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February 16 2006

The Winds of Change

Internetwine-related blogs have run amok with posts on the chaos that is happening withwine shipping. I don’t find this terriblyinteresting because the dialogue on both sides is horribly mis-leading andone-sided. It’s the adult equivalent ofrecess verbal taunts. Tiring and petty. And, its multi-faceted—wine laws are pretty Byzantineand there, frankly, hasn’t been much in the way of change for a long time.

But,back in the early summer of last year, the Supreme Court ruled that states thatallow wine shipping in-state cannot forbid wineries from shipping out of state.

And,the crowd roared. Game on. 

Exceptin Indiana—where there was already statute on the books that said thatwineries in-state weren’t allowed to ship wine—a fact that had long beenignored as wineries had been shipping to customers for years without repercussion.

And,that brings us to today. I might havethe vagaries of the genesis a little mixed up, but basically what’s happeningis legislation is likely going to be passed that says that ALL wine must gothrough the 3-tier system with a distributor.

Thisisn’t really great, because any manufacturing company should have the abilityto find a free market and distributors tend to be under-managed companies thatrely heavily on the 80/20 rule of sales focus.

Unfortunately,most independent, midwestern wineries, with a few exceptions, are in the 80%

Moststates are going through some level of this dialogue, but the below excerptsfrom the Indianapolis Star is notable because it very clearly delineates theoutsized caricatures of the people and positions that populate this discussionin numerous states.

Will state wineries die on the vine?

Industry says bill halting in-stateshipments could cripple it

By Bill Ruthhart

February 14, 2006

After the U.S. Supreme Court ruled lastyear that states must treat all wineries equally, the Indiana Alcohol andTobacco Commission decided to eliminate state wineries’ right to ship theirproducts to Hoosiers.

Nine state wineries then sued in MarionCircuit Court, receiving an injunction in November that allows them to continueshipping wine in-state until March 1—the deadline given for the GeneralAssembly to solve the issue.

That has left Indiana lawmakers with adecision: allow all wine to be shipped to Hoosiers or none.

For now, legislators seem poised tochoose the latter.

Four bills were proposed in the GeneralAssembly that would legalize wine shipments to and from Indiana, but all diedwithout receiving a vote. Instead, the bill outlawing wine shipments has passedthe House and moved on to the Senate, leaving Indiana’s 31 wineries worried theirbusinesses could be in jeopardy.

This is extremely regrettable. And, this is regrettable not as a business issue for 31 smallwineries, it’s regrettable for hundreds of thousands of consumers that cannothave choice.

"This is a growing business. Everyyear we’re adding wineries, and all the existing wineries are getting largerevery year, producing more wine and more acres of grapes," said Ted Huber,co-owner of Huber Orchard & Winery in Starlight, about 25 miles northwestof Louisville in Clark County.

"This bill would just pull the rugout from under the industry."

Ted, mostly sells his wine at his winery, by choice, Ibelieve. But, following Olivery Winery,a well regarded winery in the state with regional distribution, and in order togrow, he needs distribution. I’ve seenhis wines at local grocery stores—probably sold directly in, as well. And, it’s the semi-sweet stuff that tends tosell well in Indiana, especially during the Summer. His comment about pulling the rug out from under the industry is,at best hyperbolic.

House Bill 1190 would require wineriesto use a wholesaler to deliver wine to a retailer, eliminating direct shipmentsto Indiana customers. Under the bill, wholesalers could charge $2 per bottle or$4 per case and could assess additional charges to pick up the wine.

"When you add retail cost on topof those two, we’re looking at three mark-ups. The price of Indiana wine wouldgo up 30 or 40 percent," said Dr. Charles R. Thomas, owner of the ChateauThomas Winery in Plainfield.

This comment by Dr. Thomas, in particular, is the reason I’mblogging on this topic. Dr. Thomasmakes high-end fine wine. If thefastest growing segment in the wine industry is in the super-premium categoryfrom $12.99 to $14.99, he is in the ultra-premium. It’s actually difficult to find a Chateau Thomas wine at retailfor under $15.

In my opinion, what Dr. Thomas isreally arguing is not the price of wine going up, it’s the margins goingdown. So, what he’s really saying is, “IfI have to sell through distribution, I’m going to pass it along to theconsumer.

This is the opposite approach that Iwould take when you consider that if he works with a distributor and has trulycreated a market for his wine, then his sales will increase exponentially basedon the expanded reach in sales and marketing coverage he would receive.

