Is alcohol in Australian convenience viable? ShopAbility examines the pros and cons, for Convenience World Magazine.
When your friendly neighbourhood Convenience World editor asked me to contribute some thoughts on the recent AACS submission to the Productivity Commission on alcohol, the key questions that came up for me were how big is the opportunity, and is it viable?
Leaving aside the anticipated moral outrage from the usual conservative pundits, and assuming convenience stores ably monitor and regulate 18+yo alcohol shoppers occurs as they do now for tobacco, would selling alcohol in convenience actually work here?
WHERE WILL THE SALES AND GROWTH COME FROM?
On the face of it you can see why it’s an opportunity, if you use the $8.1bn liquor retail sales figure from IBIS World’s Liquor Retailing in Australia report (2010).
However, Australian alcohol consumption, and thus volume, is pretty flat. We’re actually drinking less litrage of alcohol per capita than we did 20 years ago. There are some changes in consumption at a category level too, as highlighted by Jessica Irvine in today’s Sydney Morning Herald (24 September 2011), in her opinion piece on the SABMiller purchase of Foster’s: “Australians consumed an average of 469 tinnies of beer each in 1979. Three decades on, this has slumped to the equivalent of 285 tinnies. We are quaffing an extra 10 bottles of wine a year and half a litre of spirits.”
This is because wine has become relatively cheaper with the wine glut and subsequent ranging of value cleanskins, and full strength bottle spirits sales increased when the RTD excise was introduced a couple of years ago resulting in a switch by RTD drinkers into bottle spirits (and to a lesser extent, beer). Beer volume is in decline, but value is increasing, as shoppers trade up in quality and down in volume. They are trading out of mainstream lagers and up to imports and microbrews/craft beers.
In the USA, it’s predominantly mainstream beers ranged in convenience. Mainstream heavy lagers here (VB, Tooheys etc) are in decline albeit currently nearly 2/3 of total domestic beer production volume (Datamonitor, 2010).
So given that the offpremise alcohol market is flat, if convenience stores were to successfully range and sell alcohol, where would the sales come from?
Existing offpremise liquor outlets, and likely the independents rather than the chains.
Channel shift, rather than incremental category growth.
CREATING DEMAND BY UNDERSTANDING CHANNEL ROLE
Ranging alcohol in convenience stores requires an understanding of alcohol based shopping trips.
Contrary to the IBIS World Liquor Retailing premise that much of offpremise liquor sales are on impulse (as quoted in the AACS submission), various liquor industry shopper studies we have conducted over the past 10 years consistently show that around 70% of offpremise alcohol shoppers know what category they are buying before they walk into the store. Not many people walk into a bottleshop without a clue of what category they are there to buy.
And for beer and RTD, within the 70% who have planned the category, 65% know the brand and/or individual product they will buy. Wine is less planned at a brand/product level due to the sheer breadth of range.
This is because bottleshop trips are destination alcohol shopping trips. The trip types themselves vary a bit by category, but generally fall into one of: stock up (beer, dark spirits); entertaining (formal and informal); take to an event (dinner/party); or ‘replace my regular’.
The question, then, is whether convenience can become known as a destination alcohol channel (given that range would be limited), and/or if convenience can pick up ‘impulse’ alcohol sales. Any impulse alcohol sales are potentially more likely in fuel than non-fuel sites, given that we know from various cross-channel shopper studies we have conducted over the past few years that impulse items need to be worth considerably less – ie under 50% – than the value of the planned basket of items. Ie, if a shopper is spending $50 on fuel the impulse items would probably need to be under $20, which rules out beer cases and most full strength bottle spirits.
Convenience could potentially act more like a drivethru or a pub attached bottleshop, with a limited convenience offer for ‘on the way’ trips. Or leverage the existing convenience store ‘party’ trip (particularly ‘local’ convenience stores) for ice, gas bottle top ups, softdrink mixers etc.
WHAT’S REQUIRED TO RANGE IT VS WHAT IT’S WORTH
To range alcohol in convenience, it’s going to come down to floorspace and coldspace (both fridges and coolrooms). Mainstream beer is mostly sold in cases, and predominantly cold. This would involve investment in coolroom unless you were going to break cases up and sell them as 6 packs (and a low percentage of mainstream beers like VB are sold in 6 packs as they are a stock up/replace my regular item). Shoppers are less likely to buy ambient cases off pallet floorstock.
Likewise, 80%+ of white wine and rtds are sold cold, requiring fridge space. You wouldn’t want it to cut into your existing cold NARTD beverages space, which is your merchandise bread and butter outside of tobacco, unless you’d done a space-to-sales analysis and figured out how many shelves/doors of overfaced beverage product you could actually give over to beer/wine/rtd.
So you’d need to invest in extra fridge doors and a coolroom. This will require capital expenditure for fitout , including any shelving near the counter for spirits. It is unlikely that independent outlets/individually owned stores will have the tens of $thousands required for fridge fitout unless it’s funded by the banner group. If you’re going to invest upwards of $20,000 in coldspace fitting an outlet (eg 3 fridge doors and a small coolroom), you’d need incremental sales revenue of $26,000 (ie $500/week or at least 2 cases of VB a day) at a 30% margin (and the actual margins are substantially lower than that) just to break even in Year 1 on your capex outlay.
