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Saturday, 5 February 2011

Some facts about cheap supermarket beer prices

14p per unit

Listen: the idea of minimum pricing worries me a little.  I don't believe that there is a direct link between Britain's supposed binge drinking problem and the widespread availability of cheap booze.  And I don't lay sole blame for the plight of the pub at the door of supermarkets.  OK?

But I wanted to comment on the disquiet in the blogosphere about this whole question of whether supermarkets ever sell beer at below cost price, with some comments on this blog suggesting the entire idea is a myth, and others asking if it's really plausible that any retail business would sell something on which it makes a loss on a sustained basis.

I don't blame anyone for thinking this - in a logical world it sounds like an insane idea.  But supermarkets are not always logical - or rather, their logic is different from ours.

Below cost selling DOES happen in supermarkets.  I know this because I've had conversations about it with the brewers who sell their beer to supermarkets and with the supermarkets who buy it.  They wouldn't thank me for sharing this, so I'll keep it completely anonymous, but here are a few trade secrets.  Well I say that, a lot of it is common knowledge within marketing circles.

Beer is what's known in the trade as a loss leader.  It's a common concept.  Most beer bought in the UK off-trade is sold on price promotion.  When you have people spending £200 on a mixed basket of groceries, you can afford to lose a few quid on staple items because you make it back - and more - on the premium items they'll also be buying in your shop.

We do big supermarket shops in the car, stocking up on heavy items.  That means we keep an eye on the prices of bulky purchases.  Research consistently shows that people respond to newspaper ads for cheap beer, driving to one chain instead of the other because we can save a few quid on slabs of lager.  We assume that everything else will be pretty much the same price, and we may be right - but the cheaper beer supermarket is getting the whole of our spend that it wouldn't otherwise have, and therefore makes a profit overall.  When we stock up in bulk on beer - at Christmas, bank holidays and big sporting events - supermarkets have to cut deeper and deeper to compete with each other, and this is when it can go below cost price.

Ever wondered why beer is right at the back of the supermarket - about as far away from the door as you can get? As soon as you've walked through the sliding doors, the cheap beer has done its job.  You've got to walk past all the expensively packaged fresh salad, the healthy looking fruit and veg, the deli counter, the bakery with the smell of fresh bread being pumped into the store, to get the the cheap beer you came for.  That's why you end up putting a heavy 24-pack in the trolley on top of your bagged lettuce, fresh bread and eggs - doesn't make sense, does it?  Until you think about it from this perspective, that is.  I've heard one supermarket buyer say that if they could, they'd take beer off the shelf as soon as you walk in.  They don't like not making any money on it, but they see it as a necessity to drive footfall, so they make it work as hard as it possibly can to deliver profit. But it delivers this profit indirectly.

And what of the brewers? The people behind one big beer brand told me that on average, their profit margin is 1p per can.  It's a grim business.  That's the average profit - meaning that there's some volume they make more profit on, and some they make less on.  Meaning sometimes, they end up selling it at a loss.

They have to do this to keep the contract, which they need to maintain volume and market share. Once again, there's plenty of consumer research that shows mainstream lager drinkers view any big, established brand as being acceptable.  You may prefer Carling to Fosters, for example, but if they didn't stock Carling, or Fosters was a quid cheaper per slab, you'd be absolutely fine with Fosters instead.  The fact that most beer is put in the trolley by women - who don't often drink it themselves - further erodes loyalty to any one specific brand.  So supermarkets hold the threat of delisting over the heads of even the biggest, most popular brands.

Recently one chain delisted one very big brand and they eventually had to cave in and concede ground to the brewer.  This was significant, because most of the time the sheer volume market power of big supermarket chains means they can kick and bully all their suppliers - even the biggest - as much as they want.

Another popular ploy is for a supermarket chain to decide at the last minute to give a steep price cut on a brand, without getting the agreement of the brewer first, and then simply sending the brewer the bill for the money the supermarket lost by cutting the price!  I'm not saying the brewer always coughs up.  But sometimes they feel compelled to do so.

These are the tricks of the trade.  I'm not suggesting for one minute that all beer or most beer is sold by supermarkets at a loss.  But this is why some of it is.


