UK Off-Trade Analysis 2010

Where do you buy yours?

Multiple grocers lead the retail fold, but other exciting sectors include online and specialist shops

THE WORD recovery was doubtless the most commonly used term of 2010 and while UK retail certainly saw some alcoholic drinks growth over the course of the year, it was, it must be stated, irregular. Primary winners in the increasingly cut-throat battle for consumer spend were once more the multiple grocers, while overwhelming losers were, like last year, those in the so-called “impulse sector” – essentially convenience stores and multiple-specialist off-licences. Within this general picture there were pockets of dynamism in the online and independent arenas, where clever positioning and eclectic offers enticed curious consumers and gave hope to suppliers of the small volume and little-known labels.

Thankfully the intense round of shop closures that characterised UK drinks retailing in 2009 was not repeated in 2010 and the worst of the damage was done when First Quench Retail (FQR) – Britain’s largest off-licence retail chain – filed for bankruptcy on 29 October 2009. At the time, commentators blamed declining discretionary spending for this high-profile collapse, but hindsight has shown two important aspects to the demise of almost all of FQR’s 1,200 shops. Firstly, the UK high street had gone beyond saturation point when it came to convenience retailing and secondly there was a need – sadly not comprehensively supplied by FQR – for a specialist drinks retailer with a genuine point of difference from the supermarkets because there is simply no way to compete with them on pricing.

MULTIPLE GROCERS

However, for producers and importers there are advantages to the supermarket sector. The most important of these is the opportunity for incredible distribution through even a single listing. This is because any one of the major multiple grocers, dubbed the “Big Four”, has a massive market share. In total, the supermarkets account for 80% of the UK off-trade in terms of wine sales by value, and are growing at 6% (NielsenMAT to we 04.09.10). Of this, the largest portion is held by Tesco (over 32.8%) followed by Sainsbury’s (18.6%),Asda (16.4%) and thenMorrisons (13.8%).

Catching up on the Big Four is The Co-operative Group (Co-op), which is the UK’s fifth largest supermarket chain, and, as of July 2009, owner of Somerfield, a 900-strong supermarket chain, which it acquired for £1.57 billion. This group has 7.1% share of multiple grocer wine sales (see pie chart, p10).

Beyond these high-turnover multiple grocer brands is Waitrose, smaller and more upmarket, it has a relatively eclectic alcoholic drinks range which accounts for 4.1% of the market. There’s also the similarly upmarket clothes and food retailer Marks & Spencer (M&S), which has a 2.4% share of supermarket wine sales.

Aside from operating large and often out-of-town outlets, the major supermarkets have encroached onto the high street and petrol station forecourts with smaller formats such as Tesco Metro and Express, Sainsbury’s Local or M&S Simply Food. These are designed for top-up shopping and contain a limited range of alcoholic drinks.

All of these retailers have high volume sales and extremely competitive pricing. Because of their volume demands their purchasing power is enormous, which can be unviable for many producers who cannot meet the volume requirements, delivery speeds, consistency of product or the necessary price demands.

Most multiple grocers have in excess of 400 drinks products (although the number on sale at any one time may change). For the most part, they are selling to price-conscious consumers withmid- to low-end product knowledge. In recent years the emergence of supermarket own-label beers, wines and spirits has opened up more business channels for producers. The buyers formultiple grocers are category-exclusive buyers and will receive hundreds of samples from which to select new products. Their prerequisite for selecting an alcoholic beverage is increasingly to provide a point of difference, and they have strict quality guidelines. Shipping in bulk and bottling in the UK is becoming an increasingly important aspect to the supermarket supply chain andAsda is building its own bottling plant in Norfolk called Vinpack.

It is worth adding that the supermarkets are also becoming major online drinks retailers too (see section on online retailing) and Tesco’s Wine by the Case web-based operation generated over £58m of sales in 2009. Meanwhile,Waitrose is working on the expansion of its Wine Direct online arm.

