Reaching The End Consumer Within A Free Market - Retail Flashcards
What ways are there to reach the end consumer within a free market in retail?
- Supermarkets
- Deep Discounters
- Convenience Retailers
- Specialist Wine Retailers
- Hybrids
- Online Retailing
- Global Travel Retail
- Wine Investment Companies
How does reaching end consumers through supermarkets work?
In many countries, supermarkets (and hypermarkets) are the most important retail outlets for groceries and household goods, allowing consumers to buy everything they need under one roof. Examples include Wal-Mart (which has outlets in 26 countries outside its USA base); the South African Woolworths (outlets in many sub-Saharan African and southern hemisphere countries); the French Carrefour (outlets in 30 countries) or the British Tesco (outlets in numerous countries some as far from UK as Eastern Asia).
For companies such as Aldi and Lidl, which specialise in selling goods at lower prices, please see Deep Discounters.
In many markets, such as the USA, UK and France, supermarkets have the largest market share when it comes to wine sales. They are therefore an attractive option for producers wanting to sell large volumes of wine.
Supermarkets generally stock wines from well-known and popular regions and/or grape varieties. They will be made in a style which appeals to a wide range of customers, many of whom have little wine knowledge. In wine-producing countries, the range will often be dominated by local wines.
Supermarkets often sell a range of well-known brands, such as Jacob’s Creek, Barefoot and Oyster Bay. These brands help to attract consumers to buy wine at the supermarket. However, because these big brand wines are widely available in a number of retailers, consumers can compare the prices across the retailer and buy wherever they are cheapest. As a result, these brands do not promote customer loyalty to particular supermarkets.
Therefore, in order that consumers cannot easily compare prices, supermarkets like to stock wines bottled under labels exclusive to them (even if they are wines available elsewhere under different labels). These are often termed private label wines. These maybe wine brands which are exclusive to the particular supermarket – the supermarket may have created the name and the brand although the supermarket’s name does not appear prominently on the labels. This is an approach favoured by Walmart and Costco in the USA and Marks & Spencer in the UK. Alternatively, 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. In either case, if these brands are popular, they can promote customer loyalty to that supermarket and, for this reason, they have become extremely important in recent years in many markets.
Private label wines need to be available in large volumes and therefore usually come from larger producers. For such producers, supermarkets offer an attractive opportunity to sell large volumes of wine and enjoy high levels of market exposure, sometimes in more than one country. 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.
However, producers face a number of risks. Supermarkets need to ensure that they offer a sufficiently varied product range: there is no point in having lots of similar wines competing at same price. Therefore, because there are often more producers wanting to sell to a supermarket than the supermarket needs (i.e. an excess of supply over demand), supermarket wine buyers have enormous negotiating power, especially when it comes to price. As a consequence, producers may not receive as much for their wine as if they were to sell it through other channels.
In addition, producers are usually expected to pay substantial fees to have their wine stocked by the supermarket and for any additional promotion, such as desirable product placement in store or coverage in the supermarket’s magazine. When supermarkets offer price promotions (see Promotion), they usually expect producers to pay for any reduction in profits due to the reduced retail price.
The contracts between supermarkets and producers usually have 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 or penalise the producer.
Also, as supermarket placement is competitive, if a wine does not achieve the expected sales volumes and profit margins, it maybe delisted.
All of these issues could have serious financial repercussions for producers. In the worst case scenario, they are left with a large volume of wine that they cannot sell.
Finally, there are some premium supermarkets chains, such as Whole Foods which buy wines from artisan producers under the producer’s label. These wines are bought in smaller quantities on the understanding that when the wine sells out, there is no more available. The range of wines in these supermarkets will appeal more to consumers with a strong interest in wine and may offer a useful route into a new market for these artisan producers. (Whole Foods has been bought by Amazon and it is unclear if thispractice will continue under the new ownership.)
How does reaching end consumers through deep discounters work?
