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Fast-Moving EV Battery Market: How to Win the Competition?

The global trend toward electric vehicles is taking place in China’s auto industry. Strong policy support and continual technical advances are the key drivers. For example, the U.S. government incentivizes EV purchases by providing a tax credit of up to $7,500. China has also set ambitious targets and introduced subsidy policies for new-energy vehicles, making China the world’s fastest-growing EV market.

The prospect of continued rapid growth in EV sales is beyond doubt. However, with changing subsidy policies and maturity of the market, competition will become increasingly intense. The American government is considering cutting the tax credit mentioned above, and that will have a significant impact on the EV market. In China, data shows that China’s overall subsidy on new energy vehicles in 2017 has dropped by 40% as compared with 2016, although EVs with high energy density and long battery life continue to receive support from the government. China will stop subsidizing pure EVs with battery life below 150 km but increase subsidies for models with longer battery life.

Under the policy changes, the fast-growing EV battery market is facing increasing challenges. Entry barriers are becoming higher and the market is consolidating. The number of EV battery manufacturers in China dropped from about 150 in 2016 to fewer than 100 in 2017.

So, what are the key success factors?

1. Investing in technologies: Follow the development of next-gen technologies

NiCoMn/ NiCoAl (NCM/NCA) batteries enjoy advantages in energy density and are catching up in cost.

Energy density: In China, policy guidelines require that the energy density of a passenger vehicle battery needs to reach 300Wh/kg by 2020 and 500Wh/kg by 2030. NCM/NCA batteries will be the only ones that can achieve this level of energy density.

Manufacturing cost: Increasing battery production brings economy of scale, with the cost of NCM/NCA batteries estimated to further decline over the next few years. Although the recent rise in the price of cobalt is a factor, it’s still highly possible that NCM/NCA batteries will break the threshold of 1,000 RMB/Kwh in two years.

Safety and service life: Both the safety and the service life of NCM/NCA batteries will be further improved with technical advances, such as better battery management and cooling systems. The number of full charging cycles for this type of battery will reach 1,200 (nearly a 15-year life) by 2020.

We project that global market demand for NCM/NCA batteries will increase rapidly.

In addition to NCM/NCA, a series of new technologies are emerging that will shape the market in the long run. For example, lithium-ion with solid electrolyte can greatly improve safety and energy density. The energy density of lithium-ion batteries with solid electrolyte can be 2.5 times greater than that of liquid electrolyte. Meanwhile, with the absence of liquid electrolyte, storage becomes easier, and additional cooling systems or electronic controls are not required, significantly enhancing safety.

Toyota announced significant progress in solid electrolyte battery research at the end of 2017 and plans to begin shipping cars with solid-state batteries in 2022. In China, several companies and research institutes have also begun research on solid electrolyte batteries. Contemporary Amperex Technology Co. Limited (CATL) and China Aviation Lithium Battery Co. (CALB) have announced that they are both accelerating the development and commercialization of solid-state batteries.

Lithium-ion batteries with solid electrolyte still have problems such as high manufacturing costs, insufficient solid interface stability and low electrolyte conductivity, although these problems will gradually be solved. We believe that early commercialization of solid-state batteries might occur by 2022, with gradual achievement of scale industrialization by 2025-2030.

2. Ramping up capacities: Accelerate capacity buildup and drive cost down through scale

Manufacturing capacity for EV lithium-ion batteries will expand rapidly to reach 180GWh globally by 2020. China will be the fastest-growing country in terms of capacity, with an estimated 60%-65% of share by 2020, surpassing that of the United States.

Low capacity and disadvantages in economy of scale will be the major challenges faced by small to midsize manufacturers.

Cuts in subsidies and pressure from downstream OEMs will squeeze the profit margin of battery manufacturers. Companies need to expand capacity to gain an edge on capacity and cost in order to survive. “Megafactories” with 20GWh capacity will bring significant competitive advantages.

Capacity expansion results in a reduction in manufacturing costs. Tesla claims that its newly built megafactory will lead to a 30% drop in battery cost. CATL achieved a 15% decrease in battery cost in the past two years through technology upgrades and capacity expansion.

