|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.