Golden Opportunity for US wine retail
Such is its size, America is a treasure trove for wine retailers keen to attract new consumers. Unfortunately, the market is full of convoluted restrictions. Despite this, writes Arabella Mileham, the prize is worth fighting for.
The US is one of the holy grails of the world’s retail markets, one of the largest on the planet and one that is in growth. But it is also a highly complex one, still driven by regulation that has its roots in the Temperance movement and Prohibition. As wine producers and importers are quick to point out, 50 states equals 50 markets, each with the ability to enact their own laws and regulations on promotion, distribution and sales, as well as their own consumer trends. But within this complex model, there are some clearly emerging trends.
Retailers, for example, are becoming more active in their wine offer, increasingly seeing the opportunity the category presents, as US consumers become more knowledgeable about wine. This has led retailers to become more savvy, while a number of disruptive forces on the horizon promise to keep the future anything but dull.
As Ignacio Izcue, export director for the US market at Concha y Toro (CYT), points out: “The opportunities are endless. It is the largest wine market in the world, which has been growing for many years; it is growing in attractive price segments, new consumers are entering the category, and consumers that are eager to try innovations.”
One thing that has dogged the wider US wine market in recent years is the consolidation of the wholesale tier, but this doesn’t seem to have spread to the retail scene itself, thanks in part to the strict regulations in some states, which prohibit multiple licences to retailers.
The exception was the surprise acquisition of Whole Foods Market by online giant Amazon in June for $13.7 billion (£10.5 billion). What effect this, and the recent entrance of German discounter Lidl onto the US scene, will have on the wider retail market has not yet become clear, but retailers, analysts and producers are waiting to see.
Competition heats up
What is clear is the way it will heat up the competition, according to Stewart Samuel, programme director at IGD, the food-trend analysis organisation.
“Lidl has made wine one of its key focus departments. It has created a distinctive in-store environment with dedicated fixtures and lighting, and has actively promoted its recent success at the Indy International Wine Competition,” he comments, even though he says the Amazon and Lidl developments will not have a significant effect on the US wine-retail market.
Stephen Rannekleiv, global beverages strategist at RaboResearch Food & Agribusiness, argues that Lidl has the potential to be “disruptive” to the market as it expands across the US. And he says the additional insight from Whole Foods’s affluent customer base, as well as its physical infrastructure in key markets, will give Amazon some significant advantages in developing the category.
“Both Amazon and Whole Foods place a great deal of importance on the wine category, and they do it well. And I have no doubt that Lidl will play a disruptive role in the US food retail sector. It will certainly have an impact on wine sales, where it can be active in this category,” he said.
But this points to the biggest check on the potential for Lidl in particular to achieve the kind of wine-market share it has accrued in the UK in recent years; the complexity of the state system.
“Many states on the East Coast [where Lidl is currently opening stores] are either control states, where alcohol sales are managed by the state, such as in Pennsylvania, or the state has placed strict limits on the number of licences they will give to a single retailer, so this will place some limitation on their participation in the wine category in some states, at least for the near term,” Rannekleiv says.
This points to another key feature of the US retail model – its divergent nature. The country is dominated by two main models. The first is the urban corridor along the East Coast, from Boston to Washington which has a heavy focus on independent retailers thanks to restrictive licensing laws, which limit retailers to only a handful of licences. The second is the southern states, where big-box retailers, supermarkets and club stores have far more leeway to operate and grow.
Whether Lidl will adopt the kind of aggressive stance on challenging limitations in states where it intends to operate for the sake of a hero category – as retailers such as Costco have done – remains to be seen.
“The area to watch in the US is still very much bound up in regulation,” says Richard Halstead of Wine Intelligence, pointing to the class-action suits and lobbying efforts by those trying to deconstruct the system to bring about greater liberalisation, and by those (primarily distributors) keen to maintain the status quo.
These new forces coming into the market might therefore force a wider conversation around the loosening of inflexible licencing laws and bring about an interesting debate as to how many licences retailers can hold. Costco has already challenged this successfully: in 2011 it led a campaign backing a vote to allow private retailers to sell alcohol in Washington State. This was instrumental in opening up the previously state-controlled market in the state. Total Wine is also at the forefront of a move to ‘modernise’ the state laws of Massachusetts, questioning laws that prohibit the savings and promotions it can offer consumers, through its Consumer First campaign and fighting back against state regulators in Massachusetts and South Carolina in the court.
“It will be an interesting battlefield, and if things do change, there will be a seismic effect on trading in that state or area,” Halstead points out, particularly for smaller retailers that tend to hand-sell their wines.
“Though there might not be a decline in the hand-sell retailers, they will feel more under pressure in mature markets if the regulations do get changed,” Halstead warns.
Risk of draining value
There is also the risk that a move to a more self-service culture, like those in UK and Germany supermarkets may “drain value from the category”, Halstead argues.
For Rannekleiv, the bigger issue for retailers lies in the shift of sales in favour of chain accounts, and the rise of disruptive retailing models. “Retail grocery chains in the US have been getting much more active in the wine space, as this is one of the few areas of the store offering growth,” he points out.
“Retailers have also realised that wine consumers tend to spend more per trip, so attracting them to the store is a profitable exercise. As the large retail chains have become more aggressive in driving wine sales, it is eating into the share of independent retailers. However, even many of the large, traditional grocery chains are feeling some pressure from some of the more disruptive retail formats that are emerging,” he says.
