Good Grape Wine Company

March 20 2006

Creating Economic Theory

I read a lot of books—almost exclusively in the wine, marketing or business biography category.

I recently finished a book called Brewing up a Business about the development of craft brewer Dogfish Head Brewery in Delaware.

This is really an excellent book as a narrative to starting a business—it’s a fairly breezy read and offers a great deal of insight for the armchair entrepreneur.

One of the really interesting things that the founder, Sam, discusses is the theory of "Beneficial Inefficiency."   I googled this phrase and the  index for this  book came up #1.  So, I’m going to  suggest that perhaps this is an economic theory created by  Mr.  Calagione.

This isn’t a new theory, but what it suggests is the fact that scarcity is good for business—particulary small businesses—in order to create excitement.  Dogfish purposefully doesn’t create as much product as it could sell. 

I was thinking about this while enjoying my first Silver Oak wine last week in Las Vegas—Silver Oak is a winery that releases very high-end immediately drinkable Cabernet a couple times of year (as opposed to Cabernet that should be cellared for a good number of years to soften the tannins)and boasts an extremely fanatical customer base—they snap this stuff up quickly, there are limits on bottle purchases, etc.  Clearly Silver Oak practices this scarcity model and their customers buy into it.  I say buy into it because, frankly, it’s expensive.  And, while I have a largely untrained palate, I have to say that while it was enjoyable, well-made wine, it wasn’t profound, which is what I would expect for a wine that costs $60 and up.  In fact, I’ll go on record and say that I’ve enjoyed wine that I thought was better that cost $13.99 and 19.99.

But, I digress, the quality of the wine, or my relative enjoyment isn’t really the point related to Beneficial Inefficiency or scarcity as a marketing tactic.

My larger question is this (with background context):  with all of the news ablaze about direct shipping, letting small wineries stay on equal footing with larger producer’s that have more power with the distributors, etc. juxtaposed against the fact that (depending on where you read the statistic) the wine market is populated with 6500 labels and 500 of those (or 8% ) makes up 90% of the wine market in $$$‘s sold.

Isn’t a really relevant question here, maybe the wineries have it all wrong? Maybe they don’t need to grow bigger, maybe they  won’t be able to sustain  a market of new  customers buying direct in the Midwest, maybe what they should do is create less product and market it better.

The old joke about the wine business is that, "If you want to make a million in the wine business, start with two million" is probably very apropos.  It takes money to make money and somewhere lost in this wine shipping debate separate from the evil death clench of the distributors is the notion that wineries might be better off sticking to their knitting, creating a hospitable environment in their tasting room, limiting production, increasing quality and seeing what happens—shipping be damned.

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