Rabobank reached this conclusion in its Q1 2012 Wine Quarterly trends and outlooks report, where it said that traditional markets – the UK, Germany, France, Holland – were facing volume declines and lower profits, especially in the UK following another recent excise tax hike.
Canada was the world’s sixth-largest wine import market and consumes roughly 480m litres of wine annually, making it about one third the size of the UK market, analysts Stephen Rannekleiv, Marc Soccio and Valeria Mutin said.
They added: “However, unlike the UK, Canada has seen strong momentum in wine consumption in recent years (+30% since 2006), and perhaps more importantly, value growth is outpacing volume growth, up 8% and 5% respectively in 2011.”
Stronger Canadian pricing
Such strong pricing was not lost on exporters to Canada, Rabobank’s team said, with many attaining average prices well above the global average: for instance, US exporters gained US 8$ (€6) per litre compared to their rest of world export average of $5.
Although Canadian pricing was higher than average for many exporters, Canada tended to import better quality wine than many other markets, the analysts said.
Sales of alcohol are also governed at a provincial level – in for instance, Ontario (33% of total Canadian wine sales) Quebec (32%) and British Columbia (17%) – which meant that provincial monopolies also required a marketing budget to back brand listings, adding costs for suppliers.
Overall, foreign wine companies had a “generally quite positive” sentiment about dealing with the provincial liquor monopolies, and export-driven firms were increasingly prioritising these markets.
Fly in the ointment?
But one dark cloud on the horizon was a recommendation by the Ontario Ministry of Finance that – to plug provincial budget holes in hard economic times – the Liquor Control Board of Ontario (LCBO) “use its purchasing power more effectively”, a move the analysts said other authorities could copy.
“Should the LCBO [do so] both foreign and domestic suppliers would be expected to feel a great deal more pricing pressure, and margins would be squeezed,” they said.
However, another ministry recommendation to “aggressively pursue store expansion” could see margin pressure eased by increased sales volumes, the analysts added, while the LCBO could also cut support for Ontario wines (80% of Canadian production) and hand new opportunities to exporters.
Irrespective of whether support was cut, Ontario domestic wine sales (0.9% growth in 2011) were already losing ground to imports (+2.7% growth), Rabobank said.
Canadian wineries also faced the problem of relatively low yields and high production costs for wine grapes (grape cost per litre of wine is $1.94 compared to $0.66 in the US), the analysts noted; thus the industry found it tough competing with international rivals on price.
“Imported wines represent 75% of wine consumed in Canada, and with current trends that percentage is likely to grow,” Rannekleiv, Soccio and Mutin wrote.