has seen modest declines in consumption in recent years.’
(A weaker pound since 2007 and a 50% increase in duty in the last 5 years has also played a part.)
The UK pays less
When you look at the individual exporters and the price they sell to the UK at, the UK pays comparatively little – Britain is, after all, a highly competitive, highly taxed marketplace for wine. Here are just some exporters’ figures from the report.
Australian wine export prices (page 25)
The UK and Germany pay the least for Australian wine. Connected with this is the remarkable shift from bottles exported to the UK, to shipping in bulk (page 26).
The red ring shows that ‘Asian countries make up the top 6 of average price for exports, with China showing a considerable step-up in 2012.’
New Zealand wine prices (page 71)
‘New Zealand relies on three key export markets: Australia, The UK and The US.’
New Zealand has an enviable reputation for achieving higher prices than other countries – double that of Australia, for example. The UK pays much less than anyone else, it seems. But there’s
‘.. an undersupply situation for the first time in more than 15 years.’
US wine prices (page 42)
‘The UK is by far the largest volume market for the US, but at lower price points.’
There’s a huge gap between what they sell in Napa, to what they sell in Asda.
 On the face of it, British supermarket and trade buyers certainly drive a hard bargain. With the average UK retail price being just over £5, they have to.
As a follow up to all this, here are a few thoughts about the likely impact on UK consumers.
Supply and demand
A balance between global supply and demand would be welcome. The biggest threat to many good wine growers’ financial stability is that there’s too much wine on the market.
Over or under supply has to be viewed region-by-region. In Bordeaux, we’re about to see the impact of a small, generally inferior crop in 2013. In the bulk wine market – we’re talking a euro a litre – stocks of 2011 and 2012 (the best of the three) will be swallowed up.
Elsewhere, as Dan Jago, Director of wines, beers and spirits at Tesco, puts it, ‘there’s a lot of wine around that doesn’t have a home to go to.’
The UK and the rise of ‘Own label’
It’s fair to say, on this evidence, that UK supermarkets and major retailers are expert at extracting the best price – after all, the UK is a hugely competitive market.
The average UK retail price of just over £5 contains mostly tax (£2.84). At a fixed £2 per bottle duty, plus 20% VAT on the wine and the duty, a £6 bottle contains £3 of tax. That leaves £3 for the wine, packaging, shipping, distribution and margins.
I think there’ll be an even stronger move towards ‘own label’ brands in the UK, away from the unsustainable fakery of ‘half-price’ offers on brands.
The UK sells more ‘own label’ brands than elsewhere: 50% of retail brands sold in the UK are ‘own label’, compared to just 5% in the US.
Tesco’s Finest wine range has risen to 139 lines, Marks & Spencer’s wines are almost all ‘own label’, the inexpensive Aldi Exquisite range has been quite well received, and so on. As ‘own label’ wines are attractively priced and discounted less, that has to be welcome. Consumers know where they stand – brand wise, price wise, quality wise.
‘Own label’ brands are used not just by supermarkets and retailers but also by agents and importers for the UK restaurant, bar and pub trade.
Champagne and ‘fine wine’ apart, you’re increasingly unlikely to see the same label from a supermarket or major online retailer in a bar or restaurant. Unlike in Spain, for example, where you know where you are with brands that span both on and off-premise.
So don’t feel embarrassed if you don’t recognise the wines labels on a restaurant or pub wine list. You’re not supposed to, and even wine experts can be clueless on this one.
Smaller producers
There is a huge diversity of wine available in the UK. The relative freedom to import and sell wine allows for a surprisingly healthy independent sector, despite the high rate of duty on wine. (The US, by comparison, has a mandatory three-tier system – importer/distributor/retailer – that foreign producers have to sell through.)
It’s probably unfair to expect many independent merchants to compete with supermarkets at lower price points. Even an £8 bottle – which most Brits still think of as a superior drop – means that the cost price of the bottle to a retailer or merchant is around £1.70 to £2.20, and bottling alone accounts for about 60p. It’s hard to make magic in a glass for that.
Richer pickings elsewhere?
Producers of all shapes and sizes are increasingly frustrated with the deal and discount-obsessed UK market. There’s nothing new there but they do have plumper fish to go for now in the Far East and the US.
China came from nowhere in 2007 to become the largest export market for Bordeaux wines in just 5 years – although choosing the right partners to work with is essential. Other wine regions and countries are now joining the party.
The US offers a tremendous opportunity, even if the distribution system from State to State takes a bit of figuring out. It’s no surprise that smart home delivery specialists from the UK, like Laithwaites and Naked Wines, are on the case.
Simon McMurtrie, CEO of Direct Wines (Laithwaites, Averys and The Sunday Times Wine Club), hit the nail on the head: ‘When we sell exactly the same wines in the US for more money, customers say what good value they are. In the UK, people say they’re expensive.’
Social media, especially Twitter, is bringing producers closer together, folks, but that’s another story…