Consumers Move from Frills to Basics

FILED SEPTEMBER 1, 2009

Dear Client:

For awhile there companies were almost flying blind, unable to properly forecast as consumers went into a panic state resulting from the recession. Luckily that’s starting to change. Kaumil Gajrawala of UBS took the stage at the Wine Industry Symposium, giving attendees the perspective of a financial analyst. The economy is slowly getting better but most importantly we’re not long in a “trendless” market. In 2008 it was very difficult to predict what the consumer was going to do. This made it extremely difficult for companies to act, resulting in some unusual moves by both consumers and industry players.

Reality plus uncertainty and fear resulted in consumer paralysis in 2008. Consumers began reconsidering all their spending habits. They looked to maximize value and reconsidered trading up and brand switching.

Now, we’re seeing a return to trends which is a good thing, said Kaumil. However, we’re not out of the woods yet and we should expect unemployment to rise through 2009. “Unemployement is here and is going to get higher.”

SPEAKING OF TRENDS, here are some of the trends Kaumil outlined: Baby boomers are worried about their savings and are increasingly going back to work, while millennials are sticking more to “tried and true” brands. It’s “not cool” for this group to spend money on expensive vodkas and other brands anymore, said Kaumil. Immigration has slowed largely due to the housing collapse and Hispanics in particular are returning to their native countries. And lastly, people are dining out much less frequently than normal.

Luckily, consumer confidence levels are starting to rise, which allows suppliers to properly forecast for the future. This means less layoffs and more investing.

So will we ever return to the “good ‘ol days?” Kaumil points out that it “takes a long time” for consumer behavior to change, but US consumers “desire high-end” products. It could take several years but we’re likely to see consumers start trading up again.

“Your responsibility is to be as relevant as possible to the consumer while maximizing productivity...this is what I like to see.”

RECESSION IS AN OPPORTUNITY. Kaumil believes that smart companies use the recession as an opportunity. “We don’t like to see companies that rely on their brands and believe it will get them out of this. When the world adapts you need to adapt with it...how you manage that brand is critically important.”

At the same time, he doesn’t like “overly ambitious cost cutting to meet numbers...if that’s cutting into the muscle it’s something we absolutely don’t like to see.” He used General Motors and Kmart as examples.

The questions analysts are asking now include: who can manage a portfolio well? Who can execute the best with the portfolio they have? And who is renting volume versus building sustainable volume?

He acknowledged that there will be “a lot of promotional activity” this holiday season. It “will be particularly difficult especially with spirits.” He recommends finding ways to “increase value to consumers and keep dollars the same,” instead of issuing large price cuts.

A MOVE FROM FRILLS TO BASICS. Danny Brager at Nielsen used data stemming from a combination of retail scans, consumer panels and TDLinx account locations in the period to September 15. He noted that consumers are desperately seeking value, resulting in the “re-prioritization of discretionary vs necessity,” and a switch “from frills and luxuries to basics and value.” This includes retail shopping and dining out. Consumers are now shopping for deals across all income levels. For example, coupons are “now back in vogue,” said Danny. Interestingly, affluent households are more apt to be heavy coupon users, and households that average $100,000 or more drink more wine.

Meanwhile, there’s increased pressure on pricing across all packaged goods, causing sharp drops overall. As prices fall, said Danny, so do same-store sales for more retailers. Table wine pricing, for example, is flat since this time a year ago.

CONSUMERS DEEM WINE MORE IMPORTANT THAN PASTA AND CHEESE. There is more pressure on retail space, but clearly wine is worthy. In channels where multiple goods are sold, the top category was canning and freezing suppliers, followed by seasonal GM, fresh meat, and then wine. Wine came before dry mix prepared foods, frozen novelties, pastas, baking mixes, vitamins, cheese, yogurt and a number of other grocery categories.

Grocery is benefiting from consumers trading to the off-premise. According to Danny, 55% of consumers are eating dinner at home more often, while 68% are eating at fine dining establishments less often and 57% are eating at casual dining less often. A total of 38% of consumers are going to a bar or nightclub less often. In fact, Danny reports that eating out less the top thing consumers are doing to save money.

