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Instant Context:  Wine News from Around the Web Pt. II of II

Quick thoughts on wine news from the last week …

Poof! Goes the Wine Deal Web Sites

“Now you see it, now you don’t.”  That is the sales premise of the flood of “one wine deal a day” flash sales web sites that have sprung up over the course of the last four years with the economy contributing to the development of a number of sites in just the last two years.  Ironically, “Now you see it, now you don’t” can also describe the long-term viability of most of these sites, as well.

In the span of one week, the market innovator was acquired (Woot.com by Amazon.com) and one of wine ecommerce’s oldest players got into the game (Wine.com via dusty, legacy URL wineshopper.com). 

You can now be sure that a shakeout of these sites is imminent.

Woot.com was the originator of the concept of one screaming wine deal a day.  They were followed shortly thereafter by Wines til Sold Out, the now defunct Radcru.com and then Winespies.com.  What followed in the wake of these companies has been a rash of “me too” imitators trying to capitalize on a combination of excess inventory in the wine supply-chain and consumers looking for a deal.

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In addition, the concept has been co-opted by dozens of other companies who are not principally in the wine space, but offer deep discounts on luxury goods, including wine – companies like Gilt Groupe and Rue La la and others.

Specific to wine, Cinderella Wine, Winery Insider, One Wine One Deal, and Wine Heist all play in this space, in addition to a rash of others.  Anecdotally, I have heard that upwards of 40 of these sites exist.

The consumer-facing business model is simple enough—usually there is some sort of free email sign-up “membership” element and then one wine deal at a time with a time limitation, sometimes one day, sometimes up to a week. The wine on offer is at a significant discount from retail price.  Sales copy varies from site to site ranging from the compelling to the hackneyed.

The short-term value is that the consumer gets a “deal” and the wine brand gets a sale with some level of brand protection given the membership and non-broadcast nature of the advertisement.

However, the questions I have related to these sites are numerous:

At what point does the consumer get numb to wine deals in general?

Is there a potential degradation to the wine brand in a fire sale?

Does commoditizing wine with price as the activation lever create long-term, conditioned harm to the wine buying market?

Just as major label clothing brands like Ralph Lauren have segmented their clothing offerings so I can buy a Polo shirt for $65 at Nordstrom, and a Chaps shirt at Kohl’s for $14.99(probably made at the same factory) is it manifest destiny with wine that second labels are going to increase in importance as production in the upper echelon adjusts to normalized market demand?

Paul Mabray, Chief Strategy Officer at VinTank doesn’t anticipate wineries increasing risk with second labels when he noted in an interview:

“The notion of ‘flash sales’ of super luxury products ($40+) does have a life span.  As demand shrinks (leaving excess inventory that requires these types of channels), the wineries generally reduce production to match market needs.  I would expect that in a 12 - 36 months the pool of excess inventory of these types of wine reduces and the ability for these wine sale sites to source in the category dries up.  At that point, these companies will need to move to a different product type (International?) or change their value proposition (e.g. great prices of upcoming wineries).”

Specific to the wine sale sites themselves, how much longer are the number of entrants in the race viable before a shakeout occurs and a winery is on the hook with outstanding receivables?

I have always followed the Jack Welch (former CEO of GE) school of thought – if you can’t be number one or number two in your market, then you’re in the wrong market (paraphrased).

I watch trends closely and the surest sign that a trend has reached its zenith is when an acquisition occurs, or a late adopter gets into the game.  The wine business has seen both instances occur within a week.

If I were a winery, I would pay close attention to the tenured players and let the rest of the inquiries to “flash” sale a wine quietly go away, because the majority of these “flash sale” sites are a “flash in the pan,”  not long for the world.

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Posted in, Wine: A Business Doing Pleasure. Permalink | Comments (22) |


Comments

On 07/07, Rob McMillan wrote:

Agree with your OP. Luxury and discount are not terms that can co-exist forever. The current consumer shift creats the opportunity for these sites to emerge as consumers pinch pennies, and wineries rationalize their inventories. But at some point, the rationalization will come full circle and wineries business models will not support a discount philosophy any more. We are seeing winery owners right now talking about pulling back from promotions and discounts. Thats the first shot in what will be the enivitable adjustment of these other models who offer price as the reason to buy. Price alone, does not define luxury.

On 07/08, Todd Trzaskos - Vermont Wine Media wrote:

This particular topic needs more investigation, as to the ramifications of deep discounting on established brands.  While I can understand the wine industry’s desire to keep pricing stable, and derive the most value from production, there will always be forces that drive discounting as a periodic necessity.  In that sense wine is no different from other consumer products.  I get the distinction between the $65 Polo at Nordstrom’s and the $15 Chaps at Kohl’s, but segementation is a different strategy than discount for inventory reduction…
If the consumer is patient and watchful, that same $65 Polo will show up at T.J. Maxx for $15. Savvy shoppers are conditioned to look for these types of deals, and I don’t think that brand value is degraded in the process. 
It’s just a reality of business…sell at discount or dump it in the compost?

On 07/08, Thomas Pellechia wrote:

You don’t need much more investigation. Just read wine history. This sort of pricing and discounting, and second labeling, and branding, and on and on has been going on since at least the Phoenicians climbed out of North Syria and gave true depth to the wine trade. That was well before Christ.

Nothing much has changed since, except the technology that allows us to continue to talk about it without seeing or touching a human being.

