It’s not just Marmite that’s more expensive

Independents have been hit with pre-Christmas price increases following the collapse of sterling against key currencies like the euro and the US dollar. But the worst is yet to come, reports Graham Holter

 

The message is invariably apologetic. Yes, we know what the prices are in the list we sent you. But sadly due to currency issues beyond our control, we have had no option but to increase them. Thank you for your understanding and support.

The increases, typically between 3% and 5%, are sometimes across the board, but have in some cases been calculated on a line-by-line basis. Sterling’s turmoil on the currency markets since the Brexit vote means few merchants are surprised by an uncustomary pre-Christmas hike. But given the scale of the pound’s capitulation in recent months – and bleak warnings about the currency’s prospects in 2017 – the bigger concern is how much prices could leap again in January and February.

The Wine Merchant issue 52
As The Wine Merchant went to press, sterling was trading at £1.16 against the euro, compared to £1.27 six months earlier (and almost £1.32 in late May). Over the same period against the US dollar, its value fell from £1.43 to £1.30, taking in a pre-referendum spike of £1.48.

Against the Australian dollar the pound fell from around £1.87 to £1.70, though shrewd speculators would have caught a rate of £2.04 in the late spring. It’s a similar picture with the South African rand: today’s rate of £17.50 compares to around £22 back in April, and over £23 in May.

“Price rises seem to be coming thick and fast now,” says Mark Wrigglesworth of The Good Wine Shop, which has branches in Chiswick and Kew. “It doesn’t wildly surprise me.”

Like his larger competitors, Wrigglesworth forward-buys currency to lock in exchange rates. “But we’re now three months down the track from the dreaded [Brexit] decision, and I would imagine that most of them have exhausted the forward buying they did at the old rates and they are consequently faced with the reality of the current rate,” he says.

“I was just working on a spreadsheet for some ex-cellar stuff which I was pricing at £1.14. I looked at the sheet for the same stuff we shipped last year and I was pricing it at £1.34. Then you put the duty rise in on top of that – it’s not a huge duty rise, but it all adds up – and you’ve got a dramatic impact.”

Rob Patchett of The Leamington Wine Company says: “Most of our providers are saying a price increase will be in full effect by Christmas so they are urging us to get orders in now, which isn’t really logistically sound because summer for us is our quiet time – there isn’t much going on.

“So asking independents to dig into a fund that isn’t fully replenished isn’t quite the right thing to do. You don’t want stock downstairs just gathering dust for the sake of 3%.”

Paul Shanley at Prohibition Wines in north London says “four or five” suppliers have announced pre-Christmas price hikes. “They’re very apologetic,” he says. “These are typically suppliers who’ll produce one price list a year straight after the Budget.

“My impression is that suppliers are really trying to absorb some of it themselves, or they’d already hedged, so they don’t perhaps have to put prices up as much as currency has moved.”

Not every supplier has imposed price increases. Hayward Bros is one. “The question that most indies ask me is ‘when are you putting your prices up’, not ‘are you putting your prices up,” says sales director Tony Schendel. “We’ll go after Christmas. You cannot go up three months before Christmas – your customers have done planning, events, they’ve done brochures. But it means if you haven’t bought currency, you’re just swallowing margin. It doesn’t help anyone if we’re all making less money.”

Concerned about a Brexit vote, Hayward Bros hedged its currency deals slightly further ahead than normal, but not every supplier had that luxury. Smaller-scale importers, and especially younger businesses, struggle to lock in currency rates at all.

One major supplier to the independents says there will be no price increases passed on by his business this side of Christmas, but he warns that the situation is likely to change dramatically in the New Year.

“In a smaller organisation you just can’t stand that loss,” he says. “I think what some of the bigger guys are trying to do is batten down the hatches and just absorb currency losses to get through Christmas. There’s going to be an almighty crunching and grinding of gears in the New Year so everyone’s going to have to re-price, and then we’ll find out how price sensitive the market really is.”

Shanley at Prohibition is sceptical about the generosity of certain importers. “One supplier said they were absorbing it completely and our view was, well, we’re very glad we’re not dealing with you, because they clearly were charging too much to start with,” he says.

Independent merchants seem to be taking a pragmatic approach to inevitable price inflation in their shops.

Wrigglesworth at The Good Wine Shop says: “I would say there’s a small number of cases where we will take a hit, and others where we will pass it on. I think for any business willing to just absorb margin hits when you’ve got rising costs, it’s a road to ruin.”

The picture for Christmas is still a bit blurry. “We certainly know what we’re going to be stocking – it’s a question of what we’re going to be selling it at,” Wrigglesworth says. “It won’t change what we’re going to be listing. There might be a few tweaks and changes along the way.”

