It’s interesting, in the light of this new report on the status of direct-to-consumer wine shipments in the U.S., to project the trend into the future and imagine what the American distribution system might look like in 15 or 20 years.
The report’s most startling discovery is that DTC’s dollar value last year “was greater than the total value of U.S. wine exports.” Almost as noteworthy is the fact that “The direct shipping channel continues to grow at a faster rate than the overall wine market.” DTC is said to be more important to “small and medium sized wineries” than it is to large wine companies that dominate supermarket and big box sales, presumably because the Big Boys have a lock on a distribution system that’s been consolidating in their favor for decades.
Which brings me to the crystal ball part of this tale.
Let’s imagine that it’s 2030 and, all other things being equal (the U.S. still exists, there’s no internal civil unrest to discombobulate markets), consumers are still healthy and buying wine. At the present rate of expansion of DTC, one can easily see the day coming when small and mid-sized wineries sell pretty much everything they produce direct, either through tasting rooms or through some sort of postage.
The result would be a schizoid market: Giant companies (Constellation, The Wine Group, Diageo, etc.), with their scores of individual brands, still dominate the supermarket aisles where most Americans continue to shop. At the same time, more and more consumers are getting their wine direct from the winery.
The situation is roughly analogous to what happened to traditional bookstores with respect to Amazon.com and other online sources of books. The trad bookstores found themselves confronted with a huge challenge: how to stay relevant. It was much easier for busy shoppers to buy something online and wait a few days to get their hands on it, than it was for them to actually get into their cars and drive to a mall or downtown, find parking, wait in line at the register, etc.
As similar-sounding as the situations are, though, there are important differences. Consumers don’t have to go to bookstores, but they do still have to go to the supermarket to buy their groceries, so as long as they’re there, it’s no hassle at all to swing by the wine aisle. This is good news for the big wine companies, who should continue to enjoy robust sales for decades to come.
Still, there are lessons for everyone. The big wine companies are going to have to “act small.” This means creating new brands that seem eco-friendly and appeal to individual niches in the market: young people, urbans, ethnic and racial groupings, housewives, singles, older retirees, liberals, conservatives, hipsters, etc. Although these brands may be mass-produced in the tens, if not hundreds, of thousands of cases, the consumers don’t know that. All they can see is a bottle they can relate to, and that seems to relate to them. To a great extent, the big wine companies are already doing this. They’re going to have to keep doing it, and do it better, if they want long-term dominance.
The small and medium-sized wineries have this lesson: They have to “think big.” They have to put on their businessman’s hat and come up with real marketing plans. After all, direct-to-consumer doesn’t happen all by itself, like Athena springing fully-born from Zeus’s brow. DTC has to be planned, created, executed and followed through; and once you have a loyal customer base, you have to keep it and make sure the competition doesn’t poach it away.
This is where communicating with the customer comes in. If a small winery has a tasting room on, say, Highway 49, in Gold Country, and is selling 90% of their wines “through the screen door,” they’re very lucky. But most wineries aren’t in that position. They may sell 30% in the tasting room, but the rest has to be cultivated, through clubs and the like. This is where social media comes in. Consumers like to feel connected to the producers of goods and services they buy, especially when the product is something as mental as wine. (“Mental”? Yes. There’s nothing emotional about buying a screwdriver. But there is something emotional about buying clothes, a car, wine. Think about it.) I’ve long said that wineries can’t put all their eggs in the social media basket, but they should put at least one or two and, depending how it goes, maybe even three or four.
The Holy Grail of wineries, especially small wineries, is direct-to-consumer shipping, where the winery sends product to the end user, without having to go through a middleman.
Usually that middleman is the distributor, and as we all know, the distribution system has been getting tighter and tighter, as companies consolidate and the majors dominate their regions. Because the major distributors are interested mainly in selling to large retailers, like Costco, Wal-Mart and big supermarket chains, they tend to take on large production wine companies, such as Gallo, Constellation, The Wine Group, Bronco and others. This has resulted in good deals for the average American consumer. Indeed, it’s safe to say that this is the best market the consumer has ever known. There’s an ocean of wine available that’s clean and well made and quaffable, and prices are being kept down by the Recession.
It’s a win-win situation for everyone, except the small producers. These mom and pop businesses, which account for the majority of winery bonds, find it difficult to get into the distribution chain. They’re just too small to matter to the big distributors. This isn’t a case of who’s wrong and who’s right; it’s simply a fact. Unable to get distribution, the small producers are left to their own devices, which means, in effect, that they have to figure out how to sell their wine all by themselves.
