This article was first published on JancisRobinson.com on Monday 26th September, 2016
Three months have now past since the UK voted to leave the EU. Just after the vote I set out some initial impacts of the result for UK wine lovers.
In the corporate world, when a major change has occurred, like buying a company or hiring a new CEO, 3 months or 90 days after the event is a good point to take stock of how the change has affected the overall business. Following a major change like this most CEOs create a 90 day plan setting out what they intend to achieve in the 90 days following the change. After 90 days have elapsed, actual performance is assessed against the plan.
In the case of Brexit there was no 90 day plan. However, now that 90 days have elapsed it is worth looking at how Brexit has affected the UK wine industry and ultimately UK wine lovers since the vote, as well as what impacts it is likely to have going forward.
A commonly used tool for assessing the health of an industry is a SWOT analysis, which identifies the strengths, weaknesses, opportunities and threats facing an industry. It helps identify what is likely to happen going forward (both good and bad) and allows business owners to set strategy accordingly.
So here is my SWOT analysis for the UK wine industry and UK drinkers 90 days after the Brexit vote.
The most obvious winners from the Brexit vote are English wine producers. It may be coincidence but there has been a marked rise in exports of UK wine overseas since the vote. Last month, the largest ever shipment of English wine was shipped to the US.
There is no doubting that English wine is growing in popularity and has made great strides in terms of quality in recent years, however the impact of currency movements following the Brexit vote will also have made English wine more appealing to export markets. The graph below shows the impact on the pound against key markets since the vote;
This has made English wine 12% cheaper in the US than it was before the vote.
At home, sales of English wine have improved too. Waitrose announced a 49% increase in sales of English sparkling wine in the 12 months to August 2016, stating it was their fastest growing category. Although still clearly a niche product in terms of the UK wine market, there are signs that English wine is moving into the mainstream. Earlier in the year Lidl announced a deal with Denbies wine estate in Surrey to launch a new range of three wines produced by Denbies. Supermarket chain Booths have also added four more English sparkling wine producers to their range.
This underlying increase in demand combined with the effect of a weakening pound against the euro puts English sparkling wine in a strong position to compete with the now relatively more expensive sparking alternatives from the EU such as Champagne and Prosecco.
The biggest immediate issue facing the UK wine industry is the impact of the weakening pound on the cost of imports into the UK. Across four of the key wine importing countries to the UK; EU, US, Australia and New Zealand, there has been a similar trend in currencies with the pound generally weakening by at least 10% in the period since the vote.
To understand how this has affected the UK wine industry, I spoke to a range of retailers to get some first-hand evidence of how Brexit had affected their businesses; David Gleave of wine importer and wholesaler Liberty Wines, Charles Lea of independent wine merchant Lea & Sandeman and Charlie Ingham, wine buyer at Morrisons supermarket (check out his blog www.charlieinghamwine.com);
David Gleave told me, "Despite the uncertainty that remains, we are simply getting on with business as usual. People have realised this is a long-term situation and their immediate prospects are more or less the same. We haven’t seen any immediate impact on business apart from the normal ups and downs. We think there will be an impact in the medium to long term, but at the moment the economy is still being driven by the economic fundamentals that prevailed prior to the referendum. After an initial bout of uncertainty, which meant that people held off ordering in July, it has been business as usual. We have worked closely with our suppliers, inside and outside Europe, to try to mitigate the impact of the fall in sterling. Many of them have offered support so we have been able to minimise the increase to our customers, and in some cases we have been able to hold prices."
Charles Lea told me; “I think it’s too early to tell what the long-term effects will be, but I expect that wine drinkers will continue to drink wine. In the short term we have been aware of more interest from abroad in the suddenly-cheaper fine wine stocks in the UK, but this has never been a market of any importance for L&S, and selling off stock which in itself provides something of a currency hedge seems a little short-termist. There’s no denying that the sharp fall in the value of sterling, which seems likely to be sustained, will put pressure on prices in the UK. This is likely to have the most effect in the on-trade, where any price change is amplified by restaurant margins, and we expect this area to become yet more cut-throat for a while. This is much the same as what happened following the 2008/9 drop. Clearly all wild currency convolutions and market uncertainty are not good, but can create opportunities as well. They also involve a lot of work which distracts from the core business of building relationships with both suppliers and customers.”
So although the weakening pound is clearly going to be an issue for UK wine lovers going forward, the impact thus far appears to be fairly limited for those buying wine in the UK. However, should this FX position continue for the foreseeable future, then the cost increases are bound to filter through at some point. One to keep an eye on over the coming months.
