25 April 2012 --- When you think of global wine markets, Canada is not the first country that comes to mind. But with many of the global wine trade’s traditional core markets seeing falling volumes and lower profits in the face of economic headwinds, it is an example of the smaller markets the wine-exporting countries are taking a harder look at because they offer stronger growth potential and better pricing, according to Rabobank’s team of wine industry analysts in their most recent Rabobank Wine Quarterly report.
Canada is the sixth-largest wine importer and consumes about 480 million litres of wine per year, making it roughly one third the size of the UK market. And while both sales and profits are on the wane in the UK thanks to high inflation, general economic recession and a sharp rise in excise tax, the Canadian market has real momentum, with consumption growing by 30% since 2006. Not only that, but prices are growing faster than volumes (dollar sales rose 8% in 2011, while volume growth was 5%).
This has allowed many exporters to attain average prices in Canada that are well above their global averages, although direct comparisons are difficult. This is because Canada tends to import higher quality wines than many other markets and suppliers have to deal with state-run provincial retail monopolies that can require them to pay part of the marketing costs for their brands. Although the Canadian market is expected to remain attractive, it may lose some of its shine as provincial governments look to provincial liquor monopolies to helpcut their budget deficits.
Ontario, for example, has a CAD 15 billion deficit and as part of its deficit reduction plan, the Ministry of Finance has suggested that the Liquor Control Board of Ontario (LCBO), its retail monopoly, should “use its purchasing power more effectively and improve its markup structure for setting retail prices”. This would lead to a squeeze on margins for importers and if it is effective in cutting costs, it will likely be replicated in other provinces. However, the effects of such a move could be offset if the provinces look to improve revenues by expanding the amount of shops they have, which would help to boost sales.
“On the whole, the Canadian market appears poised for continued growth in wine consumption, both in volume and value,” said Stephen Rannekleiv, Executive Director, Food and Agribusiness Research & Advisory at Rabobank. “However, while growth is likely to continue, suppliers may soon begin to feel greater margin squeeze as global suppliers continue to look to the Canadian market in search of greener pastures and provincial monopolies are likely to apply greater pricing pressure.”
For more details on this story and an overview of trends and the outlook for the global wine market in the first quarter of 2012, please see the attached.