Traditionally, the best way for a small family winery to sell direct to the consumer was through the tasting room. It’s still a good way, but with limitations: if you’re not on a well-traveled route, it can be hard. This is why so many of the wineries in the Sierra Foothills traditionally have sold huge quantities of wine through the tasting room: all those tourists driving up and down Highway 49, visiting gold country, or on their way to a Civil War re-enactment in Murphys, or traveling through to Tahoe and Reno. Some Foothills wineries sell up to 80% of their wine “through the screen door,” as the saying goes.
Club memberships have always been an important way for wineries to sell direct. Older wineries, like Mayacamas, depended heavily on selling to their members. But again, this is of limited value, since nowadays there are so many wineries, and they can’t all succeed with their wine clubs.
Enter direct to consumer selling through the Internet. I first started hearing about it in the 1990s. As the 2000s dawned it turned out not to be the magic bullet everybody was hoping for. Too many hassles: you needed extra staff, and fulfillment houses, and there were all those pesky state laws to comply with. But the smaller wineries plodded on, tackling issues when they could, making incremental progress.
The effort has now paid off. Our good friends at Wines & Vines Magazine are reporting today that “the winery direct shipping market…is in full recovery, with 11.5% overall gains in both volume and sales over the 12 months ending April 2011.” During that period, volume exceeded 2.75 million cases worth more than $1.2 billion. The magazine’s editor (and my former editor from back in the day), Jim Gordon, said, “With the overall retail market pegged at $30 billion, direct-to-consumer shipments of wine now represent 4% of the American retail wine market.”
The devil, however, is in the details. According to ShipCompliant, whose data were used in the study:
• Napa Valley did even better than the average, with DTC volume up 19%.
• Sonoma County was up a less impressive 5%.
• However, “mid-sized wineries dominate direct shipping sector while boutique wineries falter.” More than half of all DTC shipments were from 5,000-50,000 case wineries. The most alarming sentence in the entire report is this: “the ‘boutique’ wineries increased their average bottle price by a whopping 52% in the past 12 months yet saw a 40% decrease in volume going through the direct shipping channel”!!!
How it has been possible for boutique wineries (defined in the report as producing under 1,000 cases annually) to raise their prices 52% in this economic environment is beyond me, although it’s not surprising that they saw an immediate reduction in DTC sales as a result. I know who these boutique wineries are. I cannot believe they’re immune to the Recession’s effects. I know that restaurants they formerly depended on are telling them they can’t sustain that pricing. I know that proprietors know this, and are wondering by how much they ought to lower the prices, a tricky business because a lot of snobs determine the quality of a wine by its price. There’s no hint in the report, then, as to why this “whopping” 52% rise in pricing is happening, if indeed it is. If anybody out there has a theory, let me know.
“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.
Most wineries these days are doing their best to increase direct sales to consumers. With the recession, they’re seeing a much more sluggish market than usual. Stores and restaurants aren’t selling as much, there are fewer visitors to the tasting room, and such as there are do not want to spend any more than they have to.
What’s a vintner to do?
We know they’re turning to the Internet and to social media to build brands, make new friends and keep old ones, and attract more members to their wine clubs. And in those clubs, they’re offering special things that are not available through the usual channels. That makes the members feel like they’re getting in on something — sort of like an initial public offering, only it’s wine, not a stock.
Winemakers also are getting increasingly ingenious when it comes to P.R. Well, that’s probably not the winemakers themselves, but their public relations people. Everybody’s pitching, pitching, pitching these days. They realize it doesn’t work anymore to pitch this tired old kind of story: “Don and Janet were bored with their old life. He made a fortune in [fill in the blank], while she was a stay-at-home mom raising their kids in [fill in the city]. So they decided to return to nature by buying 30 acres in [fill in the wine region] and grow [fill in the grape variety]. They hired [fill in famous winemaking consultant] and have now released their first wine,” blah blah blah.
That is so Nineties! No, today the pitch needs an angle, a twist. Something connected to a charity often works — whales are a perennial favorite. Biodynamic is on the wane, but it still works. Ethnic and cross cultural is coming on strong. Wine and food pairing always works. Who doesn’t like to eat? And spirits are big. Get yourself a hot mixologist, and you’re golden.
Vintners are also going to more and more wine fairs, symposia, big public tastings and the like. They’ve always done that, but I think they’re having to do it more nowadays. Anything to catch another customer, get the brand name out there, nail down some loyalty.
It used to be that the winemaker would drive [or fly] to the fair, do their thing, then drive [or fly] back. Big waste of time, all that travel. Could be doing something more productive. In France, they are. A new for-profit business provides the service of telling traveling winemakers where along their route a group of wine lovers has invited them into their homes for a little tasting. Says Decanter: “It has become imperative that, while [winemakers] are at wine fairs, or on their way back home after a sales trip, they can maximise their time away. Meeting wine lovers directly in their homes is an effective way to do this.” Let’s say Bob Cabral drove down to Shell Beach for World of Pinot Noir. On his way back to Healdburg, he’d get a text message: “The Wisenheimers have invited you to their home in Los Altos Hills for a tasting. They’ve invited their neighbors. The address is….”. And: “On your way to the Golden Gate Bridge, make a detour at Geary and go up to Seacliff. The Lotsabucks will host you.”
