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What The Market Says
Some Thoughts for Ms. Lucas - Liquor Retailing in Australia
Sunday, 24th July, 2005  - David Farmer

I recently received the following email from Ms. Lucas and sent back a few ideas.

"I am a student at Macquarie Graduate School in Sydney and came across your site while searching for research on the competitive strategies of Woolworths, Coles and independents Kemenys & Porters for a strategic management report on the liquor retailing industry in Australia. Also having an interest in wine, I found your site very interesting & informative.

Reading about your experience in the industry I thought you may have some valuable insights into the retailing strategies of the companies mentioned above and/or some ideas on how I could source more information. The crux of the report will be comparing the differences in strategy of these organisations and then make some strategic recommendations on how one of these firm's can improve their competitive position or deal with the potential threats & opportunities in the industry.

Any insights or information you are able to share would be most appreciated.

Kind regards

Jane


......................................

Dear Jane,

You will have read my thoughts on Coles vs Woolworths. The growth of big box shops will profoundly alter the retail sector as we see it today. I will come back to that but let us go to the UK and see what has happened. It is a largely deregulated market. A recent report in The Times tells us that 4 out of 5 wine bottles are now sold by supermarkets. All of the high street shops of which there are thousands struggle for the rest. Tesco indeed sell 1 in 4 bottles.

Unlike Australia (the UK local industry is too small to worry about) all wine is sourced from across the globe. This I have always assumed gave an independent a great advantage. For example while a supermarket has Beaujolais, or several, the independent does not have to stock the same brand as there are countless numbers of other Beaujolais growers. So you can easily fill a shop with brands that are different to the supermarkets. This means there is no price comparison. Not so in Australia. We like our local wine and as it is controlled by three or four large suppliers it is not possible to have a viable business without stocking brands that those with greater buying power also stock. Thus you can be undercut at anytime. And price is the motivator of customers despite what you may have been taught.

Now what I thought was an advantage in the UK (see above) has turned out to be not true as independents and indeed large store brands like Oddbins and Threshers only do so-so. I have watched them shrivel from 80% to 20% of wine sales. The ease of shopping and prices of supermarkets means they win. Small fast moving independents can do OK and many act as wholesalers to pubs and restaurants in their local areas. Restaurants of course will not stock well know or supermarket brands as we who dine out take exception to a 300% mark-up compared to the supermarket price, whereas with a boutique wine, who knows what it should sell for. They get these wines from the local shop that acts as a wholesaler; a condition that you do not find in Australia. We have a diverse range of specialist wholesalers who fill this niche although I do not believe they will survive in the current form as the big two grow in dominance.

This leads me to the conclusion, to resolve my dilemma of the UK market, that the independents that survive in Australia do so because of state laws that restrict the number of licences. Being able to source wine from across the globe gives little advantage. If tomorrow all supermarkets could be licensed (as in the ACT) a great number of independents would disappear. Victoria continues to liberate its market and many small shops will go. Big companies however have trouble handling small fiddly little companies and as we now have 2000 wineries small shops can have a different range but in my view you cannot sustain a business as you are selling to the small customer numbers who are wine ‘nerds’.

So to some specifics. Woolworths with BWS and Dan Murphys are well in front and have no need to change tack. Coles has fallen away and must act quickly. They are unfolding a big box but will it succeed? If they both get to 75 shops which is the stated aim there will be blood everywhere. They will close many of their own shops and many independents will toss it in. Then their strategy is to place the rest of the licenses into the supermarkets and Coles are trialling this in Victoria. This is a winning strategy. Both are pursuing the same strategy as they are big corporates and that is all they know. Buy from big people, sell cheap in the big boxes, charge more at the convenience end and squash competitors.

Kemenys I wish well of but they sell the same range as the ‘big box’ people who are cheaper. They will with time wilt under pressure. The game has yet to begin in Sydney and a Dan Murphys will be near them soon. They do not buy as well and the cost base of expensive catalogues and full page ads is not sustainable. It is now too late for them to expand.

Smaller guys like Porters are players around the fringe. They can make a living but its hard work and there is no growth strategy I can think of.

I have addressed only wine. Spirits are very tightly controlled on the world level. Only the big two will make money in this area. They also think the same way (see above). Promoting spirits will not alter the end result of who wins.

Beer is a bit different as most pubs are owned by independents many of whom are very wealthy from the pokies. They will continue to sell a lot of beer through their bottle shops.

So the big two cannot be beaten? No. Can a great independent do very well? I do not believe so. Make sure you join Macquarie Bank when you graduate.

Regards

David Farmer

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