Ever Wondered Why? (October 6th)

 

(My thanks to an “unnamed source” for much of the information contained in this story, you know who you are.)

 

Some wines are frequently found on special, yet some others are virtually never sold for much less than their recommended retail - why is this so? There is one major reason stopping discounting, and a many very complicating factors causing it, but firstly some background.

 

In the case of mass-produced wines, sometimes the producer will offer an incentive to the retailer for bulk purchases, which in turn are (often) passed on to the consumer. This certainly moves volume. Most of the major producers frequently engage in this practice and that is why you often see the same brands on special week after week.

 

Examining the other end of the market, in the case of (French) Champagne, various brands are often on special particularly in summer, and in many instances these may not be as a result of distribution deals. If a retailer drops a $60 bottle of champagne to $50 a bottle, whilst a $10 saving per bottle is significant to the consumer, because of the high dollar cost, and the fact that the customer is buying a dozen bottles, the retailer is still making about the same amount as they would on a case of mid range wine.

 

There are all sorts of reasons why some retailers wish to discount wines below their recommended retail price, even expensive ones. It may be used as a “loss–leader”, it could be to entice people to shop with them, and it’s certainly effective in shifting excess inventory. In some cases, retailers would prefer to move high-cost wines as soon as they come in, at a lower percentage profit margin, rather than having the wine sit on the shelf for long periods of time. All of these reasons make absolute sense, so why is it that some wines are never/rarely discounted?

 

In the case of wines that have very limited production, that are highly sought-after and fly off the shelves within hours of release, it’s understandable why retailers charge full whack. But what about the other premium and icon brands, where there may be no shortage of supply, that are rarely if ever seen on special. Is it an accident that these wines are never discounted? No way!

 

Under Australian law (the Trade Practices Act in particular), there are statutes and provisions to prevent price-fixing, also known as retail price maintenance. Many cynical readers (like me) probably think the setting of petrol prices doesn't happen by accident and yet despite repeated government inquiries, no one has been able to gain enough proof of retail price maintenance or collusion in the oil industry to allow successful prosecution; and without that proof current practices continue despite what people may “think”.

 

Getting back to wine, retail price maintenance is alive and kicking, and this is the major reason for the lack of discounting on some labels. On occasions, just prior to a particular wine being released, I have asked a retailer that I do business with on a regular basis what he expects the price to be, because I'm interested in buying some. The answer will be $XY but I will give you Z% off because you are a regular customer, but whatever you do, don't tell the supplier that you got that discount or they won't give me any further stocks of this wine. If I had heard this once, or indeed from one retailer, it could be taken with a grain of salt. However I am not the only one that has heard this statement and it is not from one retailer, it's from numerous retailers. Interestingly, the same wineries keep cropping up time and time again. They are generally well-regarded wineries and tend to be well-established, small to medium sized producers, around say the 10,000 case mark.

 

These wineries tend to have limited distribution, and as the retailers don't want to lose access to supply, they have no option but to play ball. From the winery's perspective, the reason they don't like their brands being discounted is because they feel it cheapens the brand, and if consumers know they can regularly obtain the wine “on special” through retailers, they are less likely to buy them direct from the winery.

 

So whilst the winery may win, it is not in the consumer's best interest.

 

Retail Price Maintenance versus Discounting

 

Nothing stated above is new; it has been going on for decades. Now to the other side of the coin; discounting. (Note from Brian: “Thank you David and Richard Farmer, who kicked off routine discounting of alcoholic beverages in their original Farmer Bros. store in Canberra back in 1975.”) Recently I received an e-mail from someone who was a successful wine retailer in Sydney and is still involved in the industry; he filled me in on the background surrounding some of the past retail practices in Sydney. The contact told me, that when he was a retailer, whenever he discounted products his competitors complained to the suppliers about his actions. He stated, “Individually they did not have real power and whilst it was annoying, it really did not seriously impact me.”

 

This person also worked for a distributor and had this to say about one of his experiences. “As soon as we saw a retailer being “competitive“ with a product that we represented, we knew that one of the major stores would all ring us and whine and carry on, threatening to throw our products out…. As if we had anything to do with it!”

