One wine supplier after another has collapsed or been bought as the banks turn the screw - but not everyone's struggling, finds Graham Holter
Last year, the UK wine trade was buzzing with rumours of suppliers facing financial ruin. The predictions were not wrong merely premature. So far this year, six famous names have either closed or been swallowed up by rivals and there is nervous talk of more to come.
A potent cocktail of stagnating sales, rising duty rates, the weak pound and squeezed margins is the most familiar explanation for the wine trade's woes.
But the real tipping point has been the banks' sudden nervousness about investing in a sector with such well-publicised problems. Gavin Partington, head of communications at the Wine & Spirit Trade Association, says the industry felt the first tremors at the tail end of last year.
"You could see where sales were heading and that there were going to be difficulties," he recalls. "The real issue has been the impact of the downturn, which has been exacerbated by excessive tax increases. It was probably inevitable some businesses were going to cut jobs and in some cases find it difficult to survive."
For others, though, this presents an opportunity. Coe Vintners recently bought HBJ and chairman John Coe is hinting at more deals. "In fact there's another one just going through at the moment, a much smaller company in East Anglia," he reveals. "I'm genuinely not trying to be acquisitive but there are opportunities to buy companies that were slightly over-geared and had a bit of bad luck."
Bad debts are "enormous" this year, he says. "For us and our competitors, they'll be double what they were last year, if not treble. There's also a decline in purchasing. Our customers are buying less wine and spirits and there's a move to lower quality volumes are down slightly, but price per bottle is down considerably."
Coe has some sympathy for rivals that are being forced out by trigger-happy financiers. "To a man, everyone I talk to says banks are being totally unreasonable," he says. "They're pulling in the reins when it's totally unnecessary. Loans that were perfectly solid and well secured last year are being called in this year."
For its part Coe Vintners is reaping the rewards of modest, organic expansion in the boom years, which now means it can make acquisitions without relying on outside finance.
"We had 10 years of constant growth in this industry," Coe says. "When the whole industry is growing it's very tempting to get on your surfboard and go with the tide. You do tend to employ people as a luxury and take on more than you need to. Those of us who kept lean and mean are much better placed now."
A more pragmatic approach in the boom years has also served PLB well. Its recent purchase of HwCg was financed partly through the company's own reserves and topped up by a bank loan that was smaller than MD Peter Darbyshire had envisaged.
"Certainly the banks are being incredibly unreasonable," he says. "We have a strong balance sheet and the bluest of blue-chip customer lists. Yet all the banks say to us that they don't find the sector attractive. It's a pretty dire environment in which to try to do deals or raise money, even when you have a rock-solid balance sheet."
PLB certainly won't be looking to make further acquisitions in the short term, says Darbyshire. "HwCg is going to take a lot of time to digest for us," he adds. "If we give it time to run in properly, at some point two or three years down the line there will be another opportunity."
He agrees with Coe's assessment that some wine suppliers have lost control of costs, which he says makes them particularly vulnerable when, for example, their on-trade business declines by 15%.
"It's absolutely disastrous," he says. "Acquisitions in the sector will be all about growing the top line and taking out fixed costs in other words, companies taking over rivals will want to take on very few people."
There is a real possibility that, in the not-too-distant future, the wine trade will be supporting far fewer jobs and companies than it does now. The collapse of Paragon Vinters has already seen 28 jobs go, while 26 jobs are affected at Playford Ros, 40 at HBJ, 31 at Lay & Wheeler, 40 at HwCg and 30 at Ehrmanns (see box).
Although devastating for the individuals concerned, a streamlining of the trade might not be wholly bad news for the sector, argues Darbyshire. "There are too many what I call 'lifestyle companies' that operate to break even and provide a comfortable living for a number of people," he says.
"They can skew the market, because not having the full marketing team, or buying data as those who deal with the big multiples have to do, means they can take value out of the sector by undercutting those of us who do invest in those things."
Such companies might not be the only ones caught out by tougher economic conditions. It is said that one major wine supplier to the multiple grocers now operates on such slender margins that it barely covers its costs. Others are rumoured to be on a similar financial knife-edge.
Alistair Morrell, a former Asda buyer who worked for Stratfords and Orbital Wines before setting up Wheelbarrow Wines as a one-man band, believes the wine trade has grown bloated and self-obsessed.
"There's too much grandiosity and a lot of navel-gazing," Morrell believes. "Suppliers are looking at the product and telling themselves it's the greatest, but that's not what people using it are thinking. There's too much hyperbole and self-aggrandisement."
Wheelbarrow Wines operates on the lowest-possible overheads, and focuses mainly on the pub sector.
But Morrell rejects any suggestion that supermarkets are part of the problem for larger rivals it's down to suppliers to adapt to market conditions, he argues. He suspects that many won't. "There's been total complacency in this industry," he says.
Darbyshire adds that the banks' nervousness about wine is now making it harder even for strong, well-run companies to buy up weaker rivals. The net result of the current situation, he feels, is that wine producers will be left with fewer routes to market in the UK.
"In my opinion a number of companies will look very carefully at their fixed costs," he says. "We'll see more companies deciding it's not worth it and that it's easier to close the doors and walk away."
The problem is that it won't just be the 'lifestyle' companies that bite the dust.