The more things change, the more they stay the same

As it’s the start of a new year its time for some navel gazing in an endeavour to forecast like likely progress of the belly button fluff through the mine field of the wine industry.

As many readers will be aware, there is a proposed merger between BRL Hardy and Constellation Wines in the US which will result in the world’s biggest wine company if it proceeds. Regular readers of this Journal will know that for ages I have been predicting the proliferation of this merger trend where by the big keep on getting bigger and this is just one more example of its reality. No prises for guessing it will keep happening.

However, it’s not all good news for the big boys in the ‘wine case’. Southcorp’s share price has been taking a beating and one that was completely predictable for a number of very good reasons. Firstly, when any large entities merge, there are normally sizable savings to be made by utilising economies of scale and eliminating dual job positions. Two companies will each need a head bean counter, but if they merge, they only need one. This is just one small example of the savings which extend right the way through the companies from to bottom and though all areas of logistics and infrastructure. Whilst these savings are initially being made, the combined company (assuming everything is equal) will be enjoying increasing profits.

The problem arrises when these saving have been made and are no longer new; the company then has to rely on other methods to increase profit or the share price drops. So unless the company can pull a rabbit out of a hat, then it’s share price is a moral to drop after the initial savings have been made. And that’s exactly what’s happened at Southcorp.

Whilst they may have had good plans and intentions, they have been hit with some difficult outside factors. Discounting and price wars is one of the biggest problems facing producers. Currently there is a consolidation also occurring in the retail sector. Coles-Meyer and Woolworths are head to head in a battle of the titans for liquor market share. Due to their combined buying power, they can put the squeeze on producers for bigger discounts. As well as that, there is a glut of red wine grapes that many producers are having trouble moving which is also driving prices down. Whilst this is good for the consumers in the short term, it’s hurting the bigger fish up the food chain.

The distribution companies will also not be exempt from changing pressures over the next few years. As the mergers, both large and small continue amongst the producers, there is more likelihood of these enlarged entities doing their own distribution. This will be further exacerbated by the increasing centralised purchasing power of the large major retailers as they swallow up smaller retailers. So the distributors will be squeezed at one end as they have fewer producers to represent. In time they will be squeezed at the other end as they find it harder to move the products through as more and more volume is purchased by the central buying departments of the two biggest retail chains.

In terms of the overseas retail markets competition is hot, but there is nothing new about that fact. The UK has always been the most competitive wine market in the world. In the US we are doing well at the low end of the market. In the middle the gloss on the Australian wines are beginning to dull as other countries are now starting to present better value. At the top end, it’s particularly difficult for many of the “fashion statement and cult wines” as the American upper middle class tightens their financial belts and the allure of the 1998 vintage has just about passed.

2003 is a good time to be a consumer in Oz as there will be some great wine deals around, but it will be a year that provides many headaches for those in the industry.

Cheers

Ric ©

Copyright © Ric Einstein 2003