uk market for portuguese wines

The UK Market for Portuguese Table

Wines: A Structural

Analysis

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The UK Market for Portuguese Table Wines: A Structural Analysis Paulo Ramos and Keith E. Thompson, Silsoe College, Cranfield University

Introduction

Wine production is an important component of the Portuguese economy, it accounted for 43% of all agricultural exports in 1994. Yet there 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: Adapted from IVV, 1995)

The UK Market for Portuguese Table Wines: A Structural Analysis

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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 of Portuguese wine exports at 11% compared with Angola's 9% (Table 3).

Table 3: Volume and value shares of the 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


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 since the 12th century, and the commercial and political relationships built on this trade 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 Portuguese 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,


Wines: A Structural

Analysis

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Table 4: Price per litre in the top five Portuguese table wine markets 1990-1994

£1=245

USA

UK

Germany

Angola

France

1990

$esc per litre

230

270

255

168

226

1991

$esc per litre

288

275

184

182

190

1992

$esc per litre

295

266

236

122

72

1993

$esc per litre

301

213

269

76

61

1994

$esc per litre

330

296

342

84

219

5 years average

$esc per litre

284

267

246

125

97

$esc = Portuguese escudos


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 of the 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:


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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 of buyers,

3. Bargaining power of suppliers,

4. The threat of substitutes,

5. Rivalry among the existing competitors.

The combined power of these five forces 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 of new entrants in the last decade. These are mainly the 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, concentration 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.


Wines: A Structural

Analysis

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• 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.

For the Portuguese fragmentation of wine production is a major 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 volume and consequent lack of promotional expenditure. Although a number of bulk suppliers are branding their products, a lack of sustained 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)). Their country identity also works as a brand identity, making it more 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' relatively low awareness of grape 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 UK market requires 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 market research and product development. So far, research and development has concentrated on wine making and there have been technological developments, even though communication between the different research institutes and industry remains poor.

There has been a lack of will 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 for a while the best selling Portuguese brand in the UK) were spoiled either by supply problems, or by lack of effective and continuous promotional support. There


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is a significant lack of marketing knowledge in the Portuguese wine industry, and little apparent awareness of the need to invest in acquiring it.

• Access to distribution channels

The distribution of wine 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 of Portuguese 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 consumer prices and make consumers 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 knowledge 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, supplier brands are relatively weak and the successful development of supermarket own brands is an indication, and consolidation of, the power of buyers over suppliers.


Wines: A Structural

Analysis

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• Price sensitivity

Commercial wine buyers only want wines which they know will be successful 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 appear to override other factors such as brand, country of origin, grape variety 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 of the 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 sometimes of better quality than those with the designations VQPRD or DOC (equivalent to Appellation D'origine Controlle), when customers are looking for reliability. Furthermore, UK shippers report that fluctuations in supply at times of poor 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 threat of substitutes for the Portuguese wine industry comes mainly from 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.


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5. Competitive rivalry

For individual Portuguese exporters there are two main sources of competitive 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. For example, a proliferation of Portuguese 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% of the still wine market share 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 arising from the structural analysis

The structural analysis of Portuguese wines in the UK gives an insight into the forces affecting the market. Entry barriers are generally low, but Portugal 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 opportunities 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 of Luso, grandsons of Bacchus god of wine, makers of some of the 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 customers perceive a lack of reliability in quality, lack of the ability to consistently deliver the required quantity and fluctuating prices. This background of customer indifference severely curtails Portuguese bargaining power in a market which 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 of buyer 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


Wines: A Structural

Analysis

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strategy for wine exports was often mentioned as a cause of Portugal'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 longer a source of low 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 of the 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 strategy requires a competitor to possess some attribute that adds value to customers' perception of the product. The Portuguese do have potential sources of differentiation in the uniqueness of their grape varieties, types of wine and micro-climatic conditions. To take advantage of these factors it has been suggested that the industry must first adopt 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 is focused 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.


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Therefore, a focus strategy should be explored. In broad, international, terms it is necessary to choose between markets because of the differing wants and needs of buyers. For instance, Portuguese wines are unlikely to be perceived by the French as superior in quality to their own - whatever the 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 in the UK market, partly because the UK has only a tiny 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 making, technology and improvements in the functional areas of marketing 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 for the Portuguese wine industry will be its ability to make the shift from production, to market orientation and customer focus.


Wines: A Structural

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References

Christoper, M., Payne, A., Ballantyne, D. Relationship Marketing, Butter-worth-Heineman, Oxford, 1991.

Kotler, Philip. Marketing Management, Eighth edition, Prentice Hall, London, 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 (Building Portugal's Competitive Advantages), 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.