Each year the world produces about 28 billion liters of wine.  Approximately 70% is sold through supermarkets.  So what is wrong with a little healthy competition?

Nothing in theory. Unfortunately, large chains are selling wine at or below cost simply to fill carts with groceries. Loss leading products are nothing new, but undermining an entire product category serves nobody in the long term.

Producers are desperate to deplete inventories. Dumping product below cost is considered better than opening the tap.  Large retail chains are taking full advantage of this situation. And, at the prices offered by some brokers, these same chains are now able to earn a decent margin on what would have been a loss leader.  As a friend sarcastically stated “they will burn a brand simply to heat water for morning tea”.

Take this one example of a blood skirmish between grocery outlets in Australia.

Annie’s Lane Clare Valley Range Shiraz (750 ml) with an RRP of $20.99.

In late August of last year, some Tasmanian independent grocers ran it at $11.50.  The next week First Choice ran a national campaign at $8.99. Dan’s responded at $7.90. Two days later, First Choice ran a huge national campaign at $7.50 and then Dan’s offered it on radio for $6.60.  That is 69% off RRP and 43% off the discounted “starting” price following ten days of advertising trench warfare.

What effect does this have on Annie’s brand, itself?  It cheapens the brand and makes it harder to sell if any chain will even touch it in the future. I was told that this was a good example of how a brand was “burned”, after which retailers won’t stock it.  It also reinforces a perception that the wine was over-priced at the start and is better suited to binge drinking than a nice dinner with friends at home.

Were this an isolated example it might not be cause for concern, but there have been similar examples all over the world.  The consumer reaction is obvious – it is a wine buying bonanza.

What does this mean to the future viability of the wine industry? As we all celebrate the great bargains we might want to consider the potential long term consequences of this trend.

  • Industry consolidation. As margins evaporate, industrial producers are forced to realign portfolios. Assets are dumped to clean up balance sheets. The driving force becomes cost reduction which does not benefit investment in product quality, research or innovation.
  • Reduction of consumer choice. While the number of brands available may remain static, management of those brands is concentrated with fewer producers.  The control over distribution by the monolithic producers squeezes others off the shelf.
  • Social responsibility. Inexpensive wine is now the most cost competitive alcoholic beverage on the shelf (compared with beer and “ready-to-drink” RTD’s). Alcohol abuse is becoming a central concern for wine industry organizations.  Wine has the dubious distinction of being more potent while creating less “waste” fluid per standard drink than either beer or RTD’s.
  • Polarizing the product category. The stampede toward sub $20 wine means fewer wines are available in the middle price categories. The era of a good $50-$70 bottle of wine may be coming to an end.
  • Destruction of an endangered species – the small artisan producer. Many small artisan winemakers will be forced to shut down. Access to the remaining unique and delightful choices will all but disappear from the retail landscape.  Industry diversity will be replaced by oligopoly.

The short-term consumer benefits of the wine glut are undisputed.  However, we think the longer term consequences of this trend are bleak – fewer choices, lower quality, less innovation, and reduction of diversity.