Rapid expansion of capacity will bring about financial risks. Therefore, strategic partnerships with downstream OEMs are vital to risk reduction. The $5 billion joint venture between Panasonic and Tesla is the most well-known example of how EV battery manufacturers cooperate with OEMs to deal with competition and risks. Similarly in China, SAIC and DF Motor invested in CATL, and BYD announced cooperation with Guoxuan High-Tech. These are all considered to be forward-looking strategies.

3. Moving up the value chain: Control key technologies and resources through vertical integration

EV battery manufacturers (and some EV manufacturers) consider vertical integration as key to lowering costs, extracting more value through synergies both upstream and downstream, and avoiding commodity price/supply fluctuations.

Electrode materials

Given the growth in battery sales, demand for raw materials will increase rapidly, especially for nonferrous metals such as lithium, nickel and cobalt. Steady cobalt and nickel supplies are of critical importance.

  • Cobalt: Further promotion of NCM/NCA batteries will drive demand for cobalt, pushing up its price
  • Nickel: The trend toward “high nickel” will drive increasing demand for nickel sulfate; however, domestic pressure about environmental protection concerns may limit the supply capacity of nickel sulfate
  • Lithium: The demand for lithium carbonate is rapidly increasing, but capacity is lagging, leading to a short-run gap between supply and demand

Lithium battery manufacturers can invest in the upstream and strengthen control of raw material supply. With the increase in cobalt prices, competition between tech companies and EV battery manufacturers/OEMs for cobalt resources has intensified. Apple is negotiating on the long-term purchase of metallic cobalt from mining companies, seeking five-year or even longer stable contracts. Tesla and BMW have announced negotiations with mining companies to ensure raw material supply. In China, CATL and BYD have strengthened their supply chain and control of upstream battery materials in 2017.

Further promotion of NCM/NCA batteries will drive demand for raw materials even while new capacity is limited in the short run. The market is concerned that prices of raw materials will soar over the next three to five years. However, with increases in capacity or emergence of substitute materials, we project that pricing will become stable within two to three years.

Take the case of cobalt for analysis. Increase in capacity of existing projects and the launch of new cobalt mine projects (there are approximately 400 active cobalt mine projects in the world) will gradually increase overall capacity. Hence, we project that the price of cobalt will stabilize after 2019 unless affected by special factors (such as political instability in Republic of Congo, the main supplier of cobalt).


Cathodes account for the highest proportion of cost in battery production, reaching approximately 30% of the total cost.

In China, most components, except separators, have been supplied by local manufacturers. Strengthening R&D-driven investment should be the priority for future development.

It’s important for EV battery manufacturers to strengthen control of the value chain, push proper vertical integration, and control key upstream resources or technologies. Vertical integration is the trend, but associated risks need to be mitigated, including financial pressure, policy uncertainty and upstream material price fluctuations.

We are witnessing great changes in the EV and battery industries. To survive and thrive in this dynamic market, all players must consider carefully how to follow technology development, leverage economy of scale through capacity and capture more value through appropriate vertical integration.

Fast-Moving EV Battery Market: How to Win the Competition? was written by Yong Teng and Helen Chen, Managing Directors at L.E.K. Consulting. Yong and Helen are based in Shanghai, China.

For more information, please contact

Top 8 Insights From the 2018 Beauty, Health & Wellness Survey

Think nutritional supplements and skincare are of interest only to consumers of a certain age? Think again. According to L.E.K. Consulting’s third installment of a biennial survey of the healthy living marketplace, this one focusing on nutrition and skincare, some 80% of health and wellness (H&W) consumers across generations — from millennials to baby boomers — are highly engaged with both categories.

The survey captured insights from more than 1,600 respondents, representing roughly 77% of the U.S. adult population who identify with H&W themes, and generated eight key insights across categories. Together these insights make clear that consumer interest in nutritional supplements and skincare often lasts a lifetime.

For additional insights, please see L.E.K.’s 2016 Health & Wellness Survey and the two-part 2015 Health & Wellness Study: “The Many Faces of H&W Consumers” and “Six Ways to Win With H&W Consumers.”

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U.K. Specialist Lending Market Trends and Outlook 2018

The U.K.’s specialist lending sector plays an essential role in providing credit to the c. 20 - 25% of the U.K.’s adult population that is considered sub-prime and is poorly served by mainstream financial institutions.

