When the cost of a bottle of wine is close to the price of a bottle of soft drink, it is easy to understand that something is happening to the wine industry. Has a bottle of wine become a loss leader for the supermarket chains, or is competition between wineries driving prices down to the floor? Is the low price at the cost of quality?
A survey of supermarkets commissioned by "Globes" shows that for the past three years, taking into account bargains involving quantity, prices fell significantly during the period preceding and during the Passover holiday. Wine can be found in the supermarkets for less than NIS 10 per bottle (quantity bargains), mainly at Victory Supermarket Chain Ltd./ (TASE: VCTR), Yenot Bitan, and Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI). The cheapest wines are made by the Carmel, Segal, Teperberg, and Barkan wineries.
"Prices in the low-cost segment are falling as a result of a large wine surplus," says Carmel Winery export manager Arnon Harel. "In the segment of wines sold for NIS 20 or less, there is no distinction between brands in this consumer product, and there is price cannibalization."
Who is responsible for driving prices down? It depends on whom you ask. Some assert that the surplus supply of the wineries themselves dictated lower prices, while other accuse competition between supermarket chains and stores.
"The profit margin in this segment is very low. Profit comes from the quantity sold," Harel says. "Unfortunately, the margins are becoming narrower year by year. In addition to the surplus supply, another process is taking place - consumers are undergoing market education, leading them to consume higher quality wine in a price range of NIS 50, which further increases the supply of cheap wine, in turn driving the price down still further.
"Another problem pushing prices down is the inequality between supply and demand during the year. 30-40% of our yearly wine sales are at Passover, and something exceptional happens during this period: even though the demand rises, the prices plunge. It's bad for the industry and bad for the stores; it's good only for the consumers. Prices are cut to below cost, with the thought that they can be increased after the holiday, but people buy less after the holidays, and we're left with the supply."
Four bottles for NIS 100
Teperberg Winery marketing manager Roi Harel emphasizes that the aggressive price bargains for the holiday this year are deeper than in previous years. He also attributes the wine surpluses to the price. "The really big bargains come from wineries having surpluses going back to 2015, the shmita year (the sabbatical year, when many Jews will not using agricultural produce grown in Israel). Wineries prepared for this year by increasing their quantities in 2014, doubling their raw materials in some cases, and this trend continued in 2016, resulting in increased production. When consumption of wine increases, the wineries reduce their inventory through the price. Prices are lower than they have ever been. A bottle of wine from a major winery, which sold last year for NIS 30, is now selling for NIS 15, and that's something that has never happened before."
"Before, you'd see bargains of three bottles for NIS 100, a popular bargain at the time. Today, you can see four or five bottles offered for NIS 100," adds Castel Winery deputy executive director Elad Katz, who believes that the great competition between specialist wine stores is contributing to the erosion of prices.
Katz adds, "We see a trend towards opening more and more sales points with varying degrees of professionalism all over Israel. Because all of them are selling the same merchandise, a price war results, culminating in very low prices for leading brands in order to attract customers. On the other hand, it is important to note that although the public is benefiting from cheap wine, there is still strong demand for high-quality wine and willingness to pay for it."
A senior wine industry figure claims off the record that the supermarket chains are responsible for the drop in low-cost wine prices. "Particularly during the holiday season, there's very intense competition for the consumer's trade. Wine on Passover is one of the leading products that can be used to attract customers, and the result is that prices fall too far, just so that the supermarket can boast of the cheapest shopping cart in the surveys published in the media.
"We don't intervene in the price, but the low price is confusing the consumer. He thinks that wine can be produced at these prices, and that makes it difficult for the wineries to make a profit. You can't exist in the long-term with very low prices."
"Globes": Is this detracting from the quality of the wine?
"It's very difficult. The inputs aren't getting cheaper. Water prices are rising, and the farmers have to be paid for what they grow. The consumer is benefiting from competition and prices now, but these are becoming something that is taken for granted, and that is harming the entire industry. Our consolation is that this price erosion involves mainly the supermarket chains, where wine is regarded as a holiday product, like chocolate or matzo (unleavened bread eaten on Passover). In specialist stores and other sales channels, this doesn't exist."
