Drink Charitably!

I’ve been reading Michael Pollan’s ‘The Omnivore’s Dilemma’ and am loving it.  This post, however, has nothing to do with the book – but I am blatantly stealing the title – with a nod to Mr. Pollan.

The Winemaker’s Dilemma is something entirely different. It is about the strategic decision to invest in direct to the consumer vs wholesale sales efforts.  Here’s the dilemma. 

When I sell to a consumer, for example, my Cabernet is sold for $20/bottle (a total bargain!).  But when I sell to a distributor, which, by the way is mandated by law except here in California, I sell that same bottle of wine to him/her for about $7.25 or 36% of the full retail price.  The distributor then marks it up to the retailer, who marks it up and sells it for $20 to the consumer.  In the old days, the rule of thumb was about 50% of the full retail price, but those days are gone and the winery is eating the margin.

Clearly then, a winery should aspire to sell all of its wine direct to the consumer, correct?  I mean what is better, making $20 or making $7.25?  Seems obvious, but it is a bit more complicated than that.   The pros of using the 3-tier system and the wholesale network are:

Logistics – there is no way I could distribute wine to retailers and restaurateurs around the country as efficiently as the current wholesale network does.  It requires people to sell, trucks to deliver and the accompanying insurance & staff to facilitate the delivery.

Compliance – there is a quagmire of price posting, label registering & taxes paid – the distributor does all of that for me.

Breadth of channel – again, there is little chance of me seeing all of the tens of thousands of retailers & restaurants across the country to introduce them to my wines and breakthrough the clutter of maybe 60,000 wine labels available for them to choose from today.

Volume – retailers and restaurants take cases at a time and sell through the wine quickly.  Volume translates into economies of scale in production.

The cons however, are:

Profit – not only are my margins shaved dangerously low, but more and more, it requires the winery to still go out into the market and sell their wines FOR the distributor.  That translates into airfare, hotels, rental cars, meals, etc that directly eat into profitability.

Story – again, in the old days, distributors would help truly build brands.  I can remember as a retailer 20+ years ago when distributor reps would sample me on wines, very sincerely tell the story behind the winery, share anecdotes about the winemaker or winery owner, and truly help me learn the story so I could turn around and tell that story to my customers.  Frankly, those days a long gone and the vehicle for which to tell the very unique & compelling story of Humanitas is absent.  It is increasingly dependent solely on price and scores from either Robert Parker or the Wine Spectator.  Period.  End of story.

So why not go direct only?  Well – there are issues.  Humanitas, for instance does not have a tasting room as my bonded winery is at my house.  Therefore, if I want to open a tasting room, I’d have to lease space, hire staff, and promote traffic.  All have costs.

In addition, the compliance issues all fall squarely on the hands of the winery when they go direct.  This requires staff or expertise & time – again – all at a cost.

But you do get the opportunity to tell your story face to face with the consumer – an incredibly powerful tool.  And, as I give profits to charity, our ‘7% Solution’ would generate $1.40 for charity with that bottle of Cab – but when I sell it through the wholesale channel, it generates $0.50. I have to sell almost 3 bottles in wholesale to provide the same donation as I do direct to the consumer.

So it is a dilemma – direct or 3-tier.  Or so I take my price up?  No – can’t do that. I want people to drink charitably everyday.  So do I compromise quality to lower costs?  No.  Clearly I won’t do that. 

What to do?  The answer is both of course — sell direct & sell wholesale.  And in both cases, it is about relationships — with the consumer & with the wholesaler.  But it is getting harder and harder, honestly.  Anyone out there having this dilemma?