Wine industry faces “unpalatable truths”
The Sydney (Australia) Morning Herald reported on New Year’s Day on the “unpalatable truths” confronting the Australian wine industry, in this article entitled Wine industry grapples for new hook that has important implications for California’s own wine industry.
The “boom time party” is now over, the Australian Wine and Brandy Commission (AWBC) declares, and wineries must solve an “ever growing plethora of challenges…if they are to survive.”
Wow. We’re not just talking profits and losses, we’re talking survival.
The challenges, according to the AWBC, include:
- production without profit
- diminishing bargaining power in the face of attritional retail dynamics caused by the global financial crisis
A large part of Australia’s problem is over-production. A drop in exports coupled with lower domestic sales have led to a surplus of wine that can only be addressed by moving “towards a quality vision that celebrates sustainable value above unprofitable volume growth,” the AWBC says. That may mandate “the removal of several vineyards…if the industry is to remain on a sustainable footing.” Wine consumers are going to be “unforgivingly Darwinian” in 2009 and beyond, “showing little or no interest in any attribute other than volume at low cost.”
Sounds like the Australian wine industry’s neck is on the chopping block, but what does it imply for California?
Well, the party’s over here, too. You have to believe that, of the 4,000 wine brands in the state (my guesstimate), many are holding on for dear lives, watching their costs rise, their savings fall, and their profit margins (if any) shrivel. They, too, will face “diminishing bargaining power” with everyone they do business with. Distributors won’t take them on except at terms favorable to the middleman and not the producer. Consumers in America are just as unfailingly Darwinian as they are in Australia; $10 is the new $20. There’s already an over-supply of overly-expensive wines that simply aren’t worth the price being asked, and there’s absolutely no reason to think that people will continue to buy them, if in fact anyone was buying them in the first place. And all this is happening before the inevitable rises in alcohol taxes being considered in California, New York and most likely in other states.
At the AWBC’s webpage, looking forward to (or, more properly, dreading) 2009, they say “forecasts are difficult, even potentially misleading, and the emphasis of this year’s assessment is on the issues rather than providing definitive forecasts.” Meaning they don’t have a clue as to what’s happening, except that whatever it is, it’s not good.
Just as Australia needs a new wine hook — and France, and Italy, and everyplace else — so too California’s wine industry is going to have to reinvent itself. Here’s what I would tell wineries:
- Lower your prices to the minimum you can, unless you really, really think you can get away with not doing so. But make sure you’re not fooling yourself through hubris.
- Save your cash.
- Boost quality. A lot of wineries have been selling a lot of bad wine for a long time, but the handwriting’s on the wall. You won’t be able to get away with it much longer.
- Figure out alternatives to the three-tiered system and how to market and sell direct, and not just through the old tasting room, but through the Internet. You may not understand cyberspace, but your kids or grandkids do.
- Be bold. Do something different. The future doesn’t need more Cabernet Sauvignon.
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Another thing I’d suggest to wineries is to focus on retaining curent customers and rewarding customer loyalty. I am surprised that so few wineries offer any kind of special pricing or other incentives (barrel tastings, etc) to the people in their wine clubs. Keeping your current customers is the lowest cost and highest value option.
To our good fellow Wine Growers (as opposed to the Grape Farmers) in Australia we wish many years of normal rainfall and the end to socialistic government tariffs and subsidies. Parity in an open market is a strong and medicinal incentive.
Tim, do most wineries know who their end customers are? Unless they have big mailing lists, how would they know?
Good advice, all. Spirits are lurking in the shadows here, meaning that distributors may shift focus to Bourbon and its brothers and leave wine and its thousands of labels on the sidelines. At a big liquor warehouse in Ky yesterday, one of the clerks said they had their best holiday sales ever. I do see a lot of wine in those carts (though not a lot trolling the Australia aisle) but, being Ky, plenty of spirits and beer, too.
Re: “You may not understand cyberspace, but your kids or grandkids do.”
It’s not just your kids and grandkids, it’s your tasting room employees, hospitality/catering crew, shelf stalkers, and lab assistants who have smart phones and social media accounts.
I think that part of the reason why wineries are avoiding embracing the Internet to its fullest is because the people at the top are comfortable where they’re at. Maybe the recession will shake things up.
