Direct to consumer shipping on the rise
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.
My theory is that folks did a lot of discounting in the year prior to April 2010, and backed away from that discounting in the following year. At the same time, the data set from this under-1,000 bottle segment very likely comprises different players from year to year, making wide swings in the “average” possible and possibly misleading. For instance, you might have had one player with a very high bottle price included in the survey this year (and not the previous year), while another with a much lower bottle price dropped out.
The obvious simple answer is american greed. Small (boutique) producers are faced with two decisions when the recession began. They either can lower price and rid inventory or they can jack up the price and profit margin to try to sustain their business. Because they are such small producers they are less worried about inventory turnover and as the studied showed most choose the later. Also, Small producers have year to year contracts with growers and can choose whether or not to produce another vintage, or just raise prices and hang on to what they got. Its why most of them are still pouring 2006 or earlier through the tasting room! Inventory turnover is a good thing in this business, especially when your wines aren’t that good! Lower prices and try again until you deserve that price point.
Steve:
The apparent increase in average bottle price of “boutique” wineries actually means that over the past 12 months the wines they sold were higher in price.
This may sound like a sophistic explanation, but it’s an important point. In other words, small wineries didn’t necessarily raise the price of their wines. Rather, they sold more of their higher priced wines.
Pete:
The under 1000 case winery is, in my understanding, a VERY small part of the direct shipping marketplace (about 4% of volume). However, my understanding of the data set from ShipCompliant and the model they put together using Wines and Vines’s database of wineries would avoid the possibility of one winery skewing the numbers.
From my own experience as a wine junkie, I’d say that the small premium wineries would sell more wine if their prices were pegged more to the value of the dollar than to the euro. Our domestic prices tend to track with the prices of Euro wines bought here, and the dollar’s value has been cut in half to the euro since its peak.If you can buy premier cru Puligny even for $60 0r $70, its harder to shell out the same for the latest Sonoma Coast sensation.On the other hand, this is where the best blogs come into their own, especially once we know the voice of the blogger, and trust his judgement.
Steve,
Certain I’m way off track here, but, if, if, a winery goes DTC, they almost immediately see an increase in price of around 25-34% as they are charging the full price for their wine and there is no middleman – in other words, If I sell a $50 bottle of wine to a restaurant or retailer, generally, it goes to them wholesale at appx. $28-32; they then put it on their list or shelf and sell it for at least $50 (or in the case of the restaurant, $70)… If I sell the same $50 bottle of wine DTC that I sold to retailers in the previous year, then I have immediately increased the price by that appx.33%. But, I likely will not sell as much wine DTC as I do to the restaurant or retailer.
Sure this is a cockamamie theory, but you know the old saying that there are lies, da*n lies, and statistics. So, depending upon how the study was done, they likely did not ask specifics, they just took the statistics from W&V and reached a conclusion. But, I’m sure I’m wrong…
Hard to interpret the numbers without more detail. The increase of 11.5% amounts to about 285,000 cases and about $125 million revenue. Flash wine sales are over $100 million annually according to the NYT, so considering most flash sales are winery direct, we could be easily be talking about a mere 1.5% increase if these limited time sales were omitted. Their numbers say the average winery direct bottle price is about $36, so if these limited time direct sales are skewed to the harder to sell, higher priced items, such a change might account for the affect on per bottle pricing.
Also, if wineries are offering discounts to wine clubbers on elite items, and the shipments of these increase in proportion to what they were, it could account for part of the total volume increase as well as the bottle price average.
Like you say, the devil is in the details.
Tom,
Not sure that most flash sales are winery direct when the leading flash site is a retailer.
It is also possible that some of the large distributors have stopped carrying some of their smaller brands or smaller productions wineries. In turn those smaller producers have found there was a demand for their products. The same for the smaller distributors who have cut back or gone out of business.
The consumers have been used to paying the prices from the distributors which include shipping and taxes and commissions.
So a small winery/producer can raise their prices to approximately what the consumer was paying previously.
(What is american greed as opposed to lets say french greed?)
As soon as I saw that I stopped reading that post. There are wines that are overpriced just like there are lots of other products in the market that are.