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Price Points – Free .99
d=”standfirst”>Forcing wines into artificial price points is the scourge of the wine trade, but are the magic .99s still so relevant now that deep discounting is so widespread? Perhaps barriers are there to be broken, says Patrick Schmitt
“I can remember when a leg of lamb was £3, now it’s £15,” says Allan Cheesman, wine consultant and former wines and spirits buying director at Sainsbury’s. Fine, you may be thinking, but what has lamb got to do with the price of wine? Nothing, unfortunately. If wine did share any pricing similarities with lamb, however, a £3 bottle of wine some 30 years ago – when Cheesman first started in the wine trade – might now be nudging the £15 mark. In fact, the whole sub-£3 price category would probably have disappeared. As it is, over 50% of wines sold in multiple grocers in March this year were priced below £3, according to TNS (see chart 1).
That is a terrifying statistic, especially when you consider how much of that £3 or even £2 price is tax. With the duty on a 75cl bottle being £1.26, and VAT at 17.5%, approximately £1.60 of a £2 bottle of wine goes to the chancellor. Take off retailer margins too, and a producer is left with around 30 pence to bottle, label, close and ship a wine, not forgetting harvesting and making it in the first place. One might marvel at how it’s achieved, but it is, and it is not doing any good for the wine category as a whole. Even what is arguably the world’s most famous budget wine, Two Buck Chuck, is not really $2, as Americans price wine on the shelf without VAT – the tax is added on to the price of the product when you pay.
But putting aside what Cheesman calls “the lunacy” of some cheap discounting supermarkets, those who sell wine at £2 and below, it is worth looking at what are the key price points in the UK wine trade. Analysing the Nielsen chart (see chart 2) comparing price banding volume share (MAT to December 2004 with 2003), it is clear that over 26% of all wine sold in the off-trade flies from the shelves at £3 or under, although this volume share has fallen by almost three percentage points compared to 2003. (The TNS data is just for supermarkets).
This sector of the market is most likely made up of wines that are priced above £3 normally but sell plenty on promotion, as well as traditionally cheap wines, like own-label claret, cheap Soave or Hock and other entry-level German wines. However, this area of the market does not seem to be one that the leading brands operate extensively in, and if one looks at the top 20 brands in Britain and their average annual price (see chart 6), it appears only South Africa’s Namaqua slips under the £3 barrier, at £2.97, and that is an average price.
On the other hand, if one looks at the price by country chart (page 28), it is Germany that has the sake, sells under 9% of its wines at this price point or below (see chart 5), France 29%, the US 13% and Italy 36%.
Climbing up the price banding ladder, it appears volumes dip markedly as soon as one crosses the £3 threshold (see chart 2), with fewer than 4% of wines sold between £3.01 and £3.25. Why is this? Well, certainly £2.99 has become a key price point in the UK market, and retailers appear reluctant to sell wine without a 9 at the end of the three-digit price. Furthermore, the price jumps are usually in 50p or £1 steps, so wines tend to be £2.99 or £3.49, not for example, £3.03. Steve Barton at Brand Phoenix makes the point that “£3.99 or £4.99 is so crucial because in the consumer’s eyes it represents £3 versus £4.” It is the initial digit which is the significant one, so one assumes, it makes most sense to push the price as far from it, without breaking it, and hence the proliferation of .99s. Barton says: “The consumer is more confused at £3.49. Is it closer to £2.99 or nearer £4?”
Breaking the .99 barrier
Nevertheless, Waitrose’s wine buyer, Simon Thorpe, records that with the supermarket’s Cuvée Chasseur from the south of France, it decided to put up the price from £2.99 to £3.05 after the budget, and “sales haven’t dropped at all.”
On the other hand, some would argue, Waitrose is blessed with very different and favourable demographics from the more mainstream supermarket. Certainly, when Sainsbury’s experimented some two years ago with price increases beyond the .99 price points, taking a £2.99 wine, for example, to £3.03, sales dropped and prices returned to their original levels. As Asda’s Sara Brook says, “If you move over a key price point, for example £2.99, £3.99 or £4.99, then volumes will drop by at least 30%.”
To continue to prove the importance of at least 50p intervals, if we move from the £3.01 to £3.25 band to the £3.26 to £3.50 category, the share of wines sold leaps up to a little over 12%, from 4% in the former bracket, which is presumably reflecting the number of wines sold at £3.49. A similar pattern is repeated if one considers the amount of wine sold between £3.51 and £3.75, which is 5.6% and then that sold between £3.76 and £4, which is 18% – and there is little doubt that most of the wine in the latter category is priced at £3.99.