In our previous Executive Insights covering the sector’s development between 2009 and 2014 (Consumer Specialist Lending: Newly Sustainable or Another Boom-and-Bust?), we discussed its revival in the aftermath of the financial crisis. Outstanding balances at the end of 2014 had started to approach pre-financial crisis levels, which naturally raised questions about the sector’s sustainability as it navigated through changes in regulatory supervision. We highlighted the essential ingredients for success for lenders operating in this new world.

Two years on – a paradoxical overall growth story…

By early 2018, a significant majority of the sector had achieved full regulatory authorisation. Affordability assessment has become an important feature of operating in this sector and lenders that we work with have significantly enhanced their focus on both income and expenditure assessments to ensure that customers are able to repay.

This tightening of processes and focus on responsible lending might have been expected to reduce the amount of credit from specialist lenders, but the actual progression of the market has defied this logic. Between 2014 and 2016, our analysis suggests that the overall outstanding balances of lenders actively operating in this market grew at c. 9% p.a., with balances in aggregate at the end of 2016 at an all-time high of c. £16 billion (see Figure 1).

…however, there are variations at a product level

As Figure 1 shows, point of sale finance and credit cards have been the largest drivers of growth. This is in part linked to greater consumer confidence and spending over recent years, as well as expansion from the supply side driven by the greater availability of financing at retailers, the increasing maturity of lenders (including more rigorous underwriting, and better and broader use of data), and the availability of alternative funding, including securitisation. Store cards and credit unions, in contrast, experienced relatively modest growth, reflecting the greater maturity of these segments.

There are more disparate trajectories at a product level within the ‘Other unsecured products’ category (see Figure 2).

  • The increased regulatory scrutiny of and intervention in the ‘rent to own / buy’ sector has contributed to a significant decline in balances. In parallel, the ongoing migration of customer channels towards online has meant a re-evaluation of business strategy for this type of lending. This will continue to play out over 2018.
  • Growth in the car finance segment has mirrored growth rates seen in prime car finance, reflecting greater consumer confidence and used car purchases, increased availability of finance from lenders and online brokers, and a gradual progression towards higher LTV lending.
  • Following a period of steady decline to 2014, home collected credit has been relatively stable over the last two years, in part driven by the greater professionalisation of smaller players. However, we expect to see an overall decline in balances in 2017, reflecting the well-chronicled changes in the operating model of the industry leader.
  • High Cost Short Term Credit (HCSTC) lenders have resumed growth after achieving full authorisation. As expected, the leading players are now offering a range of medium-term products (12-24 months) in addition to their short-term propositions, resulting in an uptick of balances between 2015 and 2016. We expect these to have grown further in 2017.
  • Guarantor lending is now emerging as a more mainstream product, with significant growth in balances in recent years. While the industry leader continues to grow originations and, with the lion’s share of the market, drive growth of the category overall, a couple of smaller players are also beginning to reach maturity.
  • This period also witnessed the growth of longer-term unsecured loans at APRs in excess of 40%, completed both through branch and online / remote channels. Despite advances in scoring and risk assessment, the latter continues to be a challenging channel to operate in and we may very well see some changes to this landscape in the next twelve months.

Standing back from the individual product level, there has also been some momentum towards multiple product offerings from some of the larger market participants. However, this has largely stopped short of any genuinely integrated offering that provides a holistic solution to customers’ borrowing needs.

Our views on the health of the market and outlook

The industry is far more mature in its post-authorisation phase and credit is due to the regulator for having taken the industry through this process diligently. Consumers are, with few exceptions, being treated fairly, and affordability and forbearance are part and parcel of business as usual. Existing businesses continue to innovate around their propositions and products, and new entrants are operating under the stricter rules of the game. With some exceptions, in 2017 we expect the sector to have seen continued strong growth of balances.

Looking at 2018, there continues to be considerable unmet demand. However, economic uncertainty remains the key unknown at an industry level. While consumer affordability assessment has certainly been made more robust and there are built-in buffers in most players’ income / expenditure assessments, there may be some adverse impacts to originations and default rates should a slowdown materialise.

Beyond this, the potential for a more integrated “whole of customer” offering remains, and the impact of Open Banking / PSD2, may offer further opportunities for non-standard lenders to compete at the margins with prime lenders and banks in some product categories. But it’s early days in these areas, and we don’t expect 2018 to see market-altering progress.

