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.

Why Has "WineTech" Ignored the Wine Supplier-to-Wholesaler Relationship?

This post was based in part on a recent conversation I had with a technology entrepreneur who is interested in developing solutions for the wine industry, but I've had similar conversations over the years on this very topic. 

TL;DR - there has been little innovation supporting the $15B+ annual market of wine that is sold between the wine supplier (i.e., producer or importer of wine) and the wine wholesaler (state licensed distributor), but there is a tremendous opportunity for someone who can develop and market the right product.

Here is how many of these conversations begin...

Entrepreneur: I would like to get your feedback on a great idea I have for a new [app / website] to help wine retailers sell more wine based on [artificial intelligence / machine learning / social data] and we will revolutionize how wine is sold, just like Uber and Airbnb revolutionized their industries!

Me: that is a great idea, but there have been many such attempts and many more that are still playing out. The retailer-to-consumer market segment is fairly saturated with technology products and unless you have a sustainable advantage in customer acquisition, it will be a long hard road ahead.

Entrepreneur: is there a part of the market that is not already saturated?

Me: Yes! While I would say that SevenFifty has the wholesaler-to-retailer segment well covered, there has been very little innovation in the supplier-to-wholesaler tier of the 3-tier system. This segment seems to be largely ignored.

Entrepreneur: that sounds very interesting, I do not know much about that segment of the market, can you tell me about some of the common problems or issues that could be solved with technology?

Me: how much time do you have, because I could go on for hours about that?

Common sense would suggest that by solving a problem, there would be an opportunity to earn a return in relation to the size of the problem solved. Unfortunately, few entrepreneurs are familiar enough with the intricacies of the wine supplier/wholesaler process to even know what problems to solve.

Below is just an initial list of problems that, even today, remain largely manual and inefficient for both wine suppliers and wholesalers.  This is not an exhaustive list, but merely a starting point to demonstrate the opportunity for innovation through technology:

1. Finding New Wine Suppliers - there is not an easy or effective way for a wine wholesaler to find potential suppliers of a given wine that may be available for distribution in their market.

For example, let's say Wholesaler A is looking for a producer of Rioja wines to distribute in Florida. If that distributor is on SevenFifty, they could rule out those brands that are already represented in FL, but what about all the other potential options?

Chances are, Wholesaler A will ask their network for recommendations, look through various wine review publications and/or perhaps search Google. These are generally not very effective, especially once you consider the process of reaching out to the supplier and trying to form a relationship.

There are a few industry publications that offer various postings in a "wanted" format, but those are generally not well followed.

This is a classic problem that can be solved with a "two sided marketplace" business model whereby a non-industry participant sets up an offering that brings together supply (wine suppliers) with demand (wine wholesalers) and creates value by building and maintaining the marketplace. Think eBay or Uber - neither own or sell the goods or services that are transferred between buyer and seller, rather they facilitate the transaction.

2. Finding Potential Distributors - this is just a variation of above, but from the other side whereby a wine supplier searches for a wholesaler to distribute their wines in a given market.

Just like above, there is no real effective way for suppliers to locate distributors so most rely on recommendations and Google.  

This is another problem that can be solved through a two sided marketplace. The value is in the ability to facilitate efficient interactions between suppliers and wholesalers.

3. State Licensing and Compliance - everyone's favorite subject in the industry! 

Let's face it, nobody in the industry enjoys the paperwork of getting licensed to do business in a new market and the various compliance processes that come with it. Yes, Tennessee, with your 4 distinct "markets" - we are talking about you!

While there are firms that can take care of this (for a cost of course), there could be a much more effective way to handle at least the initial setup process, especially if done at the formation of a new supplier-wholesaler relationship.

Once a supplier and wholesaler agree to work together, and if the supplier is not licensed in the State, most of the time the supplier is left to figure out what needs to be done by either asking the wholesaler for guidance (who may or may not give good answers) or sifting through unclear instructions on the State-run website.

Given the many-to-many relationships between the 10,000+ wine suppliers and 5,000+ wholesalers, all it would take is for one well organized tool to figure out the process for each State and simplify it for everyone.

4. Lack of Responsiveness/Payment/Trust Between Wine Supplier and Distributor - the supplier to wholesaler segment is notorious for relationships that can "go dark" at a moment's notice, whereby one side seemingly falls off the grid and cannot be contacted.

This is made worse when one side is in need of information, such as depletion reports or product details, but can be devastating when one side is waiting on payment or product to sustain the business.

In a network where parties in a transaction do not share the same risk or incentive, there is generally value to be provided by a third party to mitigate this asymmetry. Think about financial markets where traders of a financial instrument do not necessarily know each other and a seller of stock would never agree to sell with only the "promise" to pay by the buyer.

In a two sided marketplace, this is often solved through the process member reviews or ratings.  In a more heavily controlled market, often a 3rd party facilitator is used to hold escrow and regulate the behavior of market participants.  The wine supplier to wholesaler segment could conceivably use a combination of both to facilitate a more healthy interaction among participants.

There are many other problems and related use cases (payments for example - see previous post on Blockchain for Wine), but the four listed above are the most common that I hear among the industry.

