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.

What Business Model Will Emerge as the Winner in Direct-to-Consumer Wine Sales?

There is no doubt that direct-to-consumer (DtC) is the growth engine of the wine industry. 

While overall wine sales in the U.S. generally hover around 2-3% annually, DtC wine sales are up double digits and now represent approximately $2.5 billion in annual sales.

With new states like Pennsylvania and Oklahoma easing restrictions to allow DtC shipments, and with a proliferation of web and mobile based services offering wine delivered to your door, it is easy to see how the growth trends will continue.

The question, therefore, is what business model will emerge as the winner?

There are multiple variations of the DtC business model, but when you break them down there are basically 3 differentiating models:

1. No Commitment Required (NCR) - as the name would suggest, buyers simply take advantage of the deal and/or inventory available at the time of purchase, with no obligation to make any future purchases.  This is much like the traditional e-commerce model pioneered by wine.com in the original dot-com era and now include variations ranging from flash sites such as Lot18Garagiste, WineAccess, Last Bottle and SommSelect, to more ingenious options like Underground Cellar, WineBid and Vinfolio. Note: I have excluded Amazon and eBay from this category even though both have tried (multiple times) to get into wine.

2. Commitment Wine Clubs (CWC) - unlike the NCR model, the commitment clubs are based on a subscription model. The terms of the subscription may vary from monthly to quarterly or even annual shipments, but the basic premise is to generate recurring revenues, much like Blue Apron does with meal kits. Some examples include Winc, Tasting Room (now part of Lot18), Uncorked, Bright Cellars as well as wine clubs sponsored by media outlets such as Wall Street Journal and NY Times.

3. Membership Wine Clubs (MWC) - unlike the CWC model, there are generally no automatic shipments of wine, however members pay a fee (typically annually or monthly) with the membership proceeds used to subsidize wine purchases and/or shipping costs.  This is much like a Costco membership or Amazon Prime account. Some examples include Splash Wines, Naked Wines and Plonk.

Despite the variety of options across these three business models, we have yet to see a real winner emerge.
Source: Isocline Ventures, LLC

Source: Isocline Ventures, LLC

Yes, there are some thriving businesses listed above, but nothing that even compares to the consumer direct brands from other industries.  

Where is the Warby Parker, Dollar Shave Club, Chewy, Bonobos, Casper or Everlane of the wine industry?

Surely in a $38B annual industry, there will be at least one dominant brand to emerge in the direct-to-consumer wine business.

There are several unique qualities of wine that make it hard to conquer in the direct-to-consumer world: wine is heavy, temperature sensative and expensive to ship, it is a consumable and therefore does not lend itself well to returns, and is mired in antiquated regulations.

That said, all of those problems are solvable. Companies like Casper and Wayfair ship heavy goods, Blue Apron ships perishable consumable foods every day, and a variety of third party services like ShipCompliant make navigating the regulations easier than ever.

So back to the question of what business model will emerge as the winner, in the end, it may not be the model that defines the winner, but rather the characteristics that have made other DtC businesses successful.  The winner(s) will likely incorporate the following:

  • Free shipping - this has become almost the ante to be a top DtC player and many of the wine companies listed above already offer free shipping (typically with a minimum purchase). 
  • No haggle returns - you obviously can't return an opened bottle of wine, so this means when a customer complains, the winners will give the customer a credit, no questions asked.
  • Loyalty programs - the goal is to create lifetime value (LTV) and the winners will utilize innovative loyalty programs to maximize repeat purchases and minimize subscription churn.
  • Improving quality of wine sourcing - the mistake that others have made is starting off by offering name brand wines at low prices, only to shift to lower quality private label brands over time - consumers will notice and churn will follow.  Winners will constantly up the quality levels through scale.

All the other features like personalized tasting algorithms, large wine content libraries, online cellar tracking features, etc. are all "nice to have" but not what will truly define the winner.

Given the DtC growth trend in wine, and the good examples of DtC brands to follow in other industries, we will see one or two household names emerge in the wine category... it is just a matter of time. The companies that focus less on the business model and more on delivering superior quality wine with exceptional service - the hallmark of all the great DtC brands - will be the winners.

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.