Data Indicates Lowering Prices Is NOT The Path To Profits

It’s been well-known for months that wine consumers are shopping down in price points, but solid data shows that cutting prices could only make things worse.

Wine Industry Insight‘s analysis of data provided by Information Resources Inc. (IRI), reveals a substantial group of wine companies who have raised prices, shipped fewer bottles and by doing so, increased their margins.

What’s more, WII‘s re-crunching of the IRI numbers show that, for the 52-week period ending Nov. 30, 2008, 32 of the top 100 wine brands that raised prices also managed to show overall gross revenue gains.

In addition, of the 25 brands with the largest gross revenue increases, 16 managed to raise prices while one held them steady.

HOW DID THEY DO IT?

While the list of margin leaders is dominated by big companies, the presence of a number of smaller brands shows that there are lessons to be learned and actions that can be taken regardless of size. Interviews with margin leaders indicate that their top strategies include:

• Don’t increase prices across the board. Make strategic decisions based on customer loyalty.
• Continue Advertising and Promotion.
• Increase face-to-face time with retailers and distributors.
• Custom tailor point-of-sale strategies to fit each retailer.
• Prune out retailers and distributors who become overly expensive to support.
• Utilize the vast oversupply of wine on the bulk market to introduce new, lower-cost, higher-margin wines.
• Improve quality of existing wines.
• Be creative in packaging.

SAFE WINE FOR UNSAFE TIMES

“In challenging times like these, people are going for the old reliable brands they have come to trust in the past,” said Glenn Yaffa, Executive Vice President for Sales and Marketing at Chateau Ste. Michelle. “They want a safe choice but also need a good price value.”

IMPROVE QUALITY

Yaffa said that Ste. Michelle has concentrated on the winemaking side to improve quality. “We want to make sure our $10 bottle offers a $15 or $20 taste experience.”

FOCUS ON RETAILER NEEDS

Ste. Michelle has also refocused energy on the retail channel to build stronger relationships. “We’re trying to support our retailers’ efforts within the store, to support their own marketing efforts rather than simply pushing our own brand,” Yaffa said. “At Safeway, Kroger and similar retailers, we look to cooperate on their promotions.

For example, if they’re going to promote ‘take home chicken’ then we can offer a coupon that they can market alongside it,” Yaffa said.

Yaffa’s comments were echoed by Peter Willmert, Director of Marketing at Beringer Vineyards. Willmert said that focusing on consistent quality and continuing advertising allowed them to come in at number 3 on WII’s list of Margin Leaders.

Beringer’s actions resulted in a 3% decline in overall sales, but that came with a 15.5% decrease in volume shipped making them one of only three brands with double-digit margin increases.

SIZE MATTERS

Bob Torkelson, President and Chief Operating Officer of Sutter Home emphasized innovation as a key to its success in making more money while shipping less wine.

“The 187ml PET (Polyethylene terephthalate plastic) we introduced has been extremely well received,” Torkelson said. He said that because of its unique nature, PET is included with glass in data categories.

Significantly, IRI stats show the 187ml category grew 6.2% in the 52 weeks ending Nov. 30, 2008 while volume grew only 3.5% — indicating higher margins for the size category.

While PET has only a 1.8% share of all size categories, its overall growth and better margins could suggest opportunities for wineries of any size.

The 187ml bottles are usually sold in a six-pack and are as recyclable as glass. They are also lighter, thus requiring less energy to ship a selling point for consumers swayed by “green” promotion.

WII has placed a number of other calls to Margin Leader executives and will post them as updates when received.