As American consumers grow more knowledgeable and confident in their wine choices, they also seem to be getting more comfortable with wine packaged in non-traditional formats. Nowhere is this clearer than in sales of three-liter premium boxed wine, the fastest-growing wine packaging format since 2005.
For a category that was virtually non-existent five years ago, premium three-liter boxes have the potential to carve a small but significant niche in the wine market, with some speculating that three-liter boxed wines could eventually account for 10 to 15 percent of the wine market.
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"In an The Nielsen Company study, it was estimated that 800,000 households purchase premium boxed wine. That's really not that many," said John Garaventa, brand manager of Bota Box at DFV Wines (formerly Delicato Family Vineyards). "It's still got a lot of room to grow. But the category's grown from nothing into a viable wine category. [Another study showed that] a lot of the sales are to repeat customers. To continue to grow the category, we need new customers and trials on the products. We need to continue the education. That's been a constant for the five years since the category started."
Until very recently, consumers became aware of the category largely through word-of-mouth or trial at a wine tasting event. Ryan Sproule, founder of Black Box wines, now a part of the Constellation Brands portfolio, echoed Garaventa's thoughts. "It is catching on, but we still have a ways to go because most consumers don't walk into a store looking for a three-liter box of wine," said Sproule. "We've got to increase our share of the wine market. Right now Black Box is in about 28 percent of the stores out there, so there's lots of room to grow. And we do that by getting in [new] stores and in tapping into consumers who don't know about us yet. We could easily quadruple our sales."
The Groundwork for Success
For the premium three-liter box to become successful, the wine environment had to have several things fall into place at once--and it seems that they have. Retailers, who were reticent to embrace the category upon its introduction, have noted its success and are increasingly promoting the segment. Secondly, wine consumption on a whole has increased, and there are more "core" consumers (those who drink wine at least once a week). The largest barrier, of course, was consumer trepidation about buying a box of wine. Ironically, it was the success of a 750ml bottle format--screw caps--that has paved the way for consumer acceptance of a three-liter premium wine box.
"From a consumer standpoint, the young consumers, the so-called Millennials, are embracing wine to a much greater extent than their predecessors. That has sparked a lot of healthy growth, because these consumers are open to experimentation and innovations in the business," said Jose Fernandez, president and CEO of Constellation Wines USA. "Whether it's new labels and packaging, premium bag-in-box or screw caps, there's a ground swell of innovation, more than there ever has been before in the industry."
According to Christian Miller, director of research at Wine Opinions, the groundwork for consumer acceptance was laid when the industry expanded the 1.5-liter bottle category to include higher-priced offerings. In the 1990s, he said, "even higher quality 1.5-liter bottles priced over $10 were relatively new and experimental. It would have been hard to convince the trade and perhaps the consumer to try a three-liter box." Wine Opinions surveys represent 18 million core wine consumers who dominate the market for wines priced above $15 and are responsible for a majority of the $8 to $15 segment as well. A survey of three-liter box consumers was conducted in April 2007, but results were not available at press time.
"I think the main factor [that changed the perception of three-liter boxes] is that several trends have broken up the traditional hierarchy of quality and image in low- to mid-priced wines," said Miller. "The newer generation of wine drinkers is more experimental, while many of the Boomer core wine drinkers are tiring of the 'same old' varietals and brands. The combination of Two Buck Chuck, the new offbeat and critter labels and a flood of negoçiant and import value wines gave customers the notion that experimentation was fun, tasty and safe. This has led to more open-mindedness about trying new wines and packages and, for casual situations, less worry about status and tradition."
According to Sproule, the popularity of new packaging formats represents a breaking down of the traditional barriers to wine consumption. "An interesting thing I've found is that the more educated consumers are about wine, the more comfortable they are with the package. It's those who don't drink a lot of wine who are freaked out by it," said Sproule.
"The whole wine industry should strive to lower that barrier. For far too long, wine has been put on a pedestal," continued Sproule. "The screw cap helped us because they are lowering that barrier. It goes hand in hand with the American public changing their perception of what wine is. Once they realize that wine is not a big deal, they don't need a fancy package--but they are willing to pay a premium price for the product. This exists elsewhere in the consumer market, too. People are spending $4 for a cup of coffee but are putting it in a paper cup."
