Pricing - The Never Ending Project
After reading the article posted by Tincknell & Tincknell (http://www.marketingwine.com/blog/index.php/2013/10/getting-wine-pricing-right/) on pricing in the US market, it strikes me that there are not too many articles on pricing in the Canadian market. Perhaps this is because pricing policies are guarded so tightly by a majority of suppliers... or possibly this is due to the incredibly complex issue that dealing with government monopolies in place in all but one province.
Below are some things to consider in setting a pricing policy for the Canadian market. This article is by no means comprehensive and indeed looking for comments and dialogue on the subject from interested parties.
1. Identify your goals regarding Canadian distribution
Whether you are a domestic or import supplier, knowing your ability to service and supply the various markets is where you need to start. What resources do you have to service a monopoly in terms of operations, staff and supply? Are you aware that you may be asked to hold inventory for 6 months to a year? Do you have any experience applying for tenders or someone available to do the necessary paperwork?
Also, portfolio management should be considered. For many domestic suppliers, a direct channel to market has the potential to expose your pricing structure (and your distributors margin) to the public; therefore the possibility of dividing your portfolio into products available at cellar door only and to the broader market may need to be considered. This can be difficult for smaller operations and therefore limit or define your strategy for a cross Canadian sales strategy.
For importing suppliers, pricing is a much narrower space to negotiate once all the various shipping and landing costs and margins are added to the FOB. Transparency is much less of an issue as taxes and duties often insulate an FOB, and only truly global brands with incredible recognition are often price searched. Because sales are so competitive with more products on the shelves, selection of a distributing partner influences your pricing plan. Their acumen in servicing a monopoly, existing business with the on-trade business, inter portfolio competition and ability to work with you on pricing, discounting and sales support will influence your decisions on pricing to be competitive.
2. Consider all the margins involved.
The best part of the article mentioned above is the easy explanation it provides in the many channels to market and the considerations necessary when building a FOB price and eventual SRP (suggested retail price). Albeit this was created with the US market in mind, it easily captures the supply chain and margins accumulated in the shelf price of wine in Canada as well.
(COS + margin) + (FOB laid-in & margin) + (Restaurant/Retail margin) =SRP
Supplier’s Price > Wholesale Price > Restaurant/Retail Price
(FOB to wholesale distributor) (WHSL to restaurant/retailer) (SRP to consumer)
" Each buyer in the three-tier sales channel is going to have differing operating costs and optimal profit margins, which is dictated by a dizzying number of factors such as the local market, distance from supplier, local taxes, rents, salaries, etc. Often a supplier will add yet another tier, such as a national sales agency or a regional wine broker, who needs to realize a profit out of the pricing of the wine. Complicating the process even further is that each tier typically demands some sort of price support through discounts, promotions, or free goods. These complexities absolutely must be factored in by the producer in projecting a SRP for a wine."
Is an FOB price set in stone? No. Should it be line priced across provinces? Maybe, but the result will be wildly differentiating SRPs across provinces (Have you ever tried to buy a bottle of wine in the Atlantic provinces?) An FOB price is typically a private business arrangement negotiated between a supplier and a partner, however, with more routes to market and the digital era, all margins are more transparent.
On the domestic side, direct to consumer (DTC) sales have raised concerns not only with the end consumer, but also partners in trade - specifically when the product is offered in both channels. Not every winery has the capacity to delineate a specific SKUs into different channels due to inventory issues and profitability. Cross -provincial shipping is VERY controversial however represents only a tiny fraction of the total wine being purchased within Canada. The domestic DTC business is, in my opinion, of little consequence to import business and their ability to be competitive. However, the DTC business does significantly effect the bottom line of many profitable medium to small sized domestic wineries and the employment that it represents.
