The Two Wine Industries: Separate and Distinct

canyonIt is becoming abundantly clear that there exist today in the United States two very distinct and separately operating wine industries. One, the larger of the two, is dedicated to selling relatively inexpensive wine to the masses. The other is dedicated to selling relatively expensive wine to a smaller group of wine lovers. What’s interesting about these two separate industries is that there is less and less for their members to talk to each other about.

Take for example the recent Unified Symposium in Sacramento and one particular seminar entitled, “Adapt or Go Extinct: Removing Barriers to Our Industry’s Success”.

One of the panelists, Jennifer Jo Wiseman, vice president of consumer and product insights at E. & J. Gallo Winery, suggested that “empathy is the key to understanding consumers and meeting them where they want to be met.”

Ok. All good. Then, according to a story by Wines & Vines, Wiseman related this hypothetical story:

Lea, a woman visiting the grocery store with her 5-year-old son. Daunted by the idea of accompanying her child down the wine aisle (“a canyon of glass, according to Wiseman), she chose a bottle from the end cap display and went on with her day…’Lea is experiencing a lot of the barriers we see for many different shoppers,’ Wiseman said, noting her customer’s desire for a quick solution and reservations about poring over hundreds of bottles before making a purchase. Rather than assume Lea got it wrong by picking a somewhat familiar looking label and heading straight for the register, Wiseman said wine sellers should seek to empathize with Lea and figure out how to meet her needs.

What about this story could possibly appeal to or have relevance to the winery located in Paso Robles, Russian River Valley, Napa Valley or the Finger Lakes who can’t get distribution or who has distribution and can’t get their distributor to care about them, or to the winery sells $40+ bottles of Pinot Noir to tasting room visitors and wine club members?

The Wines & Vines Story continues:

“A corner of the wine industry believes the answer for Lea is in educating consumers about wine. Wiseman cautions, however, that not all consumers want to be educated. Plus, what other business model requires you to be educated before enjoying the product you’ve already paid for? “

It’s important to note that “corner” of the wine industry of which Ms. Wiseman speaks is selling somewhere in the neighborhood of $3 billion to $5 Billion worth of wine directly to the consumer and could care less about the dynamics of Lea and her undisciplined toddler.

Another speaker on the panel also had interesting things to say, but again, spoke right past an entire portion of the industry. Again, from Wines & Vines:

“Identifying that small wine brands can get lost in the grocery aisle—if they can get distribution there at all—Amy Hoopes, president of Wente Family Estates, suggested new wineries be willing to start somewhere with a smaller footprint. Get a following, especially among the social share-happy millennial set, and you could have distributors coming to your door instead of vice versa, she suggested.”

The vast majority of new wineries give very little thought to motivating distributors to knock down their door. In fact, the vast majority of new wineries are thinking about how they can get the inquisitive, wine loving consumer who is more interested in learning about wine, its intricacies and its history to bust down its winery’s door, rather than busting through a grocery store with toddler in tow.

What’s clear is that in addition to the emergence of two industries, there is also a need for two sets of tools for these industries. For the vast majority of wineries, those that are now concentrating on direct sales, events like the DTC Symposium and like the ShipCompliant DIRECT conference, both of which focus on selling more wine direct, are more relevant. Meanwhile, for the other industry focused on three-tier distribution, the Unified Symposium, the Wine & Spirit Wholesalers of American Convention and other main market events will be better suited for their needs.

Meanwhile, media relations I think will be important to both small and large wineries. The difference will be how and toward what end direct and mass market wineries approach the media, and which media for that matter. Some members of the wine media, like Wines & Vines, Wine Business Monthly a number of bloggers as well as many reviewers do an outstanding job of covering the small, more nimble, direct sales focused wineries. Other members of the media are a bit more content focusing on mass market wines.

Social media tools also can serve both industries, but again the way they are used by the two different industries will differ significantly.

