Monday, September 13, 2004

The Power of Retailers

(Part 1 in a series of I don't know how many yet about the three-tier distribution system and related issues).

During an exchange with Alder on
Vinography, I realized that I had rather poorly made a point about the value of distributors (something few people in the direct-shipping battle want to recognize) and that I really should have pointed out the the value of a distributor is that they provide fewer suppliers to a retailer. Larger supermarkets probably have 400 alcoholic products from 300 producers and don't want to deal with 300 (or more) deliveries per month. Thus, the value of dealing with a small handful of distributors is tremendous if you are a mid-sized winery looking to get into the chain markets. You can "tag along" with the regular shipment from your wholesaler to a retailer who otherwise would be happy to only deal with the big players. Further, it underscores the power that retailers currently have in the market as they are really the bottleneck, pun intended, in the supply chain and do they ever know it!

When I go into my local Safeway, it appears that roughly 50% of the wines have a "club card" sale tag. A club card sale allows a brand to lower its price to the consumer without a permanent price drop. This is important because it gives them price flexibility - a permanent price drop would be prohibitive as the retailer wouldn't be as receptive to a return to that price level, they would view that as a price increase. This way, if you want to return to the previous price, just drop the club card deal.

For example, if your $16 Chardonnay isn't moving and your competitors have dropped to $14, you continue to invoice at $8 (50% of the $16 retail), but pay $2 for every bottle that scans through for a net to you of $6 and a net scan price of $14. The alternative, a drop to a wholesale price of $7 (50% of scan price of $14) is actually less costly, but usually viewed as more damaging to the brand in the long run. Confused? Aren't we all....

Here's the kicker though - Safeway doesn't spend a dime on this program, they turn around and immediately invoice the winery for every $2 off price scan (sometimes the wholesaler kicks in too). It makes the retailer look like the good guy, looking out for your family's budget, when really they're just applying the thumbscrews to the winery. But, if you're a producer of any size (say over 100,000 cases) you have to have some significant off-sale business (liquor stores, grocery stores, drug stores, etc.) in order to survive. That's where they get you.

You see, there are over 6,000 domestic and 4,500 imported wines that are distributed on some sort of national scale!!! With over 10,000 products clamoring to get into each retail outlet, even the biggest retailers can't offer more than a small percentage of the total. Thus, the bottleneck. Retailers started picking up on this fact when brand offerings really expanded in the 1990's and started quietly enforcing various "pay to play" programs either from the wholesaler or from the winery. Beringer coughs up the dough for one type of program or another because they fear losing shelf space to Mondavi. These guys have pretty deep pockets, but if you're not Beringer, Mondavi, Sutter Home, Gallo, Wine Group, Constellation, Diageo, Franzia, or Allied Domecq you can't afford to "promote" your wine at the retail level like they can. The result? Less shelf space for the smaller, family-owned wineries. How many of Bonny Doon's roughly 25 national offerings do you see on your shelf? Probably only 2 or 3. How many from Gallo? Probably 20 or more, including the Stealth Gallo brands.

Ultimately, this will lead to a real bifurcation in the market. You will have the big producers listed above in chain markets and the family-owned wineries will stick to direct sales via the web, their mailing list, their tasting room, and whatever local markets they can get into. You won't have any Bogles, Wentes, Bonny Doons, Rodney Strongs in Supermarkets anymore unless they sell to the big guys.

3 Comments:

Blogger Christian said...

Huge,

Spot on!!! Still have yet to get a handle on your interest in wine (be it academic or professional) but you have hit on a major problem with the 'retail' business as it usually stands.

I cannot say for sure that the situation is the same in your neck of the woods, but I would be willing to bet that it is. On this side of the coast most wine shops are not in the business of selling wine, they are in the business of scanning UPC codes. This is to say that they rely almost entirely upon the 'shelftalkers' and excerpts from (enter your favorite wine magazine here) to motivate the general public to buy whatever it is that they have stacked.