A deep discounter shares many of the features of a supermarket but sells at lower prices. Examples include the German-based companies Aldi (outlets in 19 countries) and Lidl (outlets in 26 countries – source: The Grocer); and the Danish-based Netto (which operates in a number of European countries). In the USA, Trader Joe’s can be considered a deep discounter, subject to the threetier system. Deep discounters have been an important part of the retail market in Germany for many years but have recently been making significant advances in other countries, such as the USA and UK. The deep discounters’ business model is to offer permanently low prices. They rarely, if ever, have any form of price promotion. This model is now being adopted by many traditional supermarkets. They can charge these low prices by keeping their costs down, which they achieve in a number of ways. Firstly, they take a lower profit margin than traditional supermarkets, relying instead on the volume of sales for their profits.
The shops are often basic: goods may be stacked on pallets rather than shelves. They also tend to be away from prime retail locations, meaning lower rents.
The product range is limited – a more streamlined product range is cheaper to maintain. Deep discounters do not usually sell multiple brands of one type of product. Most products, including wines, are private label; for example, Charles Shaw’s ‘Two Buck Chuck’ was originally produced for Trader Joe’s. This presents opportunities for producers, to work with the deep discounters to develop such brands.
These stores rarely stock major brands, as these tend to be more expensive (because of the marketing budget). They often work with less well-known producers with lower overheads, buying up whatever stocks may be available on the understanding that when the wine sells out, there is no more available. This may be appealing to producers who have a surplus of wine to sell.
Finally, deep discounters often buy directly from producers, cutting out any intermediary costs. Whilst they strike just as hard a bargain as the supermarkets, they tend not to charge their suppliers for stocking their products. As producers also do not have to cover the costs of any price promotions, this means greater profits than if they sold their wine through a traditional supermarket.
Sometimes, deep discounters will buy a small amount of a more expensive wine, which they usually stock in stores in more affluent areas or ahead of times of increased spending such as Christmas. This has started to attract consumers with a stronger interest in wine to their stores. Whilst there, many of these customers have also tried the less expensive wines in the range and, finding they like them, gone back to buy more. As a result, these retailers are now increasing their share of the wine market too. For example,according to Wine Intelligence[1], in 2013, 25% of British wine drinkers had bought wine from a discounter; in 2017, this had risen to 39%.
How does reaching end consumers through convenience retailers work?
The convenience sector is another which is growing in importance. In contrast to supermarkets and deep discounters which are usually located either in town centres or out-of-town shopping areas, convenience stores are found closer to where people live and are open for longer, sometimes 24 hours (although local laws may not permit the sale of alcoholic drinks for that entire time).
Convenience retailers may be independently owned (e.g. India where independently owned stores are a major part of the retailmarket) or part of a franchise group such as Spar which has franchisees in 34 countries. In some countries, the major supermarket chains are moving into the convenience sector too.
Convenience stores stock brands popular with the local customers. Therefore, in the case of wine, the range is usually similar to but smaller than those of the supermarkets. This may be dominated by major brands; however, some convenience groups (e.g. 7-Eleven or Spar) have their own exclusive brands.
Convenience stores tend to be, but are not always, more expensive than supermarkets. This is partly because the premises are smaller, making rents proportionately higher. They also tend to be premises which were designed for other purposes, making them less efficient. Also, convenience retailers usually employ a higher proportion of staff relative to their size than supermarkets. Finally, where there is a franchise arrangement, the operator has to pay a fee to the franchise owner. However, consumers are often willingto pay a little extra for the convenience of a local store to save them having to go further to a supermarket.
How does reaching end consumers through specialist wine retailers work?
As the name suggests, these retailers specialise in wine, sometimes combined with premium spirits and beers. Some also sell products such as cheese and delicatessen foods, usually from artisan producers. Some specialise in wine and foods from particular countries.
Whilst there are some larger chains (e.g. Oddbins in the UK or O’Brien’s in the Republic of Ireland), most are independently-owned or part of a small chain. Some specialise in particular styles of wine, such as organic, biodynamic and natural wines (for example, Les Caves de Pyrène in the UK and La Cave des Papilles in Paris). There are also a number of well-known specialist retailers, such as Berry Bros & Rudd and Hedonism in the UK, or Millesima in Bordeaux, which specialise in premium and super-premium wines from prestigious producers – these retailers also often engage in en primeur offerings (see Merchants for details on en primeur).