How are the low prices affecting the sector?
Roi Harel: "It's too early to say what the long-term effects will be, but it isn't contributing to the status of the industry and the brand concept in the long term."
Is wine a product that plays in a price market?
"It's a market in which consumption is increasing. For some people, the price is the most important thing. For others, it's the brand, and for still others, it's the quality. There's some kind of mix, but it's nice to see that the wineries have realized that the Israeli consumer is sophisticated enough to demand something for his money, and the quality of the wine at the right price has risen."
What is the right price?
"It's a big universe divided into segments. In supermarkets, we're talking about NIS 30 a bottle. If we look at how it was a decade ago, the wine at this price didn't have a good taste. Now there's better quality at this price."
Arnon Harel says, "A fair price for wine should be around NIS 60, which gives value for money."
"Wine culture is just beginning"
Carmel Winery VP marketing Daphna Miller says that the semi-premium segment of NIS 50-60 per bottle is the fastest growing segment, with 30% quantitative growth. "This segment now accounts for 8% of all wine sales, double the proportion of three years ago." In this price segment, however, there is a considerable quantity of high-quality imported wines.
"Competing against imports is tough," Miller says. "Like consumers in other countries, however, we've discovered that the Israeli consumer prefers his own country's wine, just like a Frenchman prefers French wine. You can add the question of kosher wines to this, although there are also imported kosher wines."
Miller adds, "In a survey we conducted, we discovered that 55% of wine consumers say they buy wine for NIS 40 or more. The higher the price, the fewer the number of consumers, because wine culture here is just beginning, even though it's also growing among haredi (ultra-Orthodox) customers. For example, they used to be price consumers, and now they also take culinary considerations into account."
Are efforts being made to halt the drop in prices during the holiday period?
"Things have to be done on an industry-wide level, rather than dealing with individual cases," Arnon Harel says. "First of all, the supply has to be reduced, with lower production and increased exports. Secondly, it is necessary to educate the market in order to generate uniform demand during the year. That's not a process that will happen in a single day; it's a culture that has to be built over years. Increasing exports is also not easy, because Israeli wine isn't cheap in comparison with Europe, it has no historical cultural advantages, and its main feature, unfortunately, is that it's kosher. The Middle East is not yet perceived as a region where high-quality wine is grown."
Some say that the customs exemptions for imports are creating competition that is making things difficult for the local industry. In the past, there were demands for subsidies to equalize the conditions, as is done in France.
"In my view, imports are a blessing," says Arnon Harel. "I'm against artificial measures against imports, just as I don't want barriers against our exports. Good quality imported wine is good for everyone, because it makes the industry prosperous, and increases consumption."
The current low price can also be found in overseas supermarkets, with bottles of wine for €3-5. Is this a necessary segment for the industry?
Roi Harel: " Wine for €3-5 isn't good quality wine. It's worth what you pay for it. Here, the wines being sold for NIS 15 should be priced at NIS 30-40, comparable to €8-10, and those are good quality wines."
Arnon Harel adds, "Wine isn't a cheap product, and it can't be sold at the price of a soft drink. The cheap threshold should be around NIS 30, and no less than that. Wineries that forego professionalism just because of the price are damaging the entire industry. The wineries should leave a spread for marketing, because the main factor in selecting wine shouldn't be the price.
"Some of the manufacturers have no patience for the production process, and that's why the warehouses are full of wine made for the cheap price, out of a desire to grow quickly to dimensions larger than the market can contain. They're making wine into a consumer product like canned goods, and exactly what we don't want in wine. The responsibility for it is only ours, you can't blame anyone else: not the supermarket chains that are selling wine cheaply because they bought it cheaply from us, and not the consumers, who are only profiting from the state of the industry."
Published by Globes [online], Israel Business News - www.globes-online.com - on April 5, 2017
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