Many Australian readers may not realise that over 50% of the wine sold in Australia today is sold through two retails chains: Coles and Woolworths own just about every major bottle shop chain in the country including Dan Murphy’s, Mac’s Liquor, Safeway, Liquorland, Vintage Cellars, First Estate, Porters, BWS, and Theo’s.

A recent browse through my local (Woolworths) Mac’s Liquor store showed exactly what happens when you have two major organisations controlling the lions share of the market. The shelves were stacked with brands from the largest producers, and the Fosters brands had basically all the “special” spots in the store. Let’s face it, it’s far easier and more cost effective for a corporate operation to deal with a few major producers and distributors. As they are also buying in huge bulk, the mega retailers also have huge pricing leverage and the ability to do deals that will certainly improve their bottom line.

When the mega retailers do deals and subsequently sell the wine on special, in some cases the small independents are paying more for the product from the producer than the special price offered by the mega retailers. That frequently makes it hard to compete on the big name brands.

In terms of price, whilst the mega retailers do offer outstanding specials from time to time, in many cases the rest of their prices are often substantially higher than the independents and pub bottle stores. The profitability of alcohol retailing for the two big grocers is huge and they will do what ever it takes to protect their position.

In my local Mac’s Liquor Store, as well as the major brands on the shelf, smaller producers from Coonawarra and Margaret River are also found; probably because these are well known regions where people are looking for particular styles and varieties.

The concentration of brand restriction will continue as the big two gain a further stranglehold on the market and to make matters worse, as time goes on, they will introduce more and more of their own brands. The major advantages of home brands is simple, there can be no price comparison; they can switch and change producers at will whilst wheeling and dealing to gain the greatest possible profit as they go.

In Australia today, there are over 2,000 producers and I doubt there would be more than about 100 of them represented in my local Woolworths bottle shop. (Remember that the like of Fosters, Constellation, Lion Nathan etc have hundreds of brands between them, many of which are on the shelves.) The top 10 producers are responsible for over 90% of the countries wine volume, so the remaining large number of smaller producers have a gigantic uphill struggle to sell their wine and it is only going to get harder as time goes on.

Some of these small producers are responsible for making some of the most exciting and diverse wines in the country, so it is critically important that they survive and prosper.

The over US$20 a bottle Australian segment is heading into turbulence (that’s the subject of a future story) which will make exports more difficult.

But there are other issues too. When we were in WA at Picardy, Dan Pannell told us about the increasing cost of using distributors. It was not all that long ago that distributors worked on a 25% mark-up and the distributors were also responsible for providing samples. Now they are working on a 43% mark-up and the wineries are expected to also supply sample stock. Distribution for the vast majority of small producers is becoming increasingly more difficult and expensive.

One solution that has worked very effectively for some wineries is to try and move most of the wine themselves and try as much as possible to avoid distributors. Wineries like Rockford and Kay Bros have been remarkably successful with this approach, moving the majority of their inventory by direct methods, and others are moving that way as they find it increasingly more difficult to sell their wine via retail channels.

The latest winery to discover the difficulties of distribution in Australia is Viking Wines. According to a fax from them, “Our wholesale price for our super premium wines is $28-35 a bottle but resold by score/investment reseller at $80-100 a bottle. Today, we believe the “scoring/investment” market is unstable. We have therefore decided to offer our wines directly to mail order customers at wholesale prices …. Grand Shiraz $35, Magnums $70, Grand Shiraz/Cab $28.”

This is good news for the consumer as they are saving about 35% on the previous cost price but it does mean more work for the winery; they how have to deal with many customers (rather than one wholesaler) to get the same price; but the reality is the winery drops profit in this situation as they would have had some previous sales to mail order customers at the old full retail price.

The specialist fine wine retailers do a great job of promoting the smaller and fashionable boutique brands, but there are always restrictions on how many brands and labels each store can carry. In many ways, they are the great hope for the small players but they can’t service everyone.

Its tough out there for wineries trying to move their wine, and it will continue to get even harder for some time. Some small producers will find it unsustainable and finding a buyer in these tough times will be very difficult.