WINES AND SPIRITS AT A CROSSROADS-THREE LEADERS
We asked the CEOs of Diageo, Pernod Ricard and Allied Domecq where they saw the future of wine and spirits headed. Is there an easy-sippin' brand in your future?
What wine will you have with dinner next Saturday? If you read Wine Enthusiast, you may know already.
Or maybe you'll pick something from your cellar. But a lot of us, in fact most Americans, buy wines from our local wine store and drink them the same day. Almost without our noticing it, the selection of wines we find on our retailer's shelves has been undergoing major changes. Our basic Tuesday-night quaffs now routinely come from all corners of the globe. The best of them appeal to the palate by offering a consistent flavor profile: fruit-forward, with smooth tannins (if red), a touch off-dry (if white), probably over 13 percent alcohol. And at $6 to $8 a bottle, they also appeal to the pocketbook.
Welcome to the world of wine in the 21st century—wines from any point on the compass, brought to you, in part, by three of the world's biggest drinks companies: Diageo, Allied Domecq and Pernod Ricard. If the directors of these giants are right, the targeted audience, 30-something middle-income Americans, will make their wine-buying decisions based not on the origin of the wine or geographic place name, but by brand name. The wines will have been designed as much by consumer testing as by nature.
To be sure, this is already happening, and Diageo, Allied Domecq and Pernod Ricard are hardly the only players driving this change. Constellation Brands, the giant U.S.-based wine company ($3.6 billion in sales for 2002), and Fosters ($5 billion), the Australian owner of Beringer Blass, are hugely significant for the volume of wines and brands they own. But the Big Three, by virtue of their focused marketing dollars and global influence, may have the most far-reaching impact on how wine brands and styles evolve.
To get a closer look at their concerns about where wine drinkers' tastes are heading, Wine Enthusiast asked the top executives of the Big Three, as well as their directors of American operations, where they think the wine industry is headed. At Diageo we spoke with CEO Paul Walsh in London and, in Napa, Ray Chadwick, head of Diageo Chateau and Estate, the company's fine-wine importing division. At Allied Domecq, based in London, we spoke with CEO Philip Bowman, and in Healdsburg, California, Bill Newlands, the president of A.D.'s U.S. wine operations. In Paris, we spoke with the chairman and CEO of Pernod Ricard, Patrick Ricard, and joint managing director Richard Burrows.
Keep it Simple
Taken together, these Big Three will have a profound impact on America's drinking selections. They already are doing so. Pernod Ricard sells a worldwide total of 17 million cases of their wine brands annually plus 62 million cases of spirits. Diageo buys, makes, imports and ships 114 million cases of spirits (though they decline to release figures on sales of their wines, which include brands such as Sterling Vineyards and Beaulieu Vineyard).
Allied Domecq's brands collectively sell some 20 million cases of wine and 50 million cases of spirits. The company owns such well-known names as Clos du Bois, Mumm and Perrier Jouët Champagnes, Cockburn's Port, Harvey's Bristol Cream, Ballantine's Scotch, Maker's Mark Bourbon and Courvoisier Cognac (see sidebars for each company's portfolio).
All three share a corporate heritage in the creation and marketing of extremely successful brands of spirits (Diageo and Allied Domecq) and apéritifs (Pernod Ricard). Unlike table wines, spirits and apéritifs have a consistent taste profile from year to year. Their ingredients are less susceptible to seasonal variation (read: no pesky vintages to worry about). There are few, if any, place names to remember.
The challenge the Big Three face, therefore, is how to find or create products that can marry the interest and complexity of wine to the virtues of a brand. And while these companies influence the market, they also take direction from it, listening to consumers' tastes and needs. Though present in scores of markets around the world, each of the three looks to the American market as the heart of its future.
All see enormous untapped potential in the U.S. market. Americans' per-capita consumption lags behind that of Europe and has in fact fallen some 20 percent since a high in 1986 (primarily due to wine coolers). Better news is that U.S. wine sales in 2002 were 6 percent higher than they were in 2001. Like the rest of the industry, all three companies are searching for ways to boost these numbers. They can:
· Increase the number of wine drinkers (people who consume wine at least once a week), which now stands at 19 million. Likelihood: fair.