I think Tim makes an excellent point. Whether it is your direct customers or your on-premise/off-premise customers, develop a program to reward their loyalty. That will be cheaper than acquiring new customers.
Then look for new channels (online or other) that have low acquisition costs — discounts for new customers or online venues are good options because they require less cash investment upfront.
It is also important to build relationships with each of your customers – be it a mailing list customer or the on-premise server that sells your wines. I get birthday cards from my dentist but never from wineries (and they often know my birth date because of shipping laws). This is hard for wineries because the three tier system isn’t forthcoming with information about purchases.
I am not sure that I think wineries are fearful of the Internet. Like most small businesses, it is hard to do everything.
Can’t agree more with what Tim/Jared etc have said above – continue to cultivate one-on-one relationships with your customers at ALL levels . . . It is just as important to ensure that your largest customer is satisfied as it is to ensure that your smallest is – you never want to assume that your smallest will remain so . . .
Cheers!
I’m all for Jared and Horowitz advice – develop direct relations with wine lovers and harness social networks to do that!
In the last few months I’ve run a MySpace community of wine-lovers. Not just wine-lovers but ones who are the most relevant and most influential on MySpace as for wine.
Once you get to the most relevant wine lovers it’s really amazing their level of dialog, excitement and cooperation.
To read some dialogs with my wine-loving top-influencers click my name ‘Udi Barone Says’ link above.
Feel free to contact me at: udi@beesandpollen.com
I think it is important to resist any knee jerk reaction to the current situation. Certainly focusing on your direct sales makes the most sense. I think most of Phelps Insignia, for example is sold direct. People who buy that wine are probably still employed, still drinking wine, and can be convinced to remain customers. Just keep the wine great, the price where it is, offer them something else for loyalty.
But,it’s a bit late to think about developing or expanding direct to consumer marketing. Tasting room traffic is in the doldrums, wine club cancellations scary. Preempt those cancellations with a letter promising big surprises and money savings for loyal wine clubbers who are current members for 2009. Make loyalty worthwhile.
Wholesalers are another story. They are never loyal except to their bottom line and private yacht…. and they are overreacting right now, particularly in the high end.
Lowering prices to a minimum is not a road to future success and should be a last resort only if absolutely forced into it by your wholesalers and competitors. You will have a devil of a time regaining your price point and your volume may fall anyway getting you in deeper. Keep your margin where it is and make cuts elsewhere like production/bottling volume, grape purchases, new barrels, capacity expansion capital expenditures, vineyard replanting, and silly wine making toys.
(verified Morton statistic – Industry wide, if the purchase of new barrels were halved, wine quality would be doubled.)
No one needs a secretary. And you can clean your own damn office, but the world needs more Cabernet Sauvignon, just not wines that are 15% alcohol, laden with oak and $100 a bottle.
I think the best thing for wineries to do (as we see happening in Australia) is to reduce supply. Simple Econ 101 stuff, but amazing how businesses can miss this while in the midst of a retraction. Consumers will continue to buy wine at all price points(yes even $200+ Napa Cabs or $2,000 Bordeauxs), but some of the higher price points will see some softness in sales.
Selling the same quantities at a loss just doen’t make sense. Scale back and try to ride it out if you can. And as others have mentioned, take care of your best customers.
“Figure out alternatives to the three-tiered system and how to market and sell direct” –
One word – Amen.
Paul Mabray
Chief Strategy Officer
VinTank.com
I am a retailer of wine. As such, I saw the same thing from my distributors that I do every year. Late in December most will drop off new price sheets for the new year. The price sheets reflect the price increases that become effective Jan. 1. This year was no exception. Not all brands will take a price increase, but many major brands did. Either they don’t get the current economic situation of my customers or they don’t care. I waited out purchasing to offset the increases. I suspect they will be selling off some inventory a discounted prices come February when they have to make room for new vintages.
I wouldn’t mind betting that all the furor in Australia is a storm in a tea cup, at least for those who do not produce “industrial” wines. What the article is talking about is a push by the larger producers to have the smaller producers reduce production.
