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Feature: Consumers Respond to Grocery Outlet Wines

At most supermarket chains, the heat is on and they must work harder to try to keep customers. Their wine departments feature more specials and more discount promotions. Still, the numbers are just not where they were one or two years ago.

Not all major chain stores are unhappy with the way the economy is going, though. In fact, business is so good at the 136 Grocery Outlet locations in six Western states that they plan to open sixty-four new stores over the next few years.

From meat to vegitables to bread to wine, the pricing is significantly lower than at most other popular grocery chains, and that’s drawn an ever-increasing number of customers who want or need products selling at consistently lower costs.

Enter a GO wine section and you’ll see major wine labels from France, Italy, Spain, and Australia, along with domestic labels, such as Clos du Bois, Blockheadia Chardonnay, Woodbridge, Robert Mondavi, and Toasted Head, with price points anywhere from $2.99, $3.99, $4.99, and a few in the very low double digits.

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How can Grocery Outlet sell these top names for such low prices? “We’re the inventory problem-solver, “says GO’s Director of Wine Doug Due. “There are three basic reasons we can get wines at these prices. A winery, or distributor, may have an excess of wine that didn’t sell and has to be moved out of the warehouse to make room for more wine arriving from the winery.”

“A package change may mean a winery has given a new look to its label, or made changes to the wine itself, so they need to sell off quickly the most recent packaging look,” says Due. A third reason is vintage changes, where a brand is releasing its latest vintage, such as an ’09, but still has ’07 or ’08 vintages available and needs to move the older “juice” in order to focus on the new one. Due adds, “We clean distributors all the time. A good example is a winery that may have sold 15,000 cases to a major chain last year, but only 10,000 this year because of the economy. They approach us, we work out a deal and take the other 5,000 cases off their hands.”

But it’s not all about price, says Due. “We are very critical when we taste wines before we buy them. We compare varietals against varietals. If a wine doesn’t show the way we think the particular varietal, or the appellation, should show, we don’t buy the wine. Not long ago, we rejected a cabernet sauvignon from the Dry Creek region because it didn’t taste right; it was more like a zin. We’re not here to sell just anything, we’re here to sell wines that people don’t expect to find. I call it the ‘wow factor.’”

With hundreds of wineries and distributors coming at him, you’d think he wouldn’t have time to sit back and pop open a beer on Saturday, but Due has locked in a team of 'brokers' who help pick up the slack. “I work with twenty-five brokers. They open doors I would never have time to,” says Due. “These brokers know our business model; we work with them and they work directly with the wineries. It saves me time I’d otherwise spend making calls.”

Due says he saw a major change coming in the economy years ago. “I kept hearing that the business cycle was dead over-and-over during ’07 and ’08. When the industry started drumming to that beat, I knew a down-market was coming, and it sure did. But for us, it meant the numbers would be going up, and they are.”

Judging by the most recent numbers, the chain’s revenues are up substantially. Due says that they had double digit growth in wine sales for 2008 and higher gains in 2009, making the department one of the biggest growth areas for the chain.

The downward shift in the economy has brought customers who normally shop at other stores to the Grocery Outlet, and they’re searching for deals. Due says he and his team “see more professionals on their cell phones asking someone on the other end to check the scores for specific wines posted in trades like The Wine Spectator or Wine Advocate. If the scores are high, they may buy an entire case or more.”

Grocery Outlet’s emphasis on lower prices also means consumers can afford to test a varietal. Due says if his customers aren’t familiar with an Argentine torrontes or Malbec, or a Spanish Garnacha, at low prices they can afford to try them. “This type of customer is catching on,” says Due. “Many times they come back with a friend to introduce them to the store.”

Due’s biggest buy? Thirty-thousand cases of one sku, and 80,000 cases — from one producer. “Yes, that’s a lot of wine,” says Due. But he has a sales program that can really move inventory. “If I put a pallet (56 cases) of wine in each of my 136 stores, that’s 7,500 cases total. Knowing that, let’s say I put two palates of a product in each store, build an end-cap of the two pallets, that’s a 15,000 case hit. With our system I can get the inventory in and out in two weeks.”

Due says that, in addition to finding more lower-priced wines, we should expect to see more microbrew beer coming into the picture, and more individual stores selling lower-priced spirits. Now, fourteen stores in California and Nevada sell spirits. Due pointed out a Russian Vodka that’s distilled six times and filtered twice; it sells at GO for $9.99.
While their marketing plan may be somewhat limited, Due says clearly the job is getting done. Typically, Grocery Outlet uses print advertising delivered via shared mail, along with “some” TV and radio.

Crunch the low price points with the cost of advertising and operation, and you’d think Due wouldn’t be able to deliver much of a margin, but not so. “At the end of the year, we deliver surprisingly high profits, well into the double digit range,” says Due.

Scott and Laura Carpenter are with ESC Media Group and publish the Broad Market Report

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