SPECIALIST OFF-LICENCE CHAINS

A further 16.9% of the UK retail wine market is accounted for by the “impulse” sector,made up of dedicated wine, beer and spirits shops, which are traditionally located on the high street. This sector is suffering froman 11% decline (Nielsen MAT to we 04.09.10) as the multiple grocers continue to steal market share.

Historically, this part of the UK retail market contained well-known high street brands such as Unwins and Threshers. The collapse of Unwins off licence chain in December 2005 saw the disappearance of this retail brand from the UK, while the Thresher name also vanished after its owner FQR went into administration in October 2009. The latter retail group also operated theWine Rack brand, which still survives because the name and 14 shops (out of 370) were sold to wholesaler Venus Wine & Spirit Merchants.

With the collapse of First Quench Retail, the largest national operator is Oddbins, with 129 stores in the UK. It predominantly sells wine and Champagne, although it does contain a wide range of Scotch whiskies and has recently unveiled a new “ministore” concept called Oddies, with a narrower range of wines. The first outlet opened in Tyne and Wear at the end of 2010 and if it proves a success, further outlets will be rolled out across the UK.

Oddbins also recently redesigned its website, a service which now provides “exclusive offers and small parcels”, from a range of 700-750 lines, including over 60 mixed cases.

In general,multiple specialist retailer trading conditions tend to imply higher margin requirements, which result in a higher bottle price on shelf.

Consumers choose to shop in specialist chains either because of their location or because they generally have more knowledgeable, approachable and attentive staff, which the majority of multiples lack. However, multiples such as Tesco and Waitrose have fought back by introducing fine wine sections and trained wine advisors. While the range profile of the specialists is not significantly different in size from that of the multiples, their typical consumers have a higher average spend per bottle and greater wine knowledge.

WINEWAREHOUSES

Another major brand in UK wine retailing is Majestic Wine, with over 150 stores in the UK. It occupies large warehouse sites with parking and only sells wine by the mixed case. In September 2009 the group reduced its in-store minimum purchase from 12 bottles to six although the minimum purchase for online orders and deliveries remains at 12 bottles.

Attentive, knowledgeable staff, instore tastings and discount offers translate to a higher-than-average spend, especially since consumers are typically more wine appreciative.

The business is expanding through home delivery via internet orders as well as new store openings.A further 12 are planned for 2011 and the retailer has a target of 250 outlets in total, although it is thinking of revising that figure upwards.

INDEPENDENT RETAILERS

One thriving aspect, albeit small (a further and final 3% of the UK offtrade) is the independent sector, which has benefited both from the collapse of the multiple specialist sector (the disappearance of Unwins and Thresher) and an increasingly knowledgeable and experimental consumer who doesn’t appear satisfied with the narrow range on offer in the major multiples. Success is apparent among those retailers with a clear point of difference in terms of wine range or store lay-out, as well as those that can provide in-store sampling – a technique employed effectively by The Sampler, which offers shoppers to chance to try a range of fine wines from Enomatic wine preservation machines. It has just opened a store in South Kensington which joins its inaugural outlet in Islington.

In general, independent retailers are more likely to list premium and niche products and they will often buy stock on allocation. As a result, stock will rotate more frequently than in other off-trade premises. The leading independents include Berry Bros & Rudd, Justerini & Brooks, Roberson Wine, Laytons, and Philglas & Swiggot.

DEPARTMENT STORES

Perhaps the most upmarket sector is wine retailing within the UK’s leading department stores. Famous names such as Harrods and Fortnum  & Mason in London, and Selfridges and Harvey Nichols, which both have branches nationwide, tend to cater for a consumer with a high disposable income and good product knowledge and hence carry a range of quality, rare and fine wines and spirits.

Refurbished to an extremely high standard has been the Harrods Wine Shop, which opened in October 2010 complete with an air-conditioned fine wine vault, tasting area with wine sampling machine, “aroma zone” and private dining room. It accommodates as many as 3,000 products with wines on shelf from £7.95 to £795, and is dedicated to wine education as well as pure retailing.

