Monday, May 29, 2017

Restaurant Wine Sales Collapsing for Small Wineries


      I will Always Love You


Every credible measure that I see regarding restaurant wine sales is trending negative for the small family run wineries. Why? What's behind the declining trend? Economics? Changing consumer attitudes? Conspiracies from wholesalers? Big wineries displacing the small ones? It's not due to a lack of desire from restaurant owners.

Restaurateurs love the wine business. The business is worthy of their love because it enhances the enjoyment of the food served to their customers. It's practical for the restaurant trade to love wine because restaurants themselves make better margins on bar sales compared to food sales. Wine for the restaurant trade is still an important part of success, but sales opportunities to restaurants are collapsing for small wineries.
 

      How Did We End Up Here?


Going back into the 1990's, family owned wineries were able to get about 30% of their total sales from restaurants. That was the high point.

The 1990's were quite an outlier compared to the factors that drive wine sales today. In the middle of the decade because of acute grape shortages, wineries could sell every drop produced and more if they had it. The middle 1990's signaled the start of the current wine boom.

Driven by a thirsty Boomer, to sell wine you just needed to make it without major flaws. Restaurateurs and distributors were begging wine producers to please give them wine. Can you imagine that?

'We love you guys and we'll always be there for you,' was the refrain from distributors. Interesting and distinctive wine from small producers was uniformly available in large chain and independent restaurants alike. That all changed when the Tech Recession hit in 2001.

      You Said You Loved Me?


When 2001 dawned distributors woke up to the fact they had a customer base of large buyers to satisfy. Those buyers were getting bigger by the month and were demanding more uniform offerings. At the same time, the raw number of wineries in the US was growing exponentially. There were too many wineries and too few distributors, so something had to give. So not only did distributors stop saying 'please' to small wine producers, they stopped answering the phones altogether!

With negotiating power now decidedly in the hands of buyers, restaurateurs did the understandable thing and focused on other parts of their business, letting winery owners and distributors court them instead. That shift in power was the start of the declining trend of sales to chain restaurants by the average winery.
<Winery Owner> I thought you said you loved me? <Restaurateur> Well I do but your wine costs me more than $20 a bottle and my customers don't want to pay the markup to $60 I need. There are so many beautiful wineries courting me now so unless you can be cheaper than the one I'm dating - and she's really cheap, I just can't love you anymore..... but it's not you. It's me.
Thank goodness the Granholm Decision was passed in 2005. That gave winery producers an alternative path to market. If they were kicked out of a distributor's book, they could go direct to consumer. But Granholm didn't solve the problem of getting access to chain restaurant placements. That part of restaurant sales was essentially closed off for most wineries starting in the early 2000's.

      Restaurant Markups


Not just about changes to distribution, around 2010 consumers started to change their alcohol consumption patterns too. Economics that collided with steep markups in restaurants are to blame. Increasingly frugal consumers started to look for alternatives.

Post-recession, instead of buying a bottle of wine at a restaurant, consumers opted for a less expensive craft beer or spirit. Ever the practical generation, instead of paying a 2x markup over the same bottle they could find in a grocery store, younger consumers started a new and very practical behavior. They began a practice called the "pre-party" before getting to the restaurant. Once there, they could have just a glass of wine or a healthy (free) glass of water with dinner. (Note: One is officially old when they start putting a younger generation's slang in quotes.)

With changing consumer behavior taking restaurant wine sales lower, small producers began to struggle to get the independent restaurant placements they previously enjoyed.

Solution? It seemed everyone had the same idea at the same time: We are going direct to trade with a by-the-glass program.

While I acknowledge the benefit of that kind of a program, wine producers had to fight tooth and nail to get those placements, often dropping price to unpalatable levels. But it moved bottles and gave restaurants the margin they wanted. It was at least positive for brand building right? And by-the-glass also helped to improve full bottle sales in the given restaurant. But be honest: Doesn't begging for discounted by-the-glass placements for a month at a time make you feel cheapened?

      Interloping Consumers Having A Say


The small winery and the consumer have been the ones that have lost out with Distributor Consolidation, especially when it comes to large restaurant and hotel chains. But I noticed an interesting Bloomberg article that was published on May 16th titled "Mom-and-Pop Joints Are Trouncing America's Big RestaurantChains."

Americans are rejecting the consistency of national restaurant chains after decades of dominance in favor of the authenticity of locally owned eateries. It’s a turning point in the history of American restaurants, according to Darren Tristano, chief insights officer at Chicago-based restaurant research firm Technomic. "This really seems to be the dawning of the era of the independent," Tristano said. "The independents and small chains are now outperforming. The big chains are now lagging."
Consumers are more concerned today about the ingredients in their food and appreciate a link back to the producer. While I'm not a fan of the term 'authenticity' simply because it's become marketing shtick thrown into every description of a consumer product, authenticity is what consumers want. They want a connection and an experience the independent restaurant offers. They want the real thing to coin a phrase from an old marketing campaign.
It’s “authentic” and Instagram-able experiences that diners are searching for these days, said John Gordon of Pacific Management Consulting Group in San Diego. “It’s not experiential to sit in a rundown McDonald’s.”

      So You're Telling Me There's a Chance?



This article intimates the consumer is dismissing the glitz and glamour of Madison Avenue hyped chains, and is looking for the independent restaurant that can deliver on service, experience and on an emotional connection. Taking it further, this article can be pointing to a consumer who thirsts for the real thing - wine made by the barrel in a small quantities.

This emerging trend of consumers embracing independent restaurants plays right into the wheelhouse of the small producer. That's the restaurant the big wholesalers can't efficiently service. That's where relationships can be built between wineries and the restaurateurs themselves. That's where discussions can start about fair markups of your wine that will improve the playing field for winery and restaurateur alike.