There has also been growth in US retail through the non-traditional formats such as warehouse clubs, notably Costco, and discount stores such as Dollar General, Family Dollar, Aldi, and Trader Joe’s, as well as online operators, Bryan Gildenberg, chief knowledge officer at Kantar Retail says. “In wine, high-end supermarkets continue to gain share as they ramp up their selection and number of stores with licences, although this obviously varies by state. The major wine retailer losing share in the market in total is Albertson’s/Safeway.”
One of the advantages of these bigger-volume retailers in more liberal states is their ability to offer significant cost advantages through bulk buying, and exclusive lines.
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As Halstead points out: “Where wine selling is more freely permitted in supermarket aisles, this gives the potential for volume purchasing opportunities that lend themselves to exclusive- and own-label wine retailing.”
Most of the retailers that are growing are relatively strong private-label retailers, but Gildenberg argues that there is little evidence outside of Costco’s success with its Kirkland Signature that own-label wine is taking off, in the way it has in, say, the UK market. But exclusive wines for particular retailers tell a different story.
“Trader Joe’s is legendary for things like its ‘Two-Buck Chuck’, a Charles Krug-exclusive wine that sells for $2 (£1.53),” Gildenberg points out.
But the name that keeps cropping up in conversation as the most evolved retailer on the exclusive own-label front is Total Wine & More, a quasi-national store that is one of the US’s largest independent specialist retailers. It “does a great job of getting great-value labels at hot price points through exclusive relationships with growers”, says Gildenberg.
Operating in 20 states from its base in Maryland, it has been quietly growing in the past few years, expanding as far away as California. It lists around 8,000 wines and is “very aggressive” on pricing, largely thanks to having a very strong selection of retailer-exclusive brands, which can be offered as profitable alternatives to many national brands. “As a result, Total Wine can be very aggressive on pricing of well-known national brands, which puts a lot of pressure on other retailers in the same area,” Rannekleiv agrees.
Growth areas
Although New York and New Jersey are key markets, the top-line pattern of growth in the US shows the bigger growth states to be Florida, Texas, the Carolinas, Georgia and the South West states of New Mexico, Arizona and California, and Oregon and Washington State (whose state-controlled liquor-store system was de-regularised in 2011).
But Halstead argues that this reflects the long-term migratory patterns and population growth in the US rather than a rise of per capita consumption. “It’s not that people in Washington DC or New Jersey are drinking less, but there’s a natural migratory pattern in terms of those states increasing in population over the past 50 years,” he points out. However, beneath the surface a few interesting trends can be seen.
“Those Southern states and big urban centres such as Atlanta, the North Carolina corridor and regenerated cities such as Baltimore tend to attract millennials, who are more involved, urban, well-educated drinkers looking for trade-up opportunities in the wine category. That is spreading to Texas, especially Austin, Dallas and Houston, and the South-West states as well. That is driving the higher-value, more involved purchase,” he continues. “We are seeing a shift from volume towards value overall in the US.”
This shift shows a clear decline of wines retailing at the lower price points. According to CYT, nearly 80% of wines in the US retail for under $10, and the median price of a bottle of wine currently lies around the $7.50 mark, although Kantar puts the average price of a bottle at around $9.39, with $8.99–$9.99 being the most common price point.
Nielsen data shows bottles priced under $8 fell by 3%, with those priced between $8.00-$10.99 growing by around 3.2% year on year, and those above $11 in double-digit growth (between 10.6% and 11.5%).
As CYT’s Ignacio Izcue argues, the growth of the market is coming from branded wines that deliver “a sense of place, authenticity, quality and value at different price points.”
Increasing interaction
But it’s not only about price and brand, US retailers are working hard to interact better with their consumers.
Wine has also been a focal category for an increasing number of larger multiple retailers, Stephanie Gallo, vice president of marketing at E&J Gallo Winery, points out. “Many of our larger retail customers have made wine a strategic category and have reinvented it, moving the department to high-traffic locations and expanding their assortment,” she says.
This focus is on giving customers new reasons to visit stores and cater for different missions, particularly those focused around entertaining.
“We are seeing wine growth in various retail outlets, particularly grocery, club and liquor stores,” Gallo continues. “The US wine consumer is becoming much more knowledgeable about wine, and, as a result, savvy retailers, particularly at grocery and warehouse stores, have moved away from the sterile ‘wall of wine’ and have created wine interactions with customers to increase wine-purchase opportunities. Wine displays are no longer confined to the wine aisle but are now located in the meat section, at the floral department, in the deli, on the end of aisles and near the cash registers. In addition, more and more retailers are conducting in-store wine tastings and promoting wine in a more high-profile fashion to attract customers and entice more purchases.”
Samuel of IGD points to Kroger as a good example of how this is working in stores. It has been rolling out its wine-bar concept, Cork and Tap, which also offers a range of craft beers on tap, while Whole Foods Market has also been remodelling some of its existing bar concepts to offer a more upscale experience. “This is a key trend that we’re watching very closely in the North American market,” he notes.
Any indie or smaller chain retailer worth its salt has extensive tastings as an attraction because they know interaction will drive trade up and help consumers engage with the retailer, Richard Halstead points out. This is particularly true for chains in the North East, which can be a tough market to do anything innovative in.
“But on the plus side, it’s where added value, and the story of the wine can be told much better” he concludes.
But, as Gallo argues, the focus needs to be on selling wine in the style, packaging and price points that meet the evolving needs of the consumer. “At the end of the day, American consumers want quality products at an affordable price and will take their business to those retailers who can consistently deliver on their wants and needs.” db
For db’s rundown of the six ‘disruptive’ US wine retailers worth watching over the next few years, as chosen by analysts, please click here.