With change comes opportunity. Although the Theresa May appears to be in no rush to invoke Article 50 and get on with trade negotiations with the EU and the UK's other trading partners, the WSTA has shown great initiative since the vote. At its annual conference earlier this month, Chief Exutive Miles Beale revealed that the WSTA had already begun talks with Australian and New Zealand counterparts to develop a model wine and spirit agreement, during a visit last month. The idea being that they can start to negotiate model agreements on behalf of the UK governments now with non-EU trading partners so that trade deals can be signed immediately after the UK has left the EU, on the basis of these model agreements.
So the WSTA clearly see opportunities for the industry in the post-Brexit world. If they can gain more control over the trade arrangements with key trading partners to ensure the new arrangements work for the UK wine industry that would be a good start. As Miles Beale stated in his conference address “we are the experts at trading wines and spirits - at home, with EU countries and beyond.”
Beyond this element of control, there are clearly opportunities in expanding the volume of trade with third countries to get more quality wine into the UK market. Having lived in Australia for four years myself a few years ago, I have first-hand evidence that most of the best wine made in Australia is very difficult to get in the UK. Many an Aussie has taken great pleasure in informing me “we keep the good stuff for ourselves, mate”.
If the new trade agreements can make it worthwhile for Australian, New Zealand and South African wine producers to export more of their quality wines to the UK then this is a great opportunity for UK wine lovers to experience the best wines available from around the world. As Withnail once said; “We want the finest wines available to humanity, we want them here, and we want them now!”.
As for the likelihood of the UK Government looking kindly on UK wine lovers in terms of duty and tax breaks for wine imports, I can’t see it happening. I think the Government will be looking for revenue streams they can bump up, rather than discount. And given the Government’s changes to the recommended alcohol intake levels in January this year, a more favourable duty and tax regime for drinkers is unlikely.
A more likely scenario is that the Government supports the English Wine industry in trade deal negotiations in an effort to boost exports of English Wine and to encourage investment in the industry. The UK Government will be keen to ensure that the Brexit vote does not stop foreign investment in English wine, like the example of Champagne House Tattinger investing in the Domaine Evremond vineyard in Kent last year.
A more recent foreign investor in English wine is Penny Streeter, Managing Director of South African wine company Benguela Cove. In May this year she invested in a new wine estate in Mannings Heath, West Sussex. Formerly a golf resort and hotel with two 18 hole golf courses, she has chopped off 9 holes from one course and planted vines of Chardonnay, Pinot Noir and Pinot Meunier to make their own English sparkling wine. Golf and wine, what a great combination.
The estate will be overseen by South African winemaker Johan Fourie, who makes wine for her in South Africa. She told me “the concept is a great success for us in South Africa, and the UK is ready for it now, with the growing interest in wine, and particularly English sparkling wines. We’re opening a new wine tasting bar and planning the vineyard, winery and a new restaurant on site.”
Here is Penny and Johan;
I asked her how Brexit had affected the outlook for her new investment, and she was fairly clear in her views; “We can’t sit and ponder Brexit. Like most business people we have no intention to do anything other than stick to our plans which, in our case, is one of bringing great wines to our market and great experiences to our customers.”
So there appears to be clear opportunities for English wine to not only expand sales in a post Brexit world, but also to create a new sub-industry based around tourism at vineyards. The WSTA last week published its English Wine Trail map. Could we be about to see the development of a Napa Valley style wine trail with posh restaurants and hotels showcasing English wine over the coming years? Sounds like a good opportunity to me, and something the Government should be supporting and encouraging.
The main threat to the UK wine industry I can see is that the UK’s position as a key trading hub in the world wine market is under threat.
According to the WSTA nearly 70% of all Australian wine exported to the EU travels through the UK first, as well as more than 70% of New Zealand wine exported to the EU going through the UK first. Should the trade deals agreed between the UK and the EU mean that additional tariffs will apply for wines moving between the UK and the EU, the UK will most probably be cut out of this equation.
This will mean UK importers lose their cut in these deals and the government will lose out in import and export duties. But most significantly for wine lovers, wine exporters may lose interest in shipping wines to the UK. This could lead to a reduction in the range of wines available to UK drinkers.
So there we have it, despite initial fears, the impact of Brexit has so far been fairly benign, but some of the problems may well be in the post.
Unfortunately, despite the WSTA’s best efforts the weaknesses and threats facing the industry are largely outwith its control. These will be dictated by the Government’s ability to negotiate trade deals with other countries and the reaction of currency markets to these deals.
It is therefore important that the wine industry puts efforts into the areas it can influence positively. These are around developing and promoting English wine as a quality product at home and overseas and supporting the investment in wine tourism in the UK’s quality wine regions.