Lessons from Coke: Can Wine Ever Be the Real Thing?

What the wine industry should learn from the cola business -- and what it shouldn't.
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The disorganized American wine industry is hardly cursed with a vision glut, but a few forward thinkers, eager to help their industry break out of its marginalized beverage niche into a broader consumer market, often point to the soft-drink industry as a model to be emulated.

But

Coke's

(KO) - Get Report

recent problems offer evidence that the wine industry could be in trouble if it imitates the

recent

strategies of its fizzy cousins too closely. Instead, what may work best for wine strategists is the soft-drink marketing magic of the early to mid-1990s, back before a saturated market and the global economic downturn prompted price wars that savaged much of the sector's vitality.

The theory that the wine industry could draw a lesson from the cola industry's playbook was advanced in a

February Drinks & Diversions column. Addressing the industry's problems with marketing, stagnant consumption and volatile retail prices, that column advised:

"The wine industry should take its cue from the soft-drink business," says Vic Motto of Motto Kryla & Fisher, the industry's top CPA and consulting firm. Motto points out that beer, soft drinks and other beverages maintain decent prices and profit margins even though they have no supply problems.

There's just one problem with this view: While historically true, the soft-drink industry has been a bloody battleground of late. As John Sicher, editor and publisher of industry publication

Beverage Digest

, points out, "Soft-drink prices started trending downward in 1997 and remained flat to slightly lower in 1998."

Sicher says data on the precise level of the drops were not very reliable, but another industry analyst estimated them to be 4% to 5% a year, with deeper discounts and outright Coke vs.

Pepsi

(PEP) - Get Report

price wars occurring in certain markets. Including inflation, that translates into a two-year price drop approaching 9% to 10%, and that's gotta hurt.

Little wonder that Coke tried to put a halt to the price wars. "Prices started upward early this year as the large soft-drink bottlers have tried to move prices up a bit," says Sicher. But that response has its own hazards, as Coke disclosed when it shocked the markets March 29, announcing that its worldwide case volumes would decline in the first quarter, and that sales for the all-important North American market (27% of total sales) would increase only 2%, contrasted with the expected 4%. Other analysts agree that consumer resistance to the higher prices and increased competition from fruit-juice drinks and bottled water may make price hikes a self-defeating proposition.

The price-volume tradeoff, of course, is nothing new, and the same situation has long afflicted the U.S. wine industry. According to scanner data from

Information Resources

, American vintners have raised their prices by 28.5% over the past four years, far outstripping the growth in number of cases sold. Protected by this large and growing pricing umbrella, imported wines have boosted their market share some 34% over the same time period -- from 8.7% of case sales in 1995 to 11.7% in 1998.

But while the U.S. wine market

behaves

like it's saturated, in reality it's a faux saturation prompted by an undeveloped market. In the U.S., wine is a distant third to beer and spirits for consumer preference. Per capita consumption here is just 7.3 liters per year, ranking it 30th in global wine consumption behind Australia (18.1 liters), Yugoslavia (19.9 liters) and way behind No. 1 France (60 liters) and runner-up Italy (59.4 liters).

And how do you develop a market? Promote, market, advertise -- things for which the industry has not had much stomach in the past. However, there are some hopeful glimmers. Industry newsletter

Wine Market Report

said Wednesday that total industry advertising expenditures reached $130 million in 1998, up from $101 million the year before and double the level of 1996.

This trend is good, but still leaves a long way to go. For example, the

National Soft Drink Association

says its industry has revenues of $54 billion per year, and a study published in

Beverage Digest

indicated that soft-drink companies spent $631 million on advertising in 1997, a little more than a penny of advertising for every dollar of sales.

By contrast, the

Wine Institute of California

pegs the wine industry's revenues at $18 billion, which means that in 1998, advertising expenditures represented about 0.7 cent for each dollar of revenues. If the soft-drink market is saturated, as many analysts believe it is, increases in soft-drink ad expenditures will no doubt find decreasing returns. The wine business, however, doesn't look as if it's even close to critical mass, much less saturation.

The 1998 increase in wine advertising is a very good sign that the industry may be waking up to the impending glut and the crisis that could bring. But it's clearly going to take a lot more than this for public wineries to transform their stock from tony lifestyle investments for a small group of dilettantes into the real thing for investors looking for real returns.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.