Market Report 2008

25 January, 2008

Graham Holter introduces this year's Market Report and weighs up some of the challenges that lie ahead in 2008

Suicidal pricing in the multiple grocers, a looming recession, specialist chains haemorrhaging cash ... it doesn't add up to the most auspicious start to a new year. But things could be worse. We could be in the on-trade.

There's a lot of doom and gloom infecting the market at the moment, but there are some positives , too. The off-trade actually grew by 5 per cent in 2007, according to Nielsen figures, comfortably above inflation. Meanwhile, our pub trade cousins watched sales slip by 1 per cent, thanks to the smoking ban and cautious consumer spending.

It's likely to get worse for the on-trade this year, with

insiders predicting a 2 per cent sales decline in 2008. Investors are nervous

- pub stocks fell by 35 per cent in 2007. Ted Tuppen, chief executive of Enterprise Inns, told the Financial Times: "I wouldn't be surprised to see 5 per cent of pubs close over the next

few years."

The on-trade's loss is likely to continue to be the off-trade's gain, though don't expect all that lost custom to walk straight through the door. There's plenty of evidence that it won't: beer volumes in the off-trade only rose by 1 per cent in 2007, which hardly represents a stampede of disillusioned pub-goers.

There is also the underlying trend towards more moderate consumption. In previous years, the silver lining has

been that consumers want to drink "less, but better". The faltering housing market, the credit crunch

and the general consensus that the economy is running out of steam threatens that cosy logic. Health-conscious consumers may want less alcohol, but how many of them will be in the mood to trade up when food prices are rising at their fastest rate for years, utility bills are soaring and the mortgage is becoming more of a struggle?

There is

every sign that price fighting is going to feature

strongly

this year. Suppliers saw their margins dented over Christmas as the big four slugged it out, and Morrisons - which lacks the non-food enticements that its rivals use to stimulate footfall - seems determined to pursue some spectacular deals in the drinks aisles. This will draw Asda and Tesco into a fight they may not relish, and make life

tougher for specialist rivals.

While Bargain Booze made customary progress in 2007, Majestic was rattled a little by the atrocious summer weather and the economic slowdown. Both are

well equipped to deal with whatever 2008

throws at them, but Thresher, Oddbins and Wine Cellar must realise

that their friends are worried about them.

Oddbins/Nicolas could go on indefinitely losing millions of pounds a year - that is the privilege of a family-owned company. As a business model, however, this plan leaves a lot to be desired and Castel will be looking to take some decisive action to turn around the fortunes of its enfant terrible. But its options are limited: its market value, as a loss-making retailer in a market that grows tougher by the week, is very far away from the suspected £40 million paid by Castel in 2002 and a sell-off would be painful financially. At least the stores provide a handy route to market for its products, though this must be scant consolation for the Castel accountants.

Thresher, now under new ownership and with a new chief executive at the helm, seems to have experienced as many incarnations as Doctor Who

and it remains to be seen if the business has the energy

to reinvent itself

again or to press on with its "top, middle and bottom" strategy with Wine Rack, Threshers and The Local. Wine Rack could be a winning proposition if this strand of the business fine-tunes its range and recruits enough passionate managers - two factors which benefit the best independents.

Independents are such a diverse bunch that it's difficult and pointless to generalise about them. One of the few statements which applies to them all is that some of the biggest influences on their businesses are things over which they have no control . Weather, interest rates, duty increases and the pricing strategies of their

rivals are beyond their jurisdiction. It's hardly surprising to hear more and more independents talking about "giving up" trying to outwit the competition and match their prices.

What will the shape of the off-trade be 12 months from now? Retailers are braced for a storm

and it seems inevitable that many won't be in business in 2009. T he question is whether new businesses will have replaced them. Independents will

bear the brunt of the economic onslaught, but it is possible that one of the chains will disappear from the scene. It's by no means unavoidable, but it could happen.

The winners in 2008 will be the retailers who have taken the trouble to learn about and understand their customers. Those who rely on outdated certainties will probably find that this is a year in which little can be taken for granted.




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