ON THE main road that links the neighbourhoods of Leith and Trinity to the north of Edinburgh city centre stands a row of shops. It contains a chemist, post office, convenience store and Threshers off-licence with a "For Let" sign hanging forlornly above its door. It has been there for months, but last week the Threshers chain fell into administration.
For this small Edinburgh street read a national problem. This weekend KPMG, which is acting as the administrator of the private equity-backed Threshers, will accelerate its search for a buyer.
Richard Fleming, UK head of restructuring at KPMG, has already announced 81 redundancies at the head office of Threshers' parent company First Quench Group in Welwyn Garden City, Hertfordshire.
Further redundancies and closures at the group, which also owns Wine Rack and Haddows, are inevitable. At risk are more than 6,500 mainly part-time staff, at 1,300 shops in England, Scotland and Wales. The group has been struggling with problems including competition from the supermarkets and the impact of the financial slump.
The news comes just weeks after Oddbins owner Castel called in receivers to recover funds at the 130-store off-licence chain it claimed were owed. Although both parties have confirmed the disagreement has been resolved, Oddbins managing director/owner Simon Baile has revised his pledge to break even by the end of the year.
The wine industry, like the rest of the retail sector, has been hit hard by the downturn. Last month, Wine Cellar, which had 170 shops UK-wide, went into administration, although 109 shops were sold to a new owner. But as Christmas approaches and the supermarkets mobilise for another round of discounting, analysts are beginning to ask how long the off-licence model can last.
"The off-licence is a business model for a different age and times have moved on," says David Stoddart, retail analyst at investment bank Altium Securities. "In the next few years we are going to see an inextricable decline in the number of off-licences. Online retailers, wine warehouses, supermarket convenience chains such as Tesco Express and Sainsbury's Local are moving into the very locations where the off-licences had a role to play. Traditionally the place where you picked up a bottle on the way to a dinner party now has a convenience store on the corner as well. This often has better prices – due to the sheer buying power that the supermarkets have – so what is the off-licence's saleable advantage? What can it do? What keeps it alive in this day and age?"
It is a question that obviously doesn't perplex Britain's wine consumers. The plight of the off-licence sector comes at a time when Britons are drinking more and more wine. Mintel estimates that wine sales in the UK will be worth £9.5 billion this year, with the off-trade (shops and supermarkets) outperforming the on-trade (pubs, clubs and restaurants), and figures from market analyst Nielsen showing that the wine market has significantly outperformed the overall drinks sector. So where is everyone buying their wine?
Oddbins' Baile believes that, despite supermarkets gaining market share, there is plenty of life left in the old format yet. Speaking to Scotland on Sunday, Baile says that, from where he's standing, the market is beginning to pick up.
"I absolutely fundamentally believe that there is a place for the non-supermarket chain in the marketplace," he says. "If I didn't I wouldn't be here.
"To be honest I actually think the market is beginning to ease. We are certainly seeing this with our sales figures now. It is a question of whether what you have is good enough. What we are categorically not doing is driving our prices down to the lowest common denominator, because we don't think that is the sensible thing to do.
"We are going to concentrate on quality and making sure we get interesting new products from small producers around the world, and it does seem to be working for us. If you remain true to yourself and go out and produce quality I can't see why it's not going to work for you. As the years go on I see the opportunity getting bigger and bigger and bigger."
It is not only the supermarkets that are stealing share. Lurking in the wings is the Majestic wine warehouse chain. By its own standards, it has under-performed this year. The group reported a 55.8 per cent slide in pre-tax profits to £7.4 million after corporates reined in purchases of bubbly, while the strength of the euro put customers off "booze cruises" and made continental European wines more expensive to buy. But even it is feeling the pinch. In an attempt to steal some of Oddbins' and Wine Rack's customers it reduced its minimum in-store purchase from 12 to six bottles.
"Majestic is succeeding because it has stable management," said one industry insider. "The problems at First Quench stem from their size. They are big and that can make it very difficult. They have had a number of different owners over the last few years. That doesn't make it any easier. They have a lot of different landlords, which is always very difficult to deal with. They also have a lot of different formats, which can be quite difficult to manage.
"If you look at the number of initiatives they have done over the past ten years you can see where the problems are. They put sandwiches in and then pulled them out. There is still a place for them but they haven't quite worked out the right way."
The first Threshers was opened by Samuel Thresher in 1897. It was bought by Flowers Breweries in the 1950s and became part of Whitbread, current owner of Premier Inn and Costa Coffee, in 1962. First Quench has been owned by Vision Capital, a US private equity company, since 2007. Earlier this year it warned that some shops may have to close if it was unable to renegotiate rents with landlords. It put in place a turnaround plan including cost savings, the closure of loss-making shops and cutting of stock. Earlier this month, First Quench's acting chief executive Martin Healy resigned and a new chief financial officer, Martin Boden, was appointed.
One analyst said: "There is still an investment philosophy based on what is known as the bigger fool theory. This is when a buyer comes in, strips out some of the loss-making units, turns the business back into what looks like a more profitable core, runs it more efficiently and then three years later flips it onto another buyer (the bigger fool).
"Having said that, it has high operating costs per square foot and a very low gross margin product that is pilferable and breakable. You would not invent the off-licence today, you really wouldn't."
