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What The Market Says
The Liquor Wars - Woolworths is Killing Coles
Tuesday, 8th November, 2011  - David Farmer

The country would be better served if Woolworths liquor and Coles liquor were about the same size and I base this on the belief that two goliaths would be better than one. Woolworths though are charging ahead at such a rate that the gap is widening and it's now beyond Coles to draw closer. This conclusion has been reached by simply considering the cost of doing so and that Wesfarmers, the Coles parent, will have better investment ideas.

This is reinforced when I study the strengths and weaknesses of the two chains.

The store count is Woolworths with 1240+ trading as Dan Murphy, Woolworths Liquor and BWS and Coles with 780+ trading as 1st Choice, Liquorland, and Vintage Cellars. Over the last six or so years Woolworths has been active opening new stores while Coles has done very little.

Woolworths Liquor

The Woolworths flagship is Dan Murphy and they have turned a Melbourne concept into the most formidable retail force in Australia. The brand perception has translated into a powerful position as good as anything developed in any country and indeed I do not think it has an equal anywhere. From cheap beer to fine wine they cover the lot and have made themselves the ultimate 'big-box' retailer with enormous depth of stock.

Next are the stores attached to supermarkets, Woolworths Liquor, which provides convenience liquor to supermarket customers. As the year roll by and the movement of licenses and the granting of new licenses becomes easier this is the chain which will expand.

The free standing BWS stores are smaller than Dan Murphy and are also the stores attached to hotels. They are the mid tier between Dan's and those linked to supermarkets. Many were previously successful independent stores with most in excellent locations with some acting as drive inns. BWS nicely covers the convenience market outside the range of Woolworths Liquor. Please note that with restrictions on licensing you simply cannot open a store where you might wish, so at this stage BWS have a large role and are very competitive.

The three brands make sense with each having an identified market position and as such are manageable by a large organisation.

If only it were the same for Coles as the current branding makes little sense.

Coles Liquor

The Coles equivalent of Dan Murphy is 1st Choice Liquor Superstore (spelt as Cho1stce in advertisements). Coles took too long to respond to the threat of 'big-box' retailing and when moves were made they were half hearted. A Dan Murphy store built from scratch is a different proposition to a medium or large sized liquor store having its name changed to 1st Choice. The first was opened in July, 2005 and by 2006 they knew the brand was not working. In the years since this perception by consumers has not improved.

The Australian, 3rd and 6th August, retail articles by Blair Speedy based on documents leaked from Coles explained:

"The company after finding that the 1st Choice name is "too generic", and, "Coles says its 1st Choice wine offering has failed to establish its credentials as a retailer of fine wine to rival Dan Murphy's, instead being seen by consumers as mainly a place to buy cheap beer in bulk."

I recall the excitement of the Coles liquor executives in 2005 when they unfolded the findings of months of research to reveal the challenge to Dan Murphy would be called 1st Choice. It was explained the '1st' would mean things like, first choice for customers, first choice for boutique beers, first choice for all liquor categories'; which suggested at the time that they had failed to grasp the enormous power and simplicity of the Dan Murphy offer.

Now it can be seen that 1st Choice is a doubtful and perhaps a losing proposition sitting as it does as a poor man's Dan Murphy. Dan's has powerful momentum and it would need brilliant retailing to flag to customers that there is an equal.

The second of the Coles chains is Vintage Cellars with 80+ stores which opened its first shop in Mosman back in 1983-84. The idea back then was to target the premium wine market which wasn't catered for by the Liquorland convenience stores. The market has changed dramatically in the years since and the relevance and future of this chain must be of concern.

From The Australian; "According to the Coles documents, its Vintage Cellars stores were seen as too upmarket and so were losing customers whenever Woolworths opened a Dan Murphy's outlet within 5km". An example is the closure of six or so Vintage Cellars in Adelaide as Dan Murphy expanded. This suggests the Vintage Cellars offering is weak and also highlights that the need for premium up-market stores is limited. Thus in some areas such as the north shore of Sydney there are far too many. It remains a mystery why one of the great liquor stores in Australia, which rivalled Crittendens of Toorak for large turnover at mouth watering margins, the former Theos at Neutral Bay, was branded Vintage Cellars. The turnover dropped from $140,000 per week to $60,000 and is still slipping.

Vintage Cellars is also a difficult proposition to manage as the range of imported wines and the reliance on a monthly catalogue requires experts to manage which is not a strength of supermarket focussed executives. In any case who now sees Vintage Cellars as credible fine wine merchants? Something drastic will have to be done to this chain as many of the sites are very good and can be put to more profitable use.

Woolworths has no direct equivalent with an initial experiment branding stores as First Estate being discontinued in July, 2005. For Woolworths the fine wine buyer is adequately catered for by Dan Murphy's.

The convenience stores are branded Liquorland the name being derived from a small Sydney chain purchased around 1980(?). Liquorland is a combination of Woolworths BWS and Woolworths Liquor as the stores are associated with supermarkets as well as free standing and drive-in outlets. The liquor retail strategy of Coles is puzzling as a recent new Coles Supermarket in the Sydney north shore suburb of Balgowlah has at the entrance a Vintage Cellars not a Liquorland. Like all Vintage Cellars the wine range includes many imported wines which I cannot see having any appeal at all to the average shopper leaving the supermarket. After 37 years in the wine business I think I have a fair knowledge of the world's wines but the selection baffles me.

It is apparent that the Coles liquor offering has many problems and this grows when the two chains are compared State by State.

In Victoria, Coles are beaten and I do not think it possible for 1st Choice, even with massive investment to take any share from Dan Murphy. They are also beaten in South Australia as Dan Murphy and BWS are now too strong. Coles are slipping in New South Wales though they have many very good locations but as yet no move has been made to place serious money on the table to buy land and build from scratch stores equivalent to Dan Murphy. The situation in Queensland is better as Coles have some great hotel sites but so does Woolworths. The battle continues in Western Australia though the recent purchase of the Compass Hotel Group of 12 hotels by Woolworths in August 2011 is a massive setback for Coles.

In 2006 reports appeared that Coles was considering changing the liquor brands to variation around the Coles brand and this was mentioned at Doing Hand Stands at the Dorchester. From The Australian, August 3rd, 2011, Blair Speedy: "The company is also considering changing the brand to Coles Liquor Superstore after finding that the 1st Choice name is "too generic". The Liquorland name is set to be rebadged as Coles Liquor."

Coles must do something quickly as the current strategy is not working and using the Coles brand while risky does shift the brand perception very quickly.

Help for Coles?

New Zealand deregulated the liquor market through the 1990s and are further advanced than Australia. This was covered at Big Box Liquor and the New Zealand Market. One effect has been that customers feel well serviced by buying wines in supermarkets and 'big box liquor barns' have not thrived. Wine displays in New Zealand supermarkets are very well done.

In the early-mid 2000s it was rumoured that Woolworths was taking the Dan Murphy brand to New Zealand. The decision not to proceed was no doubt based on the consideration that the offer may not succeed. There is also no real equivalent to Dan Murphy in the UK dominated as it is by supermarkets and a deregulated liquor market.

A few weeks ago Aldi supermarkets were granted 35 new licenses in New South Wales which continues the trend to dismantle the State based liquor regulations which stretch back to 1975 when the Canberra market was the first to deregulate.

If Woolworths has a weakness it is that of total deregulation which would allow all of the Coles supermarkets to be licensed. Now that really would change the game. Would you then need all of the giant free standing Dan Murphy stores?

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