Above the fray: Liquor retailing stays out of supermarket price wars

IBISWorld
Much has been reported on the battle for consumers’ hearts, minds and money by Australia’s two biggest supermarket brands. As the supermarket price war rages on with no clear winner emerging, liquor retailing may yet play a key role for the two giants in their battle for market-share supremacy. Woolworths currently holds the advantage over Wesfarmers in a segment with opportunities for growth. IBISWorld expects revenue from the liquor retailing industry to increase by an annualised 3.3% over the five years through 2013-14, to total $17.7 billion.
So far, Woolworths has clearly had the advantage in liquor retailing. Woolworths’ warehouse brand Dan Murphy’s and bottle shop brand BWS have both outperformed their Wesfarmers counterparts (1st Choice Liquor and Vintage Cellars/Liquorland respectively). This is evident in the companies’ financial results: Woolworths enjoys a significant lead in liquor retailing, with revenue totaling $6.8 billion versus Wesfarmers’ $3.2 billion for 2012-13. Coles Myer launched 1st Choice Liquor in 2005, well after Woolworths’ 1998 acquisition of Dan Murphy’s. The branding and promotion of these stores since going head-to-head has consistently given Woolworths a significant advantage. This is demonstrated by store numbers: Woolworths boasted 1,355 liquor outlets nationwide as of June 2013, compared with Wesfarmers’ 810. The gap is increasing. During 2012-13, Woolworths opened 54 liquor outlets to Wesfarmers’ 45. Woolworths has effectively used its established brands and economies of scale to bring in greater income from liquor sales. An advantage in this sector is significant, with liquor sales making up over 17% of Woolworths’ $40.2 billion food and liquor segment revenue in 2012-13. Of Wesfarmers’ food and liquor segment revenue of $35.8 billion, only 9% is attributable to liquor sales.
Over the past five years, alcohol consumption per capita has declined by 5.6%. In spite of this trend, the alcohol retailing industry has enjoyed a steady increase in size. In order to avoid drink-driving and alcohol-fueled violence, consumers are increasingly purchasing liquor for at-home consumption rather than going to public venues. Growth in liquor retailing has also come from consumers’ growing level of knowledge and sophistication in terms of wine, craft or premium beer, and cider. These higher margin products (compared with traditional beer brands) have driven significant growth in liquor retailing over the past five years. The fact that Woolworths and Wesfarmers have kept their renowned price war out of this segment, choosing instead to compete on promotions and exclusive brand rights, has also been a factor in encouraging growth. Current retail competitors like Aldi and IGA Liquor may offer a cheaper or more convenient alternative to Woolworths and Wesfarmers, but the majority of market share is held by the famous duopoly.
Competition from alternatives is set to intensify. Independents, including IGA Liquor outlets, are staying viable through membership with Independent Brands Australia, a coalition body that uses bulk purchases to keep costs down for members. Competition will also come from international, low-price alternatives such as Aldi and Costco, as they further penetrate the liquor retailing market. These two newer players offer warehouse-style layout and value, which has proven successful for Dan Murphy’s and 1st Choice Liquor in the past.
IBISWorld expects revenue from liquor retailing to grow at an annualised 3.1% over the five years through 2018-19. This growth will largely be fuelled by Woolworths and Wesfarmers as more independent bottle shops are forced out of the market. Woolworths currently has the momentum to hold on to its considerable market share. This state of affairs can be expected to continue as long as Wesfarmers’ focus is firmly on gaining ground in the supermarket segment.