Let’s do a quick math sample here. Let’s presume that the production of asingle bottle of his wine is expensive by industry standards—let’s say it costshim $5 to buy the grapes, vint and bottle. Let’s say his average retail price is $15.99. If he sells to a wine retailer and allows the retailer a standard30-40% mark-up, then that means he is selling at approximately $12.00 a bottle—amark-up for him of 140% or $7 a bottle—or $84 a case.

So, the net is, if he has to sell todistribution and has to add in $2 a bottle he is faced with either pricing anIndiana wine out of a comfort threshold for consumers, or eating his formergross profit into a smaller slice of the pie.

Is he concerned, darn right he’sconcerned, but not for the reasons he states in the newspaper article.

"Plus, if I can’t ship anymore,that’s 30 percent of my business I’ll lose."

Chateau Thomas does have a wine club, so he may lose somebusiness here, but if he is running 30% of his business off the wine club Iwould be shocked as most wine clubs use direct marketing benchmarks i.e. 3%capture rate of customers.

Since the 1970s, state wineries havebeen allowed to ship inside Indiana. But Rep. Marlin Stutzman, R-Howe, says theSupreme Court decision means the practice should come to an end.

"We can’t treat wine anydifferently than we do beer and liquor," said Stutzman, author of thewinery bill. "But we’re trying to give the wineries some tools to markettheir wine."

New provisions in Stutzman’s bill,which passed the House 60-36, would allow wineries to sell at farmer’s markets,increase the number of days they could sell at festivals and allow threewine-tasting rooms at their facilities instead of two.

I like this provision. Farmer’s Markets and another tasting room (moving from a currentlyallowable two to three) gives wineries an opportunity to grow their customerbase in hand-to-hand combat/selling.

"We take this bill and put in adirect-shipping provision that pretty much will wipe these wineries out,"said Rep. Matt Pierce, D-Bloomington. "Then we say, ‘Oh, by the way, ifyou want to go to a farmer’s market or have a fair or something, then go aheadand have a few of those.’

"Yeah, that’ll make it up."

I’m kind of incredulous here. If there’s a ready market for the wine, then shouldn’t there bepull through from retail? Customerdemanding the wine, retailers demanding the wine from distributors anddistributors buying it from wineries?

Isn’t this an opportunity for wineriesto expand their reach beyond what their meager marketing budgets have allowed?

I think the ability to organically (nopun intended) sell your wine at Farmer’s Markets is a great opportunity. You can catch hundreds of woman buying foodfor Saturday nights dinner … a factor that direct selling to a customer overthe phone can’t duplicate.

The issue was bipartisan in the House,with Republicans and Democrats engaged on both sides of the debate.

"This does not help our smallwineries," said Rep. Robert Hoffman, R-Connersville. "We have 31 ofthem now, and half of them would go out of business almost immediately if thisbecame law."

I will grant that there would be some short term bumps asmost of these wineries are thinly capitalized, but I doubt that ½ would go outof business. And, the other point isthe fact that if you did forensics on the last five years of wineries inIndiana, I’d be willing to bet 10 have gone out of business by themselves.

Owning a winery is time and capitalintensive and very difficult—Indiana, California and everywhere.

Rep. Robert Kuzman, D-Crown Point,spoke against the bill, stressing his opposition to "deregulatingalcohol."

Health advocates have backed the bill,citing underage drinking concerns.

"If we allow wine to be shippeddirectly, beer and liquor will be next in line," said Lisa Hutcheson,director of the Indiana Coalition to Reduce Underage Drinking.

"Underage drinking is a seriousand persistent public health issue, and we need to keep alcohol regulated andcontrolled and not make it more accessible and available to minors."

The Indiana Excise Police has nevercited a state winery for selling to a minor, said spokeswoman Jackie Robbins.That’s why arguing that shipping wine would make it easier for underagedrinkers to get alcohol is ridiculous, Thomas said.

"Is 17-year-old Johnny going topick up the phone, order a $40 bottle of cabernet (and) wait two weeks, whenhis brother can get him a can of beer in 10 minutes?" he said.

"This business about the kids isjust nonsense."

Instead, Thomas said, the lobbyingpower of the state’s wholesalers is what has moved the bill along.

Amen. He’sabsolutely right.