Anonymous said...

My personal favourite is: a supermarket buyer blames the supplier for the fact that the supermarket has decided to sell the beer at a loss. When the supplier makes the obvious suggestion that they should put their price up and stop selling the beer at an irresposibly low price the answer is: WE CANNOT TALK ABOUT PRICE.

Or, when it comes to price review time, they're mysteriously they're in between buyers for your sector (or simply refuse to repond to phone calls or emails). Oddly this is rarely the case when they want to do a promotion.

Yours Sincerely,

Anon supermarket supplier

Barm said...

Supermarket buyers are thugs in suits.

Joanna Blythmann's book "Shopped" give detailed explanations of how supermarkets pressure and bully their suppliers.

The pub is subsidising the supermarket because of course the brewer tries to recoup the lost profits by jacking up the prices in the on-trade.

stephanos_lemon said...

This is the kind of article we need appearing in newspapers; so it gets to a wider audience. I think this is a timely article in view of the government's failure to bring out worthwhile legislation of banning the sale below price of VAT+duty.

I'm not fooled by Supermarket positioning tactics and if I'm going in to a store to buy beer I'll walk straight to where its kept.

I do think irresponsible supermarket pricing has an impact on pub sales because people now preload at home before going out, whereas previously people would go to one or more pubs en route to their final destination. Of course it is not the only factor but it is a factor nonetheless.

As for binge drinking, I believe it is a problem, but not on the massive scale portrayed in the media and pseudo-health lobby but on a much smaller scale, certainly not a "culture". Definition of binge drinking has a lot to do with it, and we've already seen that recommended units per week were just plucked out of the air. There are a lot more factors than just gender that affect capacity for drink before being affected.

Anonymous said...

Is the concept of a loss leader new there? In America it is very common. It could be on beer or any product in the supermarket. I find it interesting that a consumer would choose one lager over another based on price. Here buyers are very brand loyal. A Miller Lite drinker wouldn't buy Bud if it was half price. Even though both beers are yellow carbonated low alcohol water.

Curmudgeon said...

I still find it utterly unbelievable that supermarkets sell any substantial proportion of beer at a loss. A "loss leader" is just that - a small, tempting, taster that isn't significant in terms of the overall spend. If you're selling 3 slabs of Carling for £20 at a loss, when it accounts for maybe a third of the total bill, it's a major proportion of your turnover. And I often see groups of lads in the supermarket wheeling out trolleys containing slabs of beer and cider and not much else. Tesco may have made little or no profit on it, they may have screwed the supplier into the ground, but they're not routinely selling big pack beers at a loss against the invoice price.

Curmudgeon said...

Also worth mentioning that, on my last visit to Tesco, 4x440ml cans of Carling were selling at £4.14, which is 59p a unit. Standard prices have been substantially increased recently, and there must be plenty of default shoppers who are paying them.

David said...

Hmm, my local Sainsbury's super store (Castle Marina, Nottingham) stack their top deals right by the entrance. These are often adorned with notices explaining that purchases are restricted to so many items per customer. I suspect this is a deliberate ploy to suggest that the produce (often Carling) is being sold at a loss and that the customer is being offered an incredible deal. Loss leader or clever marketing?

Vas said...

I can't believe people refuse to accept there are loss leaders on a grand scale. It's not a secret, they teach it in marketing at University. Take a butcher, sausages are the loss leader because enough people pick up some steak or a roast to make it profitable overall. We justify those other purchases to ourselves because of the money we just saved on sausages. If you're thinking "well I never do that" guess what - you're not like most of the population, which we already knew because you hang out on beer blogs making comments :-)

Garrett Oliver said...

People don't generally understand that modern supermarkets are heavily studied, psychologically sophisticated selling machines. Here's a good example: in American supermarkets, fresh fruit and vegetables are almost invariably placed near the front door, and the shop will often be designed so that you must walk through this section first.

