Introduction
Welcome to the fifth and final article in the private label series for Wine2030, a forward-looking wine research network at the University of Adelaide. I have asked questions throughout this series and started to answer some of them – it is up to the reader to take a considered view based on facts and observation and I invite discussion.

Before launching into the discussion around private labels and particularly with respect to wine in Australia, here are some selected private label wine statistics from around the world to whet your appetite:

–        US-based company Costco is the largest retailer of fine wine in the world.

–        Californian private label wine Charles Shaw has sold more than 300 million bottles across the US since 2002.

–        In Australia, Coles and Woolworths control 45 percent of the retail liquor market.

–        In the UK, depending on who you ask, anywhere from one third to one half of the volume of wine sold is own label. In Italy it is over 60 percent. In Australia it is 10 percent and rising.

Private labels in the wine industry – restating the issue
This is the fifth article in a series focusing on the rise of private labels across the world, where private labels are defined as retailer brands, also known as home brands, own brands, buyer’s own brands (BOBs), own labels, store brands, and probably more. I became intrigued by this topic after reading articles and seeing a range of television news items in Australia. Some reported excitement about the arrival of some of the world’s big players in Australia – such as the imminent arrival and spread of companies such as Aldi, Zara, Gap and Costco. Other items painted a bleak and frightening picture, particularly relating to the wine industry, some predicting the demise of the traditional wineries to be replaced by own label wines, or the supermarkets squeezing winery profits and pushing branded products off their shelves, some even referring to the supermarkets as ‘predators’. I wanted to know what the facts were behind this hype.

What I have discovered has surprised me. In Australia there is a great deal of emotion and national pride tied up in the wine industry. This is a good thing to an extent, as anyone who takes pride in their work will produce the best results. However, it must not be combined with a blinkered, myopic or anti-competitive approach to business practice as this will eat away at the industry and weaken one of this country’s current areas of strength.

Whether consumers or the wine industry like it or not, private labels are a fact of business life and are here to stay. The best approach is to understand why they are growing, from a producer and consumer point of view, and how industry can incorporate this marketing phenomenon into their own strategies. I can put it no better than Lincoln and Thomassen (2008):

“Private label is a brand owner’s wake-up call. Wake up to business reality. Wake up to the shopper. Wake up to what your company can potentially do. Wake up to real proactivity. Wake up to an opportunity to put your company back in touch with the rest of the world.” (p.4)

Private labels in the wine industry – examples overseas
Before coming back to specific developments in Australia there are some case studies I consider need to be outlined. The approaches and experiences of these companies are insightful for the discussion of what is happening in Australia.

(1) Two Buck Chuck
Arguably the most high profile and successful of private label wines in the world is the Charles Shaw label. In the US, the California-based Bronco Wine Company buys bulk wine, bottles it under the Charles Shaw label and sells it throughout the US exclusively through Trader Joe’s stores. As stated in Article 3, Trader Joe’s is a US-wide chain selling predominantly private labels and owned by the Albrecht brothers who founded the German-based multinational Aldi, which also concentrates on private labels.

Over 300 million bottles of Charles Shaw wine have been sold since 2002, according to the UK’s BBC series Oz And James’s Big Wine Adventure documenting wine writer Oz Clarke and Top Gear presenter James May travelling around California trying wines. These wines are nicknamed Two Buck Chuck as they sell for as little as $1.99 per bottle in California, and in other states where it is sold it can be a little more at $2.99 to $3.39 (Chuck is a nickname for Charles).

In this programme, both Oz and James were pleasantly surprised by the taste and quality of the wine. In the examples they showed, the marketing was simple, with the wines labelled as Californian merlot, shiraz, cabernet sauvignon, Beaujolais nouveau, chardonnay or sauvignon blanc. On accounts I have read, the wines are not exceptional but also not terrible. On 13 August, 2009, the ABC News channel reported that the chardonnay won top prize at a tasting competition in California: ‘Two Buck Chuck’ Wine Aims for Both Quality and Quantity.