"The bottom line is thewholesalers are afraid the big-box retailers like Costco and Sam’s Club willuse the direct shipping for wine if it’s legal," Thomas said. "But itwouldn’t have that much of an impact on them. We’re talking about less than 5percent of all the alcohol business in the state."

This isn’t really true. You hear all the time how wineries can’t get distribution and can’t gettheir wine marketed by the distributors. The going around the distributors idea as a threat to distributors isn’treally material. Though, Oliver may layclaim to that because they sell their Soft Red by the pallet at Sam’sClub. But for other wineries in IndianaI can’t see how it’s an argument.

Jim Purucker, a lobbyist with the Wineand Spirits Wholesalers of Indiana, disagrees.

"The wineries may feel likethey’re being threatened, but if Wal-Mart is allowed to buy wine direct fromlarge wineries like Kendall Jackson, the wholesalers’ interests aresignificantly hurt," Purucker said. "We’re concerned the next logicalextension of this will be to allow the same for Anheuser-Busch with beer andJack Daniel’s with distilled spirits."

Purucker said wholesalers wouldn’t makemuch to go out of their way to deliver for state wineries. He also argued thatIndiana wine would not become more expensive, because any added costs wouldreplace shipping and handling charges paid by consumers.

Given that Jim, above, is a lobbyist, and Dr. Thomas isthe mouth piece for the wineries, I’m guessing that the wineries are simplybeing outflanked with legislators.

I won’t even begin to debunk thecompletely absurd notion that Anheuser-Busch and Jack Daniels is an analogyworth acknowledging when compared to a small Indiana winery.

Sen. Thomas Weatherwax, R-Logansport,said Monday he is seeking a solution that will satisfy both the wholesalers andwineries. Weatherwax is carrying House Bill 1190 in the Senate.

He said he would offer an amendment tothe bill, which would allow shipping in and out of Indiana on a limited basis.

Under his proposal, both in- andout-of-state wineries could ship directly to customers only after checkingtheir identification in person. Weatherwax’s plan also would set a cap on howmany cases of wine could be shipped—a limit high enough not to dramaticallyimpact Indiana wineries, but low enough that major out-of-state wineriescouldn’t circumvent state wholesalers.

"I think these will be very bigsteps to resolve this while protecting all the wineries in our state,"Weatherwax said. "I think we’re going to make some changes people willlike."

My net opinion? Too bad Mr. Weatherwax didn’t command more of the article because boththe wineries and the distributor-pushed legislation have moved beyond reason.

There’s a win-win here … let’s hope itgets worked out. In the meantime, itmay take a couple of bottles to tone down the rhetoric and polemic garbagecoming out of both camps.

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January 31 2006

Indiana the first at anything?

According to Indiana’s Wine Grape Council, a non-profit dedicated to the advancement of Indiana’s wine industry (actually, most states have these groups—Ohio, for example, has 80 some wineries), Indiana can stake to have the first successful grapegrowing and winemaking venture early in the nineteenth century—this was led by John James Dufour, a footnote in history, but a seemingly important catalyst and Indiana’s own trailblazer.

When John James Dufour, a Swiss immigrant fleeing Napoleon’s armies,set foot in America in 1796, there was no American wine industry. Hehad been sent by his family to scout the best possible place to start aSwiss colony devoted to wine making. He traveled through the MidAtlantic states and found nothing that represented a successfulvineyard. He then crossed the Appalachian Mountains, descended the OhioRiver and eventually settled near Lexington, Kentucky where he foundeda vineyard funded by the sale of shares to the wealthy citizens of thatcity.

Dufour later sought out a new site for the Swiss colony that wason its way from Europe. He purchased land in the newly surveyed IndianaTerritory north of the Ohio River. He took cuttings of the Cape grapeto plant at the new site that would later become Vevay, Indiana. TheCape grapes planted at Vevay proved to be the basis for the firstsuccessful wine production in the United States.

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January 30 2006

Does Consolidation Put a Pinch on Consumers? Pt II of II

An article in last week’s San Francisco Chronicle raises a couple of good questions—particularly related to the consolidation of wineries and distributors:

Consolidation may actually be a good thing because it allows smaller wineries to rise up in the wake of the usual brand miss-steps when acquisitions take place.  That is unless ...

Distribution is also getting smaller.