Curoiusly enough, the wines that are 'stacked' are at the end of the isles. Over here, they are known as 'end caps'. And, lo and behold, this is valuable real estate. The monkeys aren't willing to look too hard (or pay attention to quality) so the POS and the 100 cases of Alice White Chardonnay win out. The end game is this, you gotta pay to play. And guess what, this real estate ain't cheap.

If there were ever a better arguement for the local 'bottle shop', I don't know what it was. While I admittedly don't sell the 'family' brands that you mentioned, they absolutely need to exist! Randall Graham and his take on wine has done more to bring people into the fold (especially with European varietals) than any other house that I know.

Bottom line, Don't get your politics from MTV. Don't live or die by one man's opinion and don't buy your wine at Wal-Mart.

September 16, 2004 6:33 PM  
Blogger Huge said...

Christian,

Thanks for your comments. Good to have a retailers perspective.

You don't carry BD wines? How about Rosenblum? Don't make me come out there and flog you.... ;)

What % of California vs. French wines do you put on your shelf and how do they sell by price-point?

/huge

September 17, 2004 9:46 AM  
Blogger Christian said...

Huge,

Sorry to disappoint you, but I have no Bonny Doon, Rosenblum, or any other wines from the state of California. No Australia, New Zealand, South American, or any American wines for that matter. Before you lose your cool, please allow me to explain.

There is no doubt that there are very high quality wines being produced in all of the New World regions. There can also be no doubt that there is (for the most part) a categorical difference in style between the New World and the Old. It is the latter that I favor, and it is where I spend my money.

For the record, I wasn't always like this. I cut my teeth on Oregon and California. I sold large amounts of these wines in the last two restaurants that I worked in. In fact it was a California house that planted the seed of my becoming a Francophile.

I hosted a wine dinner for Liparita Cellars at my restaurant. The 'honor' of hosting the event was predicated on my purchasing a case (12 pk) of each of the five wines to be served: .99 Chardonnay, NV Sparkling (sold only at the estate), .96 Howell Mountain Cab, .96 Howell Mtn Merlot, and .97 Napa Merlot. As with the meal, the wines were 'portioned' so as not to take a total bath on the dinner. Mutiny ensued and the thing turned into a drunk-fest. At the end of the day, it was a wash. And the three reds were all line priced at $38.45 wholesale and honestly left a bit to be desired. This was when .97 Viader was selling for $38.45 as well. Later that year, WS declared the Viader the second best wine of the vintage. By this point the .97 was pretty much gone but the issue came out just in time for the release of the .98. Delia made about 2/3 as much wine and the wholesale was $52.00. What's the point? If they think so much of these wines, they should keep them.

There is no doubt that the French and Italians have long sold wine at ungodly high prices. I think that this is ridiculous as well. The difference is that the French do adjust (not as much as I would like, mind you) price according to quality. If the vintage is there, everybody prospers. If it isn't, everybody not so much.
However, in California there are precious few producers that are willing to do so. One of them is Ridge Watson at Joullian Vineyards. But he does this because he has a conscience.

The problem is that John Q. Sixpack draws a direct correlation between price and quantity. The Napa Cab at $60 must be better than the one at $40. How much better? Twenty better. This is insane.

Of course, all things are not created equal and the intellectual laziness of the buying public fosters only more of the same. Couple that with the overwhelming power of a couple of choice publications and voila!

Not to be outdone, the wineries then keep the best of the production and allocate it via mailing list. This feeds multiple fires (exclusivity, restaurant pricing, jealousy, the owners yacht, the $6 billion piece of paradise in Napa) and does little good for the consumer.

And as for my shop, admittedly I am a Francophile. The Old World is what I favor. The situation here in Georgia is such that if you are aware that the big blockbuster, gotta-have-em, can't-live-without-em wines exist, you already are on the mailing list or they are already in retail stores that have much deeper pockets than I and get the 'discounts' that you spoke of earlier.

I could go on and on (and may have already) but suffice it to say that vast majority of the wines that I recommend and sell are between $12 - $30.

September 17, 2004 2:19 PM  

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