The 4% dilemma

How would you feel about producing 4% more or less wine this year? Or seeing a 4% increase or decrease in your sales? If the idea of a twenty-fifth of anything doesn’t excite you, you have a pretty fair idea of Diageo’s attitude towards its wine division, because that’s the proportion of the drink giant it represents. The figure is even more striking when you consider that the wine brands Diageo has in its portfolio include Blossom Hill, the biggest-selling wine range in the UK, as well as distribution for Moët & Chandon and Dom Pérignon.


The news that the drinks giant is currently looking to sell the wine brands is less of a surprise than the fact that the brands still share stable room with money spinners like Guinness, Smirnoff, Gordon’s and Johnnie Walker. Paul Walsh, CEO of the company for 12 years, made no secret of his feelings about wine when I asked him a decade or so ago whether he was interested in taking over the New Zealand wine operation then known as Montana. Wine, he said, even such relatively high margin stuff as Marlborough Sauvignon Blanc, simply had less appeal than spirits and beers.

Many in the wine industry will probably welcome Walsh’s attitude, on the grounds that they’d rather not have that kind of corporate player on their pitch. Among these will surely be those running estates that have been passed down to them over several generations; others whose recent path into winemaking began with a passion for the product and a chunk of spare cash; and of course the media, for whom wine often seems to be an aesthetic object rather than a product from which anyone might want to derive a profit.

And there’s the rub: profitability. As Rob McMillan of the Silicon Valley Bank in the US points out in his 2015 State of the Wine Industry Report, since 2006, while gross margins for California’s wine industry have ranged from 52.4% to 57.1%, pre-tax profits have swung from a high of 16.3% in 2007 to a paltry 2.2% in 2009. Mind you, the 2014 pre-tax figure of 8% would be welcomed by the smaller New Zealand wineries achieving the 3.3% described in a recent report by the accountancy firm Deloitte. If Deloitte is to be believed, a wine producer should be making 10% in order to be considered sustainable as a business. None of the wineries turning over less than NZ$10m ($7m) are making that much, and even the largest fail to make the 20% to 30% expected by international spirits- and beer-focused businesses like Diageo and Brown Forman.

Yet California and New Zealand are the two wine regions that are famously most able to command relatively high prices for their wines. Winemakers in mainland Europe who are haggling over euro-cents with their customers have a far tougher time. As Yves Barcelou, the then-head of Credit Agricole, said in 2000, the wine industry is essentially “a business without margin”. 

You don’t have to be a multi-national company to appreciate the appeal of making and selling alcohol other than wine. The English wine producer Camel Valley are, for example, very happy with the profitability of their recently-launched microbrewery, and Ghostbusters actor Dan Aykroyd seems to be far busier promoting his vodka than the wine range that bears his name that he launched a couple of years earlier.

Wine’s lack of basic profitability is of course coupled with climatic vagaries that too often make it difficult, if not impossible, to match quality and quantity to market demand, and preclude the kind of marketing efforts required to build brands and command higher prices. And the basic problem is that the industry treats poor profits as an immutable fact of life. Blame is piled at the door of governments (too many regulations; too many taxes) and retailers and the ignorance of bargain-chasing consumers who need ‘educating’. All of which ignores the inconvenient fact that other alcoholic beverages exist within the same climate as wine, and are sometimes subject to even harder conditions.

I see nothing to celebrate in Diageo’s likely exit from the wine industry. It’s rather like overhearing someone in a Ferrari saying, “Who’d want to live there?” as they drive past my house. No, I’d much prefer the wine sector to be somewhere that intelligent capitalists in other spheres were queuing to get into for a decent return on their capital, rather than out of. Maybe, if we all spent a little more time obsessing over the percentage margin we should be getting rather than the points we hope to get from a US critic, at least 4% of us might be doing rather better than we are today.

Robert Joseph

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