A winemaker’s day is never done!
* * *
And then there’s the Commonwealth of Virginia, which has been drifting to the right for years. The state’s Alcoholic Beverage Control Commission recently banned college newspapers from accepting alcohol advertising.
That prompted several Virginia colleges to challenge the ban, but it [the ban] was upheld by a U.S. Court of Appeals. On Monday, the ACLU stepped in, asking for a reversal. I know that conservatives often complain about “the nanny state” — government that is overweening and intrusive. They always say people should be left alone to make their own decisions. Well, shouldn’t college newspapers be allowed to accept advertising from perfectly legal alcohol companies, including bars that sponsor happy hours (the ban even outlaws use of that phrase!)? Come on, Virginia. Your most famous native son, Thomas Jefferson, loved wine. He must be rolling in his grave.
I so enjoyed Bono’s “Ten for the Next Ten” op-ed piece in last Sunday’s Times that I was inspired to come up with my own version. Bono changed the traditional end-of-year Top Ten list: his “looks forward, not backward,” to developments that might make the world “more interesting, healthy or civil.” I won’t pretend that anything that could happen in the wine industry is on a scale with, say, international peace or addressing climate change (although I do think that if more people drank wine the world would be healthier and more civil). But here are my hopes for the next ten years in California wine.
Wine Experiences its Greatest Renaissance Ever
It’s been astounding to watch America grow into a true wine-drinking culture. Everywhere you look, wine is portrayed as an aspirational drink with lifestyle overtones. That’s good, but we have a long way to go; for many people, wine is still an occasional indulgence rather than an essential part of their day. That could change, but for anything to change in America requires a major force to set it in motion. “Sideways” showed how a movie can be instrumental in driving wine sales. I hope more movies present wine in a positive light. It also would be great if some of America’s cultural heroes from politics, entertainment, industry and sports were more outspoken in support of wine. Why is it that some people seem almost ashamed to talk about their love of wine? (President Obama, I’m talking to you!)
California’s Under-Performing Regions Show Improvement
Paso Robles illustrates how a wine region that was pretty rustic for a long time can get its act together with a lot of hard work. It takes people with dedication and vision, but it can happen. Such places as Temecula, the Sierra Foothills, Livermore Valley and Lodi are large and historic wine districts that for whatever reason haven’t lived up to their potential. They have to figure out their own identity, and there’s no better time than in this new decade, when the old rules are being thrown out and new ones are being written.
Wine’s Health Benefits are Far Greater Than Anyone Thought
I personally believe that a little wine helps promote relaxation and God knows we all need to relax these days. Science also has strongly suggested wine can lower the risk of heart disease and cancer. I hope scientists will continue research along these lines, and that the government will support it (instead of getting in the way as they often do), and that Big Pharma will not attempt to block research in order to preserve prescription drug sales. I mean, what would Prozac do if people knew that a glass or two of wine, plus some meditation, exercise and a healthy diet, actually cured their depression?
Wine Blog Writing Gets Seriously Good
Once upon a time all a wine blog needed in order to be taken seriously was to exist. In 2010 that’s no longer true. Winners and losers are starting to emerge, based on talent. Great writing may not be a sufficient guaranty of success for a wine blogger, but it is a necessary one. We’re starting to see strong writing in wine blogs and I hope that over the next several years we’ll see the modern equivalents of the greats be critically recognized.
Anyone in America Can Buy Wine From Any State Through the Internet, Without the Government Getting in the Way
I know what you’re thinking. Dream on, Heimoff. But it’s a good dream. No more state stores, no more interstate shipping hassles, just good old-fashioned competition among brands through low-cost broadband. It could happen.
Quality at an Affordable Price Becomes the Norm
We’re on trickier ground here, because for all of history, people have had to pay more for better wine. But we’re sort of nearing the End of History, aren’t we? At least, it feels that way. With modern revolutions in grapegrowing and winemaking, there’s no reason why the gap between great expensive wines and great inexpensive wines should not continue to narrow. It already is. What that will mean for the traditional way in which we classify wine into hierarchies (a la Bordeaux and Burgundy), I don’t know.
America Lowers Its Drinking Age to 18
It’s so stupid and illogical that Americans can be sent off to fight and die in wars at the age of 18, but they can’t enjoy a beer or wine until they’re 21. This is a relic of our Protestant ethic (in which pleasure is evil) and Prohibition. And please, don’t tell me that lowering the age will result in more car crashes. Idiotic teenagers who drink and drive are not stopped for a second by being underaged.