I'm telling you there is a chance to see the declining trend in restaurant sales reverse itself for small wineries because today's consumers are looking for you; the authentic family run wine producer. You are the real thing. Your wine is what they want. They will love you and so will consumers ..... if they can only find you, fairly priced at those independent restaurants.


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58 comments:

  1. It went this way about 10 years ago. Irish Pub/Restaurant. We got to know the owner who had a reasonable wine list and great food as well as beer. Offered him some of our wines. He like them and promised to order. The Distributor came in and saw a bottle of ours on his desk. "What's that?" "Oh, some wine I'm going to pickup from a small winery." "You know we carry the same sort of wines and it would be a shame if we could not get Guinness deliveries on time for you, say next St Patrick's Day..." I got a sheepish phone call which I well understood. Leverage is what is the deal these days and little guys, other than this year's Napa darling, don't have it.

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    1. Anon 7:33 - Thanks for the perspective. No question distribution has the leverage.

      My belief is at a point, protectionist walls from prohibition will be overrun by disruptive technology. I'm not predicting the demise of distribution, because they are useful to large wineries moving boxes. But I believe there is momentum building from consumers who will want wines from the small guys, that solutions will be found.

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    2. Perhaps but not before we see a big drop in the number of small US wineries.

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    3. Anon 7:33
      Your follow up comment is a difficult one firmly debate but I'll offer a counter thought.

      On the one hand I'll agree there are plenty of brands and too many SKUs for consumers already. Then add to that the addition of imports!

      There is consolidation of wineries in major wine growing regions that reflect what's happening with the growth in larger retailers, chains, restaurants and wholesalers - but I think we've hit close to a tipping point in size. There will be more consolidation and lots of M&A of larger winery operations for several more years, but that will lag the problems we are seeing in chains and large restaurants - but that alone should lessen the number of wineries.

      On the other hand, regional family wineries continue to pop up in greater numbers in Oregon and Washington, as well as non-traditional regions throughout the USA. Every state now has "wine country" and the locals are proud of their entrance to premium wine and support those operations.

      I can't firmly support my view that we will have more wineries in 10 years than today. Nonetheless think we will likely see growth in total winery numbers, while at the same time see consolidation in ownership in segments within CA and particularly within Napa and Sonoma proper.

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  2. Hi, Rob. Really helpful analysis. Love your conclusion that the trend to independent restaurants may give small wineries a chance again. Although there are certainly independent restaurants that know wine well enough to provide a new entry into restaurants for small wineries, my concern is that so many of the independent restaurants have so much weighing on them just operating the front and back of the house, that they don't have/take the time with the wine list and just default to what the distributor is pushing at the time. That may be less of the case in places like New York or San Francisco, or I may be going to the wrong independent restaurants, but it seems to be what I see in middle America. I hope you are right that there are enough independent restaurants that recognize that a unique wine list with small label producers add to the authenticity of the experience and do indeed push their distributors to give new inroads to small wineries.

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    1. Erik - thank you. I agree with your view. Independent restaurants have a lot of hats to wear and we all know the failure rate of small restaurants. But somewhere in the middle of the equation of what consumers want, and what family wineries have lies a market solution. I'm pulling for the little restaurateur and the little winery owner.

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  3. As referred to, much of this is due to the distribution system. The big wine producers of today continue to expand their offerings with many same or similar base wine concoctions that are bottled under various labels. Many of these labels are created to mimic the look and feel of the mom and pop wineries. Then they offer financial incentives, (“spiffs” in old time vernacular), to the wholesale distributors to gain distribution and sales. The big wholesale operations love this as they make a comfortable profit and the winery supplier spends its own money to gain the sales. Because of this, many restaurant owners are never shown or tasted on wines from small producers that may be in the wholesale company’s warehouse.
    Now…with the growth of direct to consumer sales outlets, small wineries have said farewell to the interest level of being in a restaurant and are devoting effort to expanding the more profitable direct sales route.
    So yes, it takes the independent restaurateur, with the desire to research small wineries, to put together an interesting wine list. You will not find that at any chain operations.

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    1. Thank you for the thoughtful post Elmo.

      I'm hoping there will be a software solution that replaces distribution, and allows an easy path for the independent restaurateur to source small production wine.

      Since independents can't spend time on a wine list, let alone source it or track stories, wouldn't it be great if a company emerged servicing restaurants by creating venue-specific wine lists, supported by available inventory held at small wineries? Restaurant owner's inventory is on-line. She gets a text generated from software something like this:

      "Dear Independent Restaurant. You are down to two cases of [xxxx] chardonnay that fills the [xxxx] component of your wine list. Based on your depletions and minimum inventory level, you will need to order another 6 cases this week to avoid stock outs. While that producer is out of the vintage, here are 3 other producers selling similar wines that have interesting stories. Please select the producer you prefer. Here is the [link] to your updated wine list that has been pre-populated with price changes so you get your required margin of [xx%]. Please make any adjustments to the list and click [execute] and your iPads wine lists will all be updated automatically. Here is a link to the vintner stories for staff training."

      Possible?

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  4. I think this is fantastic insight into what is happening in restaurants and in the business of wine. I fear as a consumer that the reduction of distributors and the big wine companies buying more vineyards will have an adverse effect on the anility to get craft produced wines in general.

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    1. Dear Anon 8:21. There is no question that is already happening in large restaurant chains and large hotel chains.

      I"m sure other's might chime in with their experiences, but it's obvious in my travel when I walk into a chain hotel. Hoping for a decent glass of wine at the bar I ask for the list. It's filled with a big story feigning an authentic producer, but it's really just mass-produced and over-priced offerings without any distinction. I see it all the time and when I do, I just order a negroni with good gin instead of wine.

