More navel fluff gazing and predictions

The 1998 Grange is soon to be released and whilst the expected wholesale price is only (sic) up by about $25 (about 10%) and its expected the street price will be $400 on release which is a hefty rise over the 97 vintage. Why is this so?

There are two major reasons which are linked together. 1998 is seen as a great vintage and Parker rated the wine at 99 points so there is a big US demand for the wine. Southcorp has decided that the US market is to get a large chunk of production so Australian retailers allocations will be much lower than in the past. Southcorp will see two good reasons for making this move. They hope to gain valuable spin off business from the Penfolds name by having a greater Grange presence in the US and can sell the wine for more in the US than in Australia. However there will be a price to pay for Southcorp with this strategy and eventually pay the price they will.

It wasn’t that many years ago when retailers received “an allocation of Penfolds wines” and they either had to take it all in one hit or miss out. If they downgraded the allocation, the next year they couldn’t go back to the previous level. This put a few retailers’ noses out of joint and many found they could survive very well without Penfolds wines on their shelves. A couple of years ago surprise, surprise, surprise. Penfolds abandoned the allocation system and freed things up substantially because of the retailer backlash.

The diversion of Grange overseas will further alienate the Penfolds brand and hence Southcorp in some retailers eyes. But that will be just the beginning of the problem for Southcorp. Payback time and the results of this strategy will become apparent when Penfolds try and sell the 1999 and 2000 vintages of Grange to the US market. These wines are unlikely to get the big Parker points so the wine won’t have the same demand as the 1998. Some US retailers may take a punt on the 99 after the 98 screams out the door, but they sure won’t be in a hurry to take the 2000 when the 99’s are still gathering dust on their shelves. Grange does not have the status or reputation in the US that it enjoys in OZ. In Oz if a “special bottle” of wine for a big occasion is needed, even the novice/non wine buyers will think of Grange and that’s responsible for a lot of the Grange sold here. That’s not the case in the US.

In summary, the movement of a large chunk of 1998 Grange into the US market will make it a lot harder to sell the 99 and 2000 vintage wines in the US and will further alienate Australian retailers, something that Southcorp has already done with great effect in the past. If they are to survive and prosper, they will need to rethink their attitude towards their retailers and customers.

And Southcorp is not alone in this self delusion. I am going to make another big prediction and say that BRL Hardy is also going to go the same way and the BRLH division of Constellation will have some big problems within three years. Sure things have been going well for BRLH but their chickens will come home to roost too and I doubt the merger with Constellation will make them bullet proof even if they think it will.

About a year ago, BRLH increased all their top wines by 60% and BRLH was not concerned because they decided they could always export a heap of it so declining demand in Oz was not an issue. Tintara Shiraz and Classic Clare went from being on special at $25 to being on special (if you were luck enough to find it) at $40. There is still a fair quantity of 1999 Tintara Shiraz in bottle shops so what happens when they release the 2000? And even more of a concern will be the 2000 Eileen and 97 Thomas at $90 a bottle. The current vintages are regularly on special at $75 and not moving all that quickly.

BRLH are sitting back and watching what’s happening to Southcorp and feeling pretty smug right now, but from what I hear from industry sources they are starting to push the envelope with retailersing pretty smug right now, but from what I hear from industry sources they are starting to push the envelope with retailers in ways that are not making the retailers very happy. Add to that the price hikes and it looks a lot like the path Southcorp went down a few years ago. Yes, there will be some short term benefits for BRLH with the merger but I doubt they will be enough to save them from themselves.

History has a habit of repeating itself.

Cheers

Ric ©

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