Examination of Witnesses (Questions 540
- 552)
WEDNESDAY 14 MARCH 2007
MR MICHAEL PAUL
Q540 Chairman:
The attraction of New World wines for supermarkets, I suspect,
is volume and consistency? They can get both?
Mr Paul: And service.
Q541 Chairman:
If the supermarkets, say Tesco, want to sell French wine, do they
not run into the problem of getting guaranteed volumes and guaranteed
consistency?
Mr Paul: That is why I raised the issue of service.
What supermarkets found was that generally the New World companies
took time to understand how retailers went about buying wine.
When the buyer arrived in the winery, everything was ready. They
knew who Tesco were. It sounds an obvious thing to do, but sometimes
buyers say they go down to the south of France and the wine maker
would be off playing boules or something, or the samples were
not right, or all they wanted to do was have a long lunch. I am
exaggerating for effect, but in the New World it would be "bang,
bang, bang" and the sales guy from the distributing company
would actually fly out there two days beforehand so everybody
was primed as to what this buyer was going to want. This does
not sound like rocket science, but in the wine trade it was. It
is about an attitude. It is not so much just about what the product
tastes like. Remember that the average buyer for a supermarket
probably spends 75% of their time on administration and 25% on
buying, so they cannot afford to deal with hundreds of people
who maybe do not know who they are, or a shipment that does not
arrive because the bottler broke down. They just cannot deal with
that kind of issue, and the New World companies behaved in what
one could call generally a more acceptable way from a business
perspective.
Q542 Lord Bach:
You made a very interesting point about how Old World wine makers
are not so attracted by the profit motive, that it is not so much
a motivator for them as it is for others.
Mr Paul: That is a sweeping generalisation.
Q543 Lord Bach:
Could one put on that particular comment that one of the reasons
for that in the modern world, why they have not had to, is because
the EU tax payer has been subsidising them, so they do not have
to, or up to now have not had to, face reality. I do not mean
the very top of the market, the wonderful wines. I mean the whole
mass of wine that we have been talking about a lot, where the
motive that encourages business generally has not had to apply
because in the end the EU tax payer will fork out. I am putting
it in a particularly crude way but there must be an element in
it.
Mr Paul: The co-op system, if you like, works
in the sense that the objective of that company—that co-op—is
to just get rid of the wine at the end of the vintage and the
growers know they will be paid for that wine, irrespective of
what happens to it. That does not work in the New World.
Q544 Lord Bach:
Do you agree that this needs to change?
Mr Paul: It has to change because, for a start,
you get this huge issue of surpluses, which is ultimately what
it leads you into.
Q545 Chairman:
Can you go over the co-op system again for me? It works on the
basis that the producer sells to the co-op and what he gets from
the co-op is not related to how much the co-op then sells the
finished article for?
Mr Paul: The grower knows that at the end of
the year he is going to get paid according to how much he brings
into the co-op. It is not a question of him being paid by the
hectolitre. At the very least you need someone to say "we
do not need that much, could you produce half the amount next
year but at a higher quality". It sounds a very obvious thing
to be able to say. In other words, it is not market-led. Traditionally,
co-ops have been selling to the local market, they may been selling
within France or Spain or Italy, so as a whole it is market-led
because why would anybody produce wine that was not being drunk
somewhere. But now, of course, we have the situation where there
is a surplus that is not being drunk anywhere.
Q546 Lord Bach:
Keeping with supply and demand, which you have just touched on,
we have been told that the problem is that the EU produces more
wine than it can sell, so supply exceeds demand. I am particularly
interested in your views about the capacity of grubbing-up to
help solve this particular issue. You say you would favour that
in commercially non-viable areas. Would you also favour the continuance
of restrictions on planting rights, which some people say—we
have heard evidence to suggest this—that that may prevent
efficient producers from actually entering the market, so it may
be a backward step rather than a forwards step?
Mr Paul: I agree, I think it would be a backward
step. If you want to encourage a more market-driven wine industry,
you have to allow those people who are innovators, who have a
market, to realise their potential. In some instances this must
mean allowing them to plant more. It has to be so, otherwise you
are restricting the entrepreneurs who could help to turn this
round. What I said earlier was: how do you decide whether somebody
who wants to plant more has a sustainable business plan or wants
to plant more on the basis that he hopes he might be able to sell
it somewhere some day?