An interesting question is the degree to which various trade groups can and will serve the two industries. Obviously the regional trade organizations that organize around AVAs are much more important to the smaller, direct sales focused wineries and they should be supported fully by the smaller wineries.

My belief is that the canyon between these two industries will continue to widen as we go forward. Despite what some say, there will also be an important part of the consumer base that does want more detailed information on the wine, the places where it was grown, the characters who grow it and make it and who will be willing to pay much more for wine because they desire more contact with the authentic. And of course there will be a much larger part of the consumer base that merely wants to avoid broken bottles in the grocery store wine aisle while still being able to pick up a bottle of juicy, fruity alcohol in wine form that will satisfy them at dinner or when their toddler is down for the night.

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25 Responses

  1. Jim Caudill - January 30, 2017

    Very perceptive, I’m guessing the toddler insights resonated with you!

  2. Tom Wark - January 30, 2017

    Jim, being the father of a Toddler, I understand the big wine companies’ focus on parents of toddlers. I understand perfectly.

  3. Bob Henry - January 30, 2017

    Excerpt from Wine Spectator Online
    (November 12, 2013):

    “West Coast Wineries Are Up for Sale — Quietly”

    (A wave of recent deals show investors see opportunities in wine, while owners see an exit strategy.)

    Link: http://www.winespectator.com/webfeature/show/id/49221#.UoI_yAMMzG8

    SELECTIVE EXCERPTS:

    “… While small wineries can succeed by selling most of their inventory direct to consumers and large producers have muscle with wholesalers, those in the middle — annual production of 5,000 to 15,000 cases, for example — can’t get much attention from distributors unless the brand is hot.”

    AND:

    “… ‘I’ve never seen more wineries for sale in California than there are today,’ [said Charles Banks, who through investment groups such as Terroir Selections purchased Santa Barbara Syrah specialist Qupé and Napa veteran Mayacamas Vineyards.] … Banks … estimates that between 30 to 50 percent of California wineries are either in financial difficulty or aren’t as profitable as they could be.”

  4. Bob Henry - January 30, 2017

    Excerpt from MediaPost
    (December 8, 2016):

    “40% Of Alcohol Beverage Buyers Make Their Decisions In-Store”

    Link: http://www.mediapost.com/publications/article/290633/40-of-alcohol-beverage-buyers-make-their-decision.html?edition=98740

    Fully 40% of U.S. consumers who buy alcoholic beverages haven’t decided what they’re going to purchase when they walk into the store, according to a new study from IRI.

    Of the 60% who do have a planned beverage purchase, 21% end up changing their minds in store, and 50% of those who change their minds ultimately buy a different brand than they originally intended.

    . . .

    All of which points to “immense” opportunities for alcohol manufacturers to find new pockets of growth by engaging and influencing consumers while they’re in the store, point out IRI’s analysts.

    Beer, wine and spirits manufacturers are increasingly aware of the importance of working with retailers to win over consumers, according to Robert I. Tomei, president of consumer and shopper marketing for IRI. “When you consider how often most shoppers are going to the store, and that 21% of them change their minds during the shopping trip, you realize the impact that in-store signage, creative labeling and other marketing could have on your portfolio,” he stresses.

    . . .

    (Bob’s comment: But more importantly, you realize the impact that in-store salespersons play in guiding purchases as an “opinion leader” and “taste maker.”)

  5. Bob Henry - January 30, 2017

    Excerpt from WineBusiness.com
    (May 12, 2010, 2012):

    “The Market for Fine Wine in the United States”

    [Fine Wine 2010 Conference in Ribera del Duero (Spain)]

    Link: http://www.winebusiness.com/news/?go=getArticle&dataid=73903

    By Graham Holter
    Associate Director – Publishing
    Wine Intelligence market research firm (United Kingdom)

    . . .

    According to the data presented by [David] Francke [managing director of California’s Folio Fine Wine Partners], US wine drinking is compressed into a small segment of the population.

