5. Wine Sales in the Retail Sector

Question 1

What % of wine is sold BY VOLUME through retail in the UK?

What % by value?

Answer 1

80% by volume

60% by value

Question 2

Identify the different types of retailer in a Free Market :

Answer 2

Types of retailer in a Free Market :

• Supermarkets (regular and premium)
• Deep Discounters
• Convenience Retailers
• Specialist Wine Retailers
• Hybrids
• Online Retailing

Question 3

Define Supermarket:

some examples?

Answer 3

A larger store selling groceries and household goods, allowing consumers to buy everything they need under one roof.

• Wal-Mart (USA)
• Woolworths (South Africa)
• Tesco (UK)
• Carrefour (France).

NOT to be confused with Deep Discounters, such as Aldi, Lidl.

Question 4

What types of wine do Supermarkets typically stock ?

Answer 4

Types of wine do Supermarkets typically stock :

• Inexpensive to mid-priced wine
• Wines from well-known/popular regions, made by well-known brands e.g. Jacob’s Creek, Barefoot, Oyster Bay.
• Wine styles that appeal to wide range of customers, many of whom have litte/no wine knowledge.
• In wine-producing countries, selection often dominated by local wines.

Question 5

What are the Advantages for a producer to sell wines at a Supermarket :

Answer 5

Advantages of selling wines at a Supermarket :

• Attractive option for producers wanting to sell large volumes of wine
• High levels of market exposure
• In many cases, supermarkets buy directly from producers, meaning there are no intermediary costs.
• Many supermarkets also employ winemakers who work closely with producers to supervise production and ensure quality control – such expertise may help producers to improve the quality of other wines which they sell elsewhere.

Question 6

What are the Disadvantages for a producer to sell wines at a Supermarket :

Answer 6

Disadvantages of selling wines at a Supermarket :

• Enormous price negotiating power as more producers want to sell to a supermarket than the supermarket needs (i.e. an excess of supply over demand)
• Additional fees : Wine stocked by the supermarket + any additional promotion.
• Very strict requirements regarding quality control, time and manner of delivery, packaging and labelling. If these are not met, the supermarket can often simply refuse to take the wine.
• Wine may be delisted if it does not achieve the expected sales volumes and profit margins.

Question 7

How do Supermarkets reduce the consumers’ ability to compare prices of wines ?

Answer 7

By using Private Label :

• Consumers will often seek the cheapest price available and therefore buy where the price is the lowest.
• In order to reach higher margins, supermarkets will reduce the ability from customers to compare prices of wines by selling wines bottled under labels exclusive to them (private label)
• Supermarket’s name may not appear on label, and actual wine itself may be available widely under different labels.
• Some supermarkets have an own-brand range of wines (that clearly display the supermarket’s name and branding on the label), such as
  
  • Sainsbury’s Taste the Difference in the UK
  • Tesco’s Finest in the UK

Question 8

How does wine offered by premium supermarkets differ from that offered by standard ones ?

Answer 8

Premium supermarket wines :

• Mid-priced to premium wines
• Appeals to consumers with strong interest in wine
• Wine from artisan producers sold under producer’s label.
• Bought in smaller quantities with understanding that once wine runs out = no more available.

Question 9

What is the business model of Deep Discounters?

4 examples?

Answer 9

Deep Discounters :

• Similar to supermarkets, but rely even more on volumes
• Prices are set permanently low
• rarely (if ever) offering any form of price promotion.

Examples:

• Aldi, Lidl in Germany
• Netto in Denmark
• Trader Joe’s in USA (subject to 3-Tier system).

Question 10

How do Deep Discounters manage to keep their costs down?

Answer 10

Deep Discounters manage to keep their costs down :

• Relying on volume with lower margin
• Basic shop presentation
• Lower rent : Locations far from prime areas.
• Limited product range : usually only 1 type of each thing, most wines are private label, e.g. Two Buck Chuck.
• No major brands (tend to be more expensive) - Instead buying up stock of lesser-known producers for less $$
• Cut intermediaries : Direct purchasing from producers

Question 11

What are the Advantages of selling wines at a Deep Discounter :

Answer 11

Advantages of selling wines at a Deep Discounter :

• Most product sold are private labels, e.g. Charles Shaw’s ‘Two Buck Chuck’ for Trader Joe’s.
• Usually buy the entire stock of small producers
• No additional fees : Unlike supermarkets, DD do not charge producers for stocking their products and they don’t offer price promotion at the charge of the producer.

