Good times for DTC
Ever since I’ve been a wine writer—the 1980s—direct-to-consumer sales has been the Holy Grail of wineries. Why pay a middleman a cut of the profits when you can make 100% of every dollar by selling direct?
In the 1990s and early 2000s, though, DTC was as elusive as unicorns. Some wineries did a lot of it; I remember touring the wineries of Gold County, where proprietor after proprietor told me they were selling 90% or more of their production “out the screen door” to tourists cruising up and down Highway 49, or on their way to Tahoe and ski country. But if you weren’t on a major tourist route, you weren’t so lucky.
Some wineries tried to lure tourists in through indirect means. Wineries along Highway 29 in Napa Valley, for instance (where competition is fierce) offered educational, artistic and musical venues, becoming, in effect, entertainment palaces that just also happened to sell wine in the tasting room. This was, and is, quite effective. But still, not everyone was in a position to do it.
Now, Business Wire is reporting that “American wineries increased the dollar value of their direct-to-consumer wine shipments by an unprecedented 15.5% in 2014.”
Granted that this percentage increase comes on a relatively smaller base compared to traditional on- and off-premise accounts, it’s still a pretty impressive achievement.
Another breakthrough in DTC sales has come due to efforts to get around the nation’s silly patchwork of laws that limit or prohibit reciprocal shipping of alcoholic beverages between states. In Massachusetts, a new law just went into effect that “allows wineries from throughout the United States to sell and deliver up to 12 cases of wine per year to Bay State consumers — a transaction previously prohibited.”
I doubt that the three-tiered system of distribution is going away anytime soon. It’s just too entrenched, and does serve the useful purpose of providing a solid infrastructure to deliver wine to every nook and cranny of the U.S., something that individual wineries, especially smaller ones, are in no position to do. But DTC should continue to grow, fueled in part by the desire of increasing numbers of consumers, particularly younger ones, to buy locally. The Internet and social media, too, are making it easier for consumers to dial in to local wineries and buy direct from “sales’ links, provided that doing so is legal where they live.
So it’s just one game-changer after another when it comes to selling wine in America. Interest in DTC on the part of wineries and other parties is evident by the proliferation of professional seminars on the topic; the Direct to Consumer Wine Symposium just completed their 2015 event yesterday in Concord (Contra Costa County), attracting the attention of such important national media as Forbes, which reported (via Cathy Huyghe), “It was so crowded you’d have thought they were giving away money for free.”
Have a great weekend!
Having made a number of trips to wine country, I am a big buyer in the DTC segment. As I’ve become more familiar with the overall economics of wine sales (in part through this blog and your posts Steve, as well as comments from winery owners, distributors, and retailers), it’s a surpise to me how few wineries are very aggressive and effective in increasing their DTC sales. With only a very few exceptions where demand greatly exceeds supply, it would seem that most wineries should aggressively be building their mailing lists and then offering significant incentives in terms of free shipping and volume discounts to attract buyers. It’s easy to do the math to see how much a winery can discount DTC sales and still come out way ahead of selling the same wine through the 3-tier system. Why don’t more wineries take advantage of this? For wines that are well distributed at retail, I’m surprised at how often I find that the winery is asking a price that can be beat by my local discount retailer. Wineries should focus on this and making their wine available to list members at a price that with shipping and discounts would be cheaper than retail. They’d greatly increase their DTC sales and also their bottom line.
Mike speaks truth. As you mentioned, Steve, growth is off a small base. Even growing at a sustained 15% over the next decade would still put DTC sales at around 8% of the entire market. To truly move to the next level, wineries are going to need to be less greedy and start passing on some (not all) of the savings to consumers, in other words, give them a true economic incentive to do business this way rather than romantic notions of “being closer to the winery.” And a lot of that greed is not hubris-driven: the notion that people will jump through any hoops and even pay more in order to deal with us directly to get our Godly ego juice. Until wineries can get past that, most consumers will continue to support local wine merchants.
As for direct-to-trade, this greed will kill the baby before it ever has a chance to breathe as I’ve witnessed in Chicago where it’s been legal for years yet has absolutely ZERO impact in the market. Even if the inherent logistics, convenience and customer service issues can be addressed (and I don’t think they can), the greed on the part of the wineries will still be the nail in the coffin.
Bill speaks truth. While 15% may sound like a lot, it’s actually less than the average growth of ecommerce in general. That is, online tires grew faster than DTC. Additionally (and just anecdotally), it seems that the vast majority of DTC sales are tasting room-driven… where does that leave the 95% of small wineries that don’t have tasting rooms or meaningful traffic.
To me, the biggest issue is Bill’s point: wineries are demanding full price plus full boat on shipping and delivering a direct experience that is basically a cardboard box with an invoice. In most cases you can find the same wine (or directly comparable wine) for less at a local retail and have a much better purchase experience.
Still a lot of work to do.