Like the transition to drinking coffee in a paper cup, wine consumers are looking for easier ways to get into wine. "As U.S. consumers become daily wine drinkers, the need for convenience has become more and more important," said Laurie Jones, spokesperson for The Wine Group (which counts Fish Eye and Corbett Canyon among its three-liter boxed wine brands). "Consumer acceptance to innovative wine packages, including twist tops, 187ml single-serve bottles and three-liter premium wine casks is being driven by the need to find a better way to enjoy a glass of wine a day."
The Three-Liter Box Consumer
In yet another move that indicates a positive future for the category is the recent advertising campaign for The Wine Group's Fish Eye brand. "Fish Eye is investing over $4.5 million dollars to grow the three-liter category via a national television advertising campaign that premiered during Oscar week," said Jones. "The 30-second spots, targeting influential 25- to 40-year-old wine drinkers, reinforce the growing popularity of both Fish Eye wines and premium cask packaging."
"It's good that they have done almost a category ad," said Jo Andrews, brand manager of Hardys, part of the Constellation portfolio. "It's not honing in on the brand. It's speaking to the benefits and convenience. It's amazing what they've put behind it. They must see a lot of potential around the category, so that's good."
"I am very happy if anybody's spending dollars in the category because it benefits us for sure," said Sproule. "We aren't at the point where anybody would get cannibalized by someone else. A lot of marketing is just hype, but in this case there are real, pragmatic reasons for doing this--and people have a sense for that now. When I explain the benefits, you can see the light bulb go on. It's satisfying to enlighten people."
Initially, the belief was that the introduction of the premium three-liter box would cannibalize sales of the lower-end five-liter box. Research from both Wine Opinions and The Nielsen Company has shown that is not necessarily the case. While the five-liter box category has declined in volume in recent months (down 3 percent in the 52 weeks ending in February 2007), dollar sales are holding steady (up 2 percent over the same time period).
"What is interesting about the new wave of box wines is that they are bringing in a somewhat different clientele from the traditional box wines," said Miller. "Research in the past showed that the traditional five-liter box wine consumers were a small, but high-volume segment of the market, mostly older consumers of jug wines. The new box wine consumers include Baby Boomers who spend more money on wine. My guess would be that these new box wines represent further erosion of traditional brands in 750ml and 1.5-liter bottles, both in a packaging sense and to some extent a brand sense, although some brands appear to be bridging both worlds."
According to Jones, "Frequent wine consumers are the bulk of the business. From third-party consumer research, we found that 98 percent of the consumers that purchase three-liter casks also purchase 750ml wines," she said. Jones did not discuss how much crossover there is between five-liter and three-liter box consumers.
Sproule suspects that the higher cost of many of the three-liter boxes limits crossover from five-liter consumers. "We are cross-selling with people who are drinking premium bottled wines. We aren't going after the massive five-liter market--we just don't think those people are interested in our brand," said Sproule. "I think we're really dialed into the sweet spot for cross-selling with premium wine buyers. I think Corbett Canyon does much better at up-selling five-liter boxed wine customers."
Trend Toward Higher Priced Three-Liter Boxes
As the The Nielsen Company data has demonstrated, over the last several years, consumers are buying more wine at higher prices than ever before (see "Overall Wine Sales" below). This also holds true with three-liter box sales, but on a much larger scale. While the average price of all table wine sold in the The Nielsen Company-tracked market rose 8 percent between May 2004 and February 2007 (currently settling at $8.59), the average price of three-liter boxes has risen 38 percent (to $13.55).
Although the under-$12 category is the largest by volume (accounting for 1 percent of the market), it is the over-$16 category (responsible for 0.7 percent of the market) that is showing the most growth. By volume, the lowest price category rose 7 percent between February 2006 and February 2007 and 4 percent between 2005 and 2007. By contrast sales volume of the highest-priced category rose 74 percent in the last year and 157 percent in the last two years.