Fortnum&Mason also has a new and luxurious wine section alongside a wine bar, while Selfridges in London has a modern drinks area encircled by wine sampling machines.

DISCOUNTERS

Although heralded as a new major force in UK retailing to rival the Big Four supermarkets (mentioned earlier), the so-called “discounters” haven’t taken quite the large chunk of the UK alcoholic drinks market that some suspected, and currently represent 4.9% of wine sales through the multiple grocerymarket (see pie chart, p10). The discounters include the likes of Lidl ,Aldi and Netto and rose to prominence as the recession bit deep in late 2008 and during early 2009 with their enticing offer of own label products at everyday low prices. A no-frills approach to merchandising and local sourcing allow themto keep costs down.

However, as consumer confidence rebounded towards the end of 2009 and during 2010, the offer lost some of its allure, while the supermarkets responded to the discounter threat aggressively, in particular with wine offers such as three for £10. It should be added though that the wine ranges in discounters has expanded to attract a broader customer base.

CASH AND CARRY

This route to market can offer drinks brands access to the fragmented network of convenience stores (as well as the on-trade, as many caterers and small businesses will use wholesale for their alcoholic drink supply). This also applies to the independent retail section of the off-trade (local off-licences and shops), so getting brands listed here can mean reaching large numbers of small buyers and is certainly a good business option.

However, access to the central buying teams and obtaining an order from them can be timely and difficult to achieve. The main wholesalers are Makro, Booker and Landmark. Their product ranges are limited to about 100. Cash-and-carry buyers are less likely to have specialist drink knowledge and the drinks categories may form only part of their business/job function.

INTERNET AND E-COMMERCE

Aside from a multifarious mass of independent wine merchants that popped up in the UK during 2010, the other story of last year was the growth in wine, beer and spirits sales through the web. Estimates of exact market size vary but IMRG Cap Gemini reported growth figures of over 20% in online alcoholic drinks sales by summertime 2010, while wine sales alone are believed to have surpassed the £200m mark from 2.5m cases sold at an average price of £80. The largest online operator is supermarket Tesco with its “Wine by the Case” web based arm, which generated over £58m worth of sales in 2009.

Boosting this sector is the growing number of web users – as many as 70% of UK households had internet access in 2009 – as well as yet more operators. Notable, aside from market leader Tesco, is Waitrose Wine Direct, Ocado, Majestic, Everywine, Slurp, The Wine Society, Laithwaites, Virgin Wines, Oddbins and Averys, while newcomers making rapid inroads include Gondola (newly rebranded as Your FavouriteWines), NakedWines and FindWine.

In general, online wine retailers sell by the case, so traditionally have consumers with higher total spend who are also willing to experiment and trade up.Where retailers have both an off- and online offering, the latter tends to offer a greater range with exclusives and parcels of more esoteric wines.

MAIL ORDER ANDWINE CLUBS

Although mail-order and online sales tend to be combined, (see table, p11) drinks business research suggests that for wine as much as 10.2m cases are accounted for by mail order, four times the size of the online wine market described above. The size of this market is attributable to the strength of companies such as Direct Wines and The Wine Society. The former, which generated sales of £350m worldwide in 2009 contains retail brands Laithwaites, Virgin Wines, Averys as well as The Sunday Times Wine Club, while the latter, The Wine Society, has a £70m turnover and is a mutual organisation owned by its members. Such clubs and companies are characterised by their enviable consumer loyalty, offering suppliers a chance to introduce less obviously commercial wines.

AIRLINES/TRAVEL

Business is exceptionally competitive for the UK’s budget airlines, which increasingly look to on-board service to increase profits. This can mean big opportunities for the drinks industry. The main large airlines also have excellent drinks offerings in their first / business / club / executive classes. Many employ wine consultants from the industry and some have their own buying teams or buyer. The leading five travel operators in the drinks trade are airlines BritishAirways, VirginAtlantic, Easyjet and Ryanair, and train operator GNER. db