off-licences? Or are players getting their act together? James Durston finds plenty to drink to
It may well look like a sector in its death throes. The British off-licence has been crushed and sidelined by the supermarkets for some years now, and there are some that take the view that the heart monitor for an independent off-trade in the high street is perilously close to flatlining.
Ten years ago, specialist off-licences controlled a quarter of GB sales, with the multiple grocers even then holding 47%.
Today, the specialists’ share has collapsed to 11.6%, while the multiples have a whopping 63.5% [ACNielsen].
Indeed,Tim Sleep, head of retail at Ernst & Young, when pushed on the issue, is frank: “The off-licences are really only surviving as they are because their property formats are so small that the supermarket operators would not even consider buying them.”
Despite this gloomy forecast, there is some encouragement in recent sales, and the high-street off-licences are having a go at grabbing a greater share of a buoyant wine sector.
But analysts say that uplifts should be treated with caution, as they may well only represent recovery from a catastrophic low. They are, said one more pessimistic commentator, just the result of “bouncing along the bottom”.
Aloof from the suffering is the thriving Majestic Wine, which operates a completely different business model that has enabled it to leave all such troubles behind. Chief executive Tim How says a major problem for the sector as a whole is the fact that there are too many players competing for a limited cash pool.
“Yes, there is a market for specialists but it’s a limited market and I do think there will be a gradual decline in numbers because, in my view, there are too many at the moment.”
That explains why there is such a frenzy of merger and acquisition activity across the sector. Unwins was sold to DM Private Equity in March, ECI Partners is rumoured to be in talks about buying Bargain Booze and Oddbins has just bought 45 stores from Wine Cellar (see News, p4)
Sleep takes some encouragement from the turmoil: “There is a fair bit of equity in the sector and they are going to have to respond as all niche retailers do by consolidating.
“This will give them the ability to compete on price with the supermarkets.”
M&A activity is in fact just one sign that the off-trade is being forced to take serious action to get its house in order. Across the board, a raft of measures is being put in place, with focus on the core offer and offering a differentiated range often tailored to local demographics the key themes. Quality is coming to the fore, whether in terms of the alcohol itself or through staff training and knowledge, and customer service.
The results are starting to show. Total sales growth for the GB specialist off-trade may be only 2% over the past year, but some categories have done extremely well - Champagne and sparkling wine sales are up 10.3% compared with 6.9% growth in the market as a whole and 6.6% growth in supermarkets [ACNielsen], suggesting that tailored merchandising strategies can boost market share.
How sees encouragement in the current picture: “There is a sense that sales are starting to turn for the specialists. I see a clear role for the specialists who really focus on different wine ranges and great customer service.”
Alex Anson, trading director at Thresher Group, agrees that there is a place for specialists whose strategies are focused. “There’s a definite turnaround starting and it’s down to differentiation. In order to compete effectively you need to understand your customer well, and segment your estate so each store is aligned with your customers in that area.”
For some of the off-licence chains, there has been recognition that they have to go back to basics, forget about mimicking c-stores and concentrate on what they do well.
Thesher Group has thrown in the towel on the Threshers+Food concept after 18 months of trials, and is now focusing on its core off-licence offer, with fascias targeted to different demographic profiles, and with more attention on the flourishing wine sector.
The company claims it is on target for annual sales growth of around 7%.
Unwins yet has its atrocious supply problems to resolve, but here again it has turned its back on its Food & Wine idea, and is exploring, somewhat tentatively, the roll out of Phillips Newman, but only through a concession-style feature going into stores first.
The chains are also recognising, nevertheless, that a premium position will not be the panacea for all their ills. They are sharpening up their price tactics as well in the light of the gruelling Christmas battle with the supermarkets that is on its way.
Thresher’s Anson thinks this Christmas will be a benchmark for what to expect from specialists next year. “This Christmas will be one of the most competitive ever, with Asda coming off EDLP, Somerfield’s potential acquisition and Sainsbury driving footfall. We’re driving very hard to have a share of that customer spend.”
Alastair Charatan, retail specialist at PA Consulting, agrees that competing on price is necessary. “Specialists need to compete on advice and service, but also on discounts.”
Stuart MacFarlane, MD of take-home at InBev UK, has already warned grocers to expect a stepping up in competitive pricing activity from specialists, who started to flex their muscles last Christmas by matching supermarkets’ offers of two cases of beer for £20.
He says: “This helped to attract more shoppers to small stores and I would expect them to have stalled some of the mass migration they have seen over the past three Christmas periods.”
Thresher Group is running a three-for-two offer across all its wines, effectively giving customers their favourite wines at the same prices as supermarkets. Wine Cellar and Oddbins run promotions on several lines through their online arms, and Unwins is running five-for-six offers on certain wines and 25% off certain beers. It is this tailored package, comprising several different elements, that specialists hope will continue to pull the customers back in.
Meanwhile, in the light of the success of Majestic Wine, the question is whether its business model offers any lessons for the smaller specialists.
Teather & Greenwood analyst Dave Stoddart says: “Majestic is a different size of store, with a totally different sales mechanic. I don’t classify it as an off-licence. Their stores are out of town centres, and have less cost associated with property and labour. They sell by the case so transaction vales are much higher, producing good margins.
“It’s very difficult to see how an ‘off-licence’ could do this. Unwins, for instance, suffers from all the cost-structure problems of a smaller format.”
