Margin cutting and discounting – a sustainable strategy? (Summer 2011)

Wineries will need to be market savvy if they are going to survive and see growth in margins as well as sales.

New Zealand wineries are being advised that whilst it is critical in the current economic climate to focus on cost efficiencies, trading with slim or even negative margins can only be employed for so long. Trading on price alone without building brand or market is not a sustainable strategy in the long-term.

The importance of maintaining gross margin is particularly relevant to the wine industry. Price discounting is commonplace due to excess wine stocks in New Zealand and overseas but in the current trading environment, wineries are realising that aggressive discounting is not a
sustainable practice.
The following tables show graphically how discounting will not lead to long-term success.

Profit and margins – what if?

This table shows the amount by which sales would have to decline following a price increase before gross profit is reduced below its previous level.

At a 30 percent margin and a 10 percent increase in price, you could sustain a 25 percent reduction in sales volume before your profit is reduced to the previous level…you would have to lose one out of every four customers.

Prices vs sales – what if?

This table indicates the increase in sales that is required to compensate for a price discounting policy. For example, if gross margin is 30 percent and you reduce price by 10 percent, you need sales volume to increase by 50 percent to maintain your initial profit. Rarely has such a strategy worked in the past, and it’s unlikely to work in the future.

The worldwide wine glut combined with our overvalued New Zealand dollar means wineries should not to be sucked into the discounting spiral.

The only sure way to long-term success for many small to medium sized wineries in New Zealand is to concentrate on high quality, higher margin production.

Published in WINE Hawke’s Bay Summer 2011.

Serious about your success?