 

Apparently, in those days, Theo caused a great deal of angst! The story has it that for ages Theo sold Petaluma Riesling at cost every six weeks, on permanent rotation, as a pay-back for Kemeny’s once under-cutting him. The way the story is told; Theo thought he was punishing Petaluma and the distributor because they didn’t stop Kemeny’s in the first place. Can you imagine what must have happened? Theo would have been on one phone; Croser on another; and both of them would be screaming at the distributor who was the meat in the sandwich.

 

There are still whingers out there, both big and small and when discounting of the smaller brands starts to occur, the other specialist fine wine retailers don’t like it and often wind up complaining to the producer or the distributor, claiming it is difficult for them to sell their stock.

 

The advent of the Internet further complicates the discounting issue and in time this will have an even bigger impact on the market. To further blur and complicate things, in some cases brands are distributed by different distributors in different states and naturally, these distributors have different policies and attitudes towards discounting and promotional deals. This means that it's perfectly possible to obtain a wine in one state a lot more cheaply than another.

 

It gets even more confusing. The following examples is an exception rather than the rule, but it does illustrate an interesting situation, and it could have just as easily worked in reverse. Wine XYZ was strictly allocated in Victoria, but in NSW it was freely available. RRP in each state was the same in this case, but because of the allocation restrictions in Victoria the price was high and in NSW it was heavily discounted.

 

Guess what…. A prominent Vic retailer bought pallets of this wine from NSW retailers at cost, freighted it to Melbourne and resold it at a higher price… Arbitrage!!!! My god, who would think that it would be so simple? In Sydney the wine was freely available for about $39 and in Melbourne $45 was considered a good price since no one could get it.

 

Whilst there are some excellent independent wine retailers in Sydney, most of them rely on walk-in business, newspaper advertising, or mail/e-mail to their existing client base. This means they are not growing their businesses and moving stock at the same rate as their Victorian competitors.  A significant number of independent wine retailers in New South Wales are starting to use the Internet but most aren’t doing it very well and every single one of them is a “me too” player in one way or another. In reality, there is very little to differentiate between all of them, and not one of them would come anywhere near some of the major e-tailers in Victoria like Nicks or WineStar.

 

Whilst Kemeny’s web site has recently had a makeover, it is still basically a static list of wines and PDF copies of newspaper/catalogue offers rather than a fully functional website with on-line ordering selling everything they have on offer, and Kemeny’s is probably the biggest independent in Sydney. Considering Sydney is the largest city in Australia, and New South Wales has the biggest population of any State, it is surprising the lack of quality Internet e-tailing competition being generated from Sydney. I have it on good authority that a large percentage of (at least) one of Melbourne's largest e-tailers business is shipping wine into the Sydney market. There is a huge opportunity in New South Wales which is being overlooked by Sydney's fine wine retailers, who are being left behind.

 

Conclusion

 

Getting back to the first point in this article, whilst some brands are discounted on a regular basis, for all sorts of reasons, some brands are rarely, if ever publicly discounted, unless it’s in a “percentage off” storewide sale. In some cases, retailers may wish to discount some brands but won't do so because they know the next time they order the wine, it will be "unavailable." Unfortunately the retailer is in a no-win situation. Even if they have proof that further supply will be unavailable if they discount the product, (which is unlikely as it’s generally all done by verbal “hints”), they would then have to tackle the winery head-on which would cause them more trouble than it was worth. So, unfortunately it’s unlikely to happen in the near future, but things do change.

 

The small independent specialist wine shops will remain at the mercy of these producers for some time. Wine retailing is tough business and with the increasing dominance of ColesWorth, as well as the consolidation of large producers, it will only get tougher for the small independent retailers; in the long term, the major winners will be ColesWorth and a few very sharp small to medium operators that will survive.

 

In time, as the face of wine retailing continues to change, these smaller producers may not be in the same position they are in today, as finding retailers to sell their product may be their biggest concern, rather than their products being discounted.