For either domestic or imported products, line pricing a product (either in FOB or SRP) across markets will directly effect all margins taken and, once the math is done, some SKUs simply do not make sense to distribute in all markets based on their COGs. It is tricky to decide what road to take, on the one hand a line priced product with a universal SRP and one distribution partner transversing multiple provinces would likely eat into a suppliers share. Alternatively, a universal FOB would elevate the end SRP to the consumer. It is commonplace for Canadians to buy wines when traveling in other provinces to price shop on recognized products(avoiding excise/duty differences) although technically illegal. Many suppliers ask their distribution partners to share the cost (and the profit) of doing business accordingly to even out prices between provinces.
There are pricing issues that are exclusive to Import Suppliers. For example, what is the excise/custom taxes in the target market? Is it flat or fluctuating based on volume, alcohol or country of origin? What are your physical shipping times and processes, as they will add to the end SRP and ability to service a large customer? Where are your products most profitable and protected from possible new entrants or pricing fluctuations due to market supply or government intervention? All of these issues are important to plan and to prepare for by choosing the right staff and partners when opening or managing a market, particularly Canada which has 10 unique tiered distribution systems.
3. Begin as you mean to end.
Possibly the best advice given by my mother and anyone for that matter. If only we all had crystal balls to predict which price point would be growing in the new year, or which products might become favorites of the consumer or the mindset of the product consultant/marketing manager who allocates shelf and promotional space.
But wait! We do!! Like the folks down south Canada's major buyers and retailers have tracked statistics on sales in different channels, pricing trends and allocations. These statistics have yet to be packaged and sold to suppliers in Canada as in the US (i.e. Nielsen data), however Redbook data is available to purchase. Software exists to manipulate the Redbook data, however costly and also requiring man power. As for working with the buyer on sales support some LDBs publish their marketing plans and purchasing plans in advance of the next year and these can be added into your planning as relevant.
Without statistics, reading the mind of the various levels of the supply chain can be difficult and there are many who profuse to have experience. Any partner worth their salt would want to know whether you have a 5 year plan and objective for your brand and for each SKU you would like to introduce to Canada. It will pay off to know your competition within your segment and their supply issues (pricing, partners and capacity). What is relevant and how much of it is relevant?
The point is to PLAN past this year's sales projections on your own terms. It is to have a realistic number and growth plan for the products you identify as having the capacity for success in a Canadian market. Things to consider include: Profit margin, COGs, supply issues, ability to grow volume, competition from other channels, brand strength and quality. These are decisions best shared and discussed with your sales & marketing team to inform the projections/targets that you are providing. You will want to avoid selling out of a listed product or unpredictability in supply. And you will also need a shunt for product that might not ship or meet a tender's needs.
Planning ahead includes allowing for margins to promote and to market your product. It is tempting to offer a very competitive price during the tender process, but often ends in penalties and discounts when the shipment is too aggressive and product doesn't move as predicted. Discount should be applied only if absolutely necessary, as it is the start of a slippery downward slope difficult to regain position from. This is why the advice and support of a strong distribution partner is key as they will utilize sales support tactics (ie. instore tastings, shelf position, end of aisle displays, strong on trade promotions) to move your product and increase your chances of sell-through.
Your pricing will not remain static and is as titled 'the never ending project'. Expect fluctuating profit on your products; expect multiple negotiations on promotions. Expect to have someone continually monitoring and advising on your business in Canada. If you do not have a dedicated (export) sales position in your operation, who will have the final say and vision for your products in this market and will volume, profit or brand recognition define how you measure success?
Marketing as a function of sales should be part of your planning and definitely included in your budget. Promotional spend, product reviews, brand stretching (new products or new varietals) and POS materials are the TOOLS one can use to justify and protect pricing. A car requires servicing, oil and gas to keep it running smoothly and occasionally a tune up or repair to keep it roadworthy. So should you take care of your brand with a pricing plan that includes both sales and marketing issues working effectively with each other.
Please ask for my other articles /postings on pricing /market analysis by province.
Thanks in advance for your comments.
