Careers in Wine

When Not Everyone Agrees With You

News From Napa…
As I am sure you have all heard and seen the images from Sundays 6.0 quake.  Thank you so much for all the calls and texts, and emails.  We were very lucky – the Benchmark family is safe and intact. We had a few few minor breakages, but overall we are grateful and our hearts and prayers go out to our neighbors and friends who did not fare as well.  

We wish a speedy recovery to our industry friends and families.
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When Not Everyone Agrees With You
The more invested we are in an idea, the more likely we are going to present an idea persuasively. And even if we do present it well, there will likely be some resistance to some or all aspects of it. How we react to resistance is a determining factor in both the growth of our ideas and ourselves.

What is there to do when not everyone agrees with you? You could rejoice at the evident diversity of perspectives, but realistically, you must remember that this is not a personal evaluation. Keep discussions objective and tightly anchored to the original idea.

Perhaps you feel very strongly about something. As situations become more qualitative than measurable, the ultimate redress may be impossible to define. As you may have previously noted, others will have their ideas and beliefs at least as strong from another perspective.  

Perhaps you have taken great pains in presenting an idea. Opening ideas up to questioning allows you to use the knowledge gained from experience and research to further elaborate on the merits of the issue. As you rationally express your points, you will learn more deeply about the subject, as well as increase your general ability to maintain a positive and productive attitude.

Research

The New U.S. Wine Market

The U.S. wine market fell off a cliff in September 2008, and it is still hanging in mid-air.

Far more has changed in this market than the behavior of the American consumer: The companies that distribute and sell the vast majority of wines have dramatically changed the way they do business.

To begin to understand this new market, Stonebridge Research created its Fine Wine Trade Monitor in March 2010, with support from industry groups including Napa Valley Vintners, the Paso Robles Wine Country Alliance and South African Winegrowers, and with help from industry leaders across the country.

From March to June 2010, we conducted telephone conversations of one hour or more with more than 50 top managers in the wine trade: eight distributors, 17 independent wine retailers and 25 full-service restaurants (both chains and independents, including national accounts) in the top wine markets in the United States (New York, Boston, Miami, Atlanta, Washington, D.C., Chicago, Las Vegas/Reno, Dallas, Houston, Seattle, Los Angeles and San Francisco) and several smaller markets.

In each conversation, we asked:

  •  How has your wine market been, over the last 24 months?
  •  How have you adapted your business?
  •  What is selling and what isn’t?
  •  What moves wine in this marketand what doesn’t?
  •  What notable trends have you seen in consumer behavior?
  •  What has been the impact of changes in distributor business?
  •  What can – and should – producers do?
  •  What worries you about the future?In the process, we learned what exactly this new market was and how the trade – wholesale, retail, restaurant – has changed to adapt to the new economy.

BEYOND GROCERY STORE DATA

We know that Americans are still drinking wine. They are just paying less for it. Consumers have changed what they buy, what they are willing to pay for it, and particu- larly, where they buy it – with consequences for everyone in the wine business.

You may have read that not only are retail wine sales rising, so are wine prices at retail. But that is InfoScan data, which is primarily grocery and drug store data, in the states where wine can be sold in those channels. In late 2008 and early 2009, grocery stores closed out – at huge discounts – most of the higher-priced, small-production wines on their shelves. Pretty much everything else has been heavily discounted.

So what does it mean if those prices appear to be increasing? Either that discounts may be some- what smaller or that consumers are taking advantage of better wines being discounted.

So, wine prices are rising…from what?

Are wine prices recovering?

What is really going on out there?

RETAIL

Here are some basics on wine sales. In the “normal” market, before the recession, it would take about three months to move an inventory of wine at retail (described in the trade as a “turn rate” of four times a year). Some lesser-known or more expensive wines might take longer to move. Thus, much of the cost of wine in all parts of the market is the cost of holding inventory. That inventory turn rate for wine has now slipped to once a year: 12 months to move all but the strongest brands and biggest values. This happened at a time when credit was becoming scarce and more expensive.