Few specialist wine retailers have the purchasing power of the larger retailers. Therefore, whilst they may stock a few major brands (particularly of sparkling and fortified wines), they tend to focus on wines from smaller producers, including those from less well-known wine regions and less common grape varieties. These retailers are therefore a very attractive retail option for such producers.
Another attraction for producers is that the average price of wine sold at specialist retailers is higher than at supermarkets and deep discounters. This is because the specialists cater for consumers who are more interested in wine, and are willing to spend more per bottle, than the general population (often referred to as ‘high involvement’ consumer – please see Identifying the Target Market for more detail). For producers, this means that they are likely to make a better margin selling their wines through a specialist, although they usually have to pay a distributor to sell and distribute the wine given the number of potential outlets.
High involvement consumers are willing to spend more at specialist retailers because they appreciate the broader range of wines on offer and the more personal service they enjoy, as compared to other retail options. Wine specialists employ knowledgeable and well-trained staff who can ‘hand sell’ the wines – in other words, tell customers the story of the wine, provide information about the lesser-known regions or variety and suggest food pairings. The staff can build up a relationship with their regular customers, learning about their likes and dislikes, suggesting new wines they might like or letting them know when their favourite wine is on offer.
In return, the customer will trust the staff to guide them to a wine that they will enjoy and will be willing to buy an unknown wine onthe basis of the staff member’s recommendation.
Specialist retailers further enhance their customer service by holding special events such as tastings (often attended by the winemaker) and running wine education classes.
How does reaching end consumers through hybrids work?
An increasing number of specialist wine retailers also have a bar area where customers can drink wine they buy in the shop (at a slightly higher price than if they were taking it away). These so-called ‘hybrids’ usually sell food, mainly cheese and delicatessen items, although some offer tapas and more substantial dishes.
The benefit for retailers of this model is that consumers can try wines before they decide to buy, encouraging consumers, especially those with less wine knowledge, to purchase wines they might not otherwise have done. As well as selling wine by the bottle, hybrids usually offer a regularly-changing selection of wines by the glass. This is also a good way to showcase new winesand wines from less well-known regions or grape varieties.
The downside for the retailer is that they may need to stay open later into the evening and require additional staff to serve customers. There is also additional bureaucracy involved in opening premises in which people eat and drink than there is for asimple shop.
How does reaching end consumers through online retailing work?
In many countries there has been a massive growth in online retailing for all consumer goods and wine is no exception. Around 5% of all wine purchases are now made online[1] and analysts predict this will continue to grow.
Many retailers, from supermarkets to specialist wine retailers, offer online retailing in parallel with sales through their stores. In this context, these are often referred to as ‘bricks-and-mortar’ retailers. Particularly for specialist wine retailers, this enables them to connect with customers who do not live within easy reach of their shops.
However, there is an increasing number of online-only, or predominantly online, retailers. These include The Wine Society and Laithwaite’s in the UK, Wine9.com and Pinjiu.com in China and a number of wine clubs set up by newspapers such as the New York Times Wine Club and the Sunday Times Wine Club. Wine may also be sold by online-only retailers that sell a wide range of products, with wine only a part of the offering, such as Amazon.com (multiple markets), Tmall and JD.com/Jingdong (China).
Many of these businesses require customers to order a certain amount of wine each year (this model was used in particular by the newspaper wine clubs). This may be wines of the customer’s choice or restricted to cases put together by the retailer or wines of the customer’s choice. Most online retailers, however, now exist to allow consumers to order what they want when they want from the comfort of their home, although some require a minimum number of bottles per order.
The advantage for online-only retailers is that there is 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. The reduced overheads mean that these retailers can stock wines which would not justify space in a retail store. Therefore, they can stock a larger and more varied range of wines than a ‘bricks-and-mortar’ store.
This provides similar opportunities for smaller, niche producers as with specialist wine retailers. However, online retailers have a much larger customer base as this is not limited to consumers living within easy reach of a physical store.
