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.

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.

The Forthcoming Disruption in the Wine Industry

What do we mean by "disruption" ?

If you follow the technology and venture capital world, or if you've seen an episode of HBO's hilarious comedy Silicon Valley, then you have probably heard the word "disruption" used as a way to describe how startups are shaking up old industries.

In my opinion, the word "disruption" is an over-used term and often strays from its origins in Clayton Christenson's classic book The Innovator's Dilemma.  Regardless, it is hard to argue that disruption is not playing out everywhere we look...

Source: http://www.slideshare.net/CMTelecom/m-co-london26march

Source: http://www.slideshare.net/CMTelecom/m-co-london26march

It is hard to believe how much these tech startups have completely transformed traditional industries such as transportation, media, retail and hospitality.  

Why is this talk of disruption important to the wine industry?  

For starters, there are very few industries I've encountered that operate with such archaic practices -- from the extensive use of paper (amazed at how many in this business still use fax machines) to the reliance of manual processes to track and report on all manner of operations to the dependency on paper checks as the most common form of payment.

The ‘old school’ way of doing business in the wine industry is ripe for disruption on many levels.

When you have a large industry like wine ($38 billion a year business just in the U.S.) and combine it with a myriad of intermediaries that exist between the product and end consumer plus all the inefficiencies that exist, then it is a matter of when not if the industry will see disruption.

Source: BrandKnew - How Disruption created (and buried) some of the world’s biggest brands and concepts?

Source: BrandKnew - How Disruption created (and buried) some of the world’s biggest brands and concepts?

Why has the wine industry not been disrupted yet?

Two primary areas where you often see disruption are on the product itself and on the supply chain (how the product is delivered to the end consumer).

Unlike digital services, it is easy to see why the product of wine cannot be easily disrupted, and on the supply chain, the wine (and alcohol) industry is unique with the complexities of the U.S. "three tier system" which places certain constraints on innovation.  

That said, we're seeing the beginnings of some innovation in the supply chain through a few well funded venture-backed startups like Naked Wines (bringing producers closer to consumers) and Sevenfifty.com (creating transparency in wholesale markets). Both startups have addressed friction points related to broken trust and complex intermediaries. 

What is next for disruption in the wine industry?

There is no doubt we will see continued innovation with more "mobile-first" offerings that will enhance consumer experiences for the discovery, purchase and social aspects of wine. 

We will continue to see a strong trend towards direct-to-consumer offerings, shifting more of the $38 billion of annual sales in the U.S. towards the DTC model.

I believe we will also see more innovation at the point of sale through use of internet-of-things (IoT) and in-store beacon technologies. We will be introduced to new wine "chatbots" built natively into messaging platforms and interactive wine tools that use artificial-intelligence to help consumers make the best purchasing decisions.

However, all of these technologies, while good and interesting, are generally incremental in nature.

Of all the new technologies, I believe blockchain has the most potential to be a transformative catalyst and help re-invent how we do business in this industry.

Blockchain for Wine

Much has been written about blockchain's disruptive potential in the financial services industry, but it also has enormous potential to transform the supply chain for wine.  

It pains me to think about how much capital and energy is consumed tracking wine inventory from producer to consumer, not to mention the headaches involved with payment disputes, customs issues and logistical challenges.  

Blockchain has the potential to create a completely transparent and secure network for tracing every parcel from source to destination, and embedding intelligence into the supply chain process.

Imagine as a wine producer, the ability to track every shipment through the distribution channel and retail network to know with 100% confidence where the wine is at any given point?

Imagine as a wine distributor or retailer, the ability to create "smart contracts" such that as certain promotions and sales occur, discounts or sample credits are automatically calculated and applied to the correct accounts? 

Imagine as a wine consumer, the ability to trace the provenance all the way back to the producer and feel 100% confident the wine is authentic and as advertised?

Those are just a few of the possible use cases with blockchain, and can all be done more efficiently and effectively compared to any other existing technology.

I expect it will be some time before widespread adoption of blockchain occurs in the industry, but those early adopters will have the benefit of defining how the disruption will occur rather than being part of the disrupted.