The reason that wineries don’t pass along more of the DTC saving has virtually nothing to do with greed, and in 99% of cases certainly nothing to do with ego. The reality is that unless you can sell almost all of your wine DTC, you also need traditional distributors to sell the rest. And they will not work with you if your wine is available on your website for less than their customers (retail stores) are going to be able to sell it for. So wineries are forced to maintain more or less the full retail price, or risk losing distribution altogether. Then when a retail store decides to take a small margin and sell at a discount, the winery looks to be charging too high a price, even if they would be delighted to be able to charge a lower one.
Dan, I don’t know that it’s greed or ego, but simply a lack of customer focus. They could, for instance, keep their full retail price and include shipping in the cost. 95% don’t.
In my experience a lot of wineries include shipping on 6 or 12 bottles. On just a few bottles the shipping cost alone could easily eat the margin on anything other than a very expensive wine. E.g., two bottles plus a shipper could easily run $25… that means the wine would need to be $50+ to justify the shipping cost alone, not to mention that DTC is very labor intensive from a customer service standpoint, so unless you are doing a lot of it and have a dedicated DTC employee, it is hard to make it work.
To me the real gouging is happening on restaurant wine lists, where 200% mark-ups are considered reasonable and 300% or even 400% are not unheard of…
I’m afraid there may be a bit of greed here given that the wineries I buy from sell mostly through their mailing/allocation lists. For example, shipping for a case of wine from K&L in SF to my house in Sac costs just under $20. Napa/Sonoma wineries typically charge $30 to $52 to ship a case of wine, through the same shipper, to my house. And that’s on wine that costs me $600 plus per case.
And now, this Spring, one highly-respected winery plans to charge me $15 to pick wine up at their winery! Incredible. (Last year’s order was about $2000.)
Nobody ships wine to me at no or reduced cost.
Question: “Why pay a middleman a cut of the profits when you can make 100% of every dollar by selling direct?”
Answer: Distribution beyond what you can personally achieve through direct-to-consumer and direct-to-trade selling.
Winery owners (by and large) are farmers. Not salespersons. Not consumer packaged goods marketers. They have their hands full simply running a vineyard. “Who has time to go on the road and make sales calls?,” they constantly lament.
The misperception is that the middelman adds no value.
To the contrary, they are “force multipliers” — putting shoe leather on pavement securing opening orders for placements in wine stores and restaurants. Providing post-sale service (say, volunteering to pour your wines in the store’s wine bar. Maybe arranging a winemaker dinner in town). And going back to secure a second order.
Those modern-day Willy Lomans face rejection every day. But the best persist. And that’s how brands are built.
Here are some time-tested statistics from McGraw-Hill (former publisher of BusinessWeek magazine and other periodicals).
Citing their “Laboratory of Advertising Performance” — a compendium of research studies on trade advertising and marketing:
46% of salespeople call ONCE, and QUIT;
25% call TWICE and quit;
12% call THREE times and quit;
Only 10% PERSIST on calling;
80% of all sales are made after FIVE calls;
And 10% of all salespeople “close” 80% of all sales.
Source: http://library.duke.edu/rubenstein/findingaids/mcgrawhill.pdf
(BusinessWeek was kind enough to give me a hard copy of nearly every research report in their archive. They number over one hundred. A “legacy” of decades of research that no publisher in subsequent years has equaled.)
The vast majority of wineries are smaller than 5,000 cases. Distributors aren’t interested in those because of scale innefficiencies. They want large production wineries and they do add a service, more than logistics to their winery clients. Without question, those wineries do better on the whole, than wineries going DtC. How can that be when “the middleman is cut out?”
Its far more profitable to sell wine by the case or pallate versus the bottle as is the case witth DtC.
Wineries would largely prefer to sell through a wholesaler. It wasn’t until the end of the 80’s coming out of recession and declining sales, that wineries started selling more through tasting rooms. Then in the 90’s, wine sold itself because of truncated supply. Distribuors and consumers scrambled for wine and stock outs were the norm. Winery owners left their TR’s open, but there was zero emphasis.
Today DtC is again growing but its not greed. Its survival. While the markups are double their cost, the added infrastructure and salaries needed to get the incremental sales by the bottle just about net the same profit margin as selling through wholesale.
So to take that full circle, if for the same profit you could hand your product to a wholesaler and be done with it, why would you spend the added overhead to go direct? Its not greed. Its survival and the industry is lucky the confluence of technology and Granholm came around at the same time, or the business would look a lot different.
For those who don’t know his background, commenter Rob McMillan [above] is executive vice president and founder of Silicon Valley Bank’s Wine Division, and principal author of the their annual “Wine Report” on the state of the industry.
Link: http://www.svb.com/wine-report/
He has the pulse of the California wine industry. And the industry has his ear.
Related news . . .
Excerpt from The Wall Street Journal “Off Duty” Section
(January 17-18, 2015, Page D7):
“Supermarket Wine: It’s Come a Long Way, Baby”
By Lettie Teague
“On Wine” Column
Supermarkets and mass merchandisers (e.g., Wal-Mart ) accounted for an estimated 42% of all retail wine sales in the U.S. and $8.6 billion in annual sales in 2014, according to Danny Brager, SVP of alcoholic beverages for Nielsen. . . .