As long as I’m permitted to dream… There are anecdotal reports that restaurants that drop, or significantly decrease, their corkage fees actually earn more money, because diners are then willing to spend more on appetizers and dessert. Wouldn’t it be great when you can just bring your bottles in with you with no hassles, no fear of being misunderstood or challenged, etc. I’d even be willing to bring my own wine glasses, so the owners wouldn’t have to deal with breakage.
The Rise of Italian Varieties
Sangiovese, Nebbiolo, Trebbiano, Montepulciano, Dolcetto, Negroamaro, Refosco, Cortese, Verdicchio, Vermentino, Vernaccia. They make nice wines over in Italy and are fun to pronounce. Why not here? Wouldn’t it be something if they turned into household names in California over the next ten years.
A Whole New Area of California Emerges as Home to Fine Wine
Where could it be? The Far North Coast (Humboldt, Siskyou, Eureka counties)? Some distant corner of the Foothills? On the road to Mammoth? A strip of hill in San Benito County? What about Ventura? You never know in this vast state, but one thing is sure: pioneers, filled with the restless, innovative spirit of risk-taking, will push the boundaries and, on occasion, stun us.
Anyway, that’s my Ten for the Next Ten.
Joshua T. Block and Sharon Silber, two New York residents, and Kahn’s Fine Wines & Spirits, an Indiana liquor store that wanted to send them wine, never thought they had anything in common with Al Capone, until the 2nd U.S. Circruit Court of Appeals, sitting in Manhattan, compared them to “organized crime” figures who, if allowed to get away with their scheme, might illegally “dominate the [wine] industry.”
Notorious wine merchant Capone, c. 1936
That was the language the Court used in striking down the three plaintiffs’ lawsuit against New York State’s Alcoholic Beverage Control Law (ABC Law), which prohibits suppliers from selling wine directly to consumers. The Circuit Court ruled instead in favor of the New York State Liquor Authority, the main defendant, and declared that New York’s law does not violate the Commerce Clause of the U.S. Constitution.
The case was closely watched by all parties in the wine industry, particularly because it was one of the most important test cases following the U.S. Supreme Court’s Granholm v. Heald 2005 decision, which held that States may not prohibit out-of-state suppliers from selling direct to consumers, if they allow in-state suppliers that freedom. The Circuit Court, however, held that the ABC Law does apply equally to both in-state and out-of-state suppliers and hence “these provisions are within the authority granted to New York by the Twenty-first Amendment [to the Constitution, which repealed Prohibition]. Having so ruled, the Court finds it unnecessary to undertake a dormant Commerce Clause analysis. There being no further basis for plaintiffs’ challenge to the constitutionality of the ABC Law, the Complaint is dismissed.”
I guess I can see why the three Circuit Court judges ruled the way they did. Writing for the majority, Judge Richard C. Wesley said New York’s law “treats in-state and out-of-state liquor evenhandedly,” and “thus complies with Granholm’s nondiscrimination principle.” It isn’t up to these non-elected judges to make new laws, but only to interpret existing laws, no matter how loathesome.
What I don’t understand is why Wesley couldn’t leave it at that. Instead, he went on a rant when he called the plaintiffs’ lawsuit “a frontal attack on the constitutionality of three-tier system itself,” which he said the Supreme Court in Granholm found “unquestionably legitimate.” That is true, but the High Court also cast considerable doubt on the underlying merits of the three-tier system, which was not itself at issue. Justice Anthony Kennedy, writing the majority opinion, conceded the three-tier system “substantially limits the direct sale of wine to consumers, an otherwise emerging and significant business.” Noting a decline in the number of wholesalers (and it’s even worse today), Kennedy added: “The increasing winery-to-wholesaler ratio means that many small wineries do not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products.” He correctly noted that direct-shipping of wine to consumers (in States where it is permitted) represents a hope for these small family wineries. But, he pointed out, “In many parts of the country, however, state laws that prohibit or severely restrict direct shipments deprive consumers of access to the direct market,” and he quoted the Federal Trade Commission as saying, “[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine.”
So it seems to me that the Supreme Court, at least, is aware of the inadequacies and unfairness of the three-tier system. It’s going to take the wine industry years more to topple it, or at least by-pass it, but it’s incredible to me that Mr. Block and Ms. Silber, two New Yorkers who just wanted to buy some wine from a fine wine shop that happened to be located out of their State, are unable to do so, because of an antiquated law that was designed to prevent Al Capone and the Mafia from taking control of the liquor industry. I mean, come on!
I called the owner of Kahn’s Fine Wines & Spirits, Jim Arnold, and asked him what he’ll do next. “We’re re-evaluating that with our attorneys,” he replied. When I asked what specific wines he had tried to send to the New Yorkers, he said, “Collectibles. We’ve had lots of requests from New York residents to send to them, which is why we brought this suit.”