Question 12

What is an exception to the rule that Deep Discounters only stock inexpensive wines?

What has this resulted in (2)?

Answer 12

• deep discounters may buy small amounts of more expensive wine in stores located in more affluent areas, or ahead of times of greater spending, e.g. Christmas.
• this has attracted customers with a strong interest in wine, many of whom purchase inexpensive wines in addition to the $$ one.
• in Britain, wine purchases at deep discounters are increasing:
  
  • 2012: 23% of drinkers purchased from DD;
  • 2018: 37%

Question 13

How do Convenience Retailers differ from supermarkets/deep discounters ?

What is the typical product range offered by these ?

Why do prices tend to be higher ?

Why do consumers still buy knowing the prices are higher ?

Answer 13

Convenience Retailers :

• Located in prime areas (where more people live) and are usually open longer (sometimes 24 hrs).
• Can be independently owned, e.g. common in India, or part of a franchise, e.g. Spar, found in many countries.
• Product Range:
  
  • similar to but smaller than supermarkets; popular
  • major brands (some, e.g. 7-Eleven have their own exclusive brand).
• Prices:
  
  • tend to be more expensive vs supermarkets or deep discounters
  • rents proportionately higher
  • less efficient (originally designed for other purposes)
  • larger staff relative to size
  • franchise arrangement = fee to franchise owner.

Consumers are often willing to pay a little extra for the convenience of a local store to save them having to go further to a supermarket, or when everything else is closed

Question 14

Define Specialist Wine Retailer :

Answer 14

Specialist Wine Retailer :

• Retailers that specialize in wine, often from mid-priced to super-premium.
• Some sell other premium alcohol such as spirits and beers.
• Some sell artisan products : cheese and deli

Question 15

Using examples, identify some different types of Specialist Wine Retailers (4):

Answer 15

Types of Specialist Wine Retailers:

• some are larger chains (Oddbins, UK or O’Brien’s in Ireland).
• most are independently owned/part of small chain.
• some specialize in particular styles, e.g. organic/biodynamic wine (Les Caves de Pyrène, UK, La Cave des Papilles, Paris).
• some specialize in premium/super-premium/’en primeur’ wines, e.g.
  
  • Hedonism, UK
  • Millesima, Bordeaux.

Question 16

What are the Advantages of Specialist Wine Retailers :

Answer 16

Advantages of Specialist Wine Retailers :

• Opportunity for smaller producers from less common regions/grapes. SWR usually do not sell major brands (too much competition with SM/DD)
• Average price is higher than SM/DDs; clientele willing to spend more per bottle (‘high involvement’) = higher better margin.
• Knowledgable/well-trained staff to ‘hand sell’ wines, build relationships with regulars, suggesting new wines, etc…
• Special events, e.g. classes, tastings = good opportuntity for marketing, broadening consumer base.

Question 17

What are the disadvantages of Specialist Wine Retailers :

(for consumers and producers)

Answer 17

For consumers :

• Prices will be higher : SWR lack the purchasing/negotiating power of larger retailers

For producers :

• Producers usually have to pay a distributor to sell/distribute the wine, given the number of potential outlets.

Question 18

Define Hybrid Retailer:

Advantages / Disadvantages ?

Answer 18

Hybrid Retailer:

• Wine retailer that also has a bar area for drinking wine bought at shop (slightly higher price). Also sell food, cheese, deli, tapas, etc…

Advantages :

• Consumers can try wine before buying, encouraging lower-involvement consumers to try lesser-known wines.
• Offer a regularly-changing selection of wines by the glass. This is also a good way to showcase new wines and wines from less well-known regions or grape varieties.

Disadvantages :

• Need to stay open later and employ additional staff to serve.
• Additional licensing involved with on-premise consumption.

