US wine market tough but profitable - international expert

Nicholson heads International Wine Associates, a California-based strategy management company that consults to large-scale wine corporates, development banks and privately owned wineries in North America, Latin America, Eastern Europe and Australasia.

He is urging SA wine producers to invest over the long term in building a presence in the US, projected to become the biggest wine market in the world by 2008, when it is expected to account for almost a quarter of global retail wine revenues. By contrast, the UK, currently SA's largest export destination, is expected to account for 9% of retail sales by 2008.

Great opportunities

Talking to producers who gathered at Nederburg in Paarl on 29 November 2006, he said that while it would take time and money to gain a foothold in the US, it could offer great opportunities, driven largely by the growing taste for wine amongst young adults, dubbed Millennials, as well as a strong consumer interest in wine from as yet undiscovered regions, such as SA.

For the first time, in 2005, wine had become the alcoholic beverage of choice amongst Americans, overtaking beer. Last year 300 million cases of wine were sold in the US, he said, with a value of US$25 billion, up from US$11 billion in 1991. Imported wines were assuming increasing significance, growing 11% in volume in 2005, compared with US wines that grew 4% in the same period. Last year, imported wines accounted for 27% of total wine revenues in the US, with Italy and Australia the major players.

Over 60 million cases of table wine were imported into the US last year, he said, with Italy and Australia shipping approximately 20 million cases each, France around 8 million cases and Chile, some 5 million cases.

SA shipped just under 1 million cases of wine into the US last year. This accounted for less than 5% of South Africa's total exports. However, it was hoped that Constellation's acquisition of Kumala would help to build the profile of SA as a wine producer amongst US consumers.

Three-tier system

Stressing the complexities of selling in the US, dominated by a three-tier system that generally required producers to sell to an intermediary rather than directly to retailers, he said local producers needed to familiarise themselves with the US market, where wholesaler and retailer consolidation made it increasingly difficult to achieve and maintain product distribution.

Low-risk options are to engage a US importer with national coverage, although this is the most expensive route to market in that importers took a mark-up of between 25% and 40% on cost; or to identify a US winery interested in partnering with a SA producer, serving as the importer who could sell on to wholesalers.

Another potentially successful route to market is to establish a joint venture with a distribution partner, as has been done by Yellow Tail, produced by Australian company Casella, creating a partnership with WJ Deutsch & Sons. The brand is now the biggest imported wine label in US retail.

Fragmented

Unlike in the UK and Europe, where the retail channel was dominated by a few key supermarket chains, US off-consumption is far more fragmented. It is , however, also possible to sell direct to wholesalers or to retailers, although the risk to producers is far higher.

"This is where you can get used and abused. If producers are forced to sign an exclusivity agreement with wholesalers, they are precluding exposure to a broader market. Achieving a listing with a retailer is also not a guarantee of a long-term relationship."

Nicholson said local wine producers would have to accept that their investment spent researching and identifying the appropriate route to market, gaining the interest of the relevant intermediary and building distribution, is unlikely to yield profits for the first few years.

However, the rewards could be significant, particularly in the super premium and higher segments of the market, where margins were highest. He said the fastest-growing retail categories are for wines priced US$9 and higher, with wines selling for U$12.00 and U$14.99 showing the highest growth.

Unique proposition

He said South Africans should make more of Pinotage, creating a definitive but accessible fruit-forward New World style, which would give the country a unique proposition, as the Australians have done in the US with Shiraz.

Innovative packaging, including screwcap closures, unpretentious positioning and clear and simple brand messaging are essential, with irreverent brands appealing to Millennials, he added.

WOSA CEO SU Birch said local producers should not have unrealistic expectations of the US by viewing it as a panacea for declining exports in traditional markets. "Just as South Africans are chasing the US, so are other producer countries. At the same time, the channels to market are being reduced by the continuing consolidation of importers, distributors and retailers.

"This has resulted in clogged pipelines, making it immensely difficult to get brands to sell through, even once listed. To succeed will require very hard work, a very close understanding of US trading protocols and market access and ongoing investment in brands."

She said WOSA would continue to participate in trade and consumer events to broaden its reach of gatekeepers to US markets and was currently trying to raise the necessary funds to open an office in the US.