They interviewed the owner Fred Franzia (nephew of wine legend Ernest Gallo), who said “I’m a money maker”. His philosophy is: “We choose to sell good quality wines at $2 a bottle because we think it’s a fair price. We think the other people are charging too much.”

This made me think – he is clearly providing a product that people want to buy. If he can sell it at this price, who is to judge that? Do winemakers or marketers have to be seen as altruistic or master craftsmen, or are they just businessmen like any other?

(2) Costco’s Kirkland Signature
A significant player in fine wines in the US is Costco, the largest retailer of fine wine in the world. It is the third largest retailer in the US and the ninth largest in the world. Founded in Kirkland, Washington state, Costco is the largest membership warehouse club chain in the US (with 55 million members as of September 2009).

Costco also has a massive online presence. Customers are not required to become members to make a purchase online – a 5 percent surcharge is charged to non-members.  As of April 4, 2010, Costco had 567 locations across 40 US states, Puerto Rico, UK, Canada, Mexico, Taiwan, South Korea, Japan and one in Melbourne, Australia, opened in August 2009.

Costco concentrates on selling at low prices and often in bulk. As with Aldi, product presentation at stores is often on the pallets that the products arrive on. It sells a high proportion of private label products, typically under the Kirkland Signature label. The number of wines sold is limited to around 100 and the prices kept down with minimal mark-up. Well known brands of wine are sold (such as McLaren Vale’s d’Arenberg and Alsace’s Hugel) as are the range of Kirkland Signature wines, reviewed on a Costco wine blog. The private label wine is from the US, France, New Zealand, Italy and so on, and clearly labelled as such, with the Kirkland Signature name also clearly displayed.

Costco and the Bronco Wine Company are massive retailers of private label wine based in the US. In the UK, over 80 percent of off-trade wine sales are through supermarkets and around half of off-trade wine sales are private label. Tesco has been pioneering in this, and the other supermarket chains such as Sainsbury, Waitrose, Asda and Marks and Spencer, have all followed this strategy. Marks and Spencer is in fact almost exclusively private label, selling under the St Michael brand, although their private label wine is presented in such a way as to let consumers know who the producers are. These companies aim to build customer loyalty (discussed in Article 4), partly through private labels, and over time have expanded their range and magnitude of products in their private label ranges, including wine.

What about Australia?
The Australian market has similarities and notable differences from what is happening in Europe and the US. Key points I have noted in my research on the Australian market are as follows:

1. Private labels are still seen as inferior to branded products but this is lessening
2. Acceptance of private labels in many product ranges is rising
3. It is happening anyway – private label sales are common and growing across Australia, plus US and European based companies who employ private label strategies are coming to Australia
4. Major Australian supermarket chains account for a substantial share of national sales of groceries and liquor
5. The private label trend in wine is underway in Australia
6. Many in the Australian wine industry and some consumers see this trend as a negative development
7. Australian companies do not let their customers know that private label wines are their products – unlike overseas

Points 1 to 4
The first four points relate more generally to private labels and are covered in the first four articles in this series and this article will look more closely at the last three points. To recap, with regard to the image of private labels, according to a recent article in the Australia and New Zealand publication Global Food and Wine Magazine, Australia is at a different stage to Europe:

“In Australia’s supermarkets ‘home brand’ products are viewed often as inferior versions of branded produce. But that’s not the case in Europe. There, products in this range – known as ‘private label’ – are often high quality and account for approximately 25 percent of grocery sales.”

However, the Australian market is following trends of increased acceptance. As stated in Article 3, according to researchers IbisWorld, private labels accounted for 23 percent of grocery sales in 2010, and the share is rising. Not only are Australian companies mimicking many of the strategies of successful companies in the US and Europe through the expansion of private label ranges across range of price brackets and across more product categories, but these US and European based multinationals are setting up in Australia so this phenomenon is coming to Australia, like it or not.

In an article in Foodweek entitled ‘Private label ratio soars’, August 2010, IbisWorld says: “private labels are very popular with Australia’s low-income families, accounting for more than 30 percent of their grocery bill. Slowly but surely, Coles, Woolworths and other retailers are converting young single people (5 percent), couples without children (5 percent) and high-income families (15 percent) to private labels, predominantly through in-store promotional campaigns.”

