3 "Uncomfortable Truths" in the Wine Business

Warning: this post may offend some people. My intent here is not to offend, but rather to talk openly about some of the unspoken business related issues in the wine industry.

Below are 3 statements that you will likely never hear someone in the industry explicitly say, but if you're in the business you have surely seen some examples of these "uncomfortable truths."

1. Distributors are f*cking lazy

Yes, I said it. We all know it. The fact is that distribution is caught in between two very different business models and this dichotomy often manifests itself in the form of "lazy" behavior.

The first business model of a distributor is a pure logistics operation - moving bottles FOB from the supplier's warehouse to the retailer. The second business model is a sales and brand management operation - building up brands in the local market with retailers and consumers.

These two operations require dramatically different skill sets and focus, however the logistics component is not an optional activity (distributors have to move bottles in order to create sales) whereas the brand building is often seen as discretionary activity. 

Brands often see a lack of effort in brand building as "lazy" and have to resort to tactics ranging from sales incentives to the squeaky wheel approach in order to get distributors off their ass.

The point is, given the choice between representing a product with a strong brand vs. taking an unknown brand and building it, distributors will almost always take the former.

If you're a brand and either trying to get distribution or frustrated with your distributor, just understanding this is the reality of our lovely 3-tier system. 

2. Anyone can create a good $40+ domestic wine and we don't need any more of them

I personally love Pinot Noir and I love what many wineries in California and Oregon are doing to make truly fantastic Pinot. 

But, the wine industry doesn't need another $40+ Pinot. And the industry doesn't really need another $40+ domestic Cab, Chardonnay, Merlot or Rhone blend either. There are simply too many of them out there because they are too easy to make.

I am not downplaying the masterful work of many winemakers, but what I am saying is that if I went on the hunt for $4,000/ton grapes I will likely find some options from fantastic vineyards. Then if I seek out a talented winemaker willing to take on a side project at the right price, I will be able to put those grapes in good hands.

The resulting wine will be of very good quality and the economics will work out such that it will most likely price in the $40 retail range. 

There are just too many of these new labels out there and even a 90+ score doesn't do much anymore. Ultimately at this price point the differentiation and success will be on the branding and marketing side, not necessarily the quality of wine. 

3. Your growth expectations are probably unrealistic

Let's remember that wine is a very mature industry and aggregate growth is in the 2% range annually. Even if we isolate the premium segments, we are still in single digit growth territory.

When you build a business plan that calls for 20%+ year-over-year growth, you therefore assume that you will be outperforming the industry in a big way. Mathematics tells us that for every company/product that grows 20%, another company/product must be declining.

The problem is, you never hear anyone saying "we plan to grow by -10% this year."  It reminds me of the surveys of automobile drivers where something like 90% of people say they are an "above average" driver. 

There are of course certain categories that grow much faster than the overall market. Rose, sparkling wines, can wines... but if you're not in one of those categories, what assumptions are you using to arrive at growth rates that are multiples of the overall industry?

You may want 20%+ growth, but the market likely cannot support that. For brands, you might get frustrated with your distributors and call them lazy. For distributors or retailers, you might overstock and get backed up on inventory.

The result? Brand dilution. Wines get put on discount, closeout or flash sites to generate cash for the next vintage.

A better suggestion - develop a business model based on assumptions that are more grounded to the reality of the industry rather than a desired growth number.

There is still hope

Unless you're planning to take a new $40 retail wine to market through the distribution channel and grow 20%+ per year, there are ways to put better odds in your favor.

The first step is just acknowledging the "uncomfortable truths" in the industry and using these to influence your strategy.

The 2 Most Important Beverage Trends Right Now

Just a short article today to highlight two of the most important trends shaping the beverage industry right now.

The first big trend relates to the continued growth in off-premise consumption relative to on-premise.

Some in the industry call this the "Netflix affect" as more people are opting to stay at home and crack a favorite bottle (or two) while catching up on the latest shows. This trend tends to be more prominent within the millennial category which if course is growing in importance to the industry.

