Could Japan-Australia Economic Partnership Agreement backfire

Australia crowing

Australia has been crowing about the Japan-Australia Economic Partnership Agreement (JAEPA) that came into effect in January 2015. Leading the cheerleaders has been the Australian wine industry.

How good has it been for Australian wine exports? In figures to the end of March 2017, total volume shows no increase, but total value is up 3.5 per cent.

Increased value is good, but the figures are hardly worthy of flag waving, caps in the air and dancing in the street.

In April the 18th round of negotiations on a free trade agreement between the EU and Japan took place in Tokyo. Both sides are looking to conclude the negotiations this year.

Has JAEPA been good for Australian wine? We don’t think it has been detrimental, but its benefits have not been as great as Wine Australia would like us all to think.

Past the tipping point

UK-based Majestic Wine is past the “tipping point”, according to CEO Rowan Gormley. He says the worst is over and the path ahead is scattered with rose petals.

Majestic consists of four divisions:

• Retail: 210 branches in the UK and two in France. Reported sales for the year ended 3 April 2017 were £262.2 million ($437.9 million).

• Naked Wines: Funds independent winemakers to make exclusive wines at preferential prices. Naked Wines currently has 159 winemakers in 16 countries and 363,000 Mature Angels (customers). Reported sales for the full year ended 3 April 2017 were £144.3 million.

• Majestic Commercial: A specialist on-trade supplier. Reported sales for the year ended 3 April 2017 were £46.6 million.

• Lay & Wheeler: A specialist fine wine merchant. Reported sales for the year ended 3 April 2017 were £12.3 million.

Figures taken from the accounts lodged with the London Stock Exchange:

Revenue was up 11.4 per cent but profit EBIT down 28.4 per cent. After adjustments, the loss for the year was £1.5 million. The aim, according to retiring chairman Phil Wrigley, is “achieving £500 million in sales by 2019”.

CEO Rowan Gormley: “The way we measure progress is to look at the five key performance indicators (KPI). By definition these measures will take time to respond to our initiatives, although we are beginning to see some encouraging early signs.” Here are those KPIs:

Notes:  (1) The Retail customer retention KPI has remained flat. This is a mix variance, dragged down by the growth in customers buying 5 or fewer bottles. Retention for customers buying 6 or more bottles of wine remains stable. 

(2) Lay & Wheeler has started acquiring new customers with higher attrition in a new subscription program. The core customer base remains stable. 

To drive the KPI growth we have diverted the £8m a year we were spending on opening new stores, and invested it into the people and the customer proposition. This diversion does not cost more cash – but it does go straight to the income statement, so produces a short-term hit to profits.

Stopping bricks and mortar growth looks a good move. Making more of what Majestic has will contain costs and help increase profits.

Majestic has never been that keen on Australian wines. Oddbins scooped the pool back in the late ’80s and into the ’90s. It’s time for Australian producers to give more attention to this group. As with all retailers, it is looking to increase its own-label range.

Tesco turning it around

Tesco (UK) used to be the UK’s leading retailer for Australian wines. TKR is not sure if it still holds the top spot, but it is still huge and very important.

The supermarket has had a rugged three years, with the share price plummeting from almost 300 pence to about 180 pence.

 

In the 13 weeks to 27 May (first quarter), sales rose 2.3 per cent. This was the sixth straight quarter of growth, and good news, as analysts had forecast 1.7 to 2.0 per cent. The worry for Australian producers is the increasing pressure from Tesco buyers to keep margins but reduce prices to meet the challenge of Aldi and Lidl.

This is more likely to present itself in a smaller but focused wine range. Some producers will win but others will fall by the wayside. It’s a good time to strengthen the Tesco relationship.

Accolade awakes

At last it appears Accolade Wines is waking up and realising there is more to life than flogging wine in the UK at discount prices.

The awakening has come in the still valuable North American market, where Accolade has launched Outlot, a Sonoma-based brand. The range consists of:

• Sonoma County Sauvignon Blanc
• Sonoma County Chardonnay
• Alexander Valley Cabernet Sauvignon

The retail prices are between US$19 and US$25 ($25-$33). So far the US is the focus market but the brand can be expanded to other markets if successful.

Accolade will have a fight on its hands. The top three selling brands in the US in 2016, according to Market Watch, were:

1 Barefoot by Gallo with 18.25 million nine-litre cases, up 5 per cent in 2016
2 Constellation Brands’ Black Box with 5.38 million cases, up 21 per cent
3 Delicato’s Bota Box at 5.06 million equivalent nine-litre cases, up 29 per cent

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