Australian Public Transport Barometer – June 2018

The Australian Public Transport Barometer has been developed in partnership between the Tourism & Transport Forum (TTF) and L.E.K. to provide up-to-date insights about the performance of major metropolitan public transport networks in Australia. Each edition monitors public transport across Australia as well as explores the specific challenges and opportunities facing service providers. 

The Barometer promotes the role of public transport in Australian capital cities and looks at how operators are achieving improvements in customer service nationwide. 

In each edition of the Barometer, we examine a specific issue affecting public transport in Australia. ‘In the Spotlight’ this time observes how public transport patronage has seen different fortunes based on geographical location and mode. We explore the rising congestion levels in Australian capital cities and the subsequent impacts on public transportation. 

TTF & L.E.K. Consulting Public Transport Barometer July 2015

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Deposits Strategy: An Inflection Point for Challenger Banks?

The financial crisis and the era of ultra-low interest rates that followed led to the emergence of niche challenger banks in the U.K. such as Aldermore, OSB and Shawbrook. They have prospered and some are now publicly listed.

In the past few years, there has been a second tranche of bank licence applications as lenders, funded by bank term loans, bonds and other means, have sought to take advantage of the low costs available from being deposit-funded. They have been encouraged by the Prudential Regulation Authority’s (PRA) fresh approach to supporting the emergence of new banks, which includes simplifying the licence application process.

As a result, the first challengers are now being threatened themselves by a second wave of new specialist lenders with banking licences. In the 10 months to the end of 2017, the PRA approved 12 new banking licence applications, according to Specialist Banking, and in its latest annual report the PRA stated that it had met with 25 prospective banks considering applying for a licence1.

The increasing crowding of this space is squeezing margins in a number of previously niche challenger markets. Head-on price competition is rife, especially in asset finance, second charge lending and invoice finance. This is forcing many challengers to take a renewed look at their funding and to consider whether they could generate the volumes of deposits required at lower savings rates than those needed to be ranked a best buy.

This Executive Insights examines the key considerations for the challenger banks.

Deposit dynamics

The deposit market has a wide range of player types: high street banks; building societies; well-known challengers such as the Co-op, TSB and Virgin; challengers with far less established brands; and the subsidiaries of foreign banks, many of which also suffer from poor brand recognition in the U.K.

The market also has a highly segmented customer base. The majority of people hold at least some savings with the bank that holds their current account, relationships that often last decades. Around £50 billion of savings is regularly moved to ensure it’s always rewarded with a best-buy interest rate — these customers are content to save with a bank whose brand they do not know. A further £100 billion of savings is placed into new accounts by brand-conscious customers who are not readily accessible to challenger banks. A final segment is the wealthy, who want to diversify large deposits to maximise their protection from the government’s guarantee scheme.

Competitive tension is based around access to savings, the interest rates offered and how they vary over time, including through bonuses, the strength of customer relationships, and marketing and distribution.

It is a tough market for challengers because the high street banks have two structural advantages. First, their brand strength is unrivalled — in spite of the damage to their reputations from the financial crisis — and with their scale they can market heavily at a national level. Second, as the main bank for most people, through a current account or mortgage, it is easier for them to offer an additional account to customers. These advantages are enough for the major banks to raise the deposit funds they want — they are all well-capitalised now — so they don’t need to try harder by offering market-leading savings rates and features.

The challengers do not have the scale, resources or brand equity to compete with such marketing heft. In many cases they don’t have any form of relationship with potential retail savers because they don’t offer consumer banking products. And for those banks that do, their retail products tend to be in limited niche areas (for example, point-of-sale lending or near-prime motor finance) so can only ever provide a small target audience for deposit accounts. Offering very low interest rate products as the high street banks do is therefore not a realistic possibility for the challengers.

A few challengers do have standalone deposit accounts and have outsourced them to one of the few options, the Newcastle Building Society, saving themselves the cost and regulatory burden of setting up the business themselves. The flip side is that outsourcing to the same place makes differentiation very difficult, and the cost and regulatory burden argument becomes less compelling the larger the challenger becomes.

Challenger options

While the deposit market might seem impenetrable to many challengers, they should not write it off. There are two key strategies that they should consider to build share, recognising that they will not be able to compete head-on with the high street giants.

Focus on less competitive niches

Find market segments that are less well served and innovate to create savings products that are attractive to them with competitive savings rates. Good examples include Masthaven, which launched as a retail bank in 2016 and offers bespoke duration savings products, and German bank Fidor, which set-up in the U.K. in 2015 and offers savers access to online advice from other members of the bank’s saving community (providing rewards for each question posted).