Online retailers still need some staff to deal with customer queries, take orders and despatch orders. Some, including Laithwaite’s, offer their customers a wine advisor, who can get to know the customer and give them recommendations in a way similar to the staff in a specialist wine retailer.
A significant disadvantage for online retailers is the expense of delivery. Wine is a heavy, bulky, fragile product, and delivery costs are therefore proportionately higher than for, say, books, clothes or even groceries. Retailers may not always pass on the full cost of delivery to customers; however, they will retain the risk of wine being lost or damaged in transit. Increasingly, consumers are expecting quicker delivery deadlines with the online retailing giant, Amazon.com, being able to promise customers in major cities a delivery of chilled wine within as little as one hour of ordering.
Where retailers, including supermarkets, have physical stores, customers can often ‘click and collect’, i.e. order online but collect the wine from the store. For the retailer, this means that the wine ordered online can be delivered to the store with that store’s usual delivery, so saving significantly on costs.
Possibly the most important issue, however, for online retailers is ensuring that they have an easy-to-use, reliable website which makes it easy for customers to browse their wine selections and place orders. Studies have shown that consumers are quickly put off using websites which are slow and difficult to navigate.
Ideally, the website will also be distinctive and convey the retailer’s brand image. For this reason, many retailers who are serious about online sales spend a lot of money having a suitable website designed for them. They will also need ongoing technical support in case the website crashes – an online retailer loses potential sales whenever its website is not working.
Online retailers need to make sure the content of the website is well presented and helpful to consumers. Because the consumer might be buying wines they have not tried, a detailed description of the wine is important (there is usually no chance to read the back label of the bottle or speak to a retail assistant). Many online retailers provide additional information, such as food and wine pairing suggestions, scores from wine critics or medals from wine competitions. Some websites offer suggestions of other wines which a customer might enjoy, based on what they are currently looking at or have bought before whilst many allow customers to leave their own reviews of a particular wine (for the issues surrounding this, see Social Media in Promotion).
Finally, the content must also be kept up-to-date with new wines being added as they become available and out-of-stock wines being removed.
In some markets, such as China, mobile apps are much more widely used for purchasing wines than websites. Apps work in asimilar way to websites but are tailored for use on a mobile phone rather than a desktop or laptop computer. In the same way as websites, these must be quick, easy to use and provide a high level of service. Some of these apps (such as WeChat and Pinduoduo) are used to sell a wide range of products, while others (such as Bottles XO) specialise in wine. All of these apps are operational in China.
How does reaching end consumers through global travel retail work?
Global travel retail stores are located in places where customers are travelling from one country to another. Whilst most are found at airports, there are some at sea ports, and international railway stations and on board ships. At airports, the advantage to a retailer is that a passenger has time, after check-in and before boarding a flight, to view a store’s products at leisure. An other option is to have a store in the arrivals area between the point where a passenger arrives and the point the passenger passes through border controls. The advantage to customers is that they do not have to have to carry and stow extra hand luggage on their flight.
There has been a change in the way that consumers have viewed global travel retail. The sector was known as ‘duty free’ (and insome places this term is still used) because national taxes (duty) were not chargeable on goods sold for personal use in another country. Consumers, therefore, looked for low prices, especially when travelling from countries with high rates of taxes on goods such as alcoholic drinks, tobacco, and perfume. More recently, with the introduction of free-trade zones such as the EU, ‘duty free’ has become less important and customers in these stores are now looking for high-quality and high-priced goods which they cannot find in their home market. Wine retailers have seen the advantages of global travel retail for selling a range of wines, including super-premium wines.
On the negative side, selling through global travel retail is expensive. The cost of retail space is high and retailers pass a percentage of that cost on to their suppliers, resulting in lower profit margins compared to other routes to market. That could weaken the global travel sector if suppliers choose to leave it.
How does reaching end consumers through wine investment companies work?
There are many companies that specialise in sourcing and selling wine for investment. Investment-grade wines are the most sought-after and expensive wines in the world, such as Bordeaux Premier Cru Classés, Burgundy Grands Crus and the top Napa Valley wines. One of the reasons for their extremely high prices is their rarity value.