“AUSTRALIA’S wine industry appears set for a major shakeup amid growing pressure from leading winemakers to slash production and cut the total number of wineries. The push for industry reform involves calls for a 60 per cent cut to producer numbers and to trim actual wine production by 20 per cent within a decade. The reforms, outlined to last week’s Wine Industry Outlook Conference in Sydney, included a push to halve the number of wines sold in Australia. Under the plan, smaller vineyards and wineries would be replaced with bigger operations.” http://www.news.com.au/heraldsun/story/0,21985,24660286-664,00.html
One has to ask why can’t the larger producers cut production or become more efficient? Why must the smaller producers be the ones to suffer? More to the point is the fact that many small producers have been forced to reduce production due to bad weather conditions including drought in 2007 and a heat wave at the end of the 2008 season. It is true that there are producers and distributors with back logs of wine from previous vintages that need to be sold, hence the increasing number of deals on Aussie wines in the US and elsewhere. It is also true that small producers are looking past the US market to China in particular. Russia is also a possibility. A greater number of markets will handle the production problems. All Australia has to do is compete in the new markets as it has done elsewhere. The problem the US has is can it compete?
Mike, thanks for your thoughtful reply. You asked, “why can’t the larger producers cut production or become more efficient? Why must the smaller producers be the ones to suffer?” I think that’s the nature of capitalism. Big corporations endure slowdowns; small family companies don’t. But sometimes they do! Here in the U.S. Gallo did quite well in the 30s and 40s by being innovative and nimble. The problem with smaller producers, in my humble opinion, is that all too often they don’t know how to compete. They’re lousy businessmen. It’s sad, but that’s the way it is. As regards exports, I’m not as optimistic as you are. China is going down the tubes, near as I can tell. All they know how to do is produce, and America is their biggest buyer. If America stops buying, China stops selling, and their economy tanks. I don’t know all that much about the Russian market, but it’s hard for me to believe that if the American appetite for Australian wines dries up, Russia will make up the difference.
Steve your comments are quite valid for what we may face in the next year or two – a falling tide will strand all boats. But I’m not sure it’s the real future of wine. Having just done a tour of Aussie wine regions injcluding Orange, Canberra, Rutherglen, McLaren Vale, Barossa and Clare in Oct/Nov of last year I can say that the winemakers I talked with were not crying in their beer, or wine – even after what is now several years of drought but also record production! True I only sampled a small number of winemakers (between 30-40) but most were not distraught about their future prospects. Some were making their first ventures into the US market (maybe not the best move but it’s a new market for them and thus new sales), one had dropped the US market and was selling into China and very pleased with it, another sells into Europe and was happy to be out of both the US and UK. One who was concerned was a producer in McLaren Vale who has a back log of wine labeled for the US market that is not selling. They may change distributors or relabel the wine for another market. A number were looking to expand their sales in Australia! None were selling wines at a discount. I don’t think many of these folks are making the $10 million cutoff that the article mentions. But they do produce for that very small section of the wine consumer who pays above $10-20/bottle. I firmly believe that most of these producers will survive, they may struggle over the next few years and some may fail if they don’t see that the future is not the status quo, but the market they supply is affluent and is more likely to survive the current woes than those who buy the Two Buck Chucks of the world.
Personally I see the current wine market just like the stock market – its a time to spend some money to not only get some deals but to also get those wines that previously were in short supply because the market in Aussie wines has been overpriced here in the US; there are a number Australia wines that sell at a premium here in the US and I hope to see them fall back. That might be bad for the US distributors and thay may take it out on future purchases from Australia but the US is not the only wine market and to sacrifce your distribution by being afraid of a downturn that may not last more than a year or two seems very shortsighted.
The real problem for Australia was the one grower we talked with who sells most of his grapes to one of the big producers; this is where the oversupply is. He and others he knows are faced with drastic cuts in the prices being offered for their grapes. His solution is a proposal to form a co-operative so that the growers have more power. But that was tried in Australia decades ago and didn’t work then and its unlikely to work now.
Wow. After everything I’ve heard, read and experienced these last 3 months, all I can say is, We’re in for a bumpy ride.
You are right we are in for a bumpy ride, but wine pricing or markets isn’t where the big pot holes exist. Just like the sub-prime mess, wineries all over California found easy credit particularly for real estate in regions where home and vineyard prices had an unblemished thirty year record of price escalation. Just gossip, but according to a fellow I know who has one of the largest accounting firms devoted mostly to wineries, he estimates 25% percent of newer, luxury market, North Coast valley wineries, have unsupportable debt burden. All want to refinance from their 6 to 7 percent fixed to better rates, but there is no one willing to loan the money.