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  5. Rob, well-structured analysis and clearly written chronology. If it wasn't for good on-premise accounts supporting some of my smaller, eclectic, authentic imported wines (this all pertains to them, as well), I'd have nuthin', no weapons with which to battle the behemoths.
    BUT...can we also agree, as you have hinted at a few times yourself, that 300%+ bottle markups and 400%+ by-the-glass markups at the restaurant level make it a bit of a stretch to convince that pre-partying millennial that it's worth paying $9/glass for something that they might pay $14/bottle for at retail? Or that it's a better value than a $6 pint of a delicious local craft brew?
    We all bust our butts and need to make money, but I think that at least one elephant in the room is that when you put one beverage out of logical reach in terms of price, you significantly reduce its chances of success. The fair markups that you mention are critical components of getting back on track.

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    1. Keith - thanks for logging in and your comments.

      I am grateful that you are underscoring my one comment about fair markups. I bring wine into the restaurant and pay corkage because I don't want to pay that markup either.

      Young consumers have basically drawn a line in the sand and restaurants are watching their bar returns plummet. It's just economics. If you want to increase sales, one of the levers you can pull is lowering price to something reasonable. Then you can market that fact you have interesting wines available that are fairly priced as a matter of policy. Then watch what happens to table turns. I know it will make the servers happier to see wine being ordered instead of water.

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    2. Many of today's restauranteurs don't even know where the 400% standard mark-up originated. As a former restauranteur from the '90s I can tell you that it all stemmed from one thing...fear. BTG purchases, if you had any customers willing to break from tradition, represented less than 5% of overall wine sales. Those brave souls that actually cracked open a bottle for a glass pour charged what they paid for the bottle so they would, at the very least, not lose money.

      Fast forward to today, BTG purchases easily represent 85%-90% of total restaurant wine purchases. But still the standard 25% CoGS (cost of goods sold)method still remains. On a $10 wholesale cost bottle of wine and a 6 ounce pour, a restauranteur will make $30 per bottle gross profit or $360 per 9L case.

      But here is the rub. Until the consumer is no longer willing to pay for it is the restauranteur wrong in charging this much?

      The restauranteur also has other challenges. Consumer consumption has either tapered off or declined due to more than just high prices. Social responsibility has created a consumer 'wine budget'. On average, consumers max out at 2 glasses of wine per seating. The risk of DUI is too high (as it should be). If you increase the CoGS from 25% to 40%, charging $6.25 per glass instead of $10.00 per glass, the restauranteur will have to sell twice as many glasses to make the same amount of profit. Under the current economic and social conditions is that possible?

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    3. B Moore - Really great comments. Thanks for the added color on markups. That makes sense. If you spoiled a bottle selling a glass back in the day, collect the cost of the bottle at least, and any other pours are profit.

      Good point about the changing consumption patterns and DUI issues. I talk about that often in my speaking engagements. The cost of a DUI makes it far less compelling to over imbibe today. I see increase in the use of designated drivers and Uber as important mitigants in that but absolutely it's an issue in lower overall alcohol sales as well.

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  6. Small restaurants are one of the toughest sells. First it is hard to pin someone down to an appointment and if you get one the person at the restaurant does not give you his/her full attention as they have a very demanding business to run. Orders are usually for very small quantities and this is because of the cash flow tightness on the buyers side and also, and quite crucial, is the fact that most restaurants have very little storage space for inventory. If they but then they will want to reorder by the single case sometimes.
    Lastly, distributors with a big "book" can assure the restaurant that they have a truck or van that can offer daily service with a wide selection and even do them other favors.
    It's a tough racket no matter what. Happy to be out of the business now and retired.

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    1. Thomas - thank you for logging in and commenting. You are pointing out why distributors and restaurant owners struggle with their wine lists from a strategy and sourcing perspective. You obviously have the scars of that trade.

      There are solutions that should emerge with the advent of processing power and the current rapid growth in Artificial Intelligence. (see above comments about my software/business idea.) I do expect to see this sorted out easily in the next 15 years. Consumer demand is there. I believe there is plenty available to monetize the strategy. It just needs to happen and I've had many pioneers come to talk to me about initial attempts and various paths.

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  7. Much to Keith's point, why do restaurateur's decide to mark up wine 300-400% , but choose 100% on Beer (or spirits)?

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    1. Anon 9:27 - Good question. I really don't know but guess it has to do with the cost difference in holding inventory? Maybe someone else has a definitive answer?

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    2. 1) packaging - beer is sold as a single unit (bottle or can) or through a tap system

      2) volume - beer has a higher consumption rate over wine (depending on the type of account)

      3) typically lower alcohol by volume - leads to higher number of purchases

      It's the McDonalds principle. Volume over profit margin per item and reducing waste.

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    3. forgot 4) perceived value - there is a typically lower value/cost relationship with beer than wine

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  8. A succinct and to the point article. The "mom and pop" winery, I feel, are rightly interested in the revenue first and foremost. They cannot win against distributors. And, marketing is prohibitively expensive for small producers with no economies of scale. The DtC model seems to be an answer to the revenue question. Here the winery can control the message effectively (e-mails) to the decision-maker/consumer/restaurant, build loyalty (as the independent restaurants are now doing against the chains), and can garner great G2 from the consumer about new trends and tastes in wines and competition.
    Secondly, Three Tier Distribution is a monopoly that is controlled by large producers, in conspiracy with equally large distributors. The day will never come, when a politician will turn their back on donations from a monopolistic industry. I say, let the market decide when a distributor is good for a specific winery.
    Thirdly, greed can be a terrible thing. By that I mean, maybe restaurants should rethink customers bringing their own favorite bottle for dinner. A reasonable explanation of a corkage fee is a better way to eliminate customer complaints about gouging.

