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DTC sales help wineries rebound, study suggests

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“U.S. wineries [are] leveraging social media and multiple direct sales channels to rebound from recession — winery managers forecast continued double-digit growth in 2011,” a new study from Vinquest suggests. The VinQuest™ U.S. Consumer Direct Wine Sales Report is produced annually by VinterActive LLC.

Direct to consumer (DTC) long has been the Holy Grail for wineries, particularly smaller ones that find it difficult to get into the distribution chain. DTC holds other allures, as well: the winery makes 100 cents on the dollar (or close to it), instead of having to sell wholesale.

The challenges confronting DTC sales, however, have been well documented. It’s awfully difficult moving quantities of case goods a bottle at a time. It requires infrastructure and expertise that many wineries simply don’t possess. And there’s still the meddlesome issue of non-reciprocity in various U.S. states.

So it’s good news, as VinQuest reports, “that tasting room, wine club, internet, and event sales grew 12% to a record $3.4 billion in 2010 as wineries adopted new marketing strategies to emerge from the grip of recession.”

However, there are caveats. While $3.4 billion sounds like a lot, you have to compare it to the total of U.S. wine sales in retail value. That’s projected to be just north of $40 billion this year, according to Whole World Wines. So total direct sales still amounts to less than 10% of all sales, and while 62% of winery respondents told VinQuest that DTC sales is their fastest growing sales channel, it’s not the immediate game changer they might be hoping for. At least 13 states do not yet allow direct shipping from out-of-state wineries, (in apparent defiance of the U.S. Supreme Court’s May, 2005 decision), and of course there’s now HR 1161, a resurrected form of last year’s HR 5034, a bill currently making the rounds in Congress that could potentially do an end-run around the Supreme Court’s ruling.

My own feeling, in traveling around California and meeting up with lots of small winery owners, is that they’re challenged enough as it is by the day in, day out routine of producing wine, with all that entails, and don’t have the time or energy to put into adequate oversight of tasting rooms, wine clubs, managing online sales and otherwise succeeding at the whole DTC thing. Many proprietors simply don’t know where to start, and there are surprisingly few resources available to them.

So while the VinQuest report is encouraging, I’m viewing it in context. Distribution remains, and is likely to remain, the chokehold on wine sales in America. Until someone figures out how small wineries can get into the system, there are no magic bullets to ease their plight.

  1. Sherman says:

    Small wineries need to find distributors that specialize in representing them. Artisanal, low-production wines with a unique story will get lost in the giant “book” of the national and (some) regional distributors.

    As an independent sales rep for two smaller distributors,I work a smaller market (southern Oregon) that caters to small to medium size wineries. It’s still the same game, in that you move case quantities “a bottle at a time,” and you either pay a wage for someone at the winery to do it, or you pay a percentage to the distributor to work a marketplace on your behalf.

    Otherwise, as Steve has noted, it’s probably not going to get done — the wine maker is busy enough making wine, and once he gets past the “hobbyist” stage, starts looking to expand his sales.

    So far, the key seems to be finding the *right* distributor to represent the wine maker, and that can be an exasperating experience. It’s all too common to find wineries that have changed distributors multiple times in the search for the right fit. Think of it as “wine dating.”

    Having talked with, visited and worked with numerous small-production wine makers in the last few years, the great majority of them don’t have the time or expertise to expand their sales beyond the first level. So the choice is either hire someone (competent, we hope) to do the job DTC from the winery, or pay a percentage to a distributor (also competent, we hope ;). Either way, it will be a learning experience — and those don’t come cheap, and take a fair amount of time.

  2. I don’t have any special knowledge here, but just looking at the numbers from the source you cite, I think you might underestimate how valuable direct sales are and can be for wineries. Total wine sales in the United States were around $37 billion in 2010, but around $11 billion of that was imports. That trims the value of U.S. produced wine to around $26 billion. VinQuest’s $3.4 billion number is thus around 13 percent of U.S. winery sales, instead of “less than 10 percent.” But that’s still not giving it the credit it deserves: I don’t know the figures, but there’s no doubt a significant chunk of U.S. wines that aren’t ever sold direct and never will be – jug wines and other mass-produced products priced under, say, $5/750ml. Even if those wines comprise merely a third of the total $26 billion in sales, the direct sales component for the rest of the U.S. players – the wineries who make the wines you review and your readers drink, wineries that have tasting rooms and clubs – rises to around 20 percent.

  3. $3.4 billion in direct wine sales. Hmmmm.
    The report says it surveyed 3,400 wineries. Does that means they sent the survey to that many, but it would be surprising to think there were that many respondents. So there must be a lot of interpolation. Maybe VinQuest would disclose how many wineries actually did the survey?
    Using $25 per bottle (which is probably high) that translates to 11 million cases of wine! Take that 11m cases and divide it by the number of respondents (3,400) to find that each winery on average is selling 3,235 cases direct. Hmmmmm. Maybe FedEx and UPS or ShipCompliant could help get a reasonable range.
    Overall there is a sad lack of information within the wine industry, and so I applaud all efforts at gathering and sharing of data.

