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A Great Day for the Wine Business

Dateline:  August 12, 2008

Today will go down in the wine industry annals as turning point in the wine industry, a day of reckoning, an inflection point for the future of the business.  Many might liken it to a day of great tragedy, yet others will view it as a day of triumph.  If that sounds like war, with winners and losers, perhaps that is apt; great tragedy for one always creates hope for another.
Southern Wine & Spirits and Glazers, two of the largest distributors nationally, have merged, creating a new class—a super-tier of national wine distribution.

Friends, if you’re a small distributor, winery, retail shop owner or passionate wine enthusiast, today is your Independence day, your day of freedom.

It is simple. A merger of this kind will take at least two years to sort out, with untold collateral damage to employees and customers.  Am I grave dancing?  Not at all.  I am, however, looking at the big picture and realize that a gaping hole has been created in the market, the kind of hole that does not gently request to be filled, but demands to be filled by smaller, middle-tier distributors who have just been handed a gift—a gift of certain growth.  With this growth comes greater opportunity for wine shops, which cascades to greater opportunity for consumers, not to mention the robust development that this will yield in the growing online channel for brands seeking an outlet.

1)
  mega-mergers almost never work based on a) culture b) poor execution in integration c) ego

2) When Sr. leadership makes decisions based on creating value for stakeholders who are not ultimately a customer it is a mistake of colossal proportions. 

3)  Innovation always, always occurs at small companies and incremental, leveraged gain occurs at large companies

Simply, this merger is not about wine, it is about dollars, supply-chain and logistics.

Pure and simple.  This is not about wine.  It could be television sets or dairy.  It is about moving product from here to there.

This reality from the perspective of a box pusher begets opportunity for those that have customers, real customer relationships.

Large distributors think it’s about logistics and delivery to their customer, but it’s also about relationships and most large distributors treat their sales people like disposable goods and this mega merger is going to cause roils of panic at the rep. level.

All the better for others who can pick up the pieces.

Read the excerpted quotes at Wine & Spirits Daily and tell me where you find a quote about delivering value to the customer.  Sure lip service is given to the retail tier, but at the end of the day, it is about wringing more profit from large brands to large retailers. 

Much has been made of the consolidation wave and the growth of larger wine concerns, but has Fosters taught us anything?  Brand management on a large scale is very difficult to do successfully and represents such a small percentage of the number of wine brands in the U.S.

If I am a small winery, a small distributor, a small retailer, I am making a bet on growth and doing so by providing value where value has just been distracted—from the small retailer and the ultimate end-user, the consumer.

Is today a great day for wine?  For many, it will be, and I am not talking about the silver-tongued, gold-pocketed execs at the new mega-distributor.

*Ed Note* For a good contrarian read to the “World is Flat” try “Small-Mart Revolution” by Michael H. Shuman



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Posted in, Good Grape Daily: Pomace & Lees. Permalink | Comments (23) |


Comments

On 08/12, Josh wrote:

Very insightful Jeff. I hope what you describe comes to pass.

In some ways this could be viewed as a response to Amazon entering the market since they will have such reach.

80% of all wine running through one company though?

Its the Evil Empire.

On 08/12, .(JavaScript must be enabled to view this email address) wrote:

You are right about it being a big day for the wine industry.  In some part your vision of the future may come true; most of it won’t.

The reason for mega distributors is that mega producers want to be able to squeeze every possible nickel out of the distribution channel to improve their own bottom lines.  To do that distributors must have resources that can be tapped, thus the need for huge distributors, so there are more resources available.

The vast majority of wine sold and consumed in this country is made by one of the big producers, and is purchased for resale by one of the big grocery chains, who require that the distribution network have the resources to send sales reps and/or merchandisers into the stores to do the hard work of filling the shelves rotating the product, building displays and making 3 deliveries a week so that the chain doesn’t have to invest in much inventory.

Little wineries can afford to pay the high margins required by little distributors to service that market niche, but big wineries require big distributors to leverage the retailers with their resources, so big distributors are here to stay.
The effect of internet sales has yet to play out in the wine business.  Eventually little wineries will do the vast majority of their own distribution from their own web sites and will hire little on-premise oriented distributors to sell to restaurants.  They will still not have much visibility in the main stream wine market, but it won’t matter, because they don’t need it.  They will never get to be big brands either.

The real significance here is that the big producers are no longer in control of their own destiny. 

Rule number 1 of brand building and particularly of luxury brand building is that you have to control the distribution network so you know who is your buyer and what they pay for it. 

Southern/ Glazers is now far more important to the wine business in the US than any single vendor, so the power moves from the producer to the distributor.

One wonders how well the suits at Diageo are sleeping tonight.

On 08/13, .(JavaScript must be enabled to view this email address) wrote:

(The suits at Diageo better be sleeping well, they helped create this mess by going to one distributor nationwide (Southern) about 7 years ago!)

Good post, Jeff.  I think you’re right about opportunities for middle-market distribution, but that opportunity wasn’t created yesterday, its been a gaping hole for the last 5+ years and nobody has stepped up to fill it.  Tough to compete with Southern as they’ve already got offerings from everywhere, giving them nearly everything the middle-market guy would have and can provide it cheaper.  Also, if Southern can fill all of most retailer’s wine needs, do they want to deal with more suppliers?  Sadly, they often don’t.

Still, here’s to hoping this is an opportunity, not a crisis.

Cheers

On 08/13, .(JavaScript must be enabled to view this email address) wrote:

I think the fight is going to happen at the large supplier side. Large wine companies need large channels of distribution and this JV seems to widen the distribution end and enables this new entity to flex some more power in the three tiers.

I see little effect on small wineries and some effect on mid-sized wineries that are trying to compete in some of the larger retailers. The programming that the large suppliers can extend through a much larger distributor network will be felt most here.

Others’ who have commented on the opportunity for small wholesale distributors to step up are correct (especially the comment that the market has presented this opportunity for some time now). So far, I have seen very few of these small to middle sized wholesalers take advantage of this gap.

On 08/13, 1WineDude wrote:

Great angle on this, an one I am sure most wouldn’t have first thought of…  I’d be interested to see how my friends who work for smaller importers interpret this move.  They often tell me that the ‘big boys’ could gobble them up at any time - but it seems the big boys are (so far) only interested in in the big-but-not-quite-huge boys!

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