WineSleuth 10: Diversity of supply

The Supply side

Last time we talked about currency fluctuations, low inflation environments, fierce local competition and reduced local consumption particularly of higher end wines due to a firmer hand on government ‘gratuities’…

This last 5 months we have definitely felt a positive impact due to falling global oil prices. This massive reduction in transport costs looks likely to continue to have such an impact and we can expect that this should certainly have some effect on the transportation of premium commodities, such as Estate Bottled wines over Bulk Transported wines, due to the more marked effects on transport costs on bulk shipments where glass is removed form the weight equation. (aside: bulk wine is destined for local bottling and is therefore best avoided if you have food safety concerns; and know how to pick them out in a crowd).

The oversupply of low end wines, and the initial price war exchanges which were a feature from late 2013 to early 2015, between major distributors and the plethora of ‘nouveaux independent importers’ that sparked heightened attrition, might be over for now, but there are plenty of ripples still permeating out through the industry; evidenced by the continual appearance of more and more Chinese import labels from a bewildering field of new sources (we spy with skepticism).

It may be that first blood in that struggle has gone to the independents, who are more flexible and adaptable and have less to lose, so can take risks easily. We’ll have to see. But the majors are still expanding deep into China, albeit with lower levels of vigour.

After perhaps a little more downside at the lower end of the market over the year, as yet more semi professional importers look to emulate ‘les nouveaux’, by offloading ill-researched, and even less understood, unsaleable stock, onto local retailers, who are also (frankly) clueless, we can expect that sector to become more the domain of such ‘fly-by-night’ and ‘here today: gone tomorrow‘ traders and for the larger established businesses to concentrate on higher turnover on lower margins on higher end wines at the Chinese Middle class.

This is bad news for the average consumer, who, under the influence of the ‘majors’, enjoyed international standards of product security and food safety: checks and balances in-built into the system due to their own trading standards. The bottom segment of the market now looks set to be open to further threat from smuggling, counterfeiting and contraband, with all the perils that that brings for the end user. It looks to be the end of the beginning for the ‘restructuring period’. We can also expect to have to watch out for lowering quality at the bottom end, as the bulk wines become more ubiquitous.

If the bigger players do exit the low end market, and price competition falls away in that sector, we would expect prices to rise but with poorer wine supply security, and hence greater price instability. It’s still unclear to what degree any rises might be tempered by any continuing oversupply of the low end wines especilly when that scenario could be underpinned by the Australian wine recovery and the impending signed, sealed and delivered Free Trade system with China.

Conversely, the ‘upper echelons’; outside of Bordeaux (Tuscany, Burgundy and certain high demand brands) can continue to expect further price rises as Chinese consumers continue to spread their ‘taste bud wings’ to new regions. Much depends here on Chinese Gov’t fiscal and monetary policy which has a habit of appearing and disappearing at will. Might be great time to look into western influence: good Chinese wines.

The mid-range (tiers 2 to 6) will continue to be the place where the best values can be found as this level represents the proving ground and birthplace (like astronomical nebula do) for tomorrows stars. It is also the place where the majority of new players are positioning themselves and seeking market share in a part of the market largely ignored by more price concious consumers.

This last paragraph describes a circumstance which has, interestingly, not much altered in 12 months.

After a year of instability, we expect to see in the short term, a return again to the general price stability of imported wine. There will be some variation according to region and price point, as ever: and that’s the issue we’ll look at next time.

The Wine Man

March 2015

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