Succeeding with this strategy requires in-depth customer research to identify niches where new products can add significant value. This approach may also require insourcing the savings platform, a strategy Masthaven has followed.

Adopt a new channel and marketing strategy

Innovative ideas cleverly marketed to better served customer segments can also win. Other parts of the financial services industry have done this well: Octopus Cash has developed a competitive edge through offering better-off savers the best interest rates by continually moving their money for them to the highest-earning accounts, taking care to preserve their protections under the Financial Services Compensation Scheme by spreading funds across multiple accounts as required; and Hargreaves Lansdown has built a position as the go-to online platform for direct investment by sophisticated private investors.

Challengers should also consider affinity strategies, acting as the white-label bank for well-known brands and profitable segments. They can learn from the high street banks: Bank of Scotland and RBS set up Sainsbury’s and Tesco’s banks, both now self-operated, to access the supermarkets’ huge customer bases, and M&S Bank is part of HSBC. Hard, yes, but there will be opportunities for the challengers that work at it.

Online affinity communities should also be explored, particularly for special interest groups and younger generations who have only known an online world. Again, examples from other areas of financial services demonstrate what can be achieved: Carole Nash is a successful motorbike insurance business that started out focusing on vintage models; Prodigy Finance is an online platform that provides what it calls borderless loans to internationally mobile postgraduates to study at leading universities. Both benefit from customers’ affinity and engagement with the underlying product (i.e. the bike or the university) to drive two things: first, deeper relationships to achieve a combination of better underwriting results than technical underwriting criteria would imply are possible; and second, broader and more valuable customer relationships.

Bigger questions

Before aggressively pursuing an innovative deposits strategy, challengers must question the rationale for such a move — it’s certainly something that investors and the market at large can be expected to do. There must be a sound commercial thesis that complements the overall business model.

Given the increase in competitive pressure, they should first be reviewing how to optimise the margins of their lending businesses, perhaps focusing on higher-margin subsegments2 and driving margin through increasing prices, where possible, or by reducing the volume of loans provided where necessary.

The first wave of challengers should also put a renewed emphasis on minimising their operational costs, which will have grown in step with the development of their business, for example by automating the more “vanilla” elements of lending. This automation could also reduce the time it takes for a customer to receive a loan. This could be a game changer for people who need finance quickly, potentially at high margins for the lender.

More critically, boards should be asking how sustainable their business model will be when interest rates inevitably rise a few points from their current position. Companies that analyse these strategic questions now and take action will be at a significant competitive advantage over their rivals who don’t.

1 -
2 - See L.E.K. Consulting’s How Challenger Banks Can Finally Live up to Their Name: Pursue a Multi-Niche SME Strategy

Top 10 Trends Affecting the Wine Industry

The wine sector has been experiencing a number of twists and turns in recent years. From industry consolidation up and down the value chain, to changing consumer demographics and preferences, to the rise of ecommerce, here are 10 trends that are separating the winners from the losers.

1. The market is huge and growing steadily

U.S. consumers quaffed $32 billion worth of wine in 2017, and that figure is expected to reach $43 billion by 2022, an annual growth rate of more than 6%. Even if there was an economic downturn, evidence suggests the impact on wine sales would be minimal. During the last recession (2007-08), while the growth rate for volume consumption slowed, the trajectory was still positive, signaling low cyclicality. Concerns that legalization of recreational marijuana will adversely affect wine sales seem overblown. Early data from Colorado indicates legalization has not had an impact on wine consumption, which has remained constant at historical levels.

2. Premium is the place to be

If wine sales in general have been positive, the “fine and premium” category (over $10 a bottle) has been almost bubbly. The segment ended 2017 at around $17 billion, growing approximately 8% a year since 2012. This trajectory is expected to continue, with the segment reaching around $25 billion by 2022 (see Figure 1).

3. Millennials are making their mark

Not surprisingly, millennials comprise an increasing share of U.S. wine consumers. Between 2012 and 2016, Gen Xers and millennials drove overall wine market growth, increasing their share of consumption by about 8%, and edging out baby boomers as the biggest consumer segment. One estimate predicts that millennials will hold the largest share of U.S. wine consumption by 2026.1

Millennials differ from older consumers in a number of interesting ways. They have limited category loyalty, consuming beverages across categories (even during a single occasion). Compared with entry-level consumers in the 1960s, millennials have shown limited interest in the lowest-price wine segment, and as a result they made an outsize contribution to the growth of premium wines. At the same time, they are clearly value-focused consumers: They are looking for high quality at an acceptable price.