HOW DOES THIS IMPACT WINE? Out of beer, wine and spirits, wine is impacted the most by declines in the on-premise. Retail has become a bigger focus for wine (and spirits) in the past year as a result, and has become more value focused. Growth is led by wine in the $6 and $9-12 wine range, in addition to value and mid-priced spirits and sub-premium and craft beers. Clearly, noted Danny, there are some off-premise channels that perform better than others. Table wine sales did especially good in grocery stores, drugstores, c-stores and mass retailers in the past year.

In wine, consumers are making more price comparisons at the shelf before buying and purchasing less expensive products. “Wines priced around the $10 mark doing extremely well,” said Danny. Some of the brands doing particularly well at retail include Barefoot, Bringer, Chateau Ste Michelle, Bogle, Sterling and Ménage a Trios.

Danny points out that being premium priced “isn’t necessarily an obstacle if that premium makes sense to the consumer.”

WINNING REGIONS AND VARIETALS. Domestic table wines have collectively managed to post growth amid the recession mainly because they have a pricing advantage. Imports are down in dollar value and volume led by Italy, France and Australia. Argentina and New Zealand are leading import growth.

In terms of varietals, riesling, sauvignon blanc, cabernet sauvignon and pinot noir are leading the way in growth. White zinfandel, syrah/shiraz and chianti are declining the most in volume while white zin is doing good in dollar sales.

PREDICTIONS. Danny believes consumer recovery will last into next year although the economy is seeing signs of recovery. He noted that one positive of the recession is that wine is becoming more available to more consumers with increased distribution. Mass merchandisers and drugstores have seen the most growth. A negative, though, could be that more consumers are finding good wines at lower prices which “may be hard to shake.”

People will continue this habit of saving money and the notion of “value” will continue to resonate. While consumers are more satisfied with lower priced wines, Danny says there is still room for “premium brands that establish clear value proposition.” The largest opportunities for wines still exist off-premise at retail although many consumers are looking forward to going out once the recession is over.

JIM BEAM LATEST TO LEAVE NASCAR

Beam Global announced it will not return to the NASCAR Sprint Cup Series in 2010 by sponsoring Robby Gordon Motorsports. Instead, “the company plans to focus its marketing resources for Jim Beam into other platforms that directly impact the end consumer.”

“It was a difficult decision to transition away from being a NASCAR Sprint Cup Series team sponsor,” said Bill Newlands, president Beam Global Spirits & Wine U.S. “We always take a hard look at our marketing resources and how we can best interact with legal purchase age consumers. After an extensive review of our marketing strategy, we have come up with new alternatives to fuel growth for Jim Beam in 2010.”

Recall that Jack Daniel’s made a similar announcement this week.

DIAGEO YANKS DON JULIO AND CUERVO FROM JWT

Ad Age is reporting that Diageo has named a new ad agency for Don Julio and removed Jose Cuervo from its current agency. WPP’s Grey, New York won the Don Julio account after Diageo took it away from JWT after one year. Grey also wone the Ketel One account this year.

Meanwhile, Diageo also pulled Cuervo from JWT after one year and only one major national campaign: “Living Notoriously Well.” Sources told Ad Age that “creative differences” are responsible for the split. JWT still holds the Bailey’s and Smirnoff accounts. It’s still unclear if Diageo will call a review for Cuervo.

B-F EXPECTS HEAVY HOLIDAY PROMOTIONS, UBS REITERATES SELL RATING

UBS issued a research note reiterating its sell rating and $41 price target on Brown Forman shares “as the stock has outperformed the staples sector by approximately 7pp over the last month, despite weak underlying fundamentals.” B-F “expects heavy promotional activity during the upcoming holiday selling season. Our industry contacts confirm this view, as they also are seeing initial signs that the holiday period will include more discounting and an increase in promotional activity. We also are seeing no indication that on-premise trends are improving for Brown-Forman,” said analyst Kaumil Gajrawala. UBS also expects “inventory destocking issues are likely over in the US and Western Europe.”

HAVENS WINE CELLARS ORDERS LIQUIDATION

Great American Group, an auction, liquidation, and asset valuation firm, sent a press release announcing that Havens Wine Cellars appointed them to “conduct an orderly disposition of inventory and other specific assets.” Havens was sold to Billington Imports in 2006 by founder Michael Havens.


Until tomorrow, Megan

Whenever you find that you are on the side of the majority, it is time to reform.
Mark Twain

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