End to beer discounting as supermarkets and brewers seek margin over market share
The days of heavily-discounted and bulk beers sold at Australian supermarkets appear to be numbered following a recent report that demonstrates minimal margin for the big retailers, while beer manufacturers have indicated a move away from using market share as a measure of success.
Both major supermarket groups have been unceremoniously slashing prices on cartons in recent years, an era dubbed the ‘Beer Wars’, but now Coles has declared it will be ending the practice, with consumers expected to pay the price.
Coles explained that while sales in wine were growing and turning good revenue, it had decided to stop “unprofitable bulk and corporate sales and [has reduced] unsustainable price discounting, especially on beer,” a spokesperson told BusinessDay.
Despite Coles’ decision, both Lion Australia chief executive James Brindley and SAB Miller Asia Pacific chief executive Ari Mervis recently said that there is not about to be a change in their own beer prices, but rather a shift in strategy that has previously focused too heavily on market share as a measure of success.
Merrill Lynch analyst David Errington views Coles’ dependency on wine earnings as alarming with wine surpassing beer profits. 75% of Coles (and Woolworths) EBIT (earnings before interest and taxes) is now generated by wine, despite it making up closer to 40% of their sales revenue.
“The over-reliance on wine earnings is being underpinned by the fact that the major retailers lose money selling beer despite making up 30% of their sales,” Errington says.
He explains that the main reason liquor retailers have been losing money selling discounted beer all comes down to the relevant cost of doing business. “On a case of VB sold (not on promotion), we estimate the gross margin for the retailers is under 5%, which is well below the cost of doing business (on our estimates) of 15%,” he says.
This takes on added significance when it is revealed the margins of the beer-makers are more than 30%, when compared to the retailers’ single digit margins.
Interestingly, the beer industry has seen a good recovery in beer consumption in the past three months thanks largely to the summer period, with the amber fluid still one of the most branded products around.