Millennials also demonstrate a high propensity to explore, favoring “new experiences” and varietals when making wine purchase decisions. This need to constantly discover something new has led to a continual rotation of “hot” varietals, which vary year by year. Rosé wines currently hold pride of place as the latest “it” wines: U.S. consumption of rosé grew by around 53% in the 52 weeks prior to June 2017, a significant rise from its 0.3% annual volume growth between 2011 and 2016.

4. “Drinking in” is winning out

Millennials are also having an impact on another trend: Unwilling to pay restaurant wine markups, consumers in general, led by millennials, are increasingly drinking their wine at home. Off-premises consumption now represents more than 80% of overall wine consumption — higher than off-premises consumption of beer or distilled spirits (see Figure 2).

5. Packaging packs a punch

As more and more consumers bring their wine home or to private social settings, they are increasingly embracing new forms of packaging that offer convenience and portability. For example, “bag-in-box” packaged wine is expected to see particularly high growth, given the low cost of production for suppliers. In fact, this trend is so strong that it has begun to move upmarket, with premium brands now using the format for 1.5-liter and 3-liter quantities. Boxed cabernet, chardonnay and pinot grigio grew more than 20% from 2015 to 2016.2  For example, Black Box from Constellation grew from 4 million to 6.6 million cases between 2014 and 2017, while Bota Box from Delicato doubled from 3 million to 6 million cases over the same period.

At the other end of the spectrum are smaller and single-serve packages. Tetra Paks have seen significant uptake, a result of both convenience (including the ability to reseal) and environmental friendliness compared with traditional packaging. Canned wine sales more than tripled between 2015 and 2017, albeit from a very small base (they represented less than 1% of overall wine sales in 2017).

Despite the buzz, widescale adoption of alternative packaging formats is likely to remain limited by consumer perceptions, shorter product shelf life and the difficulty of finding canning partners that focus primarily on beer.

6. The industry is consolidating, but buying opportunities remain

In 2017 the top 14 suppliers made up approximately 79% of the U.S. wine market by volume; however, a long tail of some 9,000 suppliers produced the remaining 21%. M&A activity is robust, with more than 30 deals for domestic vineyards in 2016. Acquisitions were made by producers of all sizes. Those of medium-to-large producers have been focused in the premium segment while smaller wineries were more concerned with securing supply, permits or capacity.

Private equity (PE) has also taken a few tentative sips, closing a number of U.S. winery deals in 2016. While wineries may not be an ideal fit for PE firms — there is a need to hold inventory over multiple years, and land and weather are also concerns — a significant opportunity exists to improve margins through better management, operations and commercialization.

It is also likely that buying opportunities will continue to arise as smaller wineries, grappling with a range of challenges, decide to sell. According to one recent survey of winery owners by Silicon Valley Bank, half say they may consider selling within the next five years (see Figure 3).

7. Labor shortages have begun to take their toll

Labor is a primary concern for the U.S. wine industry, and right now there is not enough of it. Producers rely heavily on migrant labor, and recent immigration policy reforms appear to be exacerbating the shortage. Seasonal workers, many of whom come from Mexico, are finding that crossing the border has become too expensive and too dangerous. In addition, producers are facing increased competition from alternative crops, including newly legalized marijuana, where the pay is better and the work less physically taxing.

A shortage of available temporary housing in areas affected by recent fires may further reduce the labor supply. The Northern California fires in late 2017 displaced nearly 100,000 people, including both documented and undocumented migrant farm workers. The resulting rise in the cost of accommodation may force workers to leave the area, especially undocumented farm workers who have no access to federal assistance. With no one to harvest their grapes, wineries may need to scale back production.

8. Distributor consolidation is limiting market access for all but the biggest

The top 10 U.S. wine wholesalers now hold a full 80% of the market (see Figure 4). The largest distributors are reportedly streamlining supplier relationships, seeking partnerships with strong, well-known brands with consistent and predictable sales. The numbers reflect this trend: In 2016, 95% of sales for wineries producing more than 250,000 cases were through distributors, an increase of 6% since 2014. For those producing fewer than 10,000 cases, distributors were responsible for only 33% of sales in 2016, a 6% decrease over the same period.