Thus there’s capital investment required, and the available floorspace (particularly in smaller independent outlets) is limited which will restrict the range you can sell. So you would be limited to mainstream and ‘beacon’ brands. And the mainstream product margins aren’t all that high. So you’d be relying on your limited alcohol range to drive trips and purchase of additional items.
The available space would also dictate not only which categories are ranged (beer only, and/or wine, rtd and spirits) but also which types of convenience sites, as not all would have the space. The USA convenience channel skews to arterial and roadhouse site types, which have larger store footprints (within the context that most US retail store footprints are larger than Australian ones anyway). Local convenience stores, mini marts and transit sites may well not have the space to range alcohol.
Cost considerations additional to coldspace/shelving fitout also come in the form of:
- Stock inventory costs
- Staff training for product knowledge, unless only the largest brands and most mainstream products are ranged
- Security, which may need to be ramped up, particularly for full strength bottle spirits
- Self funded promotions to create demand. Convenience stores are unlikely to get a sales rep in-person call from alcohol suppliers, because they’re not big enough/wouldn’t drive enough volume to justify a call, let alone tailored promotional programs and consumer promotions to pull stock through (unless these were negotiated with alcohol suppliers at the banner group level). So stores would be left to their own devices to create demand.
THE US MARKET IS NOT AN ACCURATE BASE FOR COMPARISON
OK, I get that you have to start somewhere in sizing the opportunity, and that the US is an obvious market to look to as it has been ranging alcohol in convenience for a number of years.
But whilst alcohol, and primarily beer, is a convenience store staple in the US, the state based differences are huge due to the morass of state based liquor laws resulting from Prohibition. Some states aren’t allowed to range alcohol at all in convenience (eg Pennsylvania, New Jersey, Alaska). Convenience stores in some states are able to sell all alcohol categories (eg California, Nevada, Mew Mexico), while stores in many states can sell beer and/or wine but not spirits (eg Virginia, Washington, Oregon). Some states can sell beer only but not wine or spirits (eg New York, Mississippi).
In other words, it’s a mess. And in many of the states where beer and wine are ranged in convenience stores, it is INSTEAD OF, not as well as, ranging in offpremise bottleshops. So the numbers you would get by pulling % of offpremise alcohol sales in convenience stores would be extremely skewed.
In addition, where alcohol is ranged in convenience in the US it is likely to be limited in either pack size or more commonly by ABV (alcohol percentage). This explains why you see beer doors in US convenience ranging 6 packs, where in Australia the dominant mainstream beer format is the case (and for some products, the longneck 750ml for ‘roadies’, which are often sold in multibuy format eg 3/$10).
As mentioned, US convenience (with merchandise, rather than cash booth only) skews to arterial roads and roadhouse/travel plazas – stores with the floorspace and coldspace to carry the extra stock.
THE SUPERMARKET CHAINS WOULD GET IN ON THE ACTION ANYWAY
Even if convenience stores were granted offpremise licences in Australia (and getting the Community Impact Statements through in some states for liquor licence applications will be interesting, to say the least), it is hard to see how selling alcohol would be limited to the independents. The licence applications would be extended to the supermarket chains (who already have them, by the way, for their existing liquor operations across Dan Murphy, First Choice, BWS, Liquorland, Vintage Cellars and Woolworths Liquor). And you can bet that they’ll use them – Fly Buys, Everyday Rewards, fuel discount voucher programs et al would be incorporated.
The independents in offpremise liquor are under very similar stresses to those of independent convenience stores. The supermarket chains have around 60% of offpremise liquor, and the independent liquor stores can’t compete with the supermarket chains’ pricing due to the chains’ buying power. The independents are losing market share and traffic, and this is changing rapidly (the chains had less than 45% of offpremise liquor 5 years ago).
This begs the question, How would you price? Mainstream beer shoppers have 3-5 brands they rotate amongst depending what’s on special. RTD shoppers are also price sensitive, having less disposable income, which is why there was a shift to full strength bottle spirits (ie get drunker, quicker on freepour) and beer (cheaper per unit) when the RTD excise was introduced.
You can’t compete with the buying power of Coles and WW and thus their retail prices so in order to range alcohol profitably, you’d need to be priced higher. This then requires shoppers on either impulse (only around 30% at a category level for alcohol) or on convenience/emergency trips – a fewer % of trip types – when price sensitivity is less of an issue.
Chains would likely not only range alcohol in Coles Express and WW Caltex if the Productivity Commission approved it, they can do it cheaper AND tie it into their existing loyalty programs (Fly Buys, EDR) and fuel discount programs. So you still wind up with the same power imbalance problem.
Ranging alcohol in convenience isn’t going to make the power of the chains go away.
Counter to what you may think having trawled through the above, I’m not trying to scare convenience stores away from ranging alcohol.
Rather, the point was to make you aware that whilst the numbers may appear attractive on the face of it, much thought needs to be given to the execution as it may well transpire that the cost of ranging alcohol in stock, capex and fitout outweighs the returns, and the issue of chain dominance will remain the same.