  4. James McCann says:

    Anyone else find the 3.4B number a bit hard to believe? 9.2% of all wines sales (in dollars) coming directly from a winery? Is the number that high because of Harlan, Screaming Eagle, Scarecrow, and all of the other allocated cult wines that sell direct?

  5. I agree with your conclusions. Some points to add:

    a) I don’t buy the $3.4B number. They’re selling the report, and I don’t have access to it.

    b) I’m not sure what you mean by “The winery makes 100 cents on the dollar…” This could use clarification. It’s no doubt better than the wholesale margin, but it’s not anywhere near 100%.

    Be sceptical of any claims in the DTC market as a whole precisely because nobody (including Vinteractive) services the whole market and there are no data clearing houses. They likely rely on subsets of markets and survey data. Survey data is sometimes helpful but it’s unreliable when you’re looking for actual numbers.

    This whole shift toward DTC is nothing short of the Internet effect from 1995. It’s just happening last in the wine business after coursing through just about every other sector you can think of. I appreciate you pointing out that the legal barriers brought to life by cynical distribution tier lobby money are unconstitutional (Granholm), futile (the Internet Genie is out of the bottle), and anti-competitive.

  6. As a retailer it’s good to know who your competitors are! Direct sales to the consumer is a slippery slope and an act of economic desperation. If their in your tasting room, fine, which by the way I’ve stopped facilitating.Why would I send my customer to winery just to have them hijacked?.Whatever happened to the partnership between the three tier system? It’s easy to see why retailers are jettisoning the brands that aggressively pursue direct sales. I can’t be expected to promote and support brands that undermine my success and the others in the retail world.

  7. Great conversation folks. It seems to me that a balanced channels approach makes the most sense, including distribution, retail and DTC. Having a strong DTC marketing program is not optional for small producers that must move product and build their brand, and as such I agree with Steve’s comments about DTC margins. Only a few cultish and well established wineries here in Oregon can survive selling FOB and wholesale only. That said, growing DTC revenue is a slow burn and requires advance planning and creativity, which many small wineries yet to do.

  8. …“that tasting room, wine club, internet, and event sales grew 12% to a record $3.4 billion in 2010 as wineries adopted new marketing strategies to emerge from the grip of recession.”

    These multiple sales systems are the term being discussed in Steve’s blog: these sales may or may not use (all of) the 3-tier system. Note to Steven (retailer): many of these sales are clubs who are–in essence–promotional retailers who use 3-tier facilitation of distribution/delivery.

    Our experience with direct sales is that we are not competing with the 3-tier system…we discount and promote our product in the tough 3-tier sector and we all–producers, wholesalers and retailers–work hard for competitive margins. The consumer usually gets better prices than they can get via direct purchase of a wine. We encourage our customers to uses local retailers when they are stocked with our wine! Most of our direct customers either cannot access our wine at retail or they order ‘special’ non-distributed small lot wines.

    To put this issue in perspective–a 2000 case winery or a 500 case product–and there are many–“distributed” into a few markets means that only a few retailers will stock the product for their customers. The issue that drives ‘dtc’ sales by producers through is simply a matter of asserting access to new customers. (highjacked customers lost by sending them to producers? I bet consumers would respect and appreciate the extra information and service of a good retailer who could make those recommendations… So, Steven, you want to secure your customer and manage him like a mushroom?)

    The truth is that the “gross margin” to the winery is substantially greater. But, you have to advertise or solicit the dtc buyer; you maintain communication with the dtc customer; you provide “free” benefits to club members; you pay part (or all) of the cost of packaging and shipping; you own or rent a tasting room and you employ servers, retailers and maintenance staff as well as order fulfillment employees; and,you have a new bookkeeping project to license and pay taxes in any state where you sell direct…blah, blah, blah…

    You hope to make some additional money by acting for the distributor and the retailer…most of all, you hope to make a friend, develop a loyal customer and provide some more fun to wine drinkers…who will support those local retailers more because they enjoy the pleasures of wine!

  9. I eould certainly take the number with a grain of salt, the industry is changing so fast that traditional definitions of a winery and DTC may not be that helpful. Where does the WSJ wine club fit into this picture, they have a winery license, where they surveyed? Are they part of the $3.4B?
    Also as a member of a company that wasn’t surveyed, that does significant DTC business, I’m not sure what that says about the statistical accuracy.
    Without doubt the best data set is held by Ship Compliant who have volume and revenue data for a huge number of orders shipped DTC. What they don’t aggregate is the value of TR transactions that are not shipped. I’m sure their data (or highlights) will be revealed by Jason at their conference next month in Napa.

  10. Just to add a (newish) small winery perspective.

    We decided back in 2007 for our @1000 case Sonoma County Pinot Noir Winery to forgo distribution all together, and place our bet on direct sales, starting primarily through a prime location (Tasting Room , on the Healdsburg Plaza Square)

    This allows us to build our sales base in a linear fashion (albeit from zero!) meet all of our customers in person, and of course retain 100% of the sale price.

    It also allows us to spend more on our product (as necessary), that the 50% of retail (FOB) that we would get in the three tiered system, we don’t have to worry about getting paid from an out of state stranger, licensing issues are minimized,channel management is simplified and we have a way each time to reconnected with our customers, since we’ve virtually met them all!

    It’s a slower pace for sure, but a steady one.

    Eric-

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