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    Uk market for portuguese wines Uk market for portuguese wines Document Transcript

    • The UK Market for Portuguese Table Wines: A Structural Analysis 5 The UK Market for Portuguese Table Wines: A Structural Analysis Paulo Ramos andKeith E. Thompson, Silsoe College, Cranfield University Introduction Wine production is an important component of the Portuguese economy, it accounted for 43% ofall agricultural exports in 1994. Yetthere are signs that the Portuguese wine industry is not adapting itself to international trends in the wine trade. In the important UK market Portuguese table wines dropped from sixth position in 1987 to tenth in 1994. Production is in sharp decline, having fallen by 43% in the five years to 1994 (Table 1). Table 1: Portuguese Wine Production (000 hl) Year 1990 1991 1992 1993 1994 Table 10.969 9.635 7.580 4.566 6.362 % 84 85 85 83 84 Port 1.062 811 557 595 759 % 8 7 6 10 10 Others 1.097 834 732 364 366 % 8 7 8 7 5 Total 13.128 11.296 8.869 5.525 7.502 % 100 100 100 100 100 Totals subject to rounding error. (Source IVV, 1995) Table 2: Portuguese wine exports by volume and value, 1994 Wine Products VQPRD/DOC V. de Mesa/regional Sparkling Wines Port + Madeira Others Volume % 13 40 1 41 4 Value % 9 5 1 71 4 (Source: AdaptedfromIVV, 1995)
    • The UK Market for Portuguese Table Wines: A Structural Analysis 6 Table wines accounted for 53% of wine exports by volume, but only 14% by value. The value of table wine exports is weakened by the Vin de Mesa and Regional wines exported in bulk to markets such as Angola (Tables 2 and 3). In 1990 Angola (a former Portuguese colony) was the biggest importer of Portuguese wine. In volume terms it still is, but the value of Angolan imports has fallen dramatically until by 1994 the UK had the biggest value share ofPortuguesewine exports at 11% comparedwith Angola's 9% (Table 3). Table 3: Volume and value shares ofthe top five Portuguese table wine export markets 1990- 1994 Angola France UK Germany USA Total 1990 Share Vol. % 27 4.5 8.0 8.0 7.9 55 value % 20 4.5 9.6 9.2 8.2 52 1991 Share Vol. % 26 5.2 6.9 10 6.1 54 value % 21 4.7 8.9 8.9 8.3 52 1992 Share Vol. % 32 24 4.4 3.9 2.9 67 value % 28 12 8.3 6.7 6.1 61 1993 Share Vol. % 23 25 5.4 4.8 4.4 63 value % 13 11 8.2 9.3 9.5 51 1994 Share Vol. % 26 9 8.3 5.5 4.6 53 value % 9 8 11 8.4 4.6 43 1990-94 Avge. Share Vol. % 28 15 6.2 6.1 4.8 60 value % 19 8.2 9.2 8.4 7.6 52 (Source: AdaptedfromIVV, 1995) It is notable that the biggest markets in volume are those with lower prices per litre, reflecting imports based more on price and volume than on quality (Table 4). Competition in the UK Wine Market Portuguese wine has been imported into England sincethe 12th century, and the commercial and political relationships built onthistrade were confirmed in 1386 by the Treaty of Windsor, the basis for Portugal's standing as Britain's oldest ally. Nowadays the UK market is clearly of significance for the Portuguese wine industry in volume and value terms, and most Portu- guese exporters believe that it is an important market to be in for the long term. It is certainly growing; the UK market for still light wine increased by 32% between 1987 and 1994 and, as very little wine is produced in the UK,