It seems that, like £2.99, £3.99 is a crucial price cut-off, but one that is vital to the brand owner in particular. Barton explains: “£3.99 is so critical to building a brand in this market because that’s where most of your consumers are going to be interacting with your brand. Take Jacob’s Creek, the bulk of which – some 40% – is sold between £3.79 and £4.29. Blossom Hill, Piat d’Or, Gallo, Hardys, Banrock Station, they are all hovering around that £4 barrier with promotions included.” Similarly, Asda’s Brook admits that volumes at £5-plus are harder to get – “but much more profitable. Hence a number of promotions in the trade of £5.99 to £3.99 to get £5-plus wines in front of the consumer”. Barton makes the point that the market has never been as consolidated as it currently is, meaning “you can hit a massive audience through one retailer and through five you can hit almost 100% of the wine-buying audience”. That is, of course, if you price your brand near the £4 mark, or promote it at this price point. However, Barton warns, consumers do not follow wines back to their starting price if the promotion is too deep, for example £5.99 to £2.99, because it is such a long way back up. He also believes many products have not succeeded at £4 because they are not worth even this low price, and hence they last a very short time postpromotion. Louise Hill at Stratfords adds: “You have to remember that the average price of a bottle of wine is below £4, and if you want to compete volume-wise you’ve got to compete in that price point too.”
But, is the £3.99 brand actually a lasting proposition? Cheesman believes launching a brand in the UK market at £3.99 is unsustainable, because you cannot afford to support it. Again, look at the costs: there is the duty at £1.26 and then VAT at around 70p, which means almost £2 of the brand is duty and tax, and, as Cheesman says, “I don’t care where you are sourcing from, that does not give you enough money to support and promote a product.”
Promotional support
He also believes that is the case beyond the £4 cut-off, and suggests that for launching a brand in the UK, £5.99 or £6.99 are more realistic price points, but only when two or three promotional slots a year are included, as well as advertising and publicity work.
Looking at the £4 to £5 category in more detail, one finds a similar pattern to the £3 to £4 category. Sales slump between £4.01 and £4.25, then pick up between £4.26 and £4.50, before falling between £4.51 and £4.75 and finally increasing between £4.76 and £5, to a leading share figure of 8.4% for this £1 band. Here, once more, one can safely assume most wine retails at £4.99, for the same reasons as before. Some argue £4.99 is a particularly important price point because of the nature of our paper currency. If we had, for instance, a £7 note, £6.99 might become key. Whether or not this would happen, as the Co-op’s Paul Bastard says, “It must be a mental thing because it’s not as though people are handing over money and getting change for it – it goes onto a larger bill.” Nevertheless, £4.99 has become a classic cut-off for the trade, and as Bibendum’s Dan Jago says, “The old adage a year ago was that you couldn’t sell any volume above £5 and you couldn’t make any money below £5.” Certainly, as Cheesman points out, “We’ve got this nonsense now where 55% of all wine is sold under £4 and 85% is under a fiver… There is this massive log jam at £4.99, and you just get people cannibalising each other at £4.99.” Who is to blame? Henry John, marketing manager at HwCg says: “£4.99 has been considered as high as the consumer will go for everyday drinking wine.” On the other hand, he adds, “it is one of the barriers that the multiples are very reluctant to go over, and everything is skewed to this price point.” For Thorpe it is simple: “A pound is the largest single currency unit, and consumers are more likely to buy at £4.99 than £5.05 if everything else is the same.”
But there is some good news. The price bands beyond £5 are currently the fastest growing: according to Cheesman, “£5 to £6 is growing at 15%, £7 to £8 is growing at 11%, and over £10 is growing at 21%.” Many cite £5.99 in particular as still a key price point because the consumer thinks of it as £5, the real watershed price for supermarket wines. As Bastard says, “£5.99 is a fiver but £6.99 is an expensive bottle of wine.” Nevertheless, the Coop did experiment with a range of £6.99 wines over two years ago, “and it hasn’t been easy,” Bastard admits. “With a couple we’ve changed the supplier and now gone down to £5.99 and they are doing better.” Looking at the Nielsen stats once more, it appears the £5.76 to £6 price band is where the last of the significant volumes are generated, with a 2.5% share of wine sales volumes. Go up to £6.76 to £7, however, and that falls to 1%. Go up to £7.76 to £8 and it drops to just half a percent.