Question 19

Describe current trends in Online Retail (2):

Answer 19

Significant growth in online retailing for ALL goods.

Varies by market: China: 20% of all wine sales vs USA: 2%.

Question 20

Identify the 3 main types of Online Retailer:

Answer 20

3 main types of Online Retailer:

• ‘Brick and Mortar’ retailers who offer online retail in parallel with store sales, e.g. supermarkets or specialist shops.
• Online-only Retailers, e.g. Laithwaite’s (UK), Wine9.com, Pinju.com (China).
• Online-only retailers that sell other goods as well, e.g. Amazon.com, Tmall and JD.com (China).

Question 21

What are the Advantages of Online Retailers :

Answer 21

Advantages of Online Retailers :

• Significant growth in online sales
• Much larger customer base

For ‘brick and mortar’ retailers :

• Option of ‘click and collect’ = no extra delivery/shipping costs.

For online only retailers :

• No need for expensive retail stores. Although stock has to be stored in warehouses, these are located in areas where the costs of leasing/buying buildings are lower than in town centres.
• Extra space means larger range of wines can be stocked = good opportunity for smaller, niche producers.

Question 22

What are the Disadvantages of Online Retailers :

Answer 22

Disadvantages of Online Retailers :

• Lower but still expensive labor costs :
  
  • some staff still needed for customer service, order processing, etc… some retailers,
  • e.g. Laithwaites, also employ specialists to assist customers on a deeper level.
• Expense of delivery;
  
  • bulky, fragile, heavy product
  • risk usually assumed by retailer
  • customer expectations are becoming more demanding, e.g. amazon.com (chilled wine within hours).
• Website Creation/Maintenance: Significant Costs
  
  • Creation/design of a reliable and easy to use website
  • Maintenance : ensuring the website has fresh interesting contents and deals with any issue customers can experience.

Question 23

What factors must be considered when it comes to an Online Retailer’s website :

Answer 23

Online Retailer’s website :

• Must be easy-to-use, reliable and stocks up to date. Otherwise customers will easily leave the website without buying anything
• Must display information to guide the customers (low and high involvements) : Descriptions, food pairings, critic scores/awards, suggestions of other wines based on past purchases, opportunity to write reviews.

Question 24

Describe the use of Mobile Apps for Online Retailers (3):

Answer 24

especially popular in China, e.g. WeChat, Pinduoduo, Bottles XO.

• tailored for mobile device used as opposed to laptop/desktop use.
• must be quick, easy to use, high level of service.

Question 25

Define Global Travel Retail :

Answer 25

Global Travel Retail : stores located in places where customers are travelling from one country to another, e.g. airports, sea ports, international railway stations, cruise ships, where many highly-taxed goods (alcohol, tobacco, cosmetics) are sold ‘duty-free’.

Question 26

What are the Advantages of Global Retail Outlets :

Answer 26

Advantages of Global Retail Outlets :

• At airports, customers have time after check-in to spend in stores and view products at leisure.
• If located between arrivals and customs, saves customers from having to check in extra luggage.
• Gives customers opportunity to find high-quality/high-priced goods not available in their home market.

Question 27

What is the main Disadvantage of Global Travel Retail :

Answer 27

Disadvantage of Global Travel Retail :

• High property costs : passed on to suppliers = smaller margin/lower profits vs other routes to market.

Question 28

How has the way in which consumers view Global Travel Retail changed in recent years ?

Answer 28

Global Travel Retail changed in recent years :

• Previously known as ‘duty free’; taxes were not chargeable on goods sold for personal use in another country.
• Consumers looked to buy highly-taxed goods, e.g. alcohol, cigarettes, perfume.
• Introduction of free-trade zones, e.g. EU, has made ‘duty free’ less important, now greater focus on products not available in home market.

Question 29

Define Wine Investment Companies

Answer 29

Companies that specialize in sourcing/selling wine for investment (most sought-after, expensive, rare wines in the world, e.g. Classified Bordeaux, Burgundy GC, top Napa wines).