Now, I will invite everyone to imagine the following scenario:

  • Wine Supplier sets up a comprehensive profile on a well designed website, with contact and product information (perhaps linked to SevenFifty).
  • Wine Supplier then indicates which markets (and wholesalers) they are working with today AND indicates markets of interest where they would be interested in connecting with a new distributor.
  • Wine Wholesaler sets up a comprehensive profile, with contact and existing supplier information along with markets served.
  • Wine Wholesaler indicates product/region categories of interest for new suppliers.
  • Wine Supplier browses for a distributor in a market and finds that Wine Wholesaler is interested in a product that Wine Supplier offers.
  • Wine Supplier clicks to "connect" with Wine Wholesaler and start a message dialogue that is facilitated via email (think LinkedIn messaging).
  • Wine Supplier and Wine Wholesaler agree to form a relationship and this is affirmed on the website (via double opt in), at which point a simple workflow is initiated to both sides outlining the steps for licensing and custom instructions.
  • Wine Supplier and Wine Wholesaler are able to provide regular updates through the website (or mobile app) for actions such as requesting depletion reports, posting invoices, scheduling market visits, etc.
  • Wine Supplier and Wine Wholesaler are able to provide, if desired, a public review of each other for other community members to see.

There are countless additional use cases that I could include in the above scenario, but at this point I hope the potential value of such a solution is clear.

So rather than focus on yet another "me too" app to sell wine to consumers, I would encourage all aspiring #winetech entrepreneurs to really consider the supplier to wholesaler segment.

 

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.

The Wine Business is Simple, Yet So Easy to Screw Up

First, I want to apologize in advance - this post may hurt some feelings.  This is not intentional, it is just time we have an open and honest conversation about the financial realities of the wine business.

At the most basic level, the wine business is simple.  A producer makes wine, then sells it to a consumer.  The product itself can be a function of artistic expression at a very small scale, or it can be a formulaic production of mass quantity... either way, it is just a beverage to be consumed.

Note to readers - I personally much prefer the small production artistry of specially made wines, but unfortunately that approach does not have a positive correlation with financial success in this business.

There are a multitude of nuances and small decisions to go from vine to glass, but there are three key aspects to the wine business that, while obvious to everyone in it, seem to get ignored when it comes to the financial management of the business.

1. The wine business is extremely capital intensive.  Of course, you say.  So why then do so many companies get caught in this trap?  

As a wine producer, you are often paying for fruit (or farming costs) several years before you can monetize the product.  Then you have the investment costs of fermenters, tanks, barrels and other equipment - this stuff is not cheap.  Then there is the facility.  And taxes.  Oh yeah, and payroll.  

Most producers are sitting on one vintage in the vineyard, one to two vintages in tank and barrel, then another one to three partial vintages in bottle.  This adds up quickly.  Unless you are adequately capitalized, before you know it, you need more cash for the next vintage.

It is a lot easier to make wine than to sell wine.

As a wine importer and/or distributor, you are buying wine in bulk and selling it off in smaller parts for typically a 25-35% gross margin.  Importers and distributors typically get 30 to 90 day terms, and depending on the state, will often get paid either COD or within 30 days from retailers.  

This "working capital float" has been the demise of so many small importers and distributors. It is too easy to buy large amounts of wine on terms under the assumption that enough will be sold in time to pay the bill.  But in such a highly competitive market, the loss of a key salesperson or just a downturn in the market is all it takes to run out of capital.

2. The wine business is super competitive.  Again, you say "duh" - I know that.  But everyone believes their wine is better than other similar priced wine in the market and therefore it can sell.  Unfortunately, not true (for most).

Just like a poll amongst adult drivers, something like 90% believe they are above average.  The problem is, only 50% can be above average.  The same is true with wine.  

I’ve never heard a winemaker, importer or distributor describe any of their wines as “below average” or even “average” for the price point.

Here's the reality - there are something like 100,000+ unique wines available in the US market. Even in a small state like South Carolina, there are about 25,000 wines registered on SevenFifty, and that does not even cover the distributors not yet on the platform.  

With so many wines available to the retail buyer and consumer, you need to understand the magnitude of alternatives to your products.

3. It is easy to start a wine business.  That's right, in most states all you have to do is fill out some paperwork and, with a little cash, you can slap some labels on shiners and be in business as a wine brand, or start knocking on doors as an importer / distributor.  Want to buy wine to re-sell? No problem.

With such low barriers to entry and such an romantic business (in theory), wine tends to entice the naive business owner.  While the intentions of a new wine entrepreneur may be of the highest order, that does not necessarily mean the wine world needs another new entrant.

Now that we've established these basic fundamentals of the wine business - lots of capital required and the supply of both wines and competition is seemingly endless - it is easy to see why so many companies struggle.  

While these market dynamics are unlikely to go away anytime soon, there are a few things that a wine business owner can do to improve the odds of financial success.