    SIXTEEN PERCENT OF CORE WINE DRINKERS consume wine once a week or more frequently, which ACCOUNTS FOR AROUND 96 PERCENT OF CONSUMPTION. Thirty-five million adults drink virtually all of the wine sold in America, Francke said.

    [Bob’s comment: The grocery store shopper with a toddler in tow is most ikely not one of the 16% who consume 96% of the wine in the nation.]

  6. Bob Henry - January 30, 2017

    Excerpt from The Wall Street Journal “Marketplace” Section
    (November 26, 2008, Page B6):

    “Marketers Reach Out to Loyal Customers”

    Link: http://online.wsj.com/article/SB122766322705958805.html

    By Emily Steel
    Staff Reporter

    It’s an adage of the business: Persuading a satisfied customer to return is cheaper than attracting a new one. Now, in the struggle to do more with less, that concept is becoming even more important.

    Acquiring a new customer costs about five to seven times as much as maintaining a profitable relationship with an existing customer, says Marc Fleishhacker, managing director at WPP’s Ogilvy Consulting . . .

    [Bob’s comment: Wineries and retailers need to focus on their marketing efforts on retaining those 16% of core wine drinkers — the “low hanging fruit” — and not on trying to convert the other 84% into becoming more frequent wine drinkers.]

    • Bob Henry - March 2, 2017

      Timeless truths for a mature company in a mature industry:

      ~~ retain your existing core customers
      ~~ win back your lapsed core customers
      ~~ spend little time or money acquiring new customers

      Ripped from today’s newspaper headlines . . .

      Excerpts from The Wall Street Journal “Business & Finance” Section
      (March 2, 2017, Page B1):

      “[McDonalds’s] Burger Giant’s New Bet: Burgers”

      https://www.wsj.com/articles/mcdonalds-to-expand-mobile-delivery-as-it-plots-future-1488390702

      AFTER losing about 500 million U.S. orders over the past five years over FAILED ATTEMPTS TO WIDEN ITS CUSTOMER BASE, THE FAST FOOD CHAIN SAID IT IS GOING TO embrace its identity as an affordable fast-food chain and STOP CHASING AFTER PEOPLE WHO WILL RARELY EAT THERE.

      . . .

      CRITICS HAVE LONG BEEN URGING THE CHAIN TO FOCUS ON ITS CORE CUSTOMERS, but McDonald’s had added more salads, snack wraps and oatmeal to its menu to attract health-conscious customers. In recent months the chain pulled many of those slow-selling products. It also had experimented with higher-priced burgers that failed.

      CHASING NEW CUSTOMERS IS A PITFALL THAT’S HURT OTHER FAST-FOOD RESTAURANTS.

      . . .

  7. Mike Wanless - January 30, 2017

    I do in store wine tasting and sell a lot of wine to parents who can’t wait for baby to go down!

  8. Stanley Yucikas - January 31, 2017

    Visited a grocery store on Sunday, one I had never been in prior, and while not in to purchase wine I understandable took a moment to visit the wine aisle. To say it was totally bewildering would be a gross understatement. For the life of me I could not understand what was being presented. Even the varietal headers were totally wonky. If I had a toddler in hand I think I would have grabbed the first bottle that had a pretty label and called it a day. The shear volume makes me think the store sells lots of wine but I was left wondering about your comments about educating consumers about any particular wine when it is not that at all, it is in the luck of the location within the store. I’d be willing to bet the farm that those end-cap displays come at a price and that there is far more of a lable/location effect as opposed to the quality of the contents and no matter how good the wine, the marketing folks will win the day in the supermarket.

    • Bob Henry - January 31, 2017

      Paco Underhill in his seminal book “Why We Buy: The Science of Shopping” discussed his research on what shelf location is best for displaying a consumer packaged good in a grocery store aisle.

      (Executive summary: http://www.consulttci.com/Book_reviews/whywebuy.html)

      Consumers shop from the height of their eyes to their waistline. Consumers dislike having to bend over to see a product’s label on a shelf, or pick up a product from a shelf.

