The liquor retailing industry experienced solid, if somewhat variable, revenue growth during the past five years.
Strong sales during 2006-07 and 2007-08 on the back of rising disposable income and robust demand for wine and ready-to-drink spirits (RTDs) led to a weaker year in 2008-09 as increased excise on RTDs and recession affected revenue.
During 2009-10 sales bounced back as sharp cuts in interest rates and the $1000 stimulus payment stimulated sales of liquor.
The 2010-11 year is forecast to be softer as weak retail conditions and wetter than average weather affect sales.
IBISWorld estimates industry revenue will increase at an average annual rate of 3.9% during the five years to 2010-11, reaching $15.47 billion.
The real story of the industry over that period was the growing dominance of Woolworths and Coles at the expense of independent retailers.
During the past decade the supermarket duopoly increased its combined market share to more than 58% of industry revenue at the same time engineering a major shift away from bottle shops and high street liquor retailers to big box stores Dan Murphy's and 1st Choice.
During the five years to 2010-11 the supermarkets took advantage of that change to make favourable agreements with producers, discounting some products to levels that independents struggled to compete with.
Supermarkets exploited their market position to reduce shelf space dedicated to branded products, pushing their own higher margin private and control-label beer and wine.
The industry is expected to record solid revenue growth during the next five years underpinned by a strengthening retail environment, growth in premium categories and rising consumption of wine, spirits and premium beer at home.
Woolworths and Coles are expected to continue to increase market dominance, with more big-box retail outlets expected to open. Independent liquor retailers will continue to feel the squeeze as a result, forcing some to leave the industry.
Opportunities still exist for independent well located retailers who are customer driven and who focus on higher margin, high quality and niche products/services.
IBISWorld estimates that industry revenue will increase at an average annual rate of 3.4% during the five years to 2015-16, reaching $18.28 billion.
Retail environment strengthens
Liquor retailers will be emboldened by gradually strengthening retail conditions during the five years to 2015-16.
Booming investment in the resources sector, soaring terms of trade as a result of seemingly insatiable Chinese demand for minerals/energy and a gradually recovering global economy should boost income and wages during 2011-12 and beyond.
Interest rates will continue to rise and consumer expenditure is forecast to rise as personal deleveraging comes to an end, the labour market approaches full employment and asset values increase.
More benign retail conditions are expected to result in stronger liquor sales and after cutting back during 2009-10 and 2010-11 consumers are forecast to buy more premium products, helping retailers lift margins in 2011-12.
Sales of premium beers, cider, fashionable wines such as pinot gris, tempranillo and pinot noir should perform well, with retailers forecast to register strong sales of RTDs marketed to adults – particularly new ready-to-serve cocktails.
Competition is expected to remain strong as Coles and Woolworths increase market share but average prices should increase during 2011-12.
The supermarket giants are expected to continue engaging in price wars, cutting prices of flagship products like CUB beers and Penfolds wine in an effort to increase store traffic and boost sales of other products rather than across-the-board discounting.
As a result average selling prices should increase during the year, boosting revenue and margins, which will be aided by wine prices, which are forecast to increase as the wine glut ends.
Industry profitability is forecast to increase slightly as rising sales of premium products and price growth help retailers to improve margins.
Private label keeps growing
Private label products typically attract much higher margins than branded products.
Woolworths sells private label brands including Baily & Baily, Crittendon and Vivant wines, Dry Dock and Platinum Blonde beers, Mishka vodka, Napoleon 1875 brandy and Vivant sparkling wines.
Coles' private label beer brands include Hammer‘N'Tongs, Maxx Blonde, Tasman Bitter and Tasman Golf, while Robinsons Marlborough Sauvignon Blanc and Pensilva McLaren Vale Shiraz are two of its private label wines.
IBISWorld estimates private labels accounted for 2% of beer sales and 8% of wine sales in 2010-11, with those figures forecast to grow to 4% and 12% respectively by the end of 2015-16.
The next five years are expected to see supermarkets move into alcohol production, with Woolworths' 2009 25% investment in Western Australian craft brewer Gage Roads and recent acquisitions of vineyards a sign of things of come.
Online sales grow strongly
Online sales are expected to demonstrate strong growth and already represent a small but fast-growing industry segment.
Wine is the major liquor product sold online, particularly premium and rare wines. As Australians become more educated about wine and access to the internet via computers and mobile devices increases online wine sales should continue growing.
The growth potential of the online segment was underpinned early in 2011 when Woolworths acquired direct wine retailer Cellarmasters for $340 million from private equity firm Archer Capital. Despite protests from some industry players the acquisition was approved by the ACCC in April 2011.
Cellarmasters accounts for around 30% of the direct wine market in Australia.
In April 2011 Woolworths announced plans to launch a Dan Murphy's e-commerce site. Dan Murphy's sells around $15 million a year of wine and beer via phone orders and catalogues.
IBISWorld believes the new e-commerce site could eventually support sales in excess of $200 million a year. Coles Liquorland chain has an e-commerce site and Vintage Cellars is believed to be close to launching one.
Supermarkets increase market share
IBISWorld forecasts that supermarkets will increase market share well beyond 60% in the five years to 2015-16, forcing some independent retailers to exit the industry.
That is expected to result in consolidation, with industry enterprise numbers forecast to fall from 2593 to 2421 during the next five years as establishment numbers rise from 6443 to 6705, with the major operators adding more stores.
But it will not be all smooth sailing for the supermarkets, with their rising market share and pricing behaviour likely to come under scrutiny from media, politicians, health and social groups, and the ACCC.
Still opportunities for independents
The outlook appears dire for independent retailers in Australia but there is still room for them. Independent retailers can still succeed by operating as up-market specialists, focusing on lower volumes with higher margins.
That can be achieved by concentrating on drinks, mainly fine wines not available in supermarkets, with the emphasis on smaller producers and rarities.
Successful retailers will need to be customer driven, with a level of service far exceeding that found in supermarkets. They will need to employ friendly, knowledgeable and helpful staff while offering unique services and events including in-store wine samplings and regionally themed, hosted tasting nights.
Independent retailers need to be able to react quickly to changing market conditions and should follow the UK market, where specialist wine retailer Majestic Wine Warehouses thrived in the face of intense competition from four supermarket chains.
Key Success Factors
IBISWorld identifies 250 key success factors for a business. The most important for the liquor industry are:
Alter goods and services produced in favour of market conditions: Businesses need to constantly review product range and suppliers, and to be more attuned to needs and preferences of local clients.
Develop symbiotic relationship with another industry: Companies should form business and strategic alliances with other businesses that may use liquor as a promotional tool, for instance florists and wedding car hire firms.
Proximity to key markets: Location, in terms of being within or near a major shopping centre or strip shopping centre, is important.
Control stock: Businesses need to not overbuy and buy only small quantities in order to limit stock volume and handling costs.
Good technical knowledge of the product: Providing staff with superior product knowledge enhances customer service and the buying experience.
Appropriate pricing policy: Setting prices competitively with similar products sold by nearby competitors and watching discounting closely is important to maintain customer preference.
Easy access: Where possible have a drive-through area with easy access for vehicles, because convenience will attract customers.
Robert Bryant is managing director of IBISWorld. For more on this industry, click here.