Consolidation of distributors is a bigger threat than Gallo and Constellation to small- and medium-size wineries. In some states —  not including California —  one wine distributor has created a monopoly by buying up or squeezing out its competitors. Once such a monopoly exists, there’s no incentive for a distributor to deal with smaller brands that may not be able to provide a year-round supply of their product. 

Consolidation of retailers and restaurants is also a problem. Gallo spokesman Tim McDonald says, "Large retailers want to have a Cabernet or Chardonnay or Merlot that nobody else has," and his company is large enough to create retailer-specific brands like Winking Owl for them. The low prices on these relatively anonymous brands make tough competition for smaller producers.

Insel says the wine lists at national restaurant chains like Red Lobster "are dominated by Beringer and Gallo. The very large guys have to maintain supply and volume to maintain their distribution channels."

Large wine companies benefit from getting even bigger, Insel says, so they have even more marketing clout. She says she expects more wineries to be bought up in 2006. At the same time, she says, "There’s still plenty of room for small wineries."

The biggest difference between now and then (then being the timewhen baby-boomers where coming of age in the late 70s and early 80s andwines last golden era) is distribution. These days, distributors are a verysmall fraction of what they used to be in total number while quantity of wine brands and the number of wineries is growing.  Who gets hurt in thisprocess of distributor consolidation—relative at least to the winery/brand acquisition:   It’s the small, regional non-California winery who doesn’t havethe ability or the $$ to market #1) very expensive boutique wines or #2)who  doesn’t have the scale to seek distributor assistance or at least get distributor attention. 

Oh, and,yeah, by the way, consumers get hurt too because we don’t have thechoice at the shelf because small wines from small wineries are a raretreat indeed.

So, what’s the answer?  Clearly, it’s to let market economics takehold so I can buy wine from whomever I choose—and to end the fact thatmany states don’t allow consumers to buy wines direct from a winery andhave that wine shipped to a persons home.  But, that’s a whole ‘nother story.  But, in mysimple mind "Adventure" brands, regional wineries, wine shipping andGeneration Y are all linked together.

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January 30 2006

Does Consolidation Put a Pinch on Consumers? Pt. I of II

An article in last week’s San Francisco Chronicle raises a couple of good questions—particularly related to the consolidation of wineries and distributors:

Richard Peterson was an enologist at historic Beaulieu Vineyard in 1969 when it was bought by the Connecticut spirits company Heublein Corp., which also owned food brands such as Grey Poupon mustard. Peterson says then-Heublein executive Andy Beckstoffer —  now one of the largest vineyard owners in Northern California —  tried to persuade Peterson to use Thompson seedless grapes, cheap grapes meant for eating, rather than pricier wine grapes in BV’s sparkling wine. 

"Heublein never caught on," Peterson says. "The big wine companies today, they’re all very sharp."

Peterson and many others say inexpensive wines today are more consistently palatable than ever, and the wine savvy of the industry’s leading corporations has much to do with it.

One point that the article misses is that the guys in the 1970s that were doing the consolidating aren’t really the players as today (except maybe Gallo), so the times have changed and so have the names.  And, really the brands and wineries that are being bought might not have been around in the 70s—creating an economic cycle that might actually be good for smaller wineries to grow.

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January 29 2006

What the Hell is Good Grape?

Most every mainstream wine writer, magazine, website or other media outlet seeks to demystify wine. 

And, at the same time, we know that Generation X & Y are adopting wine as a part of their lifestyle.

Regional wineries are proliferating at an exponential rate and so called "Adventure" wines  http://www.msnbc.msn.com/id/9633031/site/newsweek/   are flying off the shelves.

Stop into any regional winery on a Saturday and you will find a packed parking lot and a tasting room with throngs of people under the age of 40—most under the age of 35, and many still in their 20s. 

Based on research at Wine Market Council:

This report will show that Generation X adults, now mostly in their 30s, are finally taking to wine in significant numbers. Moreover, the Millennial generation, now entering young adulthood, is exhibiting the same receptivity to wine that leading edge Baby Boomers did more than 30 years ago. Like the Baby Boom generation, their numbers are so great as to make their dominance in the market inevitable, and they offer the wine industry the kind of growth potential not seen in more than thirty years.

We know that people are quaffing simple, fruit-forward wines.

So, what’s to demystify?  Not much. Like most things related to the Internet and a younger generation the rules have changed and the old guard is clinging to a model of business that is no longer valid for young coveted consumers. This blog is dedicated to wine for people that like wine, but not necessarily the conventions of the current wine industry. 

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