Champagne for £7.50 – Tesco selling under cost – why?

31 03 2016

We often see silly deals on booze at key seasonal shopping periods. This has to take the biscuit though as, if you take advantage of the 25% off 6 bottles, the Tesco price of Pol Aime comes down to under £8 a bottle and less than some Prosecco!

Let’s work this backwards.

Assuming you buy 6 bottles then you’ll get 25% off and pay £7.46 per bottle. Take VAT off and excise duty (sparkling wine is £2.67) so Tesco is left with £3.55. There’ll be some costs for shipping, warehousing and distribution – let’s say a conservative 20p per bottle (assuming they shipped several container loads). £3.35 in euros is €4.25. According to Drinks Business (March 2016) “The average price of grapes across the region in 2015 has stabilized at €5.89 per kilo”. It takes 1.2kg of grapes to make a bottle ie. €7 worth of grapes. That’s before any of the costs of making champagne with its two fermentations, ageing it for the legal minimum of 18 months nor the cost of that extra strong bottle, the mushroom cork, wire, foil, label and carton.

Anyone can see that doesn’t add up and someone is losing money somewhere. Perhaps the producer has an excess which they’d like to offload at a knockdown price but even so I’m betting that Tesco are losing money at the £9.95 price let alone the 25% off price. So why do it?

The answer is market share. It’s a very competitive world and there seems to be a race to the bottom on price. Yes consumption is elastic to a degree ie. if you decrease the price you’ll encourage people to drink more, but basically if you want to grow your sales you have to steal them from someone else and as Easter week is like a mini Christmas the more sales you can steal away from your competitors the better. Plus if you’re a supermarket advertising a killer deal you’ll attract more customers (away from ever more popular Aldi & Lidl) and they’re bound to do some grocery shopping of higher margin goods while they’re there.

I have to come clean and say that the only reason I knew about the offer was because my husband heard about it and bought some! So, yes the strategy works. We’ll sit on these bottles for a year or so and I dare say they’ll be perfectly acceptable. There’s a risk though that ever lower prices decreases the perception of quality and whole champagne brand image.

Champagne needs to watch out. Prosecco has become popular not just because it’s a cheaper alternative to champagne but because many prefer the simpler, fruitier, unstuffy style. Premium Proseccos are becoming trendy. Cheap champagne at a similar price isn’t.

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