The infrastructure and competitive framework is in place in Australia, with the trio of Woolworths, Coles and Metcash (owner of the IGA chain) sharing 71 percent of the packaged liquor market.

Point 5 The private label trend in wine is underway in Australia
Anyone can see for themselves that the private label trend in wine is established and growing in Australia. Just go into any of the liquor outlets of Woolworths, Coles or IGA and have a look at the bottles.[1] It is not initially clear from the labels that the wine is private label until you know what you are looking for.

Examples I found in Woolworths were the Crittenden and Co. Range, Baily & Baily, Cow Bombie, Amiri, Tangaroa and many more in the wine range. There are also Dry Dock and Platinum Blonde beers, Mishka vodka and Napoleon 1875 brandy. In Coles, examples of private label wines include Robinsons Marlborough Sauvignon Blanc and Pensilva McLaren Vale Shiraz. Beers include Hammer ‘N’ Tongs, Maxx Blonde, Tasman Bitter and Tasman Gold beers.

The impact is being felt on the branded products. For example, according to independent researcher IbisWorld, in the low-carb beer market, “Since Coles and Woolworths launched their private labels, [Foster’s] Pure Blonde sales had fallen 15 percent”.

IbisWorld predicts that: “Liquor represents the next big growth opportunity for private labels in Australia. IbisWorld forecasts private labels will account for more than 10 percent of the Australian wine market by 2013 and sales of private label beers in this country will double over the next three years.”

Point 6 How the Australian wine industry and consumers regard this trend
Some in the wine industry have stated their opposition to this trend. For example, as cited in Article 1, Stephen Strachan of the Winemakers Federation of Australia (WFA), said (Winemakers worry about proliferation of supermarket home brands, ABC, 9 August 2010) “there’s a risk that ‘home brand’ wine is going to take over the supermarket shelves” and “the low prices of home brands are bad news for grape growers and winemakers”. Furthermore, a story in Australian Wine Business was entitled ‘Predators seizing the day?’ referring to Coles and Woolworths chains in Australia.

I have mentioned my research to a number of people in the wine industry and have found a mixed range of opinions, ranging from indifference to positivity and negativity.

Indifference of course came from those who thought they could ignore the trends and carry on business as always and not be affected. This is clearly not the best approach from a business point of view – this trend is well underway and will continue.

Negativity was dominated by fear of damage to the Australian winemaking industry. The reactions on many occasions were vitriolic. Main points were:

• Private labels will cause wine prices to be cut, thereby damaging the rest of the wine industry.
• Supermarkets reduce shelf space for branded products in favour of their own.
• It was assumed that the quality of private label wines would be relatively poor.
• People in the industry were largely unaware that this was an established phenomenon across Europe and the US – all the more reason to provide this range of articles to facilitate an informed debate.

Positivity came from those who could see opportunities in these trends. The main views in this vein were:

• Private label wines have to source wine from somewhere – they will therefore be providing a market for grapegrowers and winemakers. In a period of serious glut in the wine market this will save many businesses and benefit communities.
• Increased competition is a good thing.
• Those wineries with a quality product, a sound business model and effective marketing will prosper whatever the competitive environment.
• The private label phenomenon overseas is already benefitting some Australian wineries as they send their wine to be sold as private label wine in the US and Europe. This is an ongoing opportunity for the Australian winemaking industry.

With regard to consumers, there was a lot of confusion and even less awareness of this phenomenon overseas and within Australia. The overall response was reticence as they shied away from the private label wines once they knew which they were. With the supermarkets regularly portrayed in the Australian media as oligopolistic, wielding strong market powers at the expense of both consumers and suppliers, I found that the general view was that this additional market share was not welcomed.

On discovering that some of what they thought were winery brands were in fact private label wines, there was anger – predominantly at feeling as if they had been duped. So despite the growing acceptance of private labels in Australia for grocery and other consumer items, wine seems at first sight that it may be an exception to this trend. However, is it just that new trends are usually greeted with scepticism and even a little fear?