A number of specialist wine retailers (such as Farr Vintners, Fine & Rare and Berry Bros & Rudd) are allowed a small allocation of some of these wines each year, which they either buy directly from the producer or via a merchant. They then offer these wines to customers who have bought them before or expressed an interest. There are also companies which only deal in investment-gradewine, such as Amphora Portfolio Management and Cult Wines.
There are other companies who effectively act as brokers. Their customers tell them what wines they are looking for and these companies try and put them in touch with potential sellers. If a deal is done, the brokers will charge a commission.
How do wine investments work?
Wine investment has become an increasingly important part of the wine trade in recent decades, starting with the growth in Bordeaux en primeur sales and driven on more recently by the rapid growth in Chinese wine consumption. Wine has also been shown to be a safer investment than, for example, stocks and shares in times of financial uncertainty. Nevertheless, there is an element of risk: as has been seen in Bordeaux, the price of even the most prestigious wines can fall.
In this context, people often talk about ‘fine wine’; however, there is no agreed definition of this term. The types of wine which investors tend to be interested in are those from prestigious regions, such as Bordeaux, Burgundy and, increasingly, California and Australia, which are made in small quantities by leading producers and consequently command super-premium prices. They are wines for which there is a secondary market (i.e. it is possible to sell the wine on to other investors) although some fine wine purchasers buy the wines purely to lay down and drink themselves.
Investors buy these wines en primeur, either directly from the producer or through a retailer, or buy them on release. In California, many members of the most exclusive wine clubs, e.g. Screaming Eagle or Harlan, buy these wines as investments.
There are several businesses that engage in the wine investment trade. Some retailers, such as Berry Bros & Rudd, specialise in selling investment-grade wine and also provide a brokering service for investors who are looking to sell their wines. For retailers and brokers who want to find a buyer or a seller of a particular wine, there are a number of trading exchanges that work just like stock exchanges – the most well-known of these is Liv-Ex which is based in London but which deals with sales around the world.
There are also companies such as Amphora Portfolio Management and Cult Wines which manage the wine portfolios of their clients, sourcing wines which the investor wants to add and selling those which they want to dispose of. There are even managed wine investment funds which investors can buy into without needing any knowledge of wine.
London has traditionally been the hub of the wine investment world, with many of the leading companies being based there. However, it is coming under greater competition from Hong Kong, as interest in wine investment has increased in China; in 2008, the Hong Kong government abolished excise duty on wine with the aim of becoming the wine trading hub of EasternAsia.
Auction houses play an important role in the wine investment market. Although they sell a broad variety of wines (e.g. unused stock from retailers who have been forced to close), the big houses, such as Sotheby’s and Christie’s, specialise in selling investment-grade wines at headline-grabbing prices: for example, in 2018, Baghera Wines of Geneva sold 855 bottles and 209 magnums of Henri Jayer wines for CHF34.5m[1]. One risk of buying wine at auction is that it is not possible to know whether the wine has been kept in appropriate conditions. However, top auction houses now carry out detailed investigations to try andensure that the wine has been properly stored since its release.
Another problem which has particularly affected wine auctions is fraud. Wine fraud is nothing new – there are examples of adulterated and fake wine from the earliest times and new cases are coming to light all the time. Nor is the problem limited to the most expensive wines; even brands such as Jacob’s Creek have suffered at the hands of fraudsters. However, because of the money to be made, some of the most high-profile wine frauds of recent years have involved supposedly investment-grade wines being sold at auction. Perhaps the most infamous cases are Hardy Rodenstock, who sold bottles of wine that he claimed had been part of the collection of Thomas Jefferson (even managing to get them authenticated by an expert), and Rudy Kurniawan, who was eventually caught when trying to sell vintages of Clos St. Denis from Domaine Ponsot that had never been produced Producers of wines at all price points are using increasingly sophisticated anti-counterfeiting techniques to protect their wines, with the producers of investment-grade wine leading the way. Auction houses and fine wine retailers also seek to validate theprovenance of the wines they offer.
