1. 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)

2. 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,

3. 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:

4. 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.

5. 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

6. 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.

7. 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.

8. 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

9. 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.

10. 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.

11. The UK Market for
Portuguese Table
Wines:
A Structural
Analysis
15
References
Christoper, M., Payne, A., Ballantyne, D. Relationship Marketing, Butter-
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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.