· Increase per-capita consumption, now the equivalent of about 10 bottles of wine per person per year, compared with 23 in the U.K. and 76 in France (2001 figures). Sales of both domestic and imported wines at 247.3 million cases in 2002 appear to have nudged above the previous high set in 1986. Yet as the population increases, the per-capita consumption percentage is likely to stay below the 1986 record. Likelihood: fair.
· Increase the per-bottle revenue, that is, get customers to trade up to higher quality and price. Likelihood: iffy to good, depending on how long and deep the current oversupply of wine pushes down prices. Polls show that young drinkers are more willing to spend more than $10 a bottle than the industry previously thought.
As a first step toward making progress in these three areas of growth, the Big Three are keenly focused on brand building. Brands have always been elusive for wine producers caught up in the mystique of terroir and place names. It is only now, with these three global spirits companies moving into wine, that true wine brands are developing. "In the fast-moving pace of the American market, consumers are happy to take the reassurance that a brand offers," says Burrows at Pernod Ricard.
"We can win in the marketplace by developing products that address the underlying consumer motivations," says Walsh. "The [customers'] motivations will ultimately guide their choice of brands and products. For example, in choosing brands, how do consumers want to feel? To look? Who are they with? Where are they consuming our brands?"
Customer research is a priority. "We have developed a global research tool to help us answer those questions for all of our brands and therefore position them appropriately," says Walsh. "On the basis of the output, not only can we successfully position our brands against the underlying motives that matter most, but we can actually identify areas of opportunity that no brand is currently addressing."
Please Don't Mystify
Not to be left behind, Allied Domecq has undertaken a $10 million study to identify gaps in its product range, based on what the company calls customers' "need sets" (Diageo analysts call them "need states") that products can be designed to satisfy—the need for independence, status, release, discernment and so on.
One of the first areas they feel they need to address is to make wine less intimidating to the average consumer and more integrated into the fabric of daily life. "In most regions of the world, wine and spirits are part of everyday life," says Walsh. "You don't need to know a lot about wine in order to enjoy it, and you needn't be a wine snob to appreciate it. Wine is simply part of the overall culture. I believe there is an evolution in the U.S. where more and more Americans are accepting wine as part of their lifestyle."
At the same time, they want wine to be "fun, to be approachable, less of an intimidating beverage," according to Chadwick. "Wine is one of those consumer products where you don't want mystique," says Allied Domecq's Newlands. Get rid of mystique and people who now drink beer will move to wine. That may be a disconcerting thought for those who love to delve into the mysteries of appellations and terroir, but it may well explain why some European wines are having such a hard time in the modern wine market.
The companies aim to demystify wine by a variety of methods. Promotion is one aspect, and education is the other. Newlands points to the Academy of Wine and Service Excellence, which Allied Domecq established in December 2002. It aims to "make wine part of the cultural experience." Here's a tip from one industry insider: Look for more product placements in movies and music videos.
Other ways to break down the barriers? "Consumers are influenced by taste, price, and—most importantly—advice," says Philip Bowman. "In-store advice is critical, as is the role of the specialist publications. We often experience significant surge in demand on the recommendation of a writer."
Bill Newlands, who heads Allied Domecq's U.S. operations, feels that wine styles will become more consumer friendly over the next 10 years. "They will be more approachable, more fruit-driven," he says. "Buying wine to put away for 10 years will become even more of a minority sport. The wine has to be consumable as soon as it is released."
There's no question in anyone's mind that wine needs to be made more "accessible." To achieve that, the consensus is that wines should be characterized by superripe fruit, enhanced with some wood tastes, light tannins and light acidity. They will have high alcohol to give punch. The overall feeling will be of softness, roundness and ease of drinking.
Newlands is also a believer in finding new ways of attracting non-wine drinkers to the mysteries of the grape: "There could be more entry-point wines, such as wine coolers." Wine coolers—flavored, usually sweetened wine-based products—have had spotty success in the U.S. market, having made a brief splash in the 1970s and '80s. And whether or not coolers succeed in the 21st century, it is still open to debate whether they act as "starter" beverages from which consumers move on to wine.