If you borrowed $50,000 to buy that acre of grapes, you will have maybe $1,500 grapes. If you borrowed $200,000 then you are looking at $6k fruit.
This is a great conversation. As a wine lover and customer in the US, I see some comments here that give me some ideas. I am from the building industry where “big boxes” rule retail (no pun intended for “box wine”), and I see parallels.
Yes, wine and power tools are different products, but getting to the end user is not. What is similar is two and three step distribution, a wide variety of choices and prices and a large customer base.
What is not similar is the fact that alcohol is a “controlled substance” and in my humble opinion adds cost but is only a small restriction to your distribution model. Power tools have mostly gone to China to be manufactured. The power of the wine industry is that it can still call any proper growing environment it’s home and at this point doesn’t have much on the ground in China…..today.
I will have to admit that depending upon the customer’s location, they can find many choices in the market. I live in Southern Ohio and have exactly 7 locations to be able to buy wine within 3 miles of my house including one vineyard. I have no such parallel with power tools. As a matter of fact, I can’t even buy milk (another controlled substance) in as many places.
So what am I getting to? It’s just that for my money I have more choices than I can possibly handle in one lifetime for just the Merlot’s let alone the Zins, Cabs, Pinots, etc. The market is way too saturated with “branded” products. Which is best? Which is actually powdered or liquid concentrate with grain alcohol added? When the bottle says Merlot or whatever, will it taste like it? How will I know it’s good before I buy? Yellowtail tried to take the mystery out of the buying process by making it “safe” to buy their brand. It worked for a while, but I’m not so sure now.
I think the industry needs some contraction/consolidation and will get it. I’ve seen statements that the wine industry will double in the next ten years from major producers. Volume-wise that may be true, but I’m guessing that there will be new distribution models for the wine industry to make that happen. A thing called product rationalization will happen within each producer’s lineup.
I happen to like touring vineyards and sampling the choices available. I’ve bought direct and through distribution. I honestly can’t say I’m drawn to the large commercial wineries, because there is something about the organic (sorry!), personal nature of a small vineyard and talking with the owner who just poured their hard work into your glass. But the big guy’s operating efficiency can’t be disputed.
I believe the small folks will become even more captive to the large commercial operations to do what they like to do or they will get put out of business by them.
There are actually people who believe that wine is a luxury, which I believe is why the last 5-10 years have been good to it. There has been more disposable income till now. The industry needs to move towards a positioning of a necessity to a rich life even though the customer is not rich. This is a good time to plan for the next growth period.
First, Morton Leslie, please get out of my head! There’s some scary reason why I agree with you all the time! That rarely happens.
Second, perhaps Australia is finally seeing some negative repercussions from subsidizing their exports.
Third, when did comments become a place to pimp your own business? It’s transparent and cheesy, please go away with your subversive ads.
Finally, if you’re a small winery and just figuring out that focusing on the customer is a good thing, you’re late to the party. Everything is about the customer unless you’re the owner of some cool design, technology, or patent and last time I checked, wine is still just wine. Competitive advantage in sales and marketing augmented by good quality/value ratio in your wines (without cutting to the bone in price) will prove to be a winning strategy for the next 18 to 24 months at least.
@ Keith:
As a small winery, we’ve sucked up price increases every year from every supplier we use. I can’t find a single line item in my budget that decreased because of a reduction in price from a vendor. Please tell me how to not pass that along in the form of a price increase? I’ll save you one solution we have already implemented: change inputs.
We are using poly-lam capsules instead of tin. They look identical, they feel different. They don’t affect the wine quality, so it was a no-brainer.
We changed bottle molds on our most ubiquitous product, costs dropped almost $1 a case.
We dropped on level in cork quality on our $20 wine. The cost savings was about $.05 per cork and the risk of corked bottles may have increased some. Our supplier assured us that was not a factor, only time and feedback will tell.
We refused to use oak barrel alternatives. But as I peruse the latest K & L catalogue, I see wines I know for a fact that use alternative oak and they were among the top selling Cabs for 2008. I might re-think going 100% oak barrels in our lower end wines.
I’m not taking a shot at you, but I want you to know we’re getting squeezed and not just looking to upgrade our hot tub at your expense.
Auctions…