Oddbins, Thresher Group and Victoria Wine all tried bulk-buying offers in the late 1990s, but competing head-on with Majestic Wine proved problematic. The trials were ended in order to focus again on the core offer.
Concentrating on what they know well is the way forward for the specialists, say analysts. Sleep holds out encouragement: “I don’t think the supermarkets will increase their domination further. There is still a place for small, niche, conveniently located specialists.”
Thresher Group scraps a wider convenience offering; Unwins ditches Wine & Food format; Oddbins ‘does not want to be a c-store’; Wine Cellar does well with its food offer; Majestic is smiling
Thresher Group has scrapped plans to provide a wider convenience offering through Threshers+Food and is willing to sell the Leapingsalmon ready meal brand. Local stores will, however, retain community services such as video hire and e-top-up.
Older Wine Rack and Bottoms Up stores are to be turned into the new look Wine Rack, while standard Threshers will give wine a higher profile. Haddows may be converted or even sold, but could be retained because of its strength in Scotland.
Chief executive Roger Whiteside says Thresher Group believes its future lies in the prime location of its stores and staff professionalism.
“We are putting all our sales staff through Wine & Spirit Education Trust training,” says Whiteside.
Since its takeover by DM Private Equity, Unwins has been in trouble. Major alcoholic drinks suppliers say they are now refusing to stock its outlets because of unpaid bills. Unwins staff admit to sourcing some products indirectly. Store managers continue to report poor availability of cigarettes, snacks and confectionery.
Sales and marketing director Ian McLernon says Unwins Food & Wine will be ditched. As for the upmarket Phillips Newman format, Unwins is now favouring the roll out of a concession-style feature, with stores undergoing full conversion should it prove a good fit with the area.
McLernon adds: “Our point of difference as a community drinks retailer is the great locations of our sites and the expertise of our people.”
Although positioned as one of the smaller chains, Oddbins has clearly been earmarked for expansion by its French parent company Castel, following the recent acquisition of 45 Wine Cellar stores which takes its current store total from 235 to 280.
The focus for the company has been to carve out its position as a differentiated wine specialist with a diverse range of wines at a wide range of prices. Head of buying Emma Nichols says: “We want to be convenient to shop in but we don’t want to have to trade like a c-store in order to compete with them.”
Next year the company plans to put an even higher emphasis on staff training. “The range we offer is big and diverse so we have to encourage staff to get involved.”
The country’s biggest wine warehouse chain has managed to carve out a highly lucrative niche for itself between the supermarkets and high street off-licences.
Its policy of operating large out-of -town sites with ample car parking, selling wine only by the case (with bulk buying providing quality wines at affordable prices) and having trained, knowledgeable staff is paying dividends, with record pre-tax profit in March up 24% to £13.2m. Average spend is now £113.
Chief executive Tim How notes: “Sales of fine wines at £19.99 and above are growing at 40% and we expect that to continue. I still see a clear role for specialists that focus on different ranges, great customer service and staff knowledge.”
Wine Cellar has just announced the sale of its 45-strong Wine Cellar specialist wine stores to Oddbins.
Paul Gaskell, MD, says that the deal will allow Wine Cellar to concentrate on the areas where it has greater expertise; community off-licences and also c-store retailing, in which it is showing faith.
Wine Cellar now consists of 149 Booze Buster stores, 26 Simply Drinks and 13 Simply Food and Drinks stores. Group sales are up 4% to £64.7m, while sales at the Simply Food and Drinks are up 13%.
Gaskell says that convenience - in all areas - is the key to competing with the multiples.
“What we can do is be there locally so that shoppers can pick up whatever they want.”
>>venture capital takeover for franchise chain
Not such a Bargain?
A no-nonsense pricing and trading strategy has helped franchise chain Bargain Booze to buck the trend and build up a successful business within the specialist off-licence arena in recent years. So little wonder that eyebrows were raised when owner BWG put the business up for sale earlier this year with a £70m price tag; it just seemed, well, a bit too pricey.
Nevertheless, plenty of suitors were soon queuing up to have a look at the chain. Thresher was named as one possible candidate in a complex back-to-back deal that would finally allow its VC owners to exit the off-licence arena. The Grocer understands that a group of Bargain Booze franchisees also put together a bid but that their offer was rejected out of hand. Private equity house ECI Partners is now understood to be the exclusive bidder, with news of a deal due by the end of this month.
So what will ECI get for its £70m? In short, a great brand name, a clever marketing strategy and the right to supply 550 stores owned by 300 franchisees, which makes them critical to the success of any deal.
A straw poll of 10% of Bargain Booze franchisees carried out by The Grocer this week found the vast majority are happy with the prospect of a sale to a venture capitalist group - and they say they will stay with the company once the buyout is complete.
Franchisees have also been reassured that the sale will not affect the development of the drinks chain. “We are confident the sale will not cause any drastic changes to business, and it would be crazy to even consider dropping out,” said one franchisee.
Not everyone is happy, though. One franchisee says a number of fellow operators have been experiencing cashflow problems - partly due to the tough state of the market, which has hit sales growth, partly due to the way Bargain Booze has been paying its retrospective discounts to store operators.
Another was concerned at the way the current management team has been handling relationships. “Things have changed. We have become less like customers, who are looked after, and more like franchisees, who are there simply to provide a profit.”
Such concerns should not be brushed aside. The Bargain Booze model is one that can be easily replicated. And one franchisee tells us he has already been approached by two wholesalers who are interested in launching Bargain Booze lookalikes.