Research has shown that a flexible approach to wine pricing can lead to an increase in sales. Here we look at an innovative new way of retailing a pub's wine range.
Wine suppliers are always advising publicans to treat wine like any other product, rather than allowing themselves to be put off by the mystique that sometimes surrounds the category. So it might seem a bit odd if pubs were then urged to treat wine differently when it comes to pricing.
However, recent research suggests that a slightly different approach can pay dividends in terms of increasing sales. The conventional method used by most pubs is to adopt a percentage approach to margins for wine, as with most other categories. If your margin is 70 per cent, then you add that amount to the wholesale price, before VAT where applicable, in order to set the selling price. So, if a bottle of lager costs you £1 to buy, the selling price will be :
£1 + 70 per cent = £1.70
plus VAT @ 17.5 per cent of £1.70 = 29.75p (rounded up to 30p)
Selling price = £1.70 + 30p = £2
Which is fine if the result of this formula is a scale of beer prices in your pub which range from, for example, £1.60 for a pint of standard draught bitter up to £2.40 for a premium packaged lager. That price range is likely to be broadly in line with most consumers' expectations.
Wine price range
With wine, however, the wider scale of wholesale prices creates a different picture. Starting with the basics, you might expect to pay around £3 at wholesale for a house white. That works out at a selling price to your customers of £6 a bottle. However, from there the leap on your wine list might be to £12 for a slightly better wine, £20 for a reasonable vintage and £30-plus for a bottle of champagne. While all these prices have been worked out using the same formula, the range of selling prices which results is far greater than the range generated by applying the percentage formula to lower priced products.
The issue is not, in most instances, that customers will not expect to pay a premium for wine in pubs, as they do with other drinks, but rather that the premium being charged will appear to be excessive, particularly to customers with a reasonable knowledge of off-trade prices.
The likely result is that, at best, customers will trade down to the cheaper bottles on the wine list or to other drinks categories. Some customers, however, will be left with a poor opinion of the value-for-money provided by your pub, and by the trade in general. Since wine drinkers tend in general to be more affluent, higher spending customers, there are long-term implications for the pub sector if this trade is being lost.
Cash margins
So what is the alternative? Recent research by Waverley Wines and Spirits, the wine arm of Scottish & Newcastle, suggests that there is a fairly simple alternative - replacing the percentage margin with a straight cash margin. Under this formula, regardless of the wholesale price paid for the wine, the same cash amount is added to come up with the selling price at the retail.
Trials of a carefully developed cash margin approach were carried out by Waverley in Scotland last year. In what Waverley's Ian Cumming describes as "a carefully controlled experiment", a range of venues in and around Glasgow were selected, and wine sales using prices set by the traditional percentage mark-up were monitored. Then, for a second six week period, prices in the same venues were changed to a standard cash margin. This had the effect of reducing prices on some higher priced wines, such as claret and Sancerre, by as much as £3 to £4 a bottle, with some prices falling below the £20 mark, seen as a psychological barrier for many customers.
The outlets involved saw, on average, a 57 per cent increase in wine sales and a 35 per cent increase in profits on wine, set against an average drop in the margin on a bottle from 60 per cent to 55 per cent, and an average drop in the retail price per bottle of about £1."You have to remember that you bank pound notes, you don't bank margins. The increase in cash profits more than compensated for the reduced margins," said Mr Cumming.
Also significant was the fact that sales of "entry-level" wines - the lowest priced on the wine list - fell by 40 per cent as customers traded up to higher priced varieties.
Waverley would caution that it is not always possible to assume direct cause-and affect or guarantee results, since sales in particular outlets may be influenced by any number of factors.
Merchandising
However, Waverley has incorporated the cash margin approach into a wider merchandising programme it calls a "Wine MOT".
Mr Cumming said: "We've come up with the MOT as a way of helping our customers to identify ways in which they can get the most from their wine offering. After assessing the problems and identifying the solutions, we work with the customer to set targets and then monitor progress closely.
"Although the scheme is still in its infancy, we have already found that it can yield excellent results, particularly considering how little effort is often required of the customer. For example, simply re-pricing the existing range and implementing basic staff training can be enough to begin the process of improvement."
One licensee who changed his prices to a cash-margin basis said: "Moving to a cash margin has not only increased my wine volume but has also helped change the reputation of my pub in the area - profits have never been healthier."
Waverley's support comes in a series of stages:
- analysis of the existing wine offering and the way it is promoted
- proposals for changes and improvements, setting precise targets
- working with the customer to ensure that the agreed proposals are implemented.
- monitoring of the results over an agreed period
- analysis of the results and review the process.
Mr Cumming said: "We usually find that, even after a short period, wine sales have shot up, and so, accordingly, has cash profit from wine. There is no single reason why this happens, of course, but we do know that many of our customers could make more money from wine by moving to a cash margin rather than a percentage margin basis.
"This offers the customer better value for money, which in turn results in more repeat business and enhanced word of mouth publicity. Best of all, it promotes trial and experimentation, attracting customers who would not normally drink wine and encourages entry-level wine drinkers to try something new of a higher quality. So everybody benefits: the customer gets a better deal and a more enjoyable wine drinking experience, the licensee improves his reputation and makes more money, and Waverley sells more wine of a higher quality."
Mix and match pricing
Of course, there is nothing to stop individual pubs mixing and matching the approach to suit their business. You might, for example, continue to apply a percentage margin to your lower priced wines, which for most pubs will make up the bulk of sales. Where a percentage mark-up would push the selling price over a figure which you judge to be too high for most of your customers, you could apply a single cash mark-up or even a sliding scale, such as £5 on a standard bottle of wine and £10 on champagne.
You are the best judge of the prices your customers are prepared to pay. The important thing is that a flexible approach to wine pricing is likely to increase wine sales, and just as importantly ensure that consumers believe pubs, and pub wine, offer value for money.