The Dilemma Facing Small Domestic Wineries Selling to Consumers
Have you walked into wine shops across the Westchester and noticed how many similar wine labels adorn shelves and displays? Especially for wines produced in the United States.
How is it that the selections are so homogenous? Where is the diversity from the 9,091 wineries currently operating across all 50 states?
Retail shops are handcuffed in their choices of wines. Federal regulations have created a three-tier system of wine sales. Wineries must sell to distributors. Retail shops must purchase their wines from these distributors. There are very few exceptions.
This has been the structure since the repeal of Prohibition in 1933. Distributors are the fulcrum for sales of domestic wines. Large wineries, with plentiful product to sell into the retail markets, are the darlings of distributors, whose business models are built on scale. By definition, small wineries suffer the most.
For consumers, large-scale monolithic distributor channels deny a willing retail purchaser the opportunity to discover excellent wines that may not fit the large distributors’ business model. It’s economy of scale at work in a free market.
Allow me to present a framework around this consumer dilemma. Here are facts I’ve gleaned from several wine industry reports, notably the 2017 Directory & Buyer’s Guide from Wines & Vines magazine.
–Over 81 percent of wine produced in the United States is centered in 65 domestic wineries. Do the math: less than 1 percent of the 9,091 wineries produce the overwhelming amount of wine on retail shelves today.
–At the other end of the spectrum, 94 percent of wineries produce less than 50,000 cases (typically much less) annually.
–The distribution channel of the three-tier system has experienced similar contraction. There are only 675 distributors serving wineries. Four of these companies control 60 percent of all domestic wine sold in the United States. Further, one company, Southern Glazer, accounts for over 50 percent of the sales of these four companies.
This imbalance has been creeping into the marketplace through roll-ups and consolidations. Today’s market channels are inverted from traditional demographic relationships. Twenty years ago, there were 3,000 distributors serving 1,800 domestic wineries. That is 78 percent fewer distributors serving a 505 percent increase in wineries.
So how is a small winery to survive, let alone flourish? Many small wineries are owned by entrepreneurial, and passionate, winemakers. They are constantly seeking ways to (legally) contravene the existing system. Twenty-first century technology has given a number of them the necessary tools.
Here are business models progressive wineries have adopted.
- Sell to brokers. These intermediaries have greater scale to influence distributors. This approach produces the lowest profit margin but greater capacity for higher sales volume.
- Sell in their tasting room. This is more lucrative, as the winemaker sells wine directly to consumers at full retail price, producing the greatest margin. Increased costs include the capital investment of building a tasting room and staffing it.
- Sell via the internet. This is the most lucrative: full retail price and the least incremental investment. Start-up wineries may resort to crowdfunding until they establish a solid customer base.
- Sell via wine clubs. Another avenue to garner full retail pricing with an added benefit: a semi-captive, repeat customer base.
Selling directly to consumers is increasing in popularity among small wineries. A number of wineries have adopted the second, third and/or fourth business models. To better understand the value of selling directly to consumers, it is necessary to understand the pricing structure of the three-tier system.
Consider a bottle of wine on a retailer’s shelf selling for $15. A winery typically sells the wine to a distributor for $6, assuming one is willing to purchase the wine. By culling a direct-to-consumer following, the winery eliminates the other two components of the three-tier system, enjoying an additional profit of $9, significantly greater than the profit generated in the traditional channels.
Just as technology has disrupted and transformed so many industries, so too the wine industry. Unlike other industries, however, wine consumers may be the beneficiaries of these changes. The choices are yours.
Nick Antonaccio is a 40-year Pleasantville resident. For over 20 years he has conducted wine tastings and lectures. Nick is a member of the Wine Media Guild of wine writers. He also offers personalized wine tastings and wine travel services. Nick’s credo: continuous experimenting results in instinctive behavior. You can reach him at nantonaccio@theexaminernews.com or on Twitter @sharingwine.
