Is discounting costing premium lagers dear?

Premium lagers, as the name suggests, have traditionally been able to command a premium price, but it appears they are now becoming victims of their own success.

Recent industry sales figures suggest that aggressive price discounting of premium lagers such as Stella Artois and Kronenbourg 1664 in supermarkets is squeezing margins and potentially damaging long-term market development.

These price cuts may make the premium brands more attractive to customers and possibly build volume, but some say they could damage premium lager’s aspirational status.

Interbrew, which owns Stella and sells the brand as being “reassuringly expensive”, is so concerned about discounting that it referred to the problem in this year’s annual UK Market Report.

The report says: “[Multiple grocers] are using beer as a tool to drive footfall, but the knock-on effect is that it is devaluing the beer category and that is unsustainable. This devalues the on-trade as well.”

The annual report was published in May this year, and a trip to any local supermarket will show that the trend is a long way from being halted. Premium lagers, particularly Stella, are still being heavily discounted in most major supermarkets and off-licences.

Last week it emerged that grocery multiples had used heavy discounting on premium lagers during the Euro 2004 football tournament (MW last week).

AC Nielsen figures show that total beer volume was up 21 per cent during the championship with 80 per cent of this growth coming from multiple grocers. This increase in volume was mainly driven by heavy price discounting, with the deepest cuts coming from grocery multiples. They focused on slashing the price of premium lager by an average of 10.4 per cent, compared with an average discount of 7.1 per cent for standard lager.

One senior alcohol retail marketing director, who wishes to remain anonymous, believes that the discounting in multiple grocers is unstoppable, and will almost certainly create a long-term decline in brand equity for premium lagers: “It’s a vicious circle; the only people who benefit are the consumers.”

Apart from discounting backfiring, the only other thing that may stop price cuts is pressure on retailers from anti-drinking groups.

Price discounting has had no immediate effect on the perception of Stella’s brand, which is the UK’s number one beer brand in the take-home market. It had sales of £446m for 2003, up 15 per cent on the previous year. Interbrew admits that because of Stella’s “strong consumer appeal” it becomes the obvious brand of choice for retailers to discount.

Discounting on Stella and other best-selling premium lagers makes it harder for smaller premium lagers such as Heineken to compete in the off-trade sector.

Heineken UK marketing director Leslie Meredith says her company has no choice but to offer discounts in the off-trade sector: “We do discount, we have to or retailers would not give us the shelf space, but we can’t afford to do it in the way Stella does,” she says.

However, she says it is not clear if Interbrew is encouraging the supermarkets to discount its brand: “No one knows for sure who is driving these huge discounts on Stella,” adds Meredith. “Interbrew claims it is not doing it.”

Interbrew UK managing director, take-home sales Stuart MacFarlane says that discounting by retailers is devaluing the beer category and that it is unsustainable: “There needs to be a better balance between pricing, safeguarding the value of the category and protecting Stella’s brand equity.”

The fashion for premium drinks does not seem to be abating. Brands such as Grolsch, Kronenbourg 1664 and Stella are the fastest growers in the beer sector, as UK consumers have continued to shift away from standard lager to the stronger, continental-style brews. According to Datamonitor, the UK premium lager market was worth £6.5bn in 2002, and accounted for 44 per cent of all lager sold and 31 per cent of the entire £21bn beer sector.

But, despite the growth of premium lagers, the future of standard lager is not under threat, claim industry experts. “There will always be space for standard lager,” says consultant Stuart Pocock, who is a partner at Agency Assessments International. “Lager is a temperature-sensitive drink, and on a hot day people opt for a lower-alcohol lager that can refresh without getting them drunk.”

However, even Heineken, which had for years been the UK’s best-selling lager brand, was forced to reformulate with a higher alcohol strength last year.

One way of selling lager irrespective of its strength is by creating a premium image through advertising and marketing, an approach that has been successfully adopted by Carling and Foster’s.

Conventional marketing wisdom dictates that customers will not classify the cheaper brands as being “premium”. But so far there has been little evidence to show that discounting has been bad for the premium brands. In the long term, however, this could change.