Pricing Will Likely Remain Flat, says Nielsen

FILED OCTOBER 1, 2009

Dear Client:

There are signs of an economic recovery although it will likely be rocky with many hits and misses, said Nielsen vp Danny Brager at his company’s Economic Advisor Update for the Beverage Alcohol Industry webinar. “As people are cycling through the emotions related to the recession, their acceptance of it has perhaps caused a fundamental shift in the consumer psyche,” he said. This is something we’ve all certainly seen in our day to day lives not to mention in the business.

Nielsen used a combination of grocery, drug, liquor and convenience store data along with consumer panels through the end of August in preparing this report. Interestingly, beer constitutes $26.8 billion at retail followed by wine ($10.1 billion) and spirits ($8.2 billion). Their data reiterated some of what we already know: consumers are desperately seeking value. They’re trading down and also trading across categories and stores. They’ve also reprioritized discretionary versus necessary spending in the stores they shop and the products they buy.

“The operative work is value and that doesn’t just mean the lowest price. It’s the right product at the right price in the right place as the consumer defines it for him or for herself,” said Danny.

BIG SCOPE OF THE BIZ. Some of the big trends include: shift to the off-premise and shifts within the off-premise; value seeking, not limited to trading down; limited ability to take price (with beer as the exception) and increased promotions; stores effectively managing space and selection; and consumers being nervous about taking risks emotionally and financially. As a result, consumers are largely sticking with the tried and true.

In terms of retail stores, “we’ve certainly seen shrinkage in a number of locations on- and off- premise...closed locations are outstripping new locations,” said Danny. C-stores have experienced the most “closed” locations followed by bar and nightclub and dining. Stores that represent discretionary spending are feeling the most pain, while those one-stop shops focused on value are fairing much better. Shopping trips are hurting the most at department stores, mass merchandise stores and c-stores. Liquor and grocery stores are doing okay, with clubs, supercenters and online stores performing the strongest. Consumer panel research revealed that total shopping trips were down -2% for the year overall, not just in beverage alcohol purchases. Consumers are shopping for deals across all income levels, especially middle income households that average $30k-$70k and upper income, which includes $70k+.

COUPON REDEMPTION has seen double digit growth overall. “Where it’s legal we’ve seen significant increases in beverage alcohol coupons particularly on beer...especially in the first half of 2009 in both distributions and redemptions, and a large increase in spirits distribution although we don’t see that yet in spirit redemption levels,” said Danny. Interestingly, affluent households are more apt to be heavier coupon users.

PRIVATE LABELS HOT FOR WINE AND SPIRITS. Consumers are purchasing more “store brands,” which are consistently outperforming branded products. This holds true for wine and spirits as well.

“Obviously within our categories there are totally different dynamics not anywhere near the level we’re seeing here. Often the consumer is not aware of the product being a store brand giving the labeling and packaging but nevertheless they could represent an attractive proposition for the retailer especially in a category such as wine where fragmentation is pervasive and brand loyalty is generally lower,” said Danny. “So on a very low base, private label wines...and spirits are growing well ahead of the category...broader availability is a part of that as well as it being the retailer’s shelf to control.” Private label spirits are up about 15% in dollar sales in the 52 week period, while wine is up about 22%.

PRICING RELATIVELY FLAT. Pricing in the last several months has been flat overall, with beer taking some price increases compared to the same period last year but not wine and spirits.

In the following comparison Nielsen indexed pricing today versus what it was in January 2008. They found that pricing on beer has grown 2.8%, while and spirits are virtually flat, 0% and 0.7%, respectively.

Says Danny: “If we compare today’s prices to what they were a year ago, we see some advances in beer in the early part of the year but very, very flat for wine and spirits in the last year to the point where there’s virtually no increases.”

“That pattern is not likely to change, with beer more able to take price through its supplier structure and craft resiliency at the higher end, which is much tougher thing for wine and spirits now.”

All three categories were able to take a bit of price in the lower end segment versus the higher end other than price increases for craft beers.

“Small price increases at lower end still likely yields a product that is less expensive so the consumer may stay with that product even if it’s at a slightly higher price level,” said Danny. “For those companies with a broader portfolio of product increased pricing at the lower end may end up shrinking the gap versus the next higher price range and encourage some trading up.”