    • The UK Market for Portuguese Table Wines: A Structural Analysis 7 Table 4: Price per litre in the top five Portuguese table wine markets 1990-1994 £1=245 USA UK Germany Angola France 1990 $escper litre 230 270 255 168 226 1991 $escper litre 288 275 184 182 190 1992 $escper litre 295 266 236 122 72 1993 $escper litre 301 213 269 76 61 1994 $escper litre 330 296 342 84 219 5 years average $escper litre 284 267 246 125 97 $esc= Portuguese escudos (Source: Adapted from IVV, 1995) imports are needed to satisfy the continuing growth in demand. The market is still dominated by the traditional European wine producing countries of France, Germany, Italy and Spain, but their position is threatened by the success of emergent competitors such as Australia, Bulgaria and USA. Against the 32% in market growth between 1987 to 1994, the market leader, France, was only able to increase volume exports to the UK by 22%, while Australian exports to the UK went up by 968%. Unfortunately, in the same period Portuguese wine exports to the UK decreased by 10%, and Portugal was overtaken by Australia, Bulgaria, South Africa, the USA and Hungary in the UK market (Table 5). This is unfortunate, as the UK is an important international market for wine, which the Portuguese cannot afford to ignore. A Strategic Evaluation of Portuguese Wine in the UK Market Something is clearly going wrong for the Portuguese, but what? In the following section an analysis ofthe Portuguese wine industry in the context of the UK wine market is made. The analysis is based on Michael Porter's (1980) 'five forces' model, a framework for analysing the forces shaping a competitive environment. The information used in the analysis was gathered from secondary sources, and from interviews conducted with Portuguese wine exporters and UK buyers during the summer of 1996. Porter's Model According to Porter, five forces determine the competitive environment of an industry:
    • The UK Market for Portuguese Table Wines: A Structural Analysis 8 Table 5: UK still light wine imports by country of origin 1987-1994 (000 hl) France Germany Italy Spain Australia Bulgaria South Africa USA Hungary Portugal Chile New Zealand Yugoslavia Others Total 1987 2.038 1.441 497 281 44 88 17 33 29 93 2 6 188 47 4.804 1988 2.104 1.486 493 242 64 150 19 34 17 77 6 11 148 60 4.914 1989 2.198 1.473 496 215 61 142 12 43 25 64 17 10 127 86 4.962 1990 2.174 1.471 517 193 85 184 17 60 46 78 22 17 122 75 5.061 1991 2.140 1.409 504 234 155 187 27 83 54 75 38 25 116 72 5.057 1992 2.140 1.432 544 278 281 212 52 133 64 93 44 43 94 85 5.495 1993 2.025 1.201 553 293 425 289 88 110 82 81 45 52 68 82 5.394 1994 2.492 1.214 663 506 470 269 170 137 105 84 60 47 39 102 6.358 (Source: Foreign Trade Statistics, Customs & Excise, NTC). 1. The threat of new entrants, 2. Bargaining power ofbuyers, 3. Bargaining power of suppliers, 4. The threat of substitutes, 5. Rivalry among the existing competitors. The combined power ofthesefiveforces has a decisive effect on the success of an organisation. They influence prices, costs and required investment of the competitors in an industry (Porter, 1985). 1. The threat of new entrants 'New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources' (Porter, 1980). The UK market has seen a large number ofnew entrants in the last decade. These are mainlythe new world countries such as Australia, USA, South Africa and Chile, but there are also new entrants from Eastern Europe, especially Bulgaria, Hungary and former Yugoslavia. Despite intense competition, concentra- tion of retail power and high taxation, the threat of new entrants remains high with countries like Moldova, Mexico, Brazil, Canada and Uruguay all trying to gain access to the UK market.