Brands of Gold
If you think that these emerging wine styles sound more like New World-style than Old World-style wines, you're right.
"The dynamic sector of the wine market is New World," says Burrows from his Paris office. "It is much easier to create global brands based on New World fruit and wines. They also happen to be more profitable."
Global brands are a rare phenomenon, whether in wine or spirits. Patrick Ricard says that of his company's "hundreds of brands," only five are global (see box). "The only way to establish a global brand is to work slowly. It doesn't happen overnight," he says.
Ricard should know. The textbook example of a slow build to success is Pernod Ricard's Jacob's Creek, the phenomenally successful Australian table wine. The brand—originally just labeled red or white—was started in the Australian home market more than 20 years by Orlando-Wyndham wine company in South Australia, selling locally and subsequently in the U.K. market. Pernod Ricard bought Orlando in 1989 and turned Jacob's Creek into a global powerhouse. Growth has been obtained organically and by expanding the selection to wines such as reserve, limited release, sparkling and wines for aging, all under the name Jacob's Creek. Perhaps more impressive has been the explosive growth of a similarly positioned Australian brand, Yellow Tail. Sales of Yellow Tail (1.5 million cases in 2002) are expected to approach 3 million cases this year.
The reasons for these successes are instructive. Australian wines can be sold as varietals, which keeps confusing place names to a minimum; the vintages, thanks to Aussie sun, are reliably fruity and alcoholic, traits U.S. consumers favor. And Australian vineyards can produce sufficient quantities to keep prices stable. By these measures Australian wines come as close to being a brand as any country has been able to create. In fact the Australians themselves call it "brand Australia."
Wine Equals Growth
All three companies are aiming for the premium and mid-priced range of the market, typically the $7 to $15 bottle of wine. The success of the Australians has shown them the way to move into and dominate a market. Indeed, if past performance is any indicator, Australia will be having a strong future in Americans' drinking habits. In 2002, exports to the U.S. jumped more than 40 percent over 2001 (though the dollar value only rose half that).
Should drinkers of finer wines be dismayed at the apparent standardization? Pernod's Burrows thinks not. "It's not that the wine world will be totally dominated by brands," he says. "Smaller wineries will always have a place, because wine remains a diverse product. There is a progression in wine, from brands to individual wines, which you don't find in spirits, where people tend to remain brand loyal."
All three companies see more long-term growth potential in wine than spirits. Allied Domecq went on a spending spree recently, acquiring Buena Vista in California, plus top wineries in New Zealand (Montana, better known as Brancott Vineyards) and Spain. Says Newlands, "We view wine as a growth business, particularly compared with spirits. We have invested [in wine] around the world, which speaks to the way we look at the business."
Allied Domecq's Bowman elaborates on this. "There are shortages of wine in New Zealand, periodic shortages in Rioja, and Champagne is working its way toward shortages," he says. "Allied Domecq has deliberately chosen to acquire in regions more resilient to surpluses."
With all the talk of brands and of promotion, it seems that European wines have been left to one side. Not to worry, say the Big Three, fine wines will always be with us. Diageo Chateau and Estate is the largest buyer of Bordeaux classified growths in the country. Chadwick sees that market as strong, growing ("especially with the arrival of the 2000 vintage") and stable.
The growth of future European brands is problematic, however. "The European wine system currently prohibits the possibility of creating New World-style varietal brands," says Ricard. "We can influence a change, along with other companies in the sector. But we need agreement, and not everyone in Europe agrees."
Pernod Ricard, Diageo and Allied Domecq see a more homogenized wine world emerging from the muddled diversity that has characterized the past. So as you raise your glass of Jacob's Creek, or Blossom Hill or Callaway Coastal, knowing with each bottle what taste to expect, these companies believe you will easily appreciate the great fruit, the soft flavors, and the instant accessibility. It will also be clear that the drink that spans millennia has finally entered the modern world of big business.