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Shelf space…is there room for me?
By Carolyn Evans-Hammond
Supermarkets continue to seize an increasing share of retail wine sales globally. This trend is reshaping the playing field, and gives rise to the question of how to compete in the demanding grocery sector and other market segments.
The KPMG Wine Industry Group in Australia recently examined market access issues for wine brand owners in the UK, US, Canada, Australia and New Zealand. The report titled Shelf space...is there room for me? questions the viability of the on-trade versus off-trade market approach, brand ladders, and other traditional strategies.
“Over the past 20 years, wine retailing has altered dramatically, principally due to the growing pervasiveness of the grocery channel,” says Keith Smith, executive chairman for the Wine Industry Group of KPMG in Australia. “The consequence of this shift combined with changing consumer lifestyles is a more complex channel structure.”
Analysing the market by place of consumption—on-trade and off-trade channels—is outmoded. This model must be overlaid by a third dimension of “convenience” and “destination” outlets, which considers the respective consumer’s impetus.
Grocery groups, pubs and restaurant chains dominate convenience channels and independent groups, specialist stores and restaurants form the bulk of destination outlets. Destination outlets offer consumers an experiential /discovery element whereas convenience channels compete heavily on price.
The emerging destination/convenience polarisation threatens the viability of the vertical brand integration model, known as brand ranging and ladders, which relies on consumers buying entry level wines and trading up within a brand’s portfolio.
“The consumer is now differentiating between convenience and experiential brands,” says Smith. “As a result, brands that sell in destination outlets may compromise their brand equity by selling in convenience channels as well.”
Appearing in both types of outlets can not only blur a brand’s image and erode equity; it can dissuade destination outlets from listing the brand because these retailers seek a different offer than convenience channels.
Smith is not recommending large and established brands like Penfolds and Beringer move away from a brand integration model but that new and less established players question if this structure is suitable for them based on analysis.
“The first requirement for new and less established players is to determine where the brand or brand portfolio will be most appropriately represented—convenience or destination outlets,” says Smith.
“Once the appropriate channel is identified, brand owners must differentiate their offer; find ways to engage the consumer—not the buyer, who is a conduit; and be creative in their approach.”
He also argues engaging wine writers is not sustainable as this territory is crowded and journalists are constantly seeking new offers, regions, and styles. Educating opinion leaders is important but it must be part of a broader marketing mix.
Brand owners that choose to compete in the convenience sector must expect to adopt fast moving consumer goods (FMCG) techniques to command shelf space whereas destination channels want tactics such as in-store theatre, consumer engagement, and third party endorsement.
“One tool that is underutilised among wine brands competing in the grocery sector is market research,” says Smith. “Supermarkets are used to brands backing their activity with studies.”
Other functions required for wine brands to compete well in the grocery channel include: supply chain management, access to and interpretations of scan data (AC Nielsen), national account management capabilities, and management information systems with the ability to interface with key account systems.
Limited resources of small to mid-sized enterprises (SMEs) can hinder their ability to function with this level of sophistication so they may look to brand agents for such support.
Clearly, SMEs with no defined market niche are at most risk of failing to compete in the grocery sector due to issues of resources and volumes. Finding funds for listing fees, marketing, and promotional activity—at the expense of other capital demands—can be more difficult for smaller producers. And the required volumes may not be available. The grocery sector may not an ideal target for many SMEs and KMPG’s report offers solutions to help them compete in other channels by enhancing market visibility and profitability—see sidebar.
The dominance of grocery channels has implications for brand agents as well. Major grocers are reviewing supply chains to drive further rationalization for both brand owners and agents, according to the study. Targets include both efficiency gains and the margin of up to 30% paid to agents by producers.
For brand owners, this means the potential for distributor margins to be re-cut on a fee for service basis—lower for grocery account management and higher for on-trade/destination accounts.
For brand agents, the current environment requires reassessing their service offering to remain relevant to retailers and brand owners. One way they can remain valuable is to provide brand owners with functions critical to competing in the convenience channel such as supply chain management.
As brand agents take an increasingly active role in the brand’s ability to compete, KPMG expects to see them start taking equity in brands with long term potential.
A brand’s potential lies in its ability to look beyond price and raise awareness to create consumer pull. Consider the following insights:
- The majority of consumers continue to be price, rather than brand, loyal, which constrains pricing options for brands
- Strong volume delivery on and off promotion delivers superior profitability through the value chain, and attractiveness as a supplier
- Small and mid-sized players need to lift their brands above the pack. In the UK, the space between private label and the top 20 brands represents less than 15% of sales. It is the most competitive point in today’s beverage market
- Aggressive price promotion is driving traffic rather than being used as a lever to trade up consumers. Consumer brand pull becomes essential to ranging if this trend remains a feature of the industry
As of 1999, grocery channels held about 50% of the global retail volume sales. This figure is expected to continue to rise because the sector benefits from convenient one-stop-shopping; a powerful buying scale that permits competitive pricing; increased home consumption of wine; and female purchasing.
KPMG’s study provides interesting insights into how wine brand owners can adapt to the changing playing field. Key themes of the report, along with an order form can be accessed at www.kpmg.com.au. The full report costs $A350.
[SIDEBARS]
Shelf space…is there room for me?
Key insights
- The shift from on-trade and off-trade to a more complex channel structure
- The grocery sector: Reshaping the promotional focus
- FMCG techniques in the grocery sector
- Options for SMEs
- Consumer pull—looking beyond price
- Brand agents: Reassessing their role
- Decisions for brand owners
- Convenience or destination
- Trade support level
- Brand agent selection
- Product differentiation strategy
- Marketing and promotion mix
- Capital allocation
- Cost management
- Detailed analysis of the UK, US, Canadian, Australian and New Zealand markets
SME options: Solutions to enhance market visibility and profitability
- Improved understanding of market segmentation and the profit implications of their production capability
- Consumer pull strategies
- Down-sizing of volume aspirations with a focus on direct wine sales (cellar door and mailing lists) and selected on-trade
- Effective asset utilization
- Resource sharing allowing a reallocation of working capital to brand and market investments
- Producer consolidation