The reason is simple and ingenious - psychologists and marketers have figured out that if the shopper buys fruits and vegetables first, that gives him or her psychological "permission" to buy cheap snack foods, which is where the money is. "I'm going to have a salad, so I deserve some crisps!" The effect is subliminal, but very real. So the consumer goes and buys a big bag of crisps, spending two quid on something containing a few pennies worth of actual product.

As a craft brewer, I can say that one thing is becoming clear, at least in the U.S.; if you don't carry flavorful beers, your supermarket risks becoming an also-ran. As better beer increasingly becomes a staple, people stop shopping in supermarkets that don't have good selections.

A real eye-opener was when last year I had a talk at a beer dinner with someone who procures food for the U.S. military around the world. Increasingly, he said, the troops are asking for flavorful craft beer in military facilities. Enlisted men are arriving on base, seeing a bland selection, and saying "I don't drink this stuff - can you get us some real beer?" Given the demographics of the military, this would seem to represent a mind-bending shift in the future market for beer. Craft brewers need to be in supermarkets, but supermarkets need to understand that craft beer isn't packets of crisps. We're serious food producers. We need to act that way and be treated that way as well. Craft brewers who play low-price games will find that road scattered with bleached bones.


Garrett Oliver

Paul Bailey said...

David, my local Sainsbury's does the same with their beer deals, although I haven't seen any notices restricting the amount of "slabs" that people can buy.

I suspect the latter is to prevent independent off-licences and convenience stores stocking up at prices that are probably cheaper than the Cash & Carry, and then re-selling the items at a higher price.

FyneJamie said...

Another great article, but maybe it's not just the supermarkets and big brewers with questions to answer. I am quite suprised by some of the Brewers who are working with the same kind of kit we are, and using the same materials who are prepared to sell to Supermarkets at prices that would appear to me to be below their full costs.

It does seem a bit unreasonable to sell to supermarkets at a low price that only 'makes a contribution' to your overheads, while looking to make the on-trade carry more than their share of overheads and all of the profit.

We handmake a craft product, using the best materials we can find, in relatively small batches - why the obsession with Greene King IPA's price point?

Vas said...

Below cost all depends on what you count as cost. With all that stainless sitting in a building costs are piling up whether you are brewing or not. Runing your brewery 24/7 as long as you can shift the product makes every batch cheaper. For fixed costs (costs you pay wehther you are brewing or not) like rent, loan repayments on the brewery, council tax, insurance etc. every batch reduces the overall cost per batch. A few batches where you take a hit on the costs of grain, hops, energy to fire the kettle etc makes the brewery more cost efficient overall.

Antony Begley said...

It's much simpler than many of the comments suggest (I work in this sector). The supermarkets use beer as a loss leader just as you said - and it's effectively impossible to establish how much a supermarket paid a brewer for their beer. Very easy to hide / distort those numbers. They do so because cheap cases of beer pull people to the store and virtually nobody then simply buys the case of beer they came for and leaves. They all spend £50 on other shopping while they are there. Over the years the supermarkets have tried loss leading on everything from Easter eggs and confectionery to bread and milk. But nothing works like cheap beer. Nothing. And it's obvious why - you're not going to drive to Tesco 10 miles away for morwe chocolate than you can eat but you will do it for more beer than you can drink.
And even placement of said cheap deals in-store isn't so important - you often see stacks on the way in - because most supermarkets are structured such that you have to pass through at least 50% of the retail space before you can get to the the till to leave anyway.
And the brewers will tell you (off the record) that they hate the practice. But they will all then add "but if we don't don't do it, someone else will"...

Anonymous said...

People can eat cheaper at home than in restaurants but they go to restaurants because they meet thier needs. That cheap drinks from supermarkets 'consumed at home' stop people going to pubs is not supported by valid evidence. There are a host of other reasons why people don't like some pubs and they close or don't do well, such as: non-availability of good food, no smoking space, drink driving laws, location and uninteresting space. Purposeful change cannot come from myths about drinking of alcoholic products or, for that matter, any other activity...minimun price on alcohol will do nothing but encourage the temperance movement and make more money for supermarkets and brewers that will judiciously reduce alcohol content and contianer volume to meet minimum price and make more money off most drinkers who, in the main, drink brands not alcohol.GHP.