Danny Brager, SVP of Nielsen’s Beverage Alcohol practice recently stated:

Drinking at home’ growth is outpacing ‘drinking out of home.’ While both channels are critical, the off-premise continues to be not only significantly larger volumetrically than on-premise, but also the environment currently offering the larger growth opportunities
— https://www.beveragemedia.com/2017/01/31/onoff-premise-closer-look/

This trend is supported by new alcohol delivery services such as Drizly and Mini Bar along with more established delivery services such as Instacart and Delivery.com which now offer alcohol in certain markets.

The second big trend relates to "premiumization" within the industry where consumers are opting to consume less quantity, but higher quality products. 

This has led to the new buzzword, particularly in the liquor segment, but is playing out in wine and beer as well.

The days of the daily jug wine and handles of generic vodka are being traded in for more epicurean experiences of small batch craft liquors and family estate wines.

The key question for the industry is - what do these trends mean for my business?

First, we need to recognize that the lifecycle of a particular brand will likely be shorter than in the past.

Consumer preferences are changing at a faster pace and brand loyalty is not as strong, therefore brands will need to become more proactive to stay relevant and portfolio managers will need to manage portfolios like investments - discarding those that underperform and diversifying into emerging brands and categories more quickly.

This is especially important for on-premise retailers where a more diverse, eclectic and dynamic selection will be required to get consumers off the couch.

Second, the already competitive off-premise segment will become tougher with emerging digital channels.

Retailers cannot simply rely on the handful of wine outlets in the neighborhood as the primary  competition - the smartphone that every consumer now has glued to their hand will be the biggest form of competition going forward. 

Savvy retailers will form partnerships and improve their own digital offerings to take advantage of the trend while brands will need to "up" their digital game in order to capture the attention of these new customer acquisition channels.

Finally, the middle tier (importers, wholesalers and brokers) will need to add more value to sustain their position in the industry.

As brands and retailers become more savvy at capturing the consumer's attention through new digital channels, the role of the middle tier will become increasingly commoditized, putting downward pressure on margins.

Middle tier operators will need to highlight service offerings that go beyond just movement of boxes and fulfilling compliance in order to justify their margins. 

While there are many other important trends to pay attention to in the industry, the growing shift towards off-premise and "premiumization" are driven by larger demographic and social forces and will have a long lasting impact.

How to Effectively Work the Distribution Channel as a Wine Producer (part 2)

This is part two in a multi-part series on how to work the distribution channel as a wine brand owner. Click here to read part one.

If you have followed the steps outlined in part one of this series, hopefully you have the attention of someone at your target distributor, thanks to a nice introduction from a wine buyer in the market.  This post is about how to determine if the distributor will actually be a good fit for your brand.

It is easy to overlook this part of the process due to the desire to get picked up in the market, but if you don't find the right fit you will likely run into performance issues down the road, and depending on the state, it can be very messy to get out of a distributor relationship.

Thanks to the myriad of franchise laws in many states, entering a relationship with a distributor can be more like a marriage vs a standard supplier-buyer business relationship, so you must approach it that way.

Below are four questions you will want to answer in search of a good "producer-distributor-fit":

1. How does the distributor "tell the story" of the brands in its portfolio?

Every wine brand has a story - some are small estate wines produced with careful attention to every detail and others are produced in a more industrial setting to meet a certain market position.  Ask the distributor - "can you tell me about a brand in your portfolio that is successful in the market, and why has it been a good fit in the portfolio?"  

Pay careful attention to the answer and look for warning signs that the distributor may not be a good storyteller for your brand. 

2. Does the distributor specialize in your target account segments?

You already know the distributor works with at least one target account if you got the introduction from part one, but how well does the distributor cover the rest of your target market?

The bottom line is you don't want to be with a distributor that caters to the needs of grocery chains if your wines are best suited for independent chef-driven restaurants and vice verse.  This may seem obvious, but I've seen too many brands wind up in the wrong hands too many times.  