PRESSURE ON SPACE. Craft beers, table wines priced $9-$15 and vodka and its multiple flavor offerings are gaining shelf space, while flavored malt beverages, imports and cordials are losing space. This is often translating to less SKUs in accounts. In multiple goods stores, the beverage alcohol department is growing 2% in volume and almost 5% in dollars.
If consumers are only buying what they need, the beverage alcohol must be meeting some of those needs. Out of the top consumer goods in retail stores, wine ranked #5, spirits was #20 and beer ranked #39. Why is that? Danny says that “our consumer base tends to be more upscale relative to the overall population contributing a much higher percentage of sales to our categories.” Wine, for example, likely benefits from reported health benefits.

WINE MOST IMPACTED BY SHIFTS TO OFF-PREMISE. Nick Lake, another vp at Nielsen, noted that the impact of the shift from on- to off-premise is very significant. For one, there are less butts in seats. Secondly, many are trading down their dining experience, and when they do dine out, they’re ordering fewer drinks and less expensive drinks. Consumers polled by Nielsen revealed that dining out less was the top way they planned on saving money.

Wine is most impacted by the shift to the off-premise while beer is the least impacted. Spirits is somewhere in the middle. In terms of share of the on-premise, wine has lost -3.3%, spirits is down -3% and beer has lost -1.3%. Overall there has been a drop of about 2 points for beverage alcohol on value but it’s more significant than that for wine and spirits.

QUICK SERVICE CHAINS OFFERING DRINKING OCCASIONS. Buffalo Wild Wings is the only chain retailer building same store sales right now along with fast food and casual quick service restaurants, which are starting to offer beer and wine.

“It’s clear that these chains and these restaurants are trying to capitalize further by taking away wine and spirit occasions from the off premise,” said Nick. “They’re trying to build up checks and ultimately make a more affordable experience for consumers looking to dine out and have an adult beverage.”

WINE BY THE GLASS, SPIRITS LOSING SHARE TO BEER. In using data from GuestMetrics, which tracks transaction level data from roughly 100 locations per major market (including LA, Chicago, Miami, Atlanta, DC and NYC), it’s apparent that wine is losing the most share across these markets. Beer by and large is fairing the best and spirits is typically in the middle.

“This is suggesting that as consumers consume wine, they’re shifting from bottles to glass. We’re also seeing some trade down to beer from wine and spirits and we’re seeing some spirits drinkers moving from branded to well drinks,” said Nick.

OFF PREMISE GROWTH LED BY WINE. Meanwhile, wine is leading growth in the off-premise, said Nick. In the latest 13 week period relative to the latest 52 week period, “beer is slowing down in volume and certainly growing in value but not as rapidly. Wine growth is slowing as with spirits,” he said.

Interestingly, the gap between value and volume continues to shrink across all segments “suggesting that consumers continue trading down.”

NEW PACKAGE SIZES. Nielsen found that about 35% of consumers are buying larger packages to take advantage of price per serving. About 10% are buying smaller packages because it’s all they can afford or gives them opportunity to buy a certain brand without spending as much. Beer is shifting to 30-packs; wine is seeing an increase in 5 liter and 187 ml packages; and finally, spirits is seeing more growth in 1.75 and 50ml bottles.

DOMESTICS BENEFITING FROM PRICE. Domestics are enjoying significant advantages largely due to pricing with the exception of Canadian Whisky and vodka which is showing slight growth for imports.

CONSUMERS ARE HIGHLY PRICE AWARE and sensitive, said Nick. They’re making more comparisons at the shelf before buying, mostly with wine and beer, while 24% are waiting for a sale before buying their favorite products. A total of 22% are buying less expensive brands largely in the wine category.

“It’s absolutely critical to understand your price points and what’s going on with your promotions relative to what’s being put out before the consumer,” said Nick, “whether its shelf talkers, POS or what’s in your ads.”

SPIRITS GAIN IN C-STORES AND SUPERSTORES. In latest 13 weeks, spirits grew 2.2% in dollars across all retail channels. C-stores, who are just getting in this business, are showing the most growth driven by more stores stocking spirits. They’re also seeing growth in food stores as consumers migrate to that channel. Alternative growth is coming from mass merchandisers and superstores, which were up about 10%, and club stores, up about 4%.

