These are the things that keep me up at night.
What made me ask this question?
Talking with a winery president, who shared that wholesalers no longer want a 25 percent mark up on an incoming winery’s product. The big guys have grown to currently be taking a 33 to 34 percent markup. Now that’s a pretty good level of greed at the top (in my humble opinion); but, what makes it even worse is that the wholesalers also expect the product to sell at as low of a rate as they can possibly squeeze out of the winery… Like the same rate they had when they were only having a 25 percent mark up… In other words, “Don’t raise your prices, Mr. Winery, because we won’t be able to sell your wine… And, by the way, we still either want a sales allowance (a discount on the price of the wine going into the wholesaler’s house), or we want a depletion allowance (a discount to move the wine out of the wholesaler’s house).
How can small wineries survive on this playing field? They can’t. It’s too much to bear, so one-by-one they drop out of national distribution,and find a way to only sell directly to consumers. The brands being offered to the wholesalers, more-and-more, become the commodity brands.
It’s all economy of scale, too big to fail, with the last cover of this coffin receiving its final nail.
Capitalism lends itself toward oligopolies, with the top three to four companies in any given industry being the rulers of that type of mercantilism. Just think of the “Big Four” in the auto industry, for instance; or think about airlines. Shareholders want more and more profit from their investments, and that demand keeps the business managers thinking about how to squeeze even more out of their business partners.
At the Oregon Wine Grape Symposium, Eugenia Keegan of Keegan Consulting, and Ellen Brittan of Brittan Vineyards, presented THE NAKED TRUTH ABOUT DISTRIBUTION. If you don’t know Eugenia, I’m happy to tell you that this woman is brilliant. We’ve worked together on a project for the Oregon Pinot Gris Symposium, and I quickly learned that she’s tenacious in her research and development capabilities. Ellen Brittan is a Petite Sirah friend’s spouse, Robert Brittan; whom many of you might know because of his years of working with Carl Doumani, while Carl owned and operated at Stags’ Leap Winery. Ellen is a partner with Robert now at Brittan Vineyards just outside of McMinnville, Oregon, and she is also equally as brilliant. Take these two dynamo characters, and you’ve got one superior presentation.
Together, these two women took on the huge tasks of surveying wholesalers for their honest and forthright answers.
Here’s the biggest take away that I got from this presentation that is absolutely frightening to me, as I observe all aspects of the wine business. And, by the way, this information comes directly from wholesalers, as they answered a survey that allowed for them to remain anonymous, so their answers could and would be honest.
CHANGING ENVIRONMENT BP + DC = WF*
Number of Wineries
1995 = 1800
2011 = 7000+
Number of Distributors
1995 = 3000
2011 = 675
*Brand Proliferation + Distributor Consolidation = Winery Frustration
I can’t make this stuff up… and this is why I’m so concerned. Imagine, in 1995, when I was in wine sales, there were only 1,800 wine companies with 3,000 distributors. We had a lot of options, and if things weren’t working out, like wholesalers not selling our wine because we didn’t grease their palms enough, we had other companies that were happy to take a brand that already had some traction.
Remember, if a brand already doesn’t have brand recognition, there’s no reason for a wholesaler to take on a new brand. Distributors are not in the marketing business; i.e., spending money to build a brand’s reconnection. They just take the wine and put it on a shelf somewhere. They write up sales receipts, but they don’t spend copious hours talking up the restaurateurs and wine shop owners about these wines. (Today, they can’t, as opposed to when I was in the sales arena, we could get their attention for a longer period of time… like 15 minutes to spew it all out.)
They used to help build brands, mind you, but those days of customer service are mostly long gone. When I was working in sales and had depletion reports to input date into our AMS system in the 1990s, I’d gasp at the charge backs we’d get for the printing of menus for restaurants. Yep… that’s right. If your wine ended up on a restaurant’s list that was going to be printed for a one year period of time, for that commitment of bringing in your wine for the year, you had to pay for the printing of the menu. There’s a way that some wholesaler originally created for getting a wine onto a list. Once the first person came up with this one, it caught on.
“Tell you what, Chef, you take this wine for a year, and they’ll pay you to help print your wine list. It’s win-win for you… Great wine you can depend on, and a free wine list. Get it printed with the highest quality of everything, and they’ll pay!”
And, that’s on top of either the sales or depletion allowance, with the sales manager coming into town a couple of times a year, taking everyone to lunch and/or dinner, and bringing in armfuls of printed material for all of the sales reps to use in their sales efforts.
My competition seemed fierce at the time, and I do remember Todd Bacon (who at the time worked for Columbia Distributing that was – only – located in Portland, Oregon at the time) tell me that I was the best cheerleader that Belvedere Winery ever had. Translated: “You work you butt off more than anyone else ever has for this brand.” I had to. Belvedere was having distribution/sales problems even back then. I sold a lot of wine and helped to take a company running in the red back into the black.
Today with 7,000 wineries and only 675 wholesalers, you can see how easy it is to squeeze that orange for even more juice.
This is the final disturbing part of this report for me.
When evaluating brands as potential additions to your book, please rank the factors below as to their level of importance from 1 (most important) to 5 (least important).
What key factors do you use in determining whether a wine meets your price vs. value criteria?
1) WINE QUALITY
Yup, you guessed it, they want it both ways…
So, back to my original question… Will capitalism eventually cannibalize itself?
Once these guys have knocked out all of the remaining competition, they’ll be sitting in the pretty oligopoly seat of wholesalers, their shareholders and/or stakeholders will have received their enormous dividends, but they’ll be just like the banks, and who will bail them out? All of us taxpayers, that’s who, but even we are dwindling, I hear, as more and more people are displaced from jobs. (Do you believe that unemployment figures take into account those who have become homeless and have fallen off the unemployment rolls?)
Will the fall of the Roman Empire repeats itself with the fall of Capitalism? I just had to ask.