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    1. Anon 9:37 You should join the community here and have a name. I appreciate your logical view.

      Regarding the political power of the distributors, I agree politicians won't soon turn their back on that money. It becomes easy to take a view they the politician, are supporting business and jobs for constituents by siding with them on pro-monopolistic laws and regulations.

      The one hope is the consumer - both their voice and choice. While Granholm passed because of a legal argument, I think it really passed because the voice and mood of the US citizen was demanding change and availability. And when it comes to choice, if the consumer votes with their pocketbook to buy one good over another, that will induce change as well.

      Again, I'm hoping digital technology accelerates the change as noted above in my other comments but I also acknowledge you are certainly correct when it comes to the difficulty finding rational political solutions.

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  9. Your post is exactly the reason why I founded my new distribution company and can offer distribution to any winery that wants it. For small wineries, we offer a platform to showcase products and the ability to be in the marketplace. For small, independent restaurants, they can buy from us with the back-end (billing, consolidated purchasing/invoicing, electronic payments, online ordering) of a larger wholesaler....but supporting those small producers with unique and interesting wines (we do spirits and beer too). Oh, and no minimums and the opportunity for library or large format bottles. Half the margins give wineries more wiggle room to give a better deal to the buyer or put a little more in their pocket.

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    1. Cheryl - thanks for signing into the community and for using your name. I always appreciate that.

      And also thank you for not crossing the promotion line by including a URL in the text of the reply. I try and keep the discussion away from single company solutions for many reasons.

      That said, I believe you and I have spoken and if I have my conversations straight, your's was an interesting solution that is one of those pioneering examples ... if I have my people right. And again, without promoting anyone's solution, I'm sure people in the community who are interested can find out more by reviewing the profile link embedded in your name in your comment.

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  10. Hi Rob, fascinating data, more extreme shift than I realized. There is something else to consider, remember, back in the late 90s/early 2000s, when "food wine" started being used as a disparaging comment? Similar to "elegant?" You might hear this at a tasting: "The best thing I can say about this one is that it's a 'food wine...'" Cutting edge farm to table restaurants today probably don't represent a big portion of overall restaurant sales, but they are completely uninterested in high alcohol/low acid/oaky "cocktail wines (the opposite term)" to go with their delicate food, so they have increasingly turned to lighter bodied, more acidic imports--"food wines." And they are starting to drive the conversation in the restaurant world. Wine style can't be discounted as a factor in the decline in restaurant sales. We do great in restaurants--as you know, we make lighter bodied, lower alcohol, more acidic wines--but not so great with the collectors looking for the bigger wines. That is fine with us, we know our niche. Our take on the wine business is that you can't please everyone, you need to follow your own palate, and then be realistic about what is the right market for the style of wine that you create and are proud of.

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    1. Steve - thanks for signing in with your name and for the comments.

      Clearly there are many components to a consumer's choice of wine in a restaurant. The conversation about wine is evolving to ingredients, authenticity and I think 'food wine' is coming back as an OK thing but that's my narrow opinion.

      I also hope that we will move back to lower alcohol levels in wine that as you note, did take off in the late 90's as hang time became the topic de jour. Like all trends, they do seem to go too far before they come back. Hang time can't equate to raisin wine, which is where the trend peaked.

      Let's hope we can get to a time when authentic balanced wine at reasonable markups can be found routinely in independent restaurants!

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    2. Steve/Rob how has the growth of Keg/Tap wine from FreeFlow effected the BTG wine market? I know there are plenty of taps in the Bay Area/Wine Country at Farm to Table restaurants (usually not large chains), but get into the Central Valley of CA and I can probably count the number of wine taps on one hand. The wine keg keeps costs down, moves volume and offers a "fresh" wine to the consumer.

      Any stats on Keg/Tap Wine Rob? Curious.Is Keg Wine a disruptor that can put us on an equal footing with craft keg beer and quicker product cycles and "seasonal" wines?

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    3. I started reading this post and thought that this sounds a lot like our winery. Then I read that Steve Matthiasson wrote it and I said "well of course." Please say "hello" to Jill for me.

      This is a fantastic article to me because we've spent the last seven years building our brand to just over 5,000 cases and have consistently wondered how are growth fits in the overall wine sales trends/stats. Like Matthiasson, we too do pretty well with independent restaurants and now have decent coverage (19 states)of distribution around the U.S. That said, we are experiencing an inverse relationship to what your data points to as common for wineries of our size, as 70% of our sales are wholesale and 30% DTC. We would of course love to see the DTC grow, but like Steve noted, our wines seem to be more accepted/desired by independent restaurateurs seeking lower alc/higher acid/lighter wines and the DTC channel is still more favored to scored wines, which tend to still be on the richer/higher alc side (this does seem to be changing slowly though). Also, without a tasting room, we find it difficult to have as many opportunities to meet one on one with potential customers.

      Rob - I do have a question to you about trends in demographics. It appears to me that although DTC provides the clearest path for smaller wineries to thrive, do you believe that the model for reaching them (wine club/tasting room, etc) will remain the same as millennials become the dominate buying group? I say this because they don't seem to have the collector/expensive bottle interest like my parents generation (baby boomers), nor the brand loyalty that I see with the older generations. My parents drink mostly the same 3-4 wines/beer every week and have collected the same 4-5 wines that they will occasionally "show off" as a gift or at a dinner (think Silver Oak). If this is the case with the millennial generation and they are not going to ever be as loyal or as much into collecting wines, does it make sense for a smaller winery to spend as much energy building wine clubs and things of that nature given retention may become challenging and costly? Perhaps we should just try and find as many avenues/channels as possible (broaden the net) to make more transaction (non repeat) wine sales to them at prices that they are willing to spend knowing that many of them will likely only purchase once. Does that jive with what you're seeing or do you think as they age, their buying trends will float towards historical buyers?

