The Big Squeeze

Recently there has been a spate of very boring press reports about the takeover of a chain of Hotel bottle shops which are current owned by  Australian Leisure and Hospitality Group Ltd (ALH). The likely winning bidder will be either of Australia's retail giants Woolworths or Coles Myer Ltd. (Update, Wollies won). On the surface, this may be a big yawn but if you are a wine lovers, small producers or small retailers it will wind up affecting and hurting you. To see how, all you have to do is examine the contents of a couple of press articles and extrapolate the data.

To put this in perspective, when milk was deregulated the price to the farmer dropped, the price to the consumer rose and who ended up with the advantage? The supermarkets! They use the stranglehold of their buying power to dicate to the market what will be and the way it will happen. If you don’t play ball, you are in strife.

In a recent article in The Australian, Stephen Millar, the former chief executive of BRL Hardy who now runs the global wine business of US-based Constellation Brands, says, “Australia is experiencing nothing more than a worldwide trend towards retail concentration. It presents challenges and opportunities. If you're a producer and you have a listing with one of the main retailers, it's very positive.”

No doubt there are some opportunities as well as dangers in this situation for the bigger players. The potential advantages for them are as obvious as they are huge but they are equally as potentially dangerous for both consumers and smaller wineries.

Miller went onto say “It simply means if you want to succeed you need to be in a partnership with the major retailers of the world. It gives you a chance, if you are successful with them, to get volume."

Yes, it is great if you are a Southcorp or Constellation and manage to not get squeezed too hard (or shafted – bad pun intended) in the process of climbing into bed with the big two retailers. We all know the vast majority of wine produced in Australia is produced by the big four or five players, about 90% in actual fact but about 90% of the production from these large companies, from a wine-lovers perspective, is plain boring and uninteresting. It’s not that they make bad wine, far from it, it’s just that for real winelovers there is an ever increasing interest in wines from smaller producers.

The greater the concentration of the players in wine retailing the greater the power the retail sector yields.  As the big two gain an increasing stranglehold on wine retailing, if you are a small player, trying to get shelf space in these stores will be a lost cause. The small producers will have to rely on cellar door sales and the decreasing number of independent wine retailers and e-tailers.

From a consumers perspective, as to the prices you will be charged, the chains operated by the big two (with the exception of a few specials) in many cases are well above the independents. A recent stroll though my local Woolworths during a ‘sale’ showed that many of the wines, when discounted by the 20% (for buying a six pack) were still more than my local pub bottle shop normal shelf price. (Comment: Many consumers are too lazy to find the cheaper prices or like the convenience of buying wine when doing the grocery shopping even if they have to pay much more to do it…  It also leaves a substantial niche for efficient small retailers/e-tailers to service the serious wine-lovers who want more choice and or better prices.)

A recent article in the Melbourne Age said “As Woolworths and Coles Myer spar over the pubs and pokies chain Australian Leisure & Hospitality, concern among winemakers about the tightening grip of the big retail chains on the packaged liquor market is balanced by the prospect of cheaper supermarket prices for consumers.”

Not once, but twice in the Age article the author stated that consumers would be better off because the retail consolidation “consumers would benefit from lower pricing.” What a load of horse manure! This is just like milk deregulation and the evidence is already there with their current pricing structure.

Coles Myer and Woolworths between them own Vintage Cellars, Liquorland, Quaffers, Theo's, Dan Murphy, BWS, Macs Liquor, Safeways, Bailey and Bailey, and First Estate. So the big two already control somewhere between 40% and 50% of the alcohol retail market.

ALH has a 4% share with over 260 outlets so now you can see why the big two were scrapping over the possible acquisition.

The Age article further states “To further reduce costs, Coles and Woolworths are also fundamentally restructuring their businesses with programs they euphemistically call “supply chain reforms”. But for a small liquor industry wholesaler, the big retailers' programs should be known for what they achieve. "They're all about de-listing brands, shifting inventory costs to suppliers and sending people broke," the wholesaler says bitterly.

"As this rationalisation juggernaut continues, it will be more and more difficult for suppliers to get their goods under the retailers' noses. And if you do get listed, you stand by and get ready to be squeezed until your eyes pop out."”

What can consumers and small producers do about this situation? You may think nothing; and in one way you would be right, the juggernaut will keep doing its thing and like the Tryffids, keep growing.

However, like me, you can choose to support your independent retailers and e-tailers and in doing so will probably be better off financially, will ensure they stay in business and that the local small producers will have an outlet to sell their wine. Everyone wins except the big two retailers and their shareholders, but they won’t miss your few bob (translation for non-Aus or those under about 40 years old, pre-decimal currency: bob = shilling = 12 pence, equivalent to 10 cents), they will just try and dominate another market segment.

Copyright © Ric Einstein 2004