Liquor industry drowning its sorrows

Alcohol consumption has edged up to $4 billion, but future growth is being slowed by a range of factors, says JASON BAKER.

Lower disposable household income and an attitudinal change to alcohol consumption have conspired to slow the growth of liquour sales in Australia.

By Jason Baker

Liquor sales are growing but a cultural shift away from booze and pressure on household budgets means retailers can expect only moderate growth over the next five years.

Revenue grew by 3.1% to reach $4 billion in 2006-07, continuing an upward trend in sales from 2005.

But the industry is mature. Changes in the labour market, increased interest rates and significantly higher petrol prices mean consumers have a lower real household disposable income, and there is an attitudinal shift toward reduced alcohol consumption.

In the five-year period to 2012, IBISWorld predicts liquor retailers may eventually be absorbed into the supermarket industry.

Australia’s 855 liquor retailers sell packaged alcohol for consumption off-premises. Woolworth’s enjoys a quarter of market share with its Dan Murphy’s and BWS flagships. Coles Group, whose brands include Liquorland, Vintage Cellars, Quaffers and 1st Choice, claims 20% of the liquor market, and smaller players comprise the remaining 55%.

Most liquor retailers are based in New South Wales, which hosts 44.4% of all stores. Victoria has 23.5% while Western Australia ranks third with 14.9%. Other states and territories host fewer than 10% of retail outlets.

Wine is the most popular product, at 39.3% of all sales, beer runs a close second at 33.4% and spirits and other alcoholic drinks attract 21.3% of buyers.

Liquor retailers struggled in the aftermath of the September 2001 terrorism attacks, with a decrease in business and consumer sentiment slowing industry revenue growth in 2002-03. Sales picked up in 2003-04 to grow by 3.4%, only to slump in subsequent years with slowing household disposable income.

Already-slim profit margins in the liquor retailing industry have tightened in to 2006-07. Price-based competition from other liquor retailers – such as supermarkets, pubs and cafes – is growing and the industry is feeling the effects of the broader liquor industry deregulation that came into effect in early 2006.

Despite these problems, IBISWorld forecasts liquor retailing to grow at an average rate of 3% over the five years to 2012-13.

Industry revenue is only expected to improve slightly and profit margins will remain slim, due to continuous high levels of competition.

Supermarkets are anticipated to dominate the industry going forward, as independent stores decline rapidly and Coles and Woolworths continue to aggressively expand their direct and indirect liquor retailing activities. Licensed establishments such as pubs and restaurants will continue their rivalry, particularly with changes to legislation allowing more outlets to sell alcohol without meals.

Tight margins will be compounded by an ageing population and a crackdown on drink driving, underage drinking and bans on alcohol possession and consumption at certain venues, events and time of the year.

Increasing barriers to entry suggest now is not a good time to enter the liquor retail sector, but IBISWorld suggests key success factors for operators in the industry:

• Development of new products. Consistently providing new brands and product range to attract new and repeat customers.
• Ability to alter goods and services produced in favour of market conditions. Constantly reviewing the product range and suppliers; being more attuned to local clientele needs.
• Development of a symbiotic relationship with another industry. Forming business and strategic alliances with other businesses who may use liquor as a promotional tool (such as florists, wedding car hire firms, etc.)
• Well-developed internal processes. Keeping accurate records of purchases to limit stock holdings and control any stock shrinkage problems.
• Proximity to key markets. Location, in terms of being within or in the vicinity of a major shopping centre or strip shopping centre.
• Close monitoring of competition. Needing to establish and continually monitor the strengths and weaknesses of competitors in the immediate vicinity (such as hotel and supermarket bottle shops) – particularly of comparable products and prices.
• Ability to control stock on hand. Not overbuying and buying in only small quantities from the wholesaler to limit stock and handling costs.
• Economies of scope. Offering a comprehensive range of products, suitable for the customers’ needs and tastes.
• Having a good technical knowledge of the product. Providing staff with superior product knowledge to enhance customer service and the buying experience.
• Ensuring pricing policy is appropriate. Setting prices competitively with similar products sold by competitors in close vicinity; watching discounting closely.
• Use of production techniques that add value to base product(s). To some extent carrying some higher margin goods such as non-alcoholic drinks or chocolates to improve overall profitability.
• Production of goods currently favoured by the market. Understanding the local population and their specific preferences.
• Easy access for clients. Where possible, have a drive through area with easy access for vehicles.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au