On the madness of supermarket discounts
Is Australia going the way of Germany or is it the other way round? It does not really matter as what I saw on a recent trip to Australia signalled to me: “very bad and worse to come”. When I visited a liquor shop in Adelaide in early January 2013, I noticed that every other bottle of wine carried a sticker saying “best offer”. As if this was not bad enough, there was also an offer for an Australian white wine at AUD 25 (USD 26 / EUR 19.30), which, by Australian standards, is not really expensive. What made me gasp for air was the fact that with the wine came a free six pack of Mexican Sol beer (owned by FEMSA/Heineken). In a nearby cooler cabinet the same Sol six-pack was priced at AUD 16 (USD 16.60 / EUR 12.50).
That a supposedly superpremium-priced import beer like Sol was given away free was shocking. But what really threw me was the realisation that these bumper discount deals are now kind of the norm and NOT the exception in Australian retailing.
This made me wonder: what is actually the real value (or price) of a bottle of wine or a carton of beer in Australia, if producers and retailers can afford to put on such massive discounts?
According to an article in the Sydney Morning Herald (SMH) newspaper on 23 January 2013, retail sales in Australia in January have begun to slow down, which implies more price wars ahead.
Coles and Woolworth’s, through their various retail brands, control about 60 percent of the Australian booze market in terms of value. In other words, they have got the market cornered. Two years ago, brewer Foster’s took the unprecedented and bold step of cancelling deliveries to both Coles and Woolworths of tens of thousands of cartons of VB, Carlton Draught and Pure Blonde after learning of a promotional campaign to sell the brands at below cost. But did this put an end to beer discounts? No.
Over the past two years there have been a lot political debates and regulatory scrutiny of the detrimental impact of the supermarket wars on suppliers, farmers, independent retailers and retail competitiveness in general. However, most suppliers have been reluctant to speak out for fear of upsetting the retailers, says the SMH.
One not to leave anybody in doubt is Phil Sexton, one of the founders of craft brewer Little Creatures and now owner of the winery Giant Steps. He recently told media that, while his grape input costs are up 10 percent, it will be a difficult task to get the retailers to chip in.
Still, Coles’ immensely popular pricing campaign “Down Down” scored a hit in July last year, when the supermarket chain managed to recruit the British rock band Status Quo for a TV ad, in which the band changed the lyrics to their 1974 UK number one hit “Down Down” to "Down down, prices are down’’ in line with Coles’ advertising tag line. The band – who have sold over 110 million albums since 1967 – also play guitars in the shape of the Coles trademark giant red hands. You can watch the TV ad at youtube at www.youtube.com/watch?v=3BZt6lumdlQ.
In an equally shrewd move, Coles tried to appease the powers-that-be by releasing a report put together by Deloitte Access Economics (dated October 2012) on the impact of its pricing campaign. The report’s overriding message is this: rising profits and lower prices are being achieved through rising revenue and lower unit costs, rather than by squeezing the supplier.
Revealingly, Coles’ report (with an eye to politicians and regulators as readers) only focused on a few supermarket items, such as bread and dairy as Coles’ policy of everyday low prices for these products affects local and locally-owned producers most – unlike brewers Lion and Foster’s, both of whom are foreign-owned.
From this we may conclude that in the beer and spirits segment there is still a lot of profit transfer going on from the supplier to the retailer. This may harm the suppliers, but for as long as consumers believe that brewers and drinks companies over-earn in Australia relative to overseas peers or parent companies, they will continue to buy their beer and booze brands only when they are on offer. “Let them brewers cry into their beers” is all they will say.
At the end of the day, the big duopoly brewers Lion and Foster’s will be able to come to some sort of agreement with the big retailers. Tough luck for the craft brewers if they can’t do likewise.