From the third quarter of 2008 through the spring of 2010, retail wine sales revenue declined 15%- 20% in most parts of the country, while sales volume – the number of bottles sold – rose. Many retailers found they were “working twice as hard for less money.” Wine would only sell with large discounts – 30% being the norm – or a special event. Many retailers cut staff by as much as 20%. “Hand-selling” of wine was an expense few could continue to afford.

Retailers also responded by cutting inventory, by 20% or more. They swapped out wines costing more than $50 for wines under $20. Anything that didn’t move quickly was closed out. Imports were the first to go, then smaller producers, library wines, multiple vineyard-designates, all those “new varietals” – all gone. And if they haven’t seen you lately, you are probably one of the brands they cut.

If it looks like retail shelves became filled with large-volume brands, they were. Risk-averse consumers were reaching for not only less expensive wines, but familiar labels from large producers able to fund the promotional allowances and discounts needed to sell wine.

The only alternative to discounting that seems to work has been special events with winemakers. Vintners’ travel is up 30% or more.

We do a lot of consumer research at Stonebridge. A few years ago, price was a factor in wine purchases – one of several, along with brand, variety, ratings, the occasion when the wine would be served, etc. Wine was, to use a wonderful phrase from Yankelovich Partners’ study for the California Wine Institute in 2005, a “safe adventure” – consumers were excited about trying something new, even dangerous, in wine. Well, that’s over.

Today no one is quite sure what consumers want, other than price. At least at retail, they are not being adventurous. Not that they are being given much of an option, either, because there is less and less adventurous wine on the shelf.

RESTAURANTS

Restaurants have been much more creative in responding to this economy.

The year 2009 was the worst for U.S. restaurants in almost 40 years. Full-service restaurants were the hardest hit, with particular pain coming from the loss of corporate and expense-account business. The average check was down 15%- 20%, but the average wine sale was down 20%-50%. Wine sales were down far more than spirits or beer, which were seen as more economical alcoholic beverages.

Restaurants responded by adapting their menus to allow customers to “manage their spend” through increased choices in more price categories and flexible portion size, prix fixe meals, special offers, food sharing and small plates. And they have adapted their wine lists accordingly.

Customers have been turning toward wine by the glass for several years, but in 2009, the shift was drastic, from bottle purchases to a cocktail, followed by a glass of wine with dinner. Restaurateurs described their new business as “selling more wine to fewer people at lower prices.”

The “sweet spot” for wine bottle sales dropped to the $40-$60 range from $90 or more – and it hasn’t improved. We even began seeing “house wine” again, albeit of better quality than in years past. With wine sales slowing, restaurants began cutting new purchases, cutting lists and selling from inventory. They put the expensive wines on special and when they sold out, they were replenished with wines they could sell for $40 or less.

Inventory levels were cut, long- term, to reduce costs. Individual orders got smaller – cases became six-packs and six-packs became two bottles – to limit inventory exposure.

Restaurants have long expected to be able to re-order regularly, monthly or bimonthly, for their more active wines, which became more important as individual orders dropped in size.

With the wines they do offer, restaurants have taken a different road than retailers. They are looking for “esoteric” imports, new wines, small producers, wines not available at retail. The last thing customers need to see on a restaurant list is a wine they could have bought in the grocery store or (horror of hor- rors!) at Costco at a fraction of the price.

Thanks to creative wine lists and support from energized sommeliers and trained servers, consumers have regained some of their cour- age to experiment with wine, seeking new, affordable alternatives to the more expensive wines they used to order in restaurants. Thus, wine sales on premise have been shifting toward small-production imports: particularly Veneto whites and Rhône reds. Restaurant traffic was revived in much of the country in 2010. Corporate and private dining business is coming back — yet wine lists have not returned to their glory days.

With restaurants and retailers heading in different directions, how do you build a brand today?

DISTRIBUTION

Now we get to the distributors.

Think about it: The whole structure of the three-tier system depends on distributors holding inventory. Inventory costs have multiplied as turn rates collapsed. Restaurants cut their purchases by as much as 50% and many closed. Retailers cut orders. Inventory credit costs rose and conditions tightened.