Some suppliers are apparently hitting brick walls in their discussions with larger retailers. “The problem we’ve all got is that Majestic and people like that are just saying, ‘price rises – you just swallow the difference. If you don’t like it, take the wine away’,” one supplier says.

“I heard that quite a big producer said ‘you’ve got to pay the price’ and they said ‘we’ll cancel the Christmas order then’. Twelve thousand cases … no one wants to lose that sort of business. Unfortunately indies can’t really do that.”

It’s a story backed up by another supplier, who admits that “with larger retailers, you just couldn’t move things now”.

He adds: “The UK consumer has become trained and used to deflation. I’ve seen pretty solid numbers suggesting that we’ve had deflation of at least 10% in wine since the beginning of 2014. That’s fuelled by supermarkets lowering their own margins to compete with the discounters, and the strong pound. That’s going to have to reverse out.

“Nobody really knows what the supermarkets are going to do. There will be a further big fallout of ranges in supermarkets and that’s all good for the indies. The inevitable consequence is there will be an even duller selection on supermarket shelves.”

Will customers in independents be prepared to pay more, and will their favourite wines survive a post-Christmas range review?

“I think we need to look at what each individual line is going to go up by and take a decision whether to keep it or not,” says Shanley at Prohibition. “We’ve got to pass on everything – we’re not going to absorb a penny, because we can’t afford to. But if we find that a wine on the shelf suddenly looks too expensive we’ll probably have to delist it.

“I don’t think that’s looking likely at the moment.”

Patchett at Leamington describes the situation as “a huge concern”.

He adds: “There’s only so much you can ask of your customers. Everyone’s got pockets and some are deeper than others, but it doesn’t mean that they’re endless.

“It’s a concern simply because people for a long time have been going for quality over quantity – but there’s only so much you can do before the quantity of the quality going out starts depleting as well.

“Wines at £10 absolutely have to sing and dance at that price point to get people coming back. You can’t be hand-selling obscure wines at £10-£15 that people can’t be confident about.”

Wrigglesworth at The Good Wine Shop adds: “While we will and want to remain competitive, these prices rises are affecting everyone in the industry – and other industries outside ours. If businesses are just going to take it on the chin, none of those businesses are going to be in a very good place in nine months’ time.

“If you’re prepared to take a 8% or 9% slash in your gross margin, that’s the money you were going to invest in your website for next year, or another member of staff, a new van – whatever it was.

“We know what we need to make in terms of margin in order to make a profit as a business, and to have a profit to invest in further growth. And we will maintain that margin, so prices will have to go up.” It may well be that some retail prices will be held below a critical price point like £10, and the cost increase absorbed. “But that’s going to be the minority of cases.”

Yet the current pragmatism may only stretch so far. There are other icebergs on the radar. For a start, the 3% to 5% increases we’ve seen so far don’t begin to reflect the reality of how far sterling has fallen. “Three per cent just can’t be enough for anybody to do anything,” warns one supplier. “Margins were under pressure before the Brexit vote.

“The currency is 15% down now. Larger brands may take the view that passing on a 15% price increase overnight, to restore margins, is going to have too drastic an effect – but we’re going to have to have plans to restore margins over a period.”

Short harvests in South America, as well as in Chablis and the Loire Valley, will also have an inflationary effect. And that’s without factoring in any further shocks to the currency markets – the triggering of Article 50, if it happens next year, is an event that may prompt some merchants to hide behind the sofa.

Rabobank’s analysis hardly soothes the nerves. “We continue to see sterling as a vulnerable currency and expect further downside for the pound against both the dollar and the euro in the coming months,” says senior currency strategist Jane Foley.

“We look for euro/sterling to move towards 88p by the middle of 2017 and sterling/dollar moving to £1.25 in this time frame,” she told Forbes.

Ultimately, there is very little that merchants can do about any of this. So the view might as well be: why worry?

“If anybody should be able to introduce price increases and explain them it’s the independents, because they get to talk to the customers,” suggests one supplier. “They’ve got to hold on to that margin and explain it.”

Shanley picks up the point. “I think everyone knows what’s happened after the referendum, they know the way exchange rates have gone, and I would imagine they’re prepared for prices going up.”

Wrigglesworth sees parallels with the last financial crisis, some of them positive.

The two-year timescale for leaving the EU after Article 50 is “a very long time, and we’ve all got to carry on doing business in that time,” he says.

“I cast my mind back to the banking crisis and I remember everyone was in a pretty fragile state for about six or nine months, and I think this is somewhat similar.

“There’ll be some ebb and flow, and shocks to the market and currency, but you’ve got to hope there’ll be some stability – because we can’t stay in crisis forever. I’m not pessimistic about next year.”

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