  1. Develop and use a financial planning model.  We're not talking Wall St complexity here, but it does need to allow for scenario planning and the "what ifs" that seem to always happen.  While you may not like the numbers that it spits out, it is at least better to plan in advance so you are not caught off guard when capital becomes tight and options are limited.
  2. Align your strategy with market reality.  If your goal is to grow 50% next year, and we all know the market tends to grow in the 2-6% range at the national level, then you need to have a strategy that is based on taking a lot of share from the competition.  This is not as easy as it sounds, so you have to link the financial model to the sales model to the operations to figure out how to make this a reality.
  3. Really assess your capabilities to execute.  A strategy without execution is just a hallucination.  I never hear of wine business owners talk about "scaling down" the business - it is always about growing.  In that case, execution is everything.  In addition to strong demand for the wine, execution requires a strong team and the right technology.

In most of my conversations, I tend to see some evidence of a financial model (although usually not to the level it needs to be), a strategy that is difficult to articulate beyond lofty aspirations, and no structured emphasis on assessing and improving the execution.

However, this should be good news for those in the business.  If this is how most companies operate in this highly competitive industry, then simply addressing these points can put you a step above everyone else.

 

 

How to Effectively Work the Distribution Channel as a Wine Producer (part 1)

This is part one in a series of posts about how to effectively work the distribution channel as a wine producer.

One of the great things about having been involved in wine distribution is seeing all three tiers of the supply chain.  Wine distributors play the role of balancing the supply from producers with the retail demand and the best ones have a real good pulse on the market. 

Distributors can be lazy at times and entering the world of distribution can be a total pain in the ass, especially for the small wine producer.

Through many years of interaction with wine producers I've seen everything from the small brand trying to get picked up by distributors to well established brands looking to upgrade distributors in an underperforming market.  

Unfortunately what I often see is a process that takes much longer and is more expensive than it really needs to be.

Here's how the process typically goes:

  1. Ask other winemakers for distributor recommendations - "hey, do you know of any good distributors in [insert state]?"
  2. Google "wine distributors [insert state]" and browse a bunch of (generally) poor websites to figure out if your brand would be a good fit.
  3. Call or email distributors from the results of #1 and #2, tell your story and spend $100+ on product and shipping to get them your wine samples. 
  4. Wait patiently to hear from the distributor. Wait some more. Then keep waiting.
  5. Pester the distributor until you get feedback, often settling for an ambiguous "we really liked the wines and we just need to figure out when we can bring them in"
  6. Wait patiently for a PO and in the meantime wonder if you should contact other distributors.

There are of course exceptions to this, but I've heard some variation of the above countless times so I know this is a pervasive issue.  

That said, there are some simple tips that can dramatically improve this process.

First, as a small wine producer, try to avoid the temptation to cold call / cold email.  From my experience, the ROI just isn't there.  

The time and money involved in cold calling distributors will often far outweigh the low chance of both receiving a PO and actually getting paid on time.  

Worst case you get into a "no pay" situation and have no social leverage through mutual connections for any recourse.

For the wine producers without a good set of connections, a more effective way to engage distributors is through a carefully selected set of target accounts in the market.  If you have the luxury of visiting a market where you want to distribute, spend your "Google time" researching the best wine programs for your brand and talk with the wine buyers first not the distributors.  

I would recommend asking the wine buyer two very specific question:

1. What wine distributors do you work with on a regular basis that consistently have good service in both sales and delivery?

The key words here are regular basis and consistent. Regular basis implies a distributor that is established enough to get the regular attention of one of your target accounts vs. a distributor that has worked with the account but struggles to maintain attention.  The word consistent will often filter out the distributors who struggle to keep inventory and operate with thin capital - a big red flag.

2. What wine distributors would you never work with and why?

You are likely to get a variety of reasons why, so the key here is to discern between distributor performance reasons vs. personal reasons. Plenty of buyers will have some mixed history with distributors for reasons that have nothing to do with performance, but either way it is a red flag if this is a target account.

If you do not have the luxury of visiting a market and talking with wine buyers, then anytime you interact with buyers from markets that you are interested in gaining distribution, ask these question and keep a log (I recommend using Evernote).  

Once you hear the same names come up, then you can start to build a short list and research the portfolios to find your top choice. This process can take some time, but in the long run it can be a faster route to consistent POs and timely payments.

Unfortunately, there are no shortcuts to rapidly grow distribution. It takes time, patience and the right strategy.

Now once you have your top choice, resist the urge to reach out right away.  Instead, reach out directly to the wine buyer at a target account in their market, ideally someone who gave you recommendations and positive feedback towards your wines.  

Send them a few samples along with a thank you card explaining that you appreciate their input and are considering approaching [insert top choice distributor] for distribution.  

Then, follow up and get the feedback directly from the wine buyer and just ask the question, "if my wines were available in your market, would you consider working with them?" - if the answer is yes, ask for an introduction.

This approach can be very powerful in two ways.

First, the distributor will always respond when a communication comes directly from an account - use that as a point of leverage.

Second, the distributor will be much more likely to engage with you if there is a good chance for an initial placement.  This approach helps mitigate the  biggest risk from the distributor perspective - can I sell the wines in my market?  

In effect, you're doing a bit of the distributors work for them (remember: distributors are often lazy), but the prospect of a new sale will always get them to perk up.

In part two of this series, I will focus on how to determine if the distributor is a good fit for your brand.