Cut-rate Rioja: Can it be avoided?

Screenshot 2019-07-24 at 20.16.13

The other day I read an interesting thread on the internet about a Rioja reserva 2015 selling for 4.09€ in a hypermarket in Catalonia in northeastern Spain. The debate centered on whether a Rioja winery make a profit producing a 2015 reserva that a hypermarket can sell for 4,09€, whether this kind of offer is good for Rioja and what, if anything, can be done to avoid it.

Let’s tackle the problem one question at a time.

First, can a winery make a profit at that price? Probably not, but with a cut-rate product like this one, the issue is primarily not about making a profit, but rather covering the product’s contribution margin (the selling price less variable costs; in other words, contributing to cover fixed costs).

A big hypermarket chain’s buyers are considerably more talented than winery sales personnel. Chain buyers know the prices of the competition, they know who is willing to play the volume game and they know exactly how much pressure to apply to the seller. The price calculation of a big winery specializing in high volume sales based on a second or third label with no advertising or promotional allowance, known in wine jargon as “net-net” is just a few cents above cost for a very large volume order.

A second possibility is that the winery is in need of cash. No further explanation required.

The question of whether the hypermarket can make any money on the deal is clear: yes, and potentially a lot of money.

Big retailers base their profits on three factors:

  • selling large quantities
  • selling to a lot of different customers
  • having an efficient cost structure

In Spain, the law prohibits sales below cost, so the hypermarket chain must pay at least 3.38€ (4.09 less 21% value added tax on the purchase price). If the hypermarket sets its margin for a big promotional deal like this one anywhere between 10 and 15 euro cents per bottle and orders ten truckloads of wine (150,000 bottles), it can invoice about 500,000 € and have a gross profit of between 15,000 and 22,500 €. Doesn’t seem like much? Understand that a hypermarket will typically carry 200,000 SKUS (stock keeping units or individual brands). It’s also important to understand that the hypermarket will penalize the supplier for late deliveries – to compensate for the loss of profit for out-of-stock situations.

A Rioja reserva offered at a little over 4 euros a bottle is a powerful tool to attract consumers to the wine aisle.

Screenshot 2019-07-24 at 20.16.47

Photo credit:  Pablo Orío

Offers like this one appear on supermarket shelves all the time. In fact, supermarkets create and register brands that they use to sell at aggressive prices to promote the image of the supermarket. They offer their most important suppliers the possibility of supplying products under the supermarket’s label. It’s a win-win for the supermarket because a supplier who raises their prices too much can be replaced with another.

In the case of Rioja, the supermarket brand has to be registered in the name of the current supplier. It’s a small bit of bureaucracy, but assures that all brands sold as Rioja actually are owned by a Rioja winery.

A second alternative is for a winery to sell the supermarket a second or third label.

Is this kind of deal good for Rioja’s image? I think not. First of all, consumers who see a reserva selling for 4 euros a bottle are going to wonder why they should buy others selling for 10 euros and higher. After all, the 4 euro wine carries the same guarantee label on the bottle as more expensive ones. Wineries that spend considerable amounts on developing their brand image throw up their hands in despair. The Regulatory Board, that invests over ten million euros of the wineries’ and grapegrowers’ money on advertising, promotion and public relations to elevate the image of brand Rioja, wonders if this huge investment is worth the effort.

What can be done? Sadly, nothing, until these large-volume, low margin wineries begin to understand that they can’t win long term with this strategy, usually based on buying and holding large stocks of wine, perhaps more than they need.

I have always been a great admirer of the Napa Valley. There, wineries compete in markets at much higher price points than those of Rioja and seem to agree on an image of quality and prestige for the Napa Valley brand. Coincidentally, the Napa Valley is universally recognized as the world’s most popular wine tourism destination.

Rioja has made enormous progress over the years to improve its image. The wineries agreed in the early 1990s to stop selling bulk wine outside the borders of the Rioja appellation. Recognizing wines from each of the three zones (Alta, Alavesa and Baja (currently ‘Oriental’) has been a reality for years. Wineries have created wines with strong individuality from specific areas of the appellation and the Regulatory Board, recognizing the huge diversity of terroirs in the region, recently approved the categories of singular vineyards and single village wines.

Still missing in my opinion is a greater sense of ‘Rioja patriotism’ and the need for stronger brands from all wineries with less low-price wheeling and dealing. A little more Napa in Rioja would be a good thing.

 

 

4 thoughts on “Cut-rate Rioja: Can it be avoided?

  1. Always such a pleasure to read your posts. Always a bit of knowledge and local colour added every time. Always giving me a very strong desire to pack my bags and go to Rioja tomorrow!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s