      That’s why single digit priced “bargain” wines in the grocery store are on the shelf closest to the floor. They survive purely on low price, not quality, not name recognition, and not marketing support other than fanciful names and eye-catching graphics. (Single digit priced wines have no advertising budget.)

      Exception: Yellow Tail is spending over $5 million to run a single 30-second TV ad across 80% of the local broadcast stations carrying the Super Bowl. Seasoned advertising veterans question whether that one spot will be remembered amidst the advertising message “clutter” of a Super Bowl game.

      (By my estimation, that $5 million represents the importer Deutsch Family Wine & Spirits’ gross profit market on selling 5 million bottles of Yellow Tail.)

  9. Pam Strayer - January 31, 2017

    Yes, there are two industries. And neither does a good job of demystifying wine. Upscale wineries prey upon consumer ignorance, just as much as supermarket wines do. “Like us, join our wine club, and pay our overpriced prices, since you visited us,” is the typical consumer treatment in Paso, Napa, and Sonoma.

    Eric Asimov made a poignant plea in his Unified Wine Grape Symposium keynote address by asking California winemakers to consider making more $20 and under terroir-driven wines, instead of focusing, as the supermarket industry does, on what he called “cheap imitations” of high priced wines. Point well taken. He’s pointing to the foreign wines (like Muscadet, Beaujolais) that scoop up the $20 and under market in a big way in wine stores and specialty grocers.

    • Tom Wark - January 31, 2017

      Hi Pam…Thanks for commenting.

      You wrote, “Upscale wineries prey upon consumer ignorance, just as much as supermarket wines do. “Like us, join our wine club, and pay our overpriced prices, since you visited us,”

      Can you tell me how you know if a wine is overpriced??

      Thanks,
      Tom….

    • Bob Henry - January 31, 2017

      I would submit that we one underappreciated category of domestic, terroir-driven, under $20 red wine: Zinfandel — from old vines predating Prohibition. Old vines dating back to the repeal of Prohibition.

      Zinfandel, the “backbone” grape that forms so many California red blends that have found a following among the public.

      https://www.wsj.com/articles/the-red-wine-blends-trend-more-than-just-flashy-packaging-1425661090

  10. John Stewart - January 31, 2017

    I really like what Eric Asimov has to say but I am not sure who he is talking to when he asks winemakers for a sub $20 bottle of terroir driven wine. For a medium size winery it costs about $3 per bottle for label – cork – packaging / bottling. At $2500 per ton for grapes of terroir quality (this is on the low side) that’s about $3.50 per bottle. If you are using new French oak at $1200 per barrel that adds another $4 per bottle. So that adds up to $10.50 per bottle before paying salaries or making a profit or covering sunk equipment costs.

    Let’s work backwards from that $20 retail price that the grocery store sells that bottle of wine for. The store buys it from a distributor anywhere from $10 to $12 per bottle and marks it up to $20. The distributor buys it from the winery anywhere from $6 to $8 per bottle to mark it up to sell to the store for $10 to $12. So the winery doesn’t even cover their physical cost of the terroir driven wine while everyone else makes a profit.

    Maybe in his next address he can ask the retailers and distributors to take a smaller cut.

    • Bob Henry - January 31, 2017

      John wrote:

      “At $2500 per ton for grapes of terroir quality . . . ”

      Years ago I learned the following pricing short-cut: take the cost for a ton of grapes and divide by 100. The resultant projects the suggested retail selling price of the wine.

      So for $2,500 grapes that means $25 for that bottle . . . overshooting the $20 pricing goal.

      Someone in the channel of distribution between producer and distributor and retailer is going to have to shave his profit margin to make that bottle come in at $20 retail.

      And I’m guessing is it’s going to be the producer first!

      • John Stewart - January 31, 2017

        That’s a metric used by small wineries selling DTC years ago when barrels and land costs were much cheaper.

        The big boys can do that with their oak chips and cheap Central Valley fruit but then its not terroir driven.