Question 30

General busniess model of Wine Investment Companies (3):

5 examples

Answer 30

• companies are allocated small amounts of super-premium, rare wines directly from producer or merchant/distributor.
• wines are then offered to customers with purchasing history/expressed interest.
• other companies are essentially brokers;
• essentially assisting customers to find wines they are interested in, charging commission

Some retailers offer both ‘normal’ and investment-grade wines, e.g. Farr Vintners, BBR, Fine and Rare.

Others specialize solely in investment-grade wine, e.g. Amphora Portfolio Mgmt, Cult Wines.

Question 31

What has driven Wine Investment to become an increasingly important part of wine trade in recent decades (2)?

What is meant by ‘fine wine’?

Answer 31

• began with increased Bordeaux ‘en primeur’ sales driven by rapid growth of Chinese market.
• fine wine seen as safer investment than stocks, shares, as it typically improves/appreciates with age (not always the case).

Fine Wine: no agreed definition, but generally refers to small-production wines from more prestigious regions, made by leading producers e.g. Bordeaux, Burgundy, California, Australia.

Question 32

In the context of Wine Investment, what is meant by the ‘secondary market’?

How else do investors purchase these wines?

Answer 32

‘Secondary Market’ = other investors who will buy wines from owners after they have appreciated in value.

• wines are often purchased ‘en primeur’, or, in the case of many California cult wines, by being in exclusive wine clubs, e.g. Screaming Eagle, Harlan Estate.

Question 33

What are the different types of companies involved in Wine Investment :

Answer 33

Different types of companies involved in Wine Investment :

• Retailers specializing in investment-grade wines and provide brokering service for those selling, e.g. BBR.
• Trading exchanges, e.g. Liv-Ex in London, that work much like stock exchanges, with sales around the globe.
• Portfolio management companies/funds, sourcing wines the investor wants, selling the wines they want to offload. e.g. Amphora Portfolio Management, Cult WInes.

Question 34

Where has the hub of Wine Investment traditionally been located?

How has this changed in recent years?

Answer 34

• Traditionally based in London.
• Increasingly, Hong Kong has been gaining due to growing interest in Wine Investment in China.
• Hong Kong abolished excise duty on wine in 2008 with goal of becoming wine trading hub in East Asia.

Question 35

How do Auction Houses play an important role in Wine Investment

What is an example of significant auction sales in recent history?

What is a risk of buying wine at auction (other than fraud)?

How is this mitigated?

Answer 35

• Big houses, e.g. Sotheby’s, Christie’s, sell investment-grade wines at headline-grabbing prices.
• e.g. 2018, Baghera Wines of Geneva sold 855 btls + 209 mags of H. Jayer wine for CHF 34.5m.
• No way of knowing that wines were stored in proper conditions.
• Auction Houses employ specialists to investigate/ensure that wine is sound.

Question 36

Explain how Wine Fraud can be problematic:

Give 2 specific examples of this occuring:

How is fraud being fought?

Answer 36

Wine Fraud can affect all sectors of wine market, from bulk production companies, e.g. Jacob’s Creek to the most prestigious, $$ wines, e.g. recent Sassicaia fraud.

Wine Fraud examples:

• Hardy Rodenstock; sold bottles claimed to be part of Thomas Jefferson’s personal colection, even getting them authenticated by expert.
• Rudy Kurniawan, sold fake bottles of Domaine Ponsot Clos St. Denis from vintages that had never been produced.

Wineries increasingly investing in anti-counterfeiting techniques, e.g. holograms; retailers and fine wine retailers tracking provenance of wines.

Question 37

What factors might a potential investor consider when looking to invest in a ‘fine’ or investment-grade wine ?

Answer 37

Factors to consider when investing :

• Prestige – certain regions carry prestige like Bordeaux, Burgundy and Napa Valley for example.
• Vintage – vintage hype can spike a huge interest in wines and increase their appeal to investors.
• Brand popularity – Châteaus like Châteaux Margaux or Lafite Rothschild or Screaming Eagle have cult following and very sought after investment wines as a result.
• Potential to age – the wines might increase in value with bottle age and increased rarity.
• Rarity – wine made from smaller vineyard sites / domains of certain producers can be of considerable interest for investment.