    • The UK Market for Portuguese Table Wines: A Structural Analysis 9 • Economies of Scale Scale economies are a key factor in the UK market. Due to the concentration of retail power, high volumes are expected in order to enter the market and generate the revenue needed for promotion and marketing research. Forthe Portuguese fragmentation ofwineproduction is amajor obstacle to acquiring the necessary economies of scale. Although the co-operatives group a large number of producers together, they do not use their power to achieve economies of scale. There is a proliferation of small brands. Many estate bottlers striving to succeed in the UK are hampered by their low volumeand consequent lack ofpromotional expenditure. Although anumber ofbulk suppliers are branding theirproducts, a lack ofsustained promotional support compromises their future. • Differentiation Differentiation can be defined as the perception which the consumer has of the degree of uniqueness of a product related to its competitors. In the UK market some wine producing countries have a higher level of product differentiation than others (e.g. France, Australia and USA (California)). Theircountry identityalsoworks as a brand identity, making itmore difficult for other countries to compete in their segment. Portuguese wines have a strong potential for competitive advantage based on differentiation of local grape varieties. Until now it has not been possible to turn this differential advantage into competitive advantage because of the UK consumers' rela- tively low awareness ofgrape varieties. However, as wine drinking becomes more widespread in Britain, this may be changing. • Capital requirements of market entry Apart from the costs of shipping and distribution entering and remaining in the UKmarketrequires two major costs, product development and branding. The perception of value of a wine in the UK may differ markedly from that in the home market. Portuguese producers show little appreciation of the consequent need to adapt the product to the market and have so far failed to make the necessary investment in marketresearch and productdevelopment. So far, research and developmenthas concentrated onwine making and there have been technological developments, even though communication be- tween the different research institutes and industry remains poor. There has been a lack ofwill by the Portuguese wine industry to invest in building and sustaining strong brands. The only strong Portuguese brand in table wine is Mateus Rose. Other emerging brands (like Leziria forawhile the best selling Portuguese brand in the UK) were spoiled either by supply problems, or by lack of effective and continuous promotional support. There
    • The UK Market for Portuguese Table Wines: A Structural Analysis 10 is a significant lack ofmarketing knowledge in the Portuguese wine indus- try, and little apparent awareness of the need to invest in acquiring it. • Access to distribution channels The distribution ofwine in the UK has become concentrated in the hands of a few large businesses, and the control which they exercise over distribution channels is of critical importance to wine producers. There are specialist wine distributors and direct marketing companies, but they only give access to a small proportion of the market. Supermarkets provide direct access to the market, but they are extremely powerful and demanding buyers (see (2) Bargaining power of buyers, below). • Absolute cost advantage Some countries have a significant cost advantage due to their production structure. Using technology, mechanisation and larger vineyards they can produce quality wines at very low prices. Portugal has some difficulty in competing on cost. The small size and topographic conditions ofPortuguese vineyards makes mechanisation extremely difficult, and the low cost of manpower which has been the basis for cost advantage has been eroded by wage increases. • Legislation and government action High taxes on wine in the UK aggravate consumerprices and make consum- ers more price sensitive. Within the trade it is expected that taxes will be reduced soon because cross border shopping via cross channel ferries and the channel tunnel are seriously eroding the amount of revenue earned by taxation on alcoholic drinks. 2. Bargaining power of buyers Buyers and distribution channels are concentrated in supermarkets and specialist off-licences, which control the largest share of the market. This concentration of buying power enables buyers to push down prices and squeeze suppliers' margins. Buyers frequently source directly in wine producing countries. This is often seen as a convenient arrangement by the producers with little knowl- edge of marketing, as it saves them time and marketing costs, and offers direct access to consumers via a comprehensive distribution system. The real cost to producers is complete dependence on the buyers for access to consumers, and for the key elements of their marketing strategy. For instance, supplierbrands are relativelyweakandthe successful development ofsupermarket own brands is an indication, and consolidation of, the power of buyers over suppliers.