In my experience, it is generally better to go with a smaller distributor that specializes in on-premise accounts if that is your target market, even if you have the opportunity to get picked up by a larger distributor with deeper pockets and more points of distribution.

3. How financially sustainable is the distributor?

Distribution is a highly competitive business with very low barriers to entry (at least for anyone who can fill out paperwork), so that means distributors will come and go - this is just a fact of life in the wine business.  

You need to get paid for your wine, and paid on time, so it is perfectly reasonable to ask some questions pertaining to the financial viability of your potential partner.

The key things to find out are:

  • Do they pay on time to other suppliers?  Ask for references and actually call them. 
  • How heavily do they rely on pre-sales vs. committing to inventory? More reliance on pre-sales could be an indicator of capital shortage.
  • Do they carry back vintages or hold onto inventory for strategic purposes? A healthy library of back vintages often signals a strong capital position.

4. How compatible are the growth aspirations between you and the distributor?

This may be the most under-appreciated factor in choosing a distributor, but one with potentially the largest impact on duration of the relationship.  

As a wine brand owner, you may outgrow your distributor as production scales.  If you are a 10,000 case/year producer today but have plans to go to 100,000 in 5 years, it is quite possible that a small distributor may not be able to meet your needs if you need to grow 5-10x within the market.

Alternatively, a distributor may outgrow you as a brand if they rapidly expand the portfolio or enter into new markets.  It is easy for a small producer to get lost in an ever-increasing distributor's portfolio.

The key here is to just talk openly about where you see the business going and get an feeling for whether one side runs the risk of significantly outgrowing the other in the near future.

Just like dating, if you wait to find a perfect match with no flaws, you might never get married. The point is to maximize the chance of a long healthy relationship by taking a thoughtful approach up front and hopefully avoiding a messy breakup down the road.

A Wine Blog About the Business Side of Wine

If you're reading this, you are likely either in the wine business or thinking of getting in the business. If that is the case, this blog is for you!

There are countless blogs about wine, most of which are about making, tasting and experiencing wine, but very few that are dedicated to the business aspects of starting, owning or operating an actual wine company.

Wines and Dimes is about all things related to the business side of the wine industry.

About 10 years ago I was working as a management consultant and had the good fortune of tasting an incredible bottle of wine one evening.  Soon after I became absolutely obsessed with wine.  Over the next few years I began a wine journey that has resulted in tasting tens of thousands of wines, starting four wine-related companies and investing in many others.

Along the way, I've seen hundreds of business plans, business models and wine related concepts and much of my social circle became people in the wine business.  

As the inquisitive consultant, I asked a lot of questions and noticed a couple trends that led me to the conclusion that the wine industry needs more resources dedicated to the practical aspects of owning and operating a successful wine business.

One of the trends I've noticed is that the wine business is filled [mostly] with people who are genuinely passionate about wine.  This may sound rather intuitive and obvious, but consider the vast majority of industries and jobs where people are generally much less enthusiastic about the products. When was the last time your banker friend posted a picture on Facebook holding up a new debit card and proclaiming a great day?

While this passion for wine is usually a prerequisite for entering the wine business, a solid background in key aspects of business... finance, marketing, strategy and operations... is however, not required.  I've seen too many instances where a disregard for business fundamentals, either intentionally or otherwise, has led to difficult circumstances for even the most passionate wine professionals.

The reverse can also be true when someone takes a very methodical and purely business-oriented approach to the wine industry without the important element of passion.  The result can be a very bland offering that fails to speak to the right audience.

Luckily, it is a lot easier to learn the business side, or augment your team with proper business fundamentals, than it is to teach someone to be passionate about wine if it does not come naturally.  

Step number one to starting or running a successful wine business is to embrace the passion for wine and recognize where the business skills may be lacking.

My goal with this blog is to highlight many of the topics that are important to a successful wine business and create a practical guide that can be applied by anyone.  

By sharing my learnings, failures and successes I hope to help more wine entrepreneurs reach their business goals.