      David, great observation. We have quickly expanded our tap wine program for several reasons. Firstly, we can save considerable packaging costs versus bottles, which then can lower our wine price, often to BTG range pricing, while not losing the overall margin of the wine itself. Furthermore, ecologically, we use one way recyclable kegs which are lower weight than the equivalent cases of wines and hence, lower the load costs (lower fuel burn p/pallet) to carriers moving our wines across the country. Lastly, this is has gained us access to higher end chain restaurants and hotels that our wines wouldn't have a chance with in bottle (as Rob has noted) because of the distribution barriers from the larger wineries.

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    4. David Scheidt - Regarding FreeFloow Technologies and wine on tap, as I've spoken to distributors, the largest detriment has been installing the required plumbing at the bars and restaurants.

      While I don't have stats on the product, I do know acceptance has been growing. I think the solution is a good one for the restaurant as it does simplify things and protects the wine from oxidation versus a bottle. While I'm just a single voice, I think the company will be successful but disruptive is probably a stretch.

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    5. Thomas Monroe - Your questions are good ones but outside the scope of this thread. Please email me and I'll share my thoughts and research on that topic. rmcmillan@svb.com

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  11. How much of the demise of restaurant wine sales is related to the wider demise of the brick-and-more retail world that we're witnessing today?... which is related to the gradual (and now totally dominant) rise of Internet eCommerce over the past 15 or 20 years?

    The future, it would seem, is all about getting closer to the customer. And, for better or worse, this is less about a brick-and-mortar presence and much more about leveraging digital technology (and soon artificial intelligence) as an end-to-end business enabler. Think on-demand, whenever and wherever the customer wants it, like Uber, Lyft or AirBnB...

    With about 17 billion square feet of retail space (about 56 sq. ft. for every man, woman, and child in America), the U.S. is by far the most built-up retail market in the world. And a big chunk of this space is going dark as we speak.

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    1. Anon 10:16 - thanks for the thoughts.

      I agree with the global thoughts. No questions mass retail is struggling. Just look at malls and most of the mid-tier retailers. But I don't know if the restaurant demise is related much to the brick and mortar collapse. While true companies like Amazon are making it difficult on many retailers, delivery of meals to the home is a struggling sector with another one (Sprig) going broke this past week after raising $58M in venture funding.

      There are probably many reasons why the sector is tough to crack with a digital model, but chief among the reasons people go to a restaurant is to have "a nice meal out." A nice meal in just doesn't seem to work as well so far as a business model.

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  12. Rob -

    Good write up and good discussion, as usual.

    We've found some success going direct to local independent restaurants. We can build rapport and engagement. Our very best account does a case a week of one of our wines. We are on the verge of selling the vintage out, so we area setting aside another 16 cases to get them through the summer. These are cases we can easily sell direct at the winery, but we want to maintain the relationship and the ongoing marketing exposure we believe we achieve with the restaurant.

    One thing you didn't touch on in describing the possible direct distribution of small winery cases to small independent restaurants is the cost of actually delivering the cases. In the above example, the restaurant is just down the street from our home and so it is easy for us to drop the case off during the day. However, if I had to pay an employee to drive to the location and deliver the case, we would lose the tiny margin we achieve on the case sales to labor time costs and transportation reimbursement when rolling a vehicle. (as a side note, I completely understand the faux savings we incur by having winery owners ghost the time / expense of delivering the wines, that's not the point).

    In other words, we have no density of distribution points or SKU. Your example of delivering 9 cases for a location for a week, just doesn't apply to small wineries where we might have maybe 2 SKU per location (and sometimes that is a challenge as restaurants don't want their list overly weighted to a single producer). So, if we are delivering a case here / there, the physical transportation economics stink.

    This puts us back in the position of thinking of restaurant sales as a marketing expense to broaden consumer awareness of the winery. As such, for our marketing expense, I'd like to be somewhere around 5% allocation of product to building awareness and then figuring out how to engage with consumers at these restaurants and convert them to direct consumers of our products.

    Hope this makes sense.

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    1. Chris - Thanks for logging in and pushing back on that point.

      Without a doubt deliver costs are an issue and obviously if someone delivers a case of wine at a $10 cost per bottle, that's prohibitive.... not to mention all the handling and logistics required.

      At some point in the near future that will get sorted out. If we really want to have a digital solution that allows us to economically go direct, a company like Vin65 will figure out how to group orders from multiple producers for economic delivery.

      Curious if anyone from Vin65 is out there to comment?

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    2. Hi Rob,
      Thanks for thinking about us. I love your blog and the discussion.

      We have played around with DTT a bit and your instinct is correct. It is largely a compliance and logistics problem which is solvable with technology and scale. There is however, a MASSIVE regulatory headwind that keeps the size of the prize small, there are only a few states that allow DTT, and from what I can tell the WSWA has drawn a line in the sand on this issue. Just think if Costco or Walmart starts buying from Gallo direct, those companies have the logistics networks to rival that of the biggest distributors -- which is bad news for fans of the status quo.

      So although solving DTT is completely line with our mission to help small-to-medium wineries succeed, right now we are concentrating on helping wineries nail the DTC niche and breakthrough in the with third-party marketplaces (Amazon, Ebay, and other niche luxury players).