        • Bob Henry - January 31, 2017

          Excerpt from The Sacramento Bee “Business” Section
          (February 14, 2008, Page D1ff):

          “Full Bouquet on Wine Costs;
          From grapes to glass, prices vary by region and quantity”

          Alternate links:

          http://www.record-eagle.com/news/business_the_biz/article_1d40b347-9132-54ea-bb2d-fc3fbdfa3db9.html?mode=print

          By Jim Downing
          Staff Reporter

          “Breaking Down a Bottle”

          The value of wine grapes depends on where they’re grown. While grapes are the primary ingredient in wine, they make up only a splash of a bottle’s retail price. Here’s a breakdown of the estimated costs in a typical $20 bottle of wine:

          Grapes . . . . . . . . . . .$ 1.95 Petite Sirah (Mendocino)
          Winemaking ops . . . $ 3.25 medium-volume
          Oaking . . . . . . . . . . $ 0.75 American oak barrel
          Bottle glass . . . . . . . $ 0.90 Midrange glass
          Label . . . . . . . . . . . . $ 0.25 Midsize order
          Closure (cork) . . . . $ 0.30 Midquality cork
          Capsule . . . . . . . . . $ 0.10 Aluminum
          Bottling . . . . . . . . . . $ 0.45
          Subtotal . . . . . . . . . $ 7.95

          Winery mark-up . . . +75%
          Winery mark-up . . . +$ 5.96
          Subtotal . . . . . . . . . $13.91

          Wholesaler m-up . . +20%
          Wholesaler m-up . . +$ 2.78
          Subtotal . . . . . . . . . $16.70

          Retailer mark-up . . . +20% supermarket
          Retailer mark-up . . . +$3.30
          Total . . . . . . . . . . . . $19.99

          Sources: Sacramento Bee; Robert Yeltman, UC Davis; National Agricultural Statistics Service

          • Bob Henry - January 31, 2017

            Same Sacramento Bee article. Same sidebar.

            $80 bottle

            Grapes . . . . . . . . $ 5.75 Cab Sauvignon (Napa)
            Winemaking ops $ 6.25 small lots
            Oaking . . . . . . . . . $ 2.00 French oak barrel
            Bottle glass . . . . . $ 2.00 Heavy European glass
            Label . . . . . . . . . . $ 0.65 Small order, fancy label
            Closure (cork) . . .$ 1.00 Highest-quality cork
            Capsule . . . . . . . . $ 0.18 Tin
            Bottling . . . . . . . . $ 0.50
            Subtotal: $18.33

            Winery mark-up +150% Small, renowned winery
            Winery mark-up +$27.50
            Subtotal: $45.83

            Wholesaler m-up +35% Low volume = high m-up
            Wholesaler m-up +$16.04
            Subtotal: $61.86

            Retailer mark-up +30% Wine shop
            Retailer mark-up +$18.13
            Total: $79.99

            Sources: Sacramento Bee; Robert Yeltman, UC Davis; National Agricultural Statistics Service

  11. Elizabeth Schneider - January 31, 2017

    Tom,

    Amazing work and spot on. The chasm is growing but not just among producers. It’s also among those willing to accept the mass brands and those who are interested in wine and being more informed about it. Wine education and educated consumers are an enormous threat to the Big Hulking Wineries (as I like to call them). The more people understand about wine and the intricacies of making it, the importance of terroir, and of quality winemaking, the less they want the homogenized crap that these wineries dole out.

    I find the premise that the average consumer is not interested in education to be outlandish and insulting to wine drinkers. I’m sorry, but who wants to feel bad about shopping for something they like? The SKU proliferation is mostly their doing, since shelf space is dominated by large brands at grocery. When choosing between knowing more and not knowing, I have rarely, in my years of being a wine podcaster/speaker/writer come across someone who, when offered the chance to know more, said “no thanks!”

