Grange rush a new vintage of price war

Costco's Penfolds Grange discounting is a seismic shift in the supermarket price battle – and is seeing Dan Murphy's and Vintage Cellars beaten at their own game.

Anyone who's ever tried to buy just one product in a Costco store will know it’s a futile exercise. The big box retailer uses its 30 years of experience and arsenal of variable products and low prices to snare even the most tunnel-visioned shoppers.

Now Costco has Coles and Woolworths in its sights, triggering a price war – not on the staples of milk or bread but on wine, and of the top quality variety – Penfolds Grange.

The well-known and collectable Grange went on sale at Costco today for $489.99, undercutting Coles, which is offering it for $499 at its 1st Choice liquor outlet. Both are well below the Woolworths-owned Dan Murphy's price of $554.60, which is likely to fall, and close to 20 per cent lower than the recommend retail price.

When the price wars were confined to Coles and Woolworths and on products deemed essentials it was easy for the retailers to argue that in the end, no matter what the farmers might say, consumers were the winners. And in an economic environment where the cost of living is a hot-button issue, only the bravest of politicians have been willing to weigh into the debate.

But when the product at the centre of a price war is a high-end one, it’s a different matter. And when the price wars start happening between big box retailers and retailing giants, as opposed to retailing giants and smaller retailers, it’s a sign a major shift is happening.

Big box retailing is only starting to take off in Australia, but analyst firm IbisWorld predicts there will be more than 300 retail superstores in Australia by 2015, in a market expected to be worth $24 billion annually.

While the average supermarket typically produces about $35 million in sales each year, IbisWorld predicts superstores like Costco will be making $80 million each within three years.

What does this mean for smaller retailers and the boutique wineries or other small businesses that supply them?

Alex Wilcox, who owns the Prince Wine Store chain in Melbourne, says that while he’ll be matching the price on offer by his giant competitors, the irony is the vintage is a good one and there’s really no need to discount it.

"The most disappointing thing is the wines are better than ever, and it makes it hard for anyone else to get it.”

But it’s a game businesses like Penfolds have been playing for a while as they choose volume over relationships with smaller retailers and restaurants.

"They obviously need the supermarkets to take their semi-trailer loads every week, so they get the lion’s share of the good stuff,” Wilcox says.

There’s clearly some schadenfreude happening as small retailers watch the supermarket players get trumped by Costco.

"Dan Murphy's and Vintage Cellars have been going down this path for a while, and now they’re getting beaten at their own game,” Wilcox says.

For Wilcox, the focus remains on offering premium service, wine tastings and wines that aren’t easily available elsewhere. And, he says, with the value of the Australian dollar where it is and the amount of wine available, consumers have never had it better.

The bigger question is what happens if supermarket-owned stores go more premium or decide to stop selling the mass volume product.

Wilcox says change, and government intervention, is ultimately inevitable. The Henry Tax Review called for a review of alcohol taxation, describing current arrangements as inconsistent, and there’s currently a push underway by health groups to see alcohol tax based on volume rather than price.

In the current climate that could see today’s Grange rush become less of an anomaly as better wine becomes cheaper and cheaper wine gets more expensive.