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    3. Jim Agger - thanks for taking the challenge and responding on behalf of Vin65. I knew you would have a thoughtful perspective already considered.

      I was interested to see the recent comments from the WSWA during their annual convention. video:http://bit.ly/2r9zQji They certainly fear all the changes needed to support the logistics changes required for success. Tom Wark might have a comment on that thread.

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    4. Shipping is a huge consideration in the BTG restaurant market, as the margins are thin. No restaurant will pay FOB, that cost has to be included in the case price. GSO is the only strategy within CA that makes sense currently. It's overnight and generally before 10am. If you are doing personal deliveries in a tight geographical area, that makes sense.

      What worries me longer term is the Amazon Effect of Free Shipping for wine. 1 case weighs on average 40 pounds. To ship 1 case to Florida ground in 5 days costs roughly $75 with warehouse and UPS fees. 2-Day air Priority the cost goes up to $195 or roughly $16.25/bottle. It might cost a customer more to ship than the actual wine purchased!

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    5. David Scheidt - It's a real issue especially for lower priced wine shipments. Then again, the money to be made is in low-price high-volume shipments through 3-tier where shipping is by the palate load, or in high-price low volume shipments direct where you have larger gross margins to absorb shipping costs versus the discounts given to wholesalers.

      Playing in the middle between those two has risks associated with the model. Success in the middle could be fleeting, but you are right that consumers expect free shipping today. I don't have stats, but I would expect a consumer is willing to pay shipping on something they wanted and found on-line. It's just easier once you've found something you want, to finish the transaction. You might not be as willing to do it the second time.

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  13. I THINK the big winery are using expensive marketing tool that small winery cant not afford, ex Coupon, on line deals, pricing both at wholesale and retail label and incentives to retail and salesman. Are just some of it.
    victor lopez

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    1. Victor - thanks for your comments. Appreciated!

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  14. HI Rob - Great article. I live in Hawaii (which I see you visit – either at the Moana or Royal Hawaiian based on the picture above) and I have been in the wholesale wine and spirit business since the early 90s.
    I remember when I started in this industry, the winelists around town had very few selections of “family” or “boutique” wineries, if at all… there were the Fetzers, Mondavis, K-Js, Beringer (White Zin was a must have if you had any quality winelist..), BVs, Sutterhomes maybe a Cakebread or St Francis or Sonoma Cutrer, of which the top 20% of the restaurants including hotels and resorts with winelist, may have had 10% of its wines from the “small” guys. Remember, in the early 90s there were no computers with printers that a restaurant could just pop out a “fresh sheet” for their winelist - it had to be sent out to a printing company to get that done. Therefore the wineries that were placed on it had to be consistently in-stock.
    Fast-forward to the early-mid 2000s, with the introduction of the computer to the on-premise, their menus, winelist, and specials were easily changed on a monthly if not weekly/daily interval. On the consumer end, they were enlightened by the internet and those “boutique” wineries became the rage.
    Today…there are many more independent restaurants putting out great dining experinces than ever before. Looking at the top 20% of winelists today, you will see that they comprise much more than 20% of the small guys as the restaunteurs try to find those good values that can provide them with greater margins and are more specific to the restaurant tastes (you can also define this as “on-premise only” to hide cost). But if you look at the amount of “small wineries” that are available from the wholesaler(s) there are probably 20X the amount of, if not more, offerings than what was available in the early 90s.
    There are dedicated sales divisions within the big distributors today, that penetrate the small independent restaurants. I believe without the “cash-flow” commodity brands, the small, family owned wineries would not exsist in the market besides the local or large cities (San Fran, LA, Seattle, NY, Chicago, Vegas…..)as these wineries do not have the sales and marketing force that is put out by the big wineries therefore the distributor needs this to absorb the cost of this salesforce.
    Sooo, to my point, if you have a small, family run winery, that makes limited amounts of that great wine, then by all means, get into the market. Visit restaurants both big and independent and share it with the proprietor. Shake a hand. Get the relationships. Make that listing on the winelist YOURS! Don’t rely on a salesperson that makes a commission or is focused on a quota to push your brand. Build YOUR brand to a point to where the big guys notice. Who knows, maybe one day a Foley, Jackson, Constillation will offer you $250 million for your winery…..

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    1. Anon 1:41 - thanks for the comments.

      Yes that's the Moana Surfrider above. Honolulu and Waimanalo are my two favorite spots to decompress! Not sure I could live there full time. I might implode from the slower pace! But it is nice the wine selection has greatly improved in Hawaii. That's due to consumer demand and evolution of the tourist and food scene there I think. So if I HAD to ... I suppose I could stand living there since there is wine now.

      To your counter point about wholesale, I do acknowledge both your points: 1) There are more small wineries represented by wholesalers than 20 years ago (see chart above), partly because there is greater demand and are more wineries. 2) Many wineries would be broke without distribution.

      To the second point, about 40% of a small family's wine sales come through the wholesale channel. Obviously that has as much to do with the fact that still a legislated component in delivery. And I also agree with the direction at the end of your missive. Small wineries have to build their own demand to be noticed by a distributor.

      All that said, we are speaking largely about the way things have been. Where they are going I believe will be different and depending on the same things that got us to this point probably won't work going forward. The pace of change in the business is rapidly evolving and disparate pieces of the puzzle already exist. So I believe we will see a good solution come together so solve for the problem and gap between consumer demand and the leverage wholesalers have on producers and restaurants. We'll have to wait and see! Aloha


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  15. Hi Rob,
    I enjoy your writing and the comments...many great perspectives. I manage a small winery. We used to sell 60%-70% of our wine through wholesale in By the Glass programs that netted $10-$12 a bottle for skus that cost us $12 to $22 a bottle to produce and that we sold in our Tasting Room for between $27-$48 a bottle. Restaurants loved to pour our wine because they knew their customers wouldn't find our wines in the marketplace for the same price they just paid for a glass, like they would find the big winery's wines for $10.99 in a stack, but they needed to make 400-500% margin on our wine and the Distributor needed to make their 30% so we couldn't afford to play that game any longer. We have worked to grow our Club and DTC business in the past few years and now sell 90+% through DTC and we make a reasonable margin for our wines.