Q547 Chairman:
The market will do that, will it not?
Mr Paul: The market will do it, but only after
he has been allowed to plant. On balance, I think you have to
allow people to plant, because I cannot see any way round it.
Q548 Lord Cameron of Dillington:
Going back to Lord Bach's question about grubbing-up, (the other
half of the equation, as it were) if there is going to be a grubbing-up
scheme, it will be re-introduced between now and 2010 or 2011—this
is what the current proposal is. Various Member States are saying
that they want to direct where the grubbing-up should take place.
Do you think it should be entirely at the choice of the producer?
Or should there be any form of direction as to where these grubbing-up
grants should go or should be targeted?
Mr Paul: I suppose from an idealistic point
of view it should be at the discretion of the producer, providing
they are not using that as a means of delaying the process. We
are talking here as if the surplus is an EU issue. The biggest
single problem that the wine category has in the UK—you
could also argue world-wide at the moment—is the Australian
surplus. The Australians got terribly optimistic in the late nineties,
and the huge irony of the wine category is that the country that
revolutionised the way we look at wine, by introducing such obvious
things as talking to the consumer, is now behaving—and has
behaved for the last few years—in a more production-driven
way than some of the worst parts of the Old World. Therefore,
we have almost an absence of a role model, because the Australians
were role models and that is a huge issue. Then, of course, the
Californians had a surplus and they just grubbed up. The Californian
surplus will not exist this year. The Australians are far more
optimistic. They believe that, if they have a surplus, that is
an opportunity; and that has created huge problems.
Q549 Chairman:
What are they doing with their surplus?
Mr Paul: They are discounting it and distorting
the market. If you look in the UK over the last few years, you
have had most of the Australian brands and companies discounting
like mad to try to move wine, because this is the easiest market
to move large quantities of wine and that has distorted this market
place. What I am really saying is that that is a marketing problem,
which the Australians and Californians are dealing with in their
different ways, whereas in the Old World you have always had a
surplus, there has always been a wine lake. This issue now is
that the wine lake tends to be more drinkable wine than it used
to be in the past. In the past the industry got rid of it somehow
but now it is a bigger problem from a marketing perspective, because
it is more drinkable wine and therefore can come onto the market.
The fundamental issue of wine round the world is that it is not
profitable. Even the top Australian companies, even when they
did not have a surplus, were not making an acceptable return on
investment. The concern, therefore, is that if, New World companies
cannot make a return and Old World companies, if they decide they
need to make a return, cannot make an acceptable return and if
retailers even in this market, are not making the kind of return
they can make on wine as they can make on other categories, then
actually that will be the biggest single issue going forward,
which is why we have to spend our time trying to get the consumer
to trade up to sustain the growth we have had for the last 10
years.
Q550 Chairman:
If the consumer does trade up, that has quite a significant implication
for the distribution of wine. There are going to be areas that
are not going to be able to produce wine that the consumer will
want to drink?
Mr Paul: Yes, but that is the market behaving
as markets should behave in the end.
Q551 Chairman:
I suppose the question is: what do the people who are presently
producing that type of wine do in that situation?
Mr Paul: There will be always people coming
into the market at a lower price level. There will always be people
who want lower-price wines. What I am saying is that, if the average
price of wine is now £4 and it went to £4.50, that would
add £6 a case on 150 million cases to the profitability of
the industry. But it would not necessarily affect the volume of
wine going through at lower levels. It would just mean that on
average people are spending just that bit more.
Q552 Lord Plumb:
Can I just ask you about Eastern European wines? Do you see a
glowing future for them?
Mr Paul: If they can find a reason for the consumer
to buy them other than that they are just not very expensive.
But that is tricky, because the consumer expectation of an Eastern
European wine is that it is quite drinkable but it is cheap. It
is going to be very difficult to break out of that mould, however
good the wine is that is produced.
Chairman: This has been a somewhat different
tone to some of the tones we heard last week. Thank you very much,
Mr Paul.
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