Select Committee on European Union Minutes of Evidence


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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