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    1. Thanks for logging in and for the comments Jim. You've perfectly positioned the dilemma that small family wineries have been dealing with.

      To be clear - it's more than just distributor willingness to sell wine for a small producer, the issue of the end-user consumer price paid also is an obvious detriment to both restaurateur and wine producer sales volumes. (I think you probably meant 40%-50% margin above vs. 400%-500%?) If there is to be a solution that improves restaurant sales, the markups restaurants charge will have to drop.

      I know all of my restaurant friends won't like me saying they need to reduce their wine markups out loud, but it's a fact they will come to appreciate as wine programs in restaurants are reevaluated.

      Restaurants need to make a profit, but if they want to increase wine sales, the mix of their profit is going to have to tilt back a little toward food..... or maybe they can do what the airlines did when they started charging baggage fees? Maybe restaurants will start charging admittance fees starting at $25 per person? Then they can lower the margin on wine and food on the menu! Any takers out there?

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    2. BTG Programs aim for a markup that is 5 times the cost . The restaurant buys the wine for $12 a bottle and serves five 5oz glasses and makes $60 from the $12 investment; then the distributor takes his 30% on the $12.

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    3. Jim - Thanks for the math. Love the example for the mentally challenged like me.

      I was thinking margins instead of markups. I know it's basic business but when you think margins all the time, it's hard to think backward.

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  16. In 2011-12 I attempted an internet based wholesale winery direct to trade sales in California. With a Type 2 or 17 Califonia ABC license wineries can legally sell direct to a California licensee for the purpose of re-selling at retail. With the distributor consolidation and winery growth numbers you mention plus the opportunity for passionate wine buyers to support the little guy, while offering wines that set them apart for the competition, I thought the time was right. In spite of a deeply mined and researched data base of CA's top On & Off Premise accounts (1200+) that were pitched via email and phone follow up, I failed. My portfolio was gem-packed, sampling was available, shipping all figured (1cs minimum) and the numbers/margins for the winery selling at wholesale vs FOB all penciled out! If I had 2 reps each North and South that had broad base account equity who would hand hold each account through the process, then cut them loose, I feel it would have succeeded. It still firmly believe it is viable. However, do not try it without the initial human contact plus the funding to enable that. Unlearning a predisposition to the status quo coupled with a dash of laziness are human qualities that do not change nor cannot be overstated.

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    1. Anon 6:03 - I'm sorry to hear your experience. You aren't alone. The shores of common sense in wine sales are littered with the carcasses of rational men and women who've tried to disrupt the status quo. It's not easy.

      Hopefully your experiences aren't lost on the next person who tries to make this work because success in shepherding innovation is built on the shoulders of the incremental change that preceded it. Losing your efforts in the chain sets the process back.

      Hoping your current vocation is successful, and thanks again for sharing your comments for the benefit of the community here.

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  17. A real eye-opener to see the statistics on how supply has outstripped the traditional channel in the past 20 years, cascading to restaurant purchasing behavior, clearly a challenge for the small producer. Less expensive alternative channels such as Liberation Distribution (LibDib) may offer some hope.

    From a consumer standpoint, findings from a comprehensive study of U.S. wine consumers last year I co-authored with Merrill Research confirms the opportunity for a shift away from consistency - only 2% are loyal to a few brands with 87% interested in trying new brands, having no real favorites. Next step is to generate awareness and trial. Why not offer consumers tastes of 2-3 small producer wines on premise? Another finding was that consumers are spending more and expect to spend more on wine but price/value still remains key - 68% (80% Millennials) would like a price value "score".

    Regarding the desire for fair markups, 38% avoid restaurants if the markup is too high, with only 1/4 feeling it's fair to pay 2X retail. Millennials are particularly resistant. Again, price/value, e.g. great wine for the price, is far more important than sustainability or organically grown grapes (near the bottom in importance).

    The good news is that wine consumption is increasing, especially among Millennials - 1/3 consuming more than a year ago vs. Boomers at 18%.

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    1. Roger - Thanks for logging in and for the supported comments. Lots of points to consider about the direction of consumer changes.

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  18. My career industry has spanned all three tiers of the Three Tier System; Supplier, wholesaler and restauranteur. I like to believe those experiences have given me insight enough to provide a reliable perspective.

    Who is really to blame for the reduction in opportunities for the small family owned winery? Bear with me for an industry history lesson. Just like a good detective novel the ‘killer’ will be revealed and it is not who you would think. This isn’t like having some villain dressed in black with his greasy hair and handlebar moustache grinning as he ties the damsel to the train tracks. This story has a beginning and a middle (and possibly no end)…

    80’s through the early 90’s:

    Factors:
    • More distributors than suppliers
    • More independent retail accounts than chains
    • More restaurants than retail outlets
    • More bottle purchases than by-the-glass
    • More collectors than consumers

    This period was the beginning of the heyday for suppliers. Demand for wine was growing and there were far more outlets than supply could manage. Entrepreneurs saw opportunities to create viable businesses, turning what was once only a passion into a means of income.

