Douglas Wregg of UK wine importers and restaurant suppliers Caves de Pyrène (which, in the context of Richard Hemming’s look at German and New Zealand Rieslings yesterday, is now importing the wines of New Zealand’s finest Riesling producer Framingham) sends the following thoughts on recession, wine merchants and restaurants, which may be of particular relevance to this thread about the FT Lunch for a Fiver on our forum. Comments are invited below.
As the curse says: May you live in interesting times. We are witnessing a deeply polarised wine industry. Some areas of our business will continue to flourish, whereas for others (small independent retailers, for example) there will have to be a long period of retrenchment, and even survival. While big companies are trying to ride out the recession by throwing money at every eventuality, smaller operators are obliged to protect their margins and to pass on price rises to their customers. Whereas the business of wine used to be about buying and selling, it is now about cornering market share and savvy financial strategy.
If you strip away duty and factor in average inflation, the price of wine in real terms has decreased during the past five years. Skilful negotiation – and thumbscrew tactics – has persuaded growers to keep price rises to a bare minimum, and what was a relatively strong pound has meant that there has been sufficient fat in the margin for deals and discounts.
The problem is that an expectation was created within the wine trade that the price of wine would never increase. As the market became increasingly competitive, the trade was able to pick and choose who they would buy their wine from. Restaurants, for example, began to insist on keener discounts and longer lines of credit. It was a true buyer’s market; the culture of wine mirrored that of the buoyant economy and thus was essentially unsustainable.
The credit crunch initially had little effect, but slowly the economy went into recession. The banks were immobilised and by refusing to lend money and rewriting terms and conditions of loans they began to drive small companies out of business.
The loss of thousands of jobs in various sectors of the economy has had a deep impact on restaurants.
Anecdotal evidence: A well known restaurant in Soho, London, had only a table of two one lunchtime – normally, they are full and one would have to book; another restaurant in Mayfair reported trade 30% down on last January; a bonded warehouse went into administration; a delivery driver for another company had only three deliveries into London restaurants last Friday (and one of those was a case of cooking wine); the Fullzone small chain of off-licences has been liquidated. The bonded warehouse was Anglo Overseas. (Apparently, it wasn't the wine side of the business that was doing badly but the fact that clothing companies were unable to pay their bills. What it does illustrate is that the wine trade will be affected by factors outside of its control and will have to be adaptable and reinvent itself.)
Two of London’s highest profile restaurant groups with a combined total of millions of pounds of turnover are in financial difficulties.
Bad debt and late payment is responsible for terrible cash flow throughout the wine trade. It is the classic example of the global knock-on effect. Without the business the restaurant can’t pay the merchant, the merchant can’t pay the growers and the growers can’t pay their bills.
As if that wasn’t enough, the collapse of sterling has thrown a massive spanner into the works. Last year the pound dropped over 20% against the euro and even more against the dollar
The cost of dry goods (bottles, cardboard, paper) once again increased.
2008 was an exceedingly difficult, sometimes very small, vintage in certain parts of the world.
Hefty duty rises above inflation were imposed (with more to come) in the UK.
As a result:
Commensurate price increases from wine merchants have become inevitable. Unable to absorb huge cuts in their margins, unlike supermarkets, who can effectively sell wine as a loss leader to create brand loyalty, they must evaluate whether they want to maintain turnover at a loss or walk away from unsustainable business.
It has been said by many in the trade that wine companies are no longer in the business of sourcing and selling wine, but have turned into financial institutions expected to hedge currency and take long term views on investment. Among certain companies the imperative for expansion is enormous because their investors insist on a quick return for their money. Those companies will have to buy greater market share through deeper discounting and cash deals to maintain the necessary growth.
Restaurateurs will have to make a critical decision and either trade down for much poorer quality wines at the same price or move away from the time-honoured blanket gross profit margin calculation towards more progressive cash mark-ups. The gross profit is a tyrannical tool, responsible for driving up prices and driving down value in restaurants for a number of years. It may seem counter-intuitive to increase prices during a recession, but it is surely more important to offer value by reducing the margin and demonstrating better quality.
Customers are more adept than ever at spotting lazy wine lists; it therefore behoves the restaurateur to stimulate spend by stimulating interest. [See here for my review of Terroirs wine bar/restaurant, the Caves de Pyrène's newest venture and a very good example of food and wine that stimulate interest. JR]
The most intelligent and prescient operators emerge from recessions stronger than ever, the myopic and venal go to the wall. For years restaurants traded on the good will of their suppliers, and this was fair enough, but with current economic fragility it is time for a reality check and for the appropriate medicine to be swallowed. It is time also for the trade to pull together, to put mutual interest before short term gain, to improve communication and work on imaginative solutions to ride out this crisis.
One solution would be to educate customers to spend more and drink better. Far too many consumers still don’t discriminate in their wine purchases. Merchants and retailers should raise the bar, enthuse people, and try to yank them from the mighty embrace of the supermarkets with their perennial, loss-leading 3 for £10 offers. During a recession people naturally default to the cheapest option. It doesn’t have to be so. A wine merchant or small retailer can provide the level of knowledgeable service that no supermarket can aspire to. This adds genuine value to the wine. At my company we are going to prevail upon our wine producers to visit the UK, do more proactive tastings with our customers and convey the story behind the product. We need to excite, challenge and inform customers, we need to remind people that wine can be delicious, provoking, a consolation in difficult times and a pleasure always. In short, we need to win the debate about quality over quantity...