9. Wine shipping laws are evolving, but it’s a slow process

Ever since the 1933 repeal of Prohibition, the regulatory environment for alcohol has been slow to change. While wine shipping laws are starting to evolve, a big challenge for producers is navigating a confusing labyrinth of state regulations. For example, some states allow retail intrastate shipping while others do not. Some allow winery interstate and intrastate shipping while others do not (see Figure 5).

In 2005, the Granholm v. Heald Supreme Court decision ruled that laws permitting in-state wineries to ship to consumers but prohibiting out-of-state wineries from doing so are unconstitutional. As a result, wine shipping regulations have relaxed: Forty-four states now allow out-of-state direct-to-consumer (DTC) shipments from wineries and 14 allow out-of-state DTC shipments from retailers. Today only three states — Alabama, Oklahoma and Utah — directly prohibit DTC wine shipments. This less restrictive environment could provide an important opportunity for smaller wineries that are not represented by distributors and are struggling to reach.

10. Direct-to-consumer sales are on the rise

In fact, wineries are already jumping on the DTC bandwagon. The DTC channel hit nearly $3.1 billion in 2017 and is forecast to grow around 11% a year, reaching $5.2 billion by 2022 (see Figure 6). Not surprisingly, much of the growth in DTC is driven by smaller wineries, which often are not represented by distributors. The largest wineries are pulling back on DTC sales, with this channel representing only 6% of 2016 sales for wineries producing more than 250,000 cases, compared with 12% just two years earlier. Meanwhile, DTC accounted for more than two-thirds (68%) of 2016 sales for wineries producing fewer than 10,000 cases, a 6% jump over 2014.

While DTC has shown strong growth, it is from a relatively small base, and regulatory, logistical and consumer adoption barriers may limit the upside of this channel. These include continued prohibitions on interstate shipping in some states, challenges with shipping a heavy product that can spoil when exposed to high temperatures, and consumer preference for knowledgeable sales support when making wine purchases. In response to these obstacles, wineries are employing a number of different strategies to reach consumers directly, from on-site tours and tastings to wine clubs to selling through third-party ecommerce platforms.

1State of the Wine Industry 2018, Silicon Valley Bank
2Nielsen Consumer Insights, Interpak, Beverage Daily

Top 10 Trends Affecting the Wine Industry was written by Rob Wilson, Managing Director in L.E.K. Consulting’s Food & Beverage practice. Rob is based in Chicago.
For more information, contact

More Travel for Fun, Less Travel for Chores: Why Leisure Is the Key Growth Market for Transport Operators

Evolving lifestyles, consumption habits and work culture, much of it driven by the internet, have led to structural changes in the travel behavior of people in the U.K.

Since 2005, the number of trips and the overall distance traveled per person are down by nearly 10%, caused by a drop in commuting and travel for chores (e.g. business and shopping). Meanwhile, leisure travel for entertainment or day trips has increased. Even where we socialize with friends has changed, switching from a visit to their home to trips out together (see Figure 1).

This shift in emphasis from traveling as a chore to traveling to do something fun is set to continue and has significant implications for transport operators across road, rail and air, including the fast-growing ride-sharing companies.

All operators, including those thinking of entering the market, should review how they can develop competitive advantage by optimizing for these trends. For many, this will require a strategic rethink and a repositioning of their products and services.

This Executive Insights looks at these changing travel patterns and provides an overview of the eight levers of leisure travel that operators should be addressing.

Travel as a chore is down

The growth of online shopping, both from pure plays such as Amazon and from traditional retailers, is reducing the need to travel. Online retail in the U.K. has risen from 3% to 17% of total retail sales in the past decade. Continental Europe is experiencing the same shift online, particularly France and Germany, where web sales have grown 13% and 15% respectively since 2014. Supermarkets have been particularly affected. Nearly half (48%) of British people do some of their grocery shopping online, a market now worth £10 billion, and 14% do all of it online — up from 7% in 2014, says Office of National Statistics research.

Working culture has also evolved to become more flexible, with people working from home or in transit, reducing the need for the daily commute and increasing employees’ productive time. As Figure 2 shows, the proportion of U.K. commuters traveling more than three times a week declined from 85% to 72% between 2001 and 2016.