    Mid to late 90’s:

    Factors:
    • More multi-state distributors appear
    • More suppliers appear
    • Consolidation of Hueblein (Grand Metropolitan), Schieffelin & Somerset (Guinness) and United Distillers & Vintners (Guinness) into Diageo forces regional distributors to form mergers/acquisitions
    • More retail chains with standard ‘sets’ (usually drawn by Gallo) appear
    • More restaurant chains appear
    • More by-the-glass presence in restaurants
    • Fewer collectors

    In 1997 Diageo gathered their wholesale partners together and set out mandates for handling their products. Putting all these independent wholesalers in one room led to multistate partnerships among distributors to weather the oncoming ‘storm’ of supplier consolidation.

    Independent retail accounts start to feel the impact from increased chain account presence, starting the wave of closures. Chain accounts start to develop a ‘central buying pattern’, forming alliances with larger suppliers for added services.

    2000’s:

    Factors:
    • Multi-state distributors continue to expand
    • Supplier / distributor alliances form
    • Increased centralized buying from larger chain accounts (Costco, Sam’s, Kroger, Whole Foods, Total Wine & More)
    • Reduction in smaller distributors
    • Reduction in independent shops

    The 2000’s, especially the late 2000’s, were particularly rough for independent business; retail, restaurant and distributor. The recession forced many independent retail stores and restaurants to shut their doors. Large chains reduced the number of authorized distributors, forcing many independent distributors to close. Fewer distribution and retail opportunities force small family wineries to focus more on DtC, reducing sales for the small distributor even further.

    2010’s:

    Factors:
    • Increased ‘private label’ offerings by larger chains (Total Wine & More, Trader Joes, Kroger, Whole Foods) reduce opportunities for small family wineries to gain distributions
    • Increased restaurant demand for ‘exclusive’ labels or ‘non-grocery store’ wines
    • Increased craft beer and craft cocktail consumer sales

    In the end, it is more a very vicious circle than a straight line. Did the increased influence of chain retail/restaurants force the suppliers to consolidate? Did the consolidation of suppliers force the distributors to do likewise? Did the lack of distribution opportunities force the independent distributor out of business, reducing the outlets for small family wineries?

    Ultimately, I think the onus falls back on the consumer. What are they willing to sacrifice for lowered cost and convenience? When they finally realize will it be too late?


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    1. B Moore: Thanks for the time spent in thinking through this addition to the discussion. I know that was an hour + of effort and it's appreciated.

      Rather than adding anything, I think I'll let that stand on it's own but encourage others to weigh in if they have another view.

      Rob

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  19. This is an extremely useful, revealing article, and my own experience has completely backed up its primary contention. In so many aspects of our society, there is an absolute striation between those who can afford the very best - either as a consumer or as a purveyor - and are willing to pay for it, and those in more straited circumstances who imagine at least, that they must compromise. For many restaurateurs, the temptation to take the perceived "easier" path - higher margins and a more recognizable, presumably more salable product - is just too compelling. Vitaceous virtue is no longer rewarded, at least in this lifetime. Perhaps it is now the relative ease in which consumers have access to esoteric wine via the DTC channel that the frisson of seeing aforesaid wine on a list is no longer as electric, and at least in California, it still remains a viable option to bring one's own bottle, despite an onerous corkage fee. But, withal, the disappearance of fine, original wine from wine lists has definitely become a real trend. And with so many other things in life, we will undoubtedly miss it (or not)when it's gone.

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    1. Randall - Thanks as always for logging in an offering your learned perspective.

      I always learn something when you talk. This time though I need help understanding the term Vitaceous. I had to look that one up and didn't find a useful meaning.

      To the other comments, we are definitely missing original wine from menus. Whether imports or domestically produced, the wine lists are filled with non-remarkable and over-priced wines.

      I'm hoping we've bottomed and will see a counter-culture revival in the middle that supports craft manufacturing and simplicity.

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  20. What will happen when wine lovers decide they would rather eat at home and drink wines from their favorite small winery (bought direct) than eat at a favored restaurant and pay a huge mark up to buy a "corporate" brand of wine? The next widespread economic decline, which is inevitable, will be very telling. Advice to restaurants: Be Kind, Karma is a bitch. Great dialog.

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    1. What makes you think they aren't doing that already. Many restaurant news articles are stating that trends are forming that show customers staying at home or opting for delivery.

      As I said before but will phrase it a bit better, this is a classic 'chicken versus egg' situation. Are the consumers reacting to the restaurants or are the restaurants reacting to the consumer.

      I firmly believe our current and future situation is all in the hands of the consumer. There will always be a scenario in which someone builds a better mouse trap. The evolution from independent retail specialized outlets to chain one stop shop outlets, local chains to regional to national chains, national chains to direct to consumer. As the consumer continues to 'chase' convenience and low cost they are willingly sacrificing selection whether they want to believe it or not.

      In the case of restaurants, the restaurants have to purchase from local distributors. If there are fewer local distributors there is going to be less selection. With less selection comes fewer consumer choices.

      Now before you jump on the bandwagon of the 'evil three tier system' it serves a legitimate purpose. Restaurants couldn't survive without it. Some may argue what happens in CA as a competing argument but that model is not viable the further you go from the 'source' of goods. The cost of self-distribution would destroy those same family wineries everyone seems to be championing. The restauranteur who runs out of a particular wine on a Friday night isn't going to be able to call CA and get it within a few hours.

      It is simple economics in the end. If the consumer is unwilling to support the restaurants, the cost from those same restaurants will escalate until they are forced to shut their doors. Fewer restaurants, fewer selection. If the opposite happens, and demand exceeds supply then you will see increased competition and reduced prices. Greater number of restaurants the more competitive they have to be for the consumers dollars.

      The egg starts with the consumer.

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