There is a similar story if you are looking only at dollar volume generated by each segment. Sales of the lowest priced boxes grew 9 percent between February 2006 and February 2007 and 18 percent since February 2005. By contrast, sales of the highest priced category have grown 72 percent in the last year and 160 percent in the last two years. Sales of the highest-priced tier have been so strong that it is now, at a 0.6 percent share, the largest segment of the three-liter box market; the under-$12 category accounts for 0.4 percent.
The miniscule mid-tier category, which represents just 0.1 percent of the case volume and less than that in dollar sales, is also growing. By case volume, it has risen 19 percent in the last year and 77 percent in the last two years. By dollar sales, the category is up 16 percent in the last year and 71 percent in the last two years.
"The sweet spot seems to be in that $15 to $19.99 range," said Garaventa. "That's where everyone has congregated. Some of the new brands came in at $20, but they are usually discounted or their price is dropping."
Garaventa feels, though, that there is limit to what consumers are willing to pay right now. "The ceiling's around $20. No one has really proved otherwise," he said. "Who knows how long that will last as people become more accepting of the category? You are getting four bottles of wine, but $20 is a lot of money for an initial outlay."
Andrews feels that there may eventually be a market for higher priced three-liter boxed wines, but it is still too early to introduce them now. "As long as we are delivering on the quality, people will be willing to pay the price," she said. "Above $20, though, you really need to give them a good reason to buy. I think there is a psychological barrier at that price. You really have to have appellation-specific varietals; you have to be giving people a reason to trade up. You need to have a really good selling position."
The biggest barrier to growth at price points above $20--at least for the time being--may be the very reason growth was limited at the category's introduction. "It's wine in a box. It's not a prestige product," said Sproule. "It's an every day commodity that appeals to people for the pragmatic reasons, not the sex appeal. There are others who have come out with really expensive boxes at around $35 or $40. Everyone can do the math, but psychologically that's a lot of money to pull out of your pocket. The math is really easy right around $20, but once you get around $28 it seems like a lot."
At this point in the development of the three-liter premium wine box category, the focus is on growing the overall segment. As the segment gains traction amongst consumers, more retailers have begun offering more selections and new brands are being introduced. Competition is welcomed at this tier because greater selections and promotions will bring even more attention.
Overall Wine Sales Up 6 Percent in February
As the new year hit its stride, wine sales continued to rise in the The Nielsen Company-tracked supermarket channel--though generally by smaller margins than during the holiday sales boom. In the 13 weeks ending February 10, 2007, overall wine sales rose by 6 percent, and case volume sales again gained 3 percent. These numbers have been steady over the last three months.
Year-on-year, sales have risen 7 percent in the 52 weeks ending February 10, while case volume has grown again by 3 percent. Dollar sales are continuing to outpace case sales, currently by more than double, meaning that consumers are still buying more wine at higher prices than before. This is a trend that has sustained itself for well over two years, though has slowed down from a three-to-one margin in recent months.
As always, the "big three" varietals still dominate the retail arena. Chardonnay sales rose 3 percent in the 13 weeks ending February 10. By case volume, Chardonnay was up 2 percent in the February data.
Perhaps spurred by research detailing the positive health benefits of drinking red wine, those sales continue to surge. Cabernet Sauvignon increased sales by 12 percent in the 13 weeks ending in mid-February. By case volume, Cabernet Sauvignon gained 13 percent in the 13 weeks ending February 10, 2007 over the same period in 2006.
Merlot sales are also continuing to rise, which is welcome news after months of speculation about the fall in popularity of the varietal. Merlot sales rose by 4 percent in the 13 weeks ending February 10, 2007 (identical to January). In terms of case volume, the varietal grew 5 percent in the February data, as it had in January.
Domestic wine sales gained 6 percent in the 13 weeks ending February 10, 2007 over the same period in 2006, while imports rose 5 percent in the same time period (both down about 1 percent from January). In terms of case volume, domestic wines grew 2 percent, while imports rose by 3 percent, both again down by 1 percent from last month's figures. wbm
Mary-Colleen Tinney
Mary-Colleen Tinney is the associate editor for Wine Business Monthly.