    • The UK Market for Portuguese Table Wines: A Structural Analysis 11 • Price sensitivity Commercial wine buyers only want wines which they know will be success- ful on a relatively large scale. They are consumer driven, and UK wine consumers are largely price driven. Many do not buy wines based on their 'core' qualities, but on their perceived value for money. Price considerations appeartooverride otherfactors such as brand, countryoforigin, grapevariety and packaging. Rigid price points exist, and these are often the key element in negotiations with supermarket buyers. 3. Bargaining power of suppliers The commercial performance of the Portuguese wine industry in the UK market is adversely affected by several major weakness in infrastructure, stemming partly from history and topography, but perpetuated by an inward looking attitude which emphasises tradition and production above the needs ofthe customer. Fragmentation leading to low productivity is a well known weakness of the Portuguese wine industry, but there are other problems which have severe commercial implications. For example, the system of designating the wine quality does not always reflect the true quality of the wines, so that the 'Vinhos de Mesa' (equivalent to Vin du Pays) are some- times of better quality than those with the designations VQPRD or DOC (equivalenttoAppellation D'origine Controlle), when customers are looking for reliability. Furthermore, UK shippers report that fluctuations in supply at times ofpoor harvests have led to prices being set outside the price bands which are acceptable to consumers, while simultaneously leading to the erosion of product quality. This is an unhappy combination for a supplier in a weak position in a highly competitive market, where lack of consistency in price and quality has destructive long term implications. 4. The threat of substitutes The threatofsubstitutes forthe Portuguesewine industrycomes mainlyfrom other wine producing countries, and with relatively low entry barriers to a still growing market, which lacks an indigenous industry of any size, the number of such substitutes has grown rapidly. Portugal's continuing loss of UK market share is clear evidence that with so many competitors fighting for an intensely competitive market, it is all too easy for buyers to switch from Portuguese wines to others that they perceive as more reliable and of better value. Portugal's weak competitive position not only reduces the size of its market share in volume terms, it also has the effect of squeezing Portuguese wines into the low margin price bands between £2.49 and £5.00.
    • The UK Market for Portuguese Table Wines: A Structural Analysis 12 5. Competitive rivalry For individual Portuguese exporters there are two main sources ofcompeti- tive rivalry: internal (Portuguese companies fighting each other in the UK market) and external (other international companies competing in the UK market). Both sources of competitive rivalry are likely to increase in intensity. Portuguese wine exporters have increased in number leading to an escalation of'internal' rivalry. Forexample, aproliferation ofPortuguese Rose wines imitating the Mateus Rose brand and eroding its market share. The UK has also seen a remarkable increase in the number of countries entering the wine market in recent years, and most competition is mainly from these 'external' sources. These include established competitors like France and Germany(which held 58% ofthe stillwinemarketshare in 1994) and newer entrants from South America, eastern Europe and anglophone countries whose success is partly due to their lack of 'tradition' which enables them to give the buyers and consumers what they want, rather than what tradition bound producers think they should want. Issues arisingfromthe structural analysis The structural analysis ofPortuguese wines in the UK gives an insight into the forces affecting themarket. Entrybarriers are generally low, butPortugal suffers from a lack of scale economies. This is crucial as it goes some way to explaining the other problems affecting the Portuguese wine industry: low investment in research and development resulting in missed opportuni- ties for product differentiation, low investment in marketing support and research, and the absence of any cost advantage over rivals. This leaves producers nowhere to go, except to fall back on their tradition as 'Lusitans, sons ofLuso, grandsons ofBacchus god ofwine, makers of some ofthe best wines in the world'. But this only exacerbates the problem; 'best' is a slippery concept which varies over geography, culture - and time. While Portuguese producers remain production oriented, in the UK in 1996 cus- tomers perceive a lack of reliability in quality, lack of the ability to consis- tently deliver the required quantity and fluctuating prices. This background of customer indifference severely curtails Portuguese bargaining power in a marketwhich is dominated by powerful buyers. It is no surprise, therefore, that Portugal is experiencing a loss of UK market share and pressure on margins. Furthermore, the adverse external forces (high competitiveness, concentration ofbuyer power) are likely to persist and the Portuguese wine industry does not currently have an effective way of influencing them. Strategy Choices Porter (1985) points out that, in order to succeed in competitive markets industries and organisations need a sustainable competitive advantage. However, during interviews with exporters the absence of any consistent