VODKA AND WHISKEY ARE MAIN DRIVERS. Vodka is still the main driver, making up roughly 30% of the spirits category. Vodka and whiskey together constitute 60% of the category. Vodka continues to grow, while whiskey is growing in value slightly and declining in volume. Nielsen reported tremendous growth from Irish whiskey, which continues to grow in dollars (19%) and volume (18%).

“Look at the value trend relative to volume; they’re almost identical,” said Nick. “I would forecast or guess that when the next data comes out, we’ll probably see volume overtake value.” This means consumers are definitely trading down in spirits.

Higher-end spirits are suffering from reduced buying rates, while value and mid-priced brands are growing. Nielsen tracked significant growth in dollars per buyer in the mid-price and value tiers, while the premium and ultra-premium segments of consumers are trailing behind last year.

“When we look at price tiers in consumers, there is tremendous growth in value and mid price both on volume and value and you’re seeing ultra premium showing slight growth in the latest 13 weeks but negative trends in latest 52 and 26 weeks,” said Nick.

“The lower price spirits goods are really resonating with consumers and they’re making the shift downward.”

A year ago it was largely premium and ultra premium brands, but now it’s a “very mixed bag.” The ultra-premium is seeing growth is cordials/schnapps as well as gin. There’s solid growth in the premium segment from tequila and nearly 5% growth in Canadian Whisky. The rest of the growth for other segments is happening in the value and mid-tier ranges.

In terms of package size, the bulk of growth is coming from the 50ml bottles as well as 1.75 liters.

WINE PRICED BELOW $6 SEE BIG GAINS. Wine continues to experience growth in the grocery channel, while the liquor channel is more challenged. Opportunities lie in c-stores and drugstores. According to Nielsen’s consumer panel, wine saw double-digit gains in mass merchandisers. Club stores (such as Costco) are flat and specialty stores (Trader’s Joe and Whole Foods) are down -10%.

“In 2008 and before it was all about trading up,” said Danny. Now, we’re seeing a lot of growth come from the value end (less than $6 for a 750ml bottle), particularly in the $3-$6 range. Danny pointed out that wines around $10 are also performing very well. Wines in the $12-$20 “aren’t doing as well as they once did but they’re still hanging in there.” The wine segment priced $20 and higher “has really evaporated.” Penetration is also down for wine priced $15-$20.

“It seems to be the chicken or the egg syndrome,” said Danny. “Certainly consumers are more value focused and at the same time being reminded of that regularly” by retailers offering deals on wines priced below $20. There’s also been an increase in promotional levels with wine below $20 to attract consumer attention.

WILL PREMIUMIZATION AS WE KNEW IT RETURN? Don’t hold your breath. Consumers are learning there are great, inexpensive wine offerings and have little incentive to trade up right now.

“In the face of more and more people finding wine at lower prices, a survey from the Wine Market Council suggests a steady increase of people who say they are finding good wines at lower prices...so the question is, what is their incentive to go back to their previous purchasing behavior?”

Similarly, larger package sizes (4L and 5L) are growing, which generally operate at the lower end, along with 187ml bottles that generally coming in four-pack. The wine industry is also seeing growth in alternative packages such as the 3L boxed wine and tetra packaging.

WINE IMPORTS BEING DRAGGED DOWN BY TOP THREE. Californis is still exhibiting strong performance especially considering the huge base of business they’re operating, said Danny. In the 13 weeks, value rose 5.5% and volume grew 3.1%. “At the same time, Washington wines continue to expand, carving out a wider footprint of acceptance around the country.”

In descending order of importance, Italy, Australia and France are all facing difficulties. Beyond that growth is coming from Argentina and an its Malbec variety. In addition, New Zealand now surpasses Germany and is moving in on Spain in terms of importance. New Zealand wines generally carry a premium price that has defined the trading down norm.

VARIETALS THAT SHINE. “Both rieslings and sauvignon blancs have supplanted pinot noir as the fastest growing varietal,” said Danny, “although pinot noir and cabernet sauvignon are not too far behind.”

Varieties such as malbec, muscat, petite sirah, rose and tempranillo are also on fire with double digit growth rates.


Until tomorrow, Megan

“We are advertis'd by our loving friends.”
William Shakespeare

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