"It is true that the retail industry is a huge employer in this country. Then again, so was the Australian manufacturing industry before much of it decamped for Asia because the retailers were constantly pressuring them to lower wholesale prices in exchange for high volumes.
"And, having educated consumers to buy for price rather than brand, the retail industry kept turning the screws on the remainder by demanding even greater discounts or undercutting the few survivors by importing an even greater amount of consumer goods. Try to find a house brand product at a retailer that was not imported."
Billionaires take a turn at initiating 'brand' damage, Sydney Morning Herald, January 5th, 2011, Ian Mc Illwraith.

There is no other comparable country where two large retailers have dealt themselves such a permanent advantage as Woolworths and Coles have with liquor. They can never be beaten nor challenged by other retailers. The creation of this duopoly raises many interesting questions, and will create unprecedented challenges for producers. These are explored here and while I'm certain that the effects will be far reaching I offer few directions or answers.

Australia is blessed with a complex wine history which can be traced back over 150 years and combines with a large production base to provide consumers with a rich and variable range of products which in turn have found wide appeal in overseas markets.

What has steadily changed over the last decade is how this product range is presented to consumers and how this may alter perception of wine. How should or can the producing side of the wine business handle an experiment in retail power where a duopoly acts as gate keepers to the consumers and which sees these consumers in quite a different way to the complex network of suppliers?

To recap; the producers, wholesalers and retailers have suffered two enormous shocks to profitability. The removal of fixed retail prices and as a consequence wholesale prices by the Trade Practices Act saw from 1975 the transfer of some pricing power back to consumers. Out of this turmoil arose the two chains which now use their buying power to extract further discounts from suppliers creating a further loss of pricing power and profitability.

At a guess, supermarket buying power locally and in the UK has helped scuttle Constellation Australia formed out of BRL Hardy and may be responsible for half the lost value of Fosters wine - now Treasury Wine Estates.

Without a doubt the rearrangement of power will have far reaching implications for producers and some of the questions to be asked include;

• how will this effect growers and producers and the variety of wholesalers who on-sell into the local retail trade;
• will the loss of pricing power by producers stifle innovation; and with a reduced number of local buyers does this make it unlikely that small producers can grow to medium size;
• with the chains creating house or exclusive brands what are the long term impacts for producers;
• does retail concentration create on-going complications for wine research, export promotion, wine shows, brand diversity, the appeal of Australia in export markets, the producing and selling of fine wine, and even wine writing;
• does it make a career in the wine business less inviting and in the long term will consumers be at a disadvantage?

Will Buying Power be Used Responsibly

With fewer wine buyers it would seem to follow that fewer producer can be supported and with fewer buyers deciding what is likely to sell, complications must arise. And with the best will in the world there will be a limit on shelf space and restrictions on what can be ranged. Naturally what is most profitable for the chains will be a major consideration in how they trade and from whom they buy. This in turn will complicate how suppliers can grow their business and must have an impact on innovation. Having watched this unfold for many years I tend to the view that for supermarket buyers the price will triumph over quality, leading to all manner of compromises.

Supplier to Wholesaler to Retailer

With fewer independent retailers the changes in the wholesale chain will continue to alter which in turn reduces the number of young people who can develop a career in the wine trade. I see little future for how the wholesale-supply chain is currently organised as the chains do not need it and the reduced need lifts the costs to the rest; the remaining independents and restaurateurs. Thus the wholesale trade will continue to suffer stress and its best days are well behind it; indeed the survivors are the last vestige of a business that now offers few benefits to their customers, these being last few wholesale distributors and independent retailers.

House and Exclusive Wine Brands

Not being content with buying better the chains naturally began to dabble in building a range of exclusive or house brands. As the major buyers in the market place it did not take them long to realise they had a commanding presence. I would suggest that 80% of the wines they sell under $6.00 a bottle are house brands or exclusive supplier products. They are actively deepening and broadening this range. What is of surprise is that the large independent wholesalers, e.g. Metcash-ALM, have been slow to mount a credible alternative for their members, weakening even more there rather poor offering.

Purchasing and Pricing

We might ask what sort of country is it where your local pub buys so poorly, particularly from the two brewers, that many times they save money by doing their shopping with the chain competitor down the road. Recently, to have a beer special for the opening of a new store in the far north Queensland town of Mackay, the beer was purchased from the local Dan Murphy the month before the opening, because it was $4.00 cheaper than the landed price from Lion Nathan. The chains have such a price advantage that it must end with them crushing all conventional independent competitors. Groups like Aldi and Costco are fortunately also powerful and with a different offering will provide an alternative.

The Consumers Perspective

Over the last 35 years consumers have done very well and while memories are not a great guide it seems to me that many well known brands have not increased in price for decades. The range of good drinking which can be found under $10 is wide and deep and the quality is very high. Sure these may not be the wines that excite the wine elite but they are good drinks and serve the purpose for most consumers. The duopoly are not about to lift prices in this area and indeed have done the opposite over the last decade.

In my clipping file I have this quote from a few years back: "Huon Hooke, a wine writer for the Herald, said it was vital that people supported independent bottle shops. Supermarket retailers are clever at creating the impression that you're getting a better price but I'm not convinced you always are." I don't see Huon all that often but I can assure him he is wrong about supermarket pricing.

I'm not optimistic about the future of independents and quite frankly apart from working long hours most do little to show why they should be supported. A few ultra specialists will continue to do well and with 2,500 odd wineries there is plenty to choose from which will never make it on to the shelves of the chains. But even for smart wine buyers the look of the modern Dan Murphy is awfully inviting.

To finish this series let there be no illusions about the changes that have taken place. The style of business of a decade or so ago with the clearly defined roles of the producer, wholesaler and retailer are not coming back. The new way of doing business as determined by the chains will have unforeseen consequences and is unlikely to lead to a bigger, better and healthier wine business. It's all over.

Nielsen pie charts from early 2011 showing the two chains with a 60% share of packaged liquor sales and 80% of wine sales.

Lastly, I make three points;

• I would like to see the liquor market deregulated so that anyone can open a liquor store as this may lead to a flowering of tiny dedicated, passionate retailers;
• I ask the chains to use their power very carefully as misuse will have many unexpected consequences and I think none of them will be good;
• for small producers the digital age could not have come at a more helpful time and offers a way to keep your dreams alive as consumers by nature are curious and interested in those who show passion about what they do.

The topics of this five part series have been covered in detail since we began Glug in 2004. Some of the key articles are listed below. Perhaps the most useful is The Chasm between Woolworths Liquor and Coles Liquor Will Create Problems, 3rd November, 2005.

A few others are:

A Good Idea at the Time

What Does the Tussle Between Woolworths and ColesMyer in Liquor Mean For Wine Consumers?

Woolies Keeps Growing While Coles Plays Catch Up

The Big Box Liquor Battle - An Update

Doing Hand Stands at the Dorchester

The Liquor Retailer Who Forgot How to Retail - Coles Liquorland