    • The UK Market for Portuguese Table Wines: A Structural Analysis 13 strategy for wine exports was often mentioned as a cause ofPortugal's weak competitive position. Porter proposes three generic competitive strategies: cost leadership, differentiation and focus (which is further divided into cost focus and differentiation focus). 1. Cost leadership Cost leadership, based on low wages, was once a major component of Portuguese competitive advantage. However, modernisation of Portugal's political structure and membership of the European Union have increased wage expectations and the bargaining power of the workforce to a point where wages are no longera source oflow costs. Unfortunately, it is unlikely that productivity can be increased enough to offset these higher wage costs because of difficult topographical conditions in Portugal and the limitations on mechanisation imposed by these conditions. The productivity problems are exacerbated by the fragmented nature ofthe industry, and the small size of many vineyards. Yet that problem, at least, is solvable in the medium to long term - if the will to do it exists. 2. Differentation A differentiation strategyrequires a competitorto possess some attribute that adds value to customers' perception of the product. The Portuguese do have potential sources ofdifferentiation in the uniqueness oftheir grape varieties, types of wine and micro-climatic conditions. To take advantage of these factors it has been suggested that the industry mustfirstadopt a total quality philosophy and carry it through by investment in the following key areas: • Research and development of the local grape varieties. • The technology of wine making. • Packaging improvements. • Branding and promotion. • Marketing knowledge. (Monitor Company 1994) 3. Focus A focus strategy is one which isfocused on a particular part of the market, such as a group of buyers, a geographic area or a product line. However, within this segment of the market competitive strategy must still be based either on cost or differentiation. As discussed above, cost differentiation is not feasible for the Portuguese wine industry as it is currently organised.
    • The UK Market for Portuguese Table Wines: A Structural Analysis 14 Therefore, afocus strategy should be explored. In broad, international, terms it is necessaryto choose between markets because ofthe differing wants and needs ofbuyers. For instance, Portuguese wines are unlikelyto be perceived bythe French as superior in qualityto theirown - whateverthe attributes of the product. For French importers, Portugal is a source of competitively priced bulk wine. For Portugal, France is likely to remain a commodity market, with all that implies about the balance of power between buyer and seller, and the low margins available to the latter. Better margins are available inthe UKmarket, partlybecausetheUKhas onlyatiny indigenous wine industry, and consumers are open to wines of better value from wherever they come (see tables 3 and 4). Despite poor recent performance by Portuguese wines, the UK market is worth further persevering with, and a possible source of competitive advantage has been identified in differen- tation through unique grape varieties, types of wine and micro-climatic conditions. Yet, to succeed in a UK focus strategy any differentiation must be focused on specific customer groups. Development research, wine mak- ing, technology and improvements in the functional areas ofmarketing will come to nothing unless any new Portuguese wines are focused on consumer wants and needs. Further (market) research is needed as the basis for this. The critical factor forthePortuguesewine industrywill be its abilityto make the shift from production, to market orientation and customer focus.
    • The UK Market for Portuguese Table Wines: A Structural Analysis 15 References Christoper, M., Payne, A., Ballantyne, D. Relationship Marketing, Butter- worth-Heineman, Oxford, 1991. Kotler, Philip. MarketingManagement, Eighth edition, Prentice Hall, Lon- don, 1994. MacDonald, M.H.B., Marketing Plans: How to Prepare Them, How to Use Them, Butterworth-Heinemann, Oxford, 1995. Monitor Company/Michael Porter, Construir as Vantagens Competitivas de Portuga (BuildingPortugal's CompetitiveAdvantages), Forum Para a com- petitividade, Lisboa, 1994. Porter, M., Competitive Strategy, Free Press, New York, 1980. Porter, M. Competitive Advantage, Free Press, New York, 1985.