Woolworths CEO Michael Luscombe has stated in a Sydney Morning Herald article entitled ‘Now it’s Woolworths the wine’ that consumers will warm to private labels in wine, as has happened overseas. The trend will continue he says.

“It’s no different to grocery or anything else that we are in,” said Mr Luscombe. “Consumer electronics, general merchandising, this is a trend that is happening worldwide. In fact, it’s very much behind the world trend in Australia, so there is a lot more of it to come I’m afraid.”

Point 7 Australian companies do not let their customers know that private label wines are their products – unlike overseas
As I have learned more about the trends overseas and the reasoning and economics behind the proliferation of private labels, it has raised a question regarding the approach taken by the Australian supermarkets with regards to wine (and other liquor). As discussed in Article 4, one of the key drivers in selling private labels is to build consumer loyalty. Once a consumer trusts a brand they are more likely to buy it next time they shop. In the US and Europe this rationale is clear with wine as well as groceries. The UK-based Tesco, for example, has applied this strategy successfully to wine, building its range of private labels in terms of the numbers of wines with Tesco branding, and also entering into the full quality (and price) range. Customers try a cheaper private label wine, find they like it and are then confident enough to try the premium ranges, feeling that they can trust the Tesco brand.

In Australia, Coles, Woolworths and IGA have followed this strategy for groceries and continue to expand their ranges in terms of types of products covered and the quality of the products, offering more and more complex portfolios along the lines of Tesco. However, for wine they have chosen a different strategy.

The private labels wines in these stores are given labels which are registered and owned by the stores but the name of the store does not appear anywhere on the label. Therefore, the customer is not aware that the product is a private label product. For example, Tangaroa is one of Woolworths’ private labels. It simply says Tangaroa, Marlborough, New Zealand on the label and on the back says ‘New Zealand wine bottled in Australia’. The same is true of the other private label wines I looked at.

Time to reconsider this issue with a fresh and informed mind
The reality is that Australia is seeing a growing share of its wine market being taken up by private labels, following the trend already well underway overseas. Coles and Woolworths are the biggest drivers of this trend in Australia. The key difference in their approach is the decision to keep their branding off the bottles. This defies the logic of using private labels to build and retain customer loyalty.

I have asked a lot of questions throughout this series and am hoping to provoke discussion. Bringing a few of these points again to the fore here:

• Is there anything wrong with retailers following a private label strategy for wine?
• Why are Australian retailers not making it clear which of the wines they sell are private labels?
• Should a customer expect to have this information?
• Should the Australian wine industry see this development as a threat or opportunity? Who will benefit and who will lose?
• Do private labels decrease choice by limiting competition or increase choice by increasing competition?
• Do consumers ultimately benefit from greater choice and reduced prices?
• Is quality necessarily going to fall? (This has not been the experience in Europe and the US.)
• Is Australia a sufficiently different market to expect different outcomes than are being seen overseas?

Why is wine seen as different?
When a supermarket offers us cheaper bread, pasta or milk of comparable quality to a branded product are we upset or perturbed by this because of our loyalty to the branded products? We are pleased to see competition and everyone benefits except the least competitive of the branded product producers who may not be able to compete. This is just Darwinian survival of the fittest. Do we want more expensive brands? No. Then why is wine different? Because we are passionate about wine in this country is probably the main answer. Is there room in the market for both private label and branded wine?

A final word…
My research has thrown up a range of misconceptions and fears about the rise of the private label, and has also enlightened me about its sheer success and reach. This is a huge and complex topic of which I am scratching the surface. A great many PhD theses could arise from this research if anyone wanted to get their teeth into it. I hope I am igniting people’s interest in the topic, dispelling some myths, and inviting thought and discussion.

Other articles in this series:

Article 1: Private labels – what’s the problem? Is there a problem? What about wine?

Article 2: Private labels – what are they?

Article 3: The evolution of selected private label companies and complex portfolios

Article 4: The key to success – building and retaining customer loyalty

References:

Keith Lincoln and Lars Thomassen, “Private label: turning the retail brand threat into your biggest opportunity”, Kogan Page, 2008.