Ongoing technology improvements have played a significant role in enabling effective remote working, especially conference calls and digital video platforms such as Skype. Technology has also contributed to the decline in travel for business meetings outside the office. This is particularly the case for long-distance journeys.

Transport needs are also changing with the widespread use of smartphones, tablets and computers for communication. Rather than going to someone’s house to meet up, friends’ conversations are increasingly taking place digitally, especially through social media, instant messaging and video chat.

Travel for fun is on the rise

While there has been a steady decline in overall travel in the U.K., people are traveling more for leisure. Figure 1 shows that the average number of trips per person has been increasing since 2005 for entertainment, visiting friends outside of homes and day trips. The upswing in attendance at concerts and music festivals is one area that highlights the trend: In the four years to 2016, the number of people at such events doubled to 31 million a year, according to UK Music (see Figure 3).

The spending habits of millennials reflect the step change — they spend more on taxis, eating in restaurants and going to coffee shops and bars than did previous generations. Credit card spending data suggests that millennials spend 24% of their income on restaurants, versus 15% for older generations.

The eight key levers for leisure travel

Because such trips are optional, transport operators need to prize people away from their home comforts. The competition is not another mode or operator, but a box set and sofa. L.E.K. Consulting’s work in the sector suggests there are eight key factors that influence success in this new travel environment (see Figure 4).

Increased marketing efforts. Improved and more regular dialogue with customers through engaging marketing campaigns is important in an era in which travel is no longer always a necessity — customers need to be enticed into traveling with a particular operator. U.K. travel companies could learn from Turkish Airlines’ successful YouTube video strategy targeting millennials, and SNCF’s “It’s just next door” experiential marketing campaign to highlight the many European locations to which the French train operator travels.

Superior travel experience. With the wide variety of convenient and affordable transport options available, people need to enjoy their experiences if they are to use the same operator again — and require extremely good experiences to prompt them to recommend the operator to their friends. Trenitalia, Italy’s national train operator, has tried to differentiate in this area by creating four classes of service on its high-speed Frecciarossa trains.

Competitive loyalty schemes. Attractive loyalty schemes are crucial in many markets to increase brand loyalty and ensure repeat business. Operators should take care to tailor these schemes to their range of customer segments. The airline industry excels at this, using points, rewards and air miles to induce extra trips and create long-term customer relationships.

Real-time travel information. With overall travel continuing to decline, people will become less familiar with operators’ routes, schedules and stations. To make the customer experience as seamless as possible, operators should place renewed emphasis on improved real-time travel information via station signage, onboard screens, apps and notifications. Apps such as WienMobil in Vienna, Whim in Birmingham, U.K., and Rome2rio show how integrated travel planning is becoming more commonplace. However, no major operator has truly cracked the provision of live, accurate travel information.

Targeted event planning and partnerships. As people’s leisure travel increases, operators should consider partnerships with event organizers and ticket providers to become more than just the mode of transport for customers. This could include negotiated event discounts, early-bird tickets, or partnerships with third parties such as premium food and beverage companies to provide superior dining experiences during a journey.

Aggressive yield management. To maximize their revenues, operators should review their pricing strategy to spread customer demand and increase overall asset utilization. Uber take this approach, using demand-based pricing to keep its fares down when demand is low and to charge more during peak periods of demand.

Value-adding ancillaries. Road and rail operators should learn from airports and implement ancillary services that are natural complements to leisure journeys, such as free Wi-Fi, shopping, dining and limo services. While passengers have more disposable time at airports, there are opportunities to enhance the time customers spend at bus, coach and railway stations, adding non- farebox revenue to operators.

Flexible off-peak travel. Off-peak travel growth is outpacing peak travel, providing operators with the opportunity to offer a wider variety of flexible ticket options. Flexible part-time commuter tickets, for instance, will be attractive to remote workers who might travel to their employer’s office just a few times a week.

What to do?

The challenge for operators is how to steal share from other operators and modes in the slowly declining market for necessity travel while simultaneously building share and stimulating new trips in the growing and complex leisure markets. For many operators, this will require a shift in mindset to become more consumer-oriented, drawing on the best examples from the global transport industry. Developing a new approach requires an in-depth understanding of the different customer segments across the full door-to-door experience, and the ability to create and market differentiated service propositions.

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