Starting in late 2008, most dis- tributors started trimming everything that had not moved in 30-60 days. During the past 18 months, there were hundreds of closeouts, if not more, flooding the market at discounts to retailers and res- taurants of up to 80%. Accounts often could not find out where to buy many of their usual wines.

Distributors have since cut 20%-30% of brands from inventory, primarily slower-moving small producers, library wines, new brands and imports.

One sales director described distributors as “triaging” customers, with major national brands at the top and smaller brands on the third level, described as the “if you are lucky, we might return your phone call” customer group.

Distributors have targeted inventory for no more than 30-60 days, even if it means out-of-stocks. They are not holding inventory for mid- season re-orders. Allocations go out once or not at all.

In the long run, long after the consumer starts shopping again, it is these changes in distribution that will have the greatest impact on the U.S. wine market.

WHAT DOES THIS MEAN TO PRODUCERS?

First, few, if any, producers will be able to depend on wholesalers to simply take their production off their hands and find a market for it. This situation has been coming for several years, and producers have largely been in denial.

The most immediate impact is on producer cash flow.

Distributors are decreasing what they are willing to buy, and completely eliminating some brands. In September 2009, wineries began dumping inventory to distributors with discounts as high as 60%, after spending much of the year insisting they could not even moderately adjust the pricing they had built up during the boom years.

The idea was presumably to clear out inventory to enable a healthier market with the new vin- tage, yet the discounts continue.

The expectation that pricing would return to old levels is unlikely to be met. Trade and consumers who purchased wines earlier in the year, at higher prices, felt betrayed, and those brands are likely damaged for the long term with these customers.

Next is the realization that producers are indeed responsible for generating their own demand.

Vintners need to nurture their relationships with their accounts, understand what they can sell and be out in the market to provide the training and support sales.

Independent sales and marketing companies are proliferating, assisting producers who can’t afford a sales force, yet this also adds another layer of costs.

Wine companies are learning they need to manage their distributors, monitor their inventories to avoid out-of-stocks, keep an eye on pricing to avoid closeouts, keep tabs on warehouse situations and check on deliveries.

They must work harder to make sure they get paid, and to ensure their wines are valuable to their distributors.

Finally, it comes down to more rigorously managing the business of wine: building sales planning and inventory management capabilities, and understanding and controlling costs.

Most important is to protect and improve quality while tightening business practices.

There is already concern that wine quality may be compromised as vintners try to protect margins, a counter- productive strategy when consumers are discovering that good wine can be found at every price level.

Cost savings will have to come from improved business, financial and operations management, with retaining and improving wine quality a top priority. Or, in the words of one former large-company executive, “taking money out of process to put into quality.”

What other options are there for producers?

Consumer-direct sales have revived in some regions, making up for some of the lost trade markets. But as ShipCompliant data has shown, consumer-direct is still a small segment of wine sales. Most wine will continue to be sold through retailers and eating-and- drinking establiishments.

Attention is gradually focusing on the opportunities for direct-to- trade sales, through so-called clearing distributors. There is anecdotal evidence of distributors setting up clearing divisions to process three- tier paperwork for a fee, leaving actual sales and physical distribution to wine producers. Many of the new sales and marketing companies and brokers, started by distribution veterans, are developing comparable services.

Restaurateurs report that distributors are proposing to take orders for smaller wines they do not usually stock, if the trade commits to pay in advance and to take immediate delivery, so that no inventory costs are incurred.

I had a conversation several months ago with a friend in the industry who remarked, with a startled expression, that he had just realized that he usually said “supply and demand” and I say “demand and supply.” Perhaps, he suggested, that says something about the industry and the market today.

Sadly, selling wine has always been more difficult than making it. Today, it is definitely what a vintner needs to think about first.

Barbara Insel is president and CEO of Napa-based Stonebridge Research Group LLC, a leading strategic advisory and research firm servicing the wine industry. Insel has led major projects for the French Trade Ministry, Wine Institute, California Association of Winegrape Growers, Napa Val- ley Vintners and many others. To learn more about Stonebridge Fine Wine Trade Monitor, visit www.stonebridgeresearch.com or contact Insel at binsel@stonebridgeresearch.com.