    Do they even understand why DTC is growing? It’s because people like me, who actually HAVE two kids under the age of 5, don’t want to shop under pressure in the grocery store. We want to take our time and research and understand what it is we’re drinking. I can do that on my couch and I encourage my audience to do the same when they can. Again, DTC is a huge threat to someone making seas upon seas of indistinguishable plonk that is only differentiated by a flashy label. When you have a little time, you may actually make a better choice. DTC venues are open 24-7.

    Wiseman’s and Hoopes’ (former Gallo, BTW) rhetoric needs to seep out to the wine drinking public so they can understand the, frankly, insulting way they are perceived by large wineries.

    I appreciate everything that you do for the industry and a piece like this, which is easy to share and distribute with my listeners will help enforce the message that big wine has missed the boat again. I, for one, hope that the underdogs win this round and that the “shadow” industry of small producers triumphs. For my part, I’ll do everything I can to make sure that happens.

    Thanks again,
    Elizabeth
    Wine for Normal People

  12. David Scheidt - February 1, 2017

    The Sacramento Bee articles regarding cost are spot on, however, valuations on the average price of grapes in Sonoma County have gone up since 2009. I would add, that the average is not what we pay for the highest quality fruit in the County. Costs have steadily been rising, especially for labor.

    I produce about 1000-1200 cases per year the last couple years, I’ve been doing this since 2007 and now do it full time since 2014. I have no distributor. I am the sole distributor and I drive a lot in the Central Valley of CA. I sell to restaurants, bottle shops and boutique grocery and deli stores in towns like Fresno, Visalia and Bakersfield. I complete against Southern Wine and the like. I am current on vintages in the marketplace, selling 2016 white here in a couple weeks and 2014 red wines. My price points range from $19 – $75 retail.

    I’ve done what was suggested, build up a marketplace niche, geographically, however, no distributor has ever knocked on my door. Ever.

    I have tried to get distribution in places like San Diego and Palm Springs and I’m met with a straightforward “No”; even from boutique distributors.

    I have no tasting room in Healdsburg, so I have to stay hungry. I have to innovate or the business will fail. I have to be in front of my customers, both direct and restaurant with new product launches, not launching everything at once. I have to be on the road. I have to make a wine that sells against the big brands and the boutique.

    I have a “natural” wine, my Sangiovese, but I don’t market it that way. I have a big juicy new oak Cabernet as well. I have a barrel fermented Rose. I have a NV Jug wine. My style is to make wine that people drink and customers that want to buy my wines because they like what I do.

    Making wine is easy. Selling wine is hard, because it doesn’t sell itself.
    David

    • Stanley Yucikas - February 3, 2017

      Dave,
      If you haven’t already worked with the Garagiste Festival you should check it out. They now have festival locations in LA and the Bay area. I’ve found it to be one of the most attractive venues for produces such as yourself.

      • Bob - February 3, 2017

        I have attended the Garagiste Festival every year in Los Angeles.

        (Aside: the organizers select an architecturally distinctive landmark building each year. Most recently, the Wiltern Theater — an Art Deco design that has been lovingly restored. Not every old building in La-La-Land is destined to be a “knock down” in the pursuit of “progress.”)

        It is a good promotional opportunity to introduce your wines to the “new experience-minded” wine enthusiasts. Maybe sign them up for your mailing list.

        It is NOT a good promotional opportunity to introduce your wines to the “jaded” wine trade because they won’t leave their wine stores and restaurants to attend a Saturday event.

  13. Mike Wanless - February 1, 2017

    Dave-you and i should form an association of two(though i suspect there are a number more of us fools) . You mirror my operation with the exception that i grow my grapes too. I would add (and say often) that it is “fun” and easy to “grow” and make, selling is hell. Not to the consumer, the gate keepers are so inundated with labels and sub labels and vanity labels that they never, ever want to talk and a call back, forgid about it,. it is a black hole. It is so obvious that the internet will be my savior, if I can just figure out how to find the schedule. Cheers

    • David Scheidt - February 1, 2017

      Always good to know I’m not the only one.


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