Is there any hope of breaking out of these increasingly rigid price points – the £2.99s, £3.99s and £4.99s? Cheesman believes price points “are a fixation of various buying offices and marketing men,” and he gives Asda credit “for breaking this price point nonsense with EDLP”. This involves, Cheesman explains, “taking a supplier’s net pricing and all promotional discounts and rolling it into one bottom price. Then Asda works out the margin requirements and comes up with silly prices, like £4.37, or whatever.” The advantage of such a system is clearly seen after duty increases because, as Asda does not go up in £1 jumps, or have any wines at .99, when there is a 4p duty increase, as there was in the last budget, the prices just go up from £4.79 to £4.91, for instance, and do not get pushed or stuck behind a barrier like £4.99.
But for those supermarkets that do have many wines at particular price points, Cheesman still sees a solution. “If you are at £4.99 and duty goes up 4p,” he argues, “you don’t go to £5.03 but to £5.49 and promote off £5.49 so you might have a £1.50 discount as opposed to a £1 discount. You can manage it. It’s easy to knee jerk, look at the weekly cycle and say sales have gone down the tube because nobody has taken the duty increase, but I say take it, and manage it. You have things that you don’t put up and things that you put up more – you have a balance.”
Suzie Cornwell at Morrisons suggests consumers’ sensitivity to price increases varies from wine to wine. “It depends how popular the brand is,” she says. “There wouldn’t be much difference in sales of Gallo White Grenache if we put an extra £1 on, but some small lines would suffer with an extra 4p over certain sensitive price points such as £4.99, £3.99, and so on.” For this reason, as Cheesman sees it, “we’ve been faced with creeping duty increases over the past four years, which adds up to 12p, and 12p on 120m cases of wine is a lot of money. In fact, each year it’s been around 50p a case on 120m cases which is £60m, and we’ve had that for four years so that’s £240m – which the UK trade in their infinite wisdom have decided to absorb.” This is especially frustrating when one considers this is supposed to be a consumer tax. “It’s like saying I’m not going to pay an increase in income tax, I don’t want to,” Cheesman says.
It is also particularly worrying when existing brands get trapped at particular price points and eventually the quality suffers, because quite simply, something has to give. Some, such as Hew Dalrymple at WaverleyTBS, do believe certain key price points are being gradually breached. “In my view,” he says, “the £4 mark is being broken, we are seeing more wines coming in at £4.29 and £4.49, and one could argue that the £5 mark is being broken, but it is much more of a watershed in terms of the decision to buy above or below £5.” He also makes a point that such specific price pointing tends to be a supermarket phenomenon and you do not see it so much in the independent sector. Thresher, for instance, now has its threefor-two offer, while if you go into a Sainsbury’s Local or Tesco Metro the price points do not apply in the same way. Dalrymple also makes the interesting point that price does not play such an important role in the on-trade, “because you can get 175ml or 250ml glasses, single-serve or other sized bottles, and it’s almost a drawback in the on-trade that there aren’t clear price points.”
To return to the off-trade, bottle formats can certainly be altered to hit certain price points, something often found in the fortified wine category. For example, Warre’s Otima 10 and 20 Year-Old hit £10 and £20 price points, because they are sold in 50cl bottles.
But while some, such as Barton at Brand Phoenix, suggest wine sellers look to the beer market for its multitude of pack sizes, from small to litre bottles, kegs and cans, others suggest the 75cl bottle is here to stay, as it is the perfect size for sharing. Nevertheless, no one can ignore the rising popularity of bag-in-box, a sector which has its own price point problems, with little creeping above the £15 mark.
Overall though, one must question how important is the everyday or retail price point, especially as so much is bought on promotion? As Jago says, “What is a price point? It is a nominal starting point from which retailers can then discount those wines.” In other words, it is not so much the price the wine is being sold at, but the size of the discount that is most important. “Almost every retailer is now customising or tailor-making wines which are designed to be very dramatically reduced in price,” Jago says. “The question is, has the customer spotted it, or are they going to?”
It is certainly hard to say. However a spokesman for Constellation reveals: “As a general rule we believe that a £1-off deal tends to generate between 10 and 20 times the normal weekly sales level, and a half-price deal gives more than 100 times the normal weekly sales level.” So, if there is one thing that is certain, it’s the efficacy of deep discounting.