On 07/08, Rob McMillan wrote:

The discounting that Todd cites at Nordstrom is Mass Consumer trade which is different from hand crafted luxury goods sold in small quantities. And while wine has been around since before Christ, what has changed is the impact of distributor consolidation on small wineries in the US. To cite Richard Sands last week, large wine producers struggle with very high quality wine production. That’s primarily the place for family run wine businesses.

The other piece of producing hand crafted high-quality wine is the cost. Making or selling lots of things (like Nordstrom) implies a heavy emphasis on cost control then advertising to support the vaporous notion of luxury. You might find a $15 polo at a mass retailer but the exchange in that venue is the cost of production is covered and the advertising is eliminated. These small wineries who make the best wines will never be able to produce those wines and sell them in a mass retail environment or cut advertising the way mass retailers can. Wineries don’t advertise like mass retailers.

The high end of wine requires a heavy emphasis on specific appellations and higher cost land as a component of production. Added with the other parts of production, wineries can’t afford to discount and take losses forever.

The point is the consumer will determine what price will be paid for a fine wine, but the winery has to set price based on the cost to produce plus a profit. Contrary to popular belief, average returns for these family wineries are less that 5% pre-tax. So in these periods where we have a supply or a demand shock, there will be a short window of inventory correction. When that ends (normally within 12-18 months), discounting of these wines ends, or the winery will go out of business.

The same will be true of these discount luxury sites. There won’t be enough wine sold at discount to support all of their existence. What they will end up doing to adjust is sell lower priced mass produced wines to keep up the volume.

On 07/08, Thomas Pellechia wrote:

Rob,

As I said, read wine history and you’ll see how little has changed. Do you think there was no such thing as distributors in the ancient trade, and do you think that small hand-crafted wineries didn’t exist against large, giant companies in ancient times? Further, specialized, small grape growing and winemaking was among the most expensive ancient professions to get into and to stay alive.

Ever hear of the famous Roman vintage of 121BC called Falernian? It was a single vineyard designated small production winery on a small hillside that developed a cult status—it was finally ruined by large financial and agricultural interests that cheapened the brand. That’s only one story of many.

Large wine shippers routinely set up shop from country to country as they routinely ruined markets in their wake.

History has a nasty way of repeating itself, mainly because few people know much about it, and those who do always seem to think that they have the better mousetrap.

The point is and always has been: human beings are greedy and will do just about anything to feed that greed; and to fit their needs, the rest are malleable.

On 07/08, Mart S. wrote:

I love it! I learn a lot from the post plus the comments. Cheers!

On 07/09, Winethropology wrote:

I’m afraid that if you’re hoping that these virtual clearing houses are going to be a distant memory soon, think again.  They exist because there is a need.  And the numbers suggest that this need will persist for some time.

Given the gluttonous way the higher end of the market has treated themselves to consumers’ affluence in the past decade, this drop in demand is merely a market correction.  But when you look at how polarized the ultra premium market has become in the context of the global quality equation - and the capitalization house of cards many wineries live in - it’s going to be a BIG correction.

As to the questions you pose, they’re easy:
- At what point does the consumer get numb to wine deals in general?  They don’t.  With equal quality options, price is, and always will be, the primary factor in purchase decisions.  If I keep getting emails to buy a XYZ Reserve Cab at the deeply discounted price of $100, I will continue to ignore them.  But that numbness will disappear as they test new lows in their offerings and I will wake up when that price matches my value assessment.

- Is there a potential degradation to the wine brand in a fire sale?  Of course.  And it’s HUGE.  Imagine if Mondavi suddenly allowed for their Reserve Cab to be blown out at $50.  It could be years before anyone would pay $125 for it again.  That’s one of the primary reasons for the success of companies like Cameron Hughes and 90+ Cellars.  They represent cash infusion to wineries without risk to their brand equity.

-Does commoditizing wine with price as the activation lever create long-term, conditioned harm to the wine buying market?  Lower prices harming the wine buying market?  Um, no.  I can’t think of how consumers are being adversly affected by being introduced to products they previously couldn’t afford.  Who doesn’t love luxury products at grocery store prices?  And this new outlet of brokering wine isn’t going to cause consumers to think that all red wine is the same. 

Great conversation….

On 07/09, Todd Trzaskos - Vermont Wine Media wrote:

PreferWine.com to enter the fray at the high end.
http://www.winesandvines.com/template.cfm?section=news&content=75922

On 07/09, Martin Cody wrote:

ALERT:  Long post to follow…
This is truly an exceptional and timely piece; my congratulations.  This is a multifaceted topic approached from many avenues: new technology, love of a deal, supply overage, three tier system, simple economics and quite a few others.  This has been building for some time and it will take quite a few years for inventory depletion to return to healthy levels.  Thus, a need exists to help these wineries move inventory and fast. It’s unfortunate, but there will be casualties. I applaud and agree with the Jack Welch comment to a degree, but believe the ultimate and obvious decision maker will be the consumer. Which of these sites will deliver the most value to the consumer and winery? Will the consumer tire of deals every day?  Perhaps.  However a cottage industry is already forming in select cities for “aftermarket” sales of unused Groupon certificates and other “deal a day” articles.  And don’t think the large, multinational houses aren’t waiting on the sidelines, licking their chops to add some marquee names to the portfolio.  Is there brand erosion at flash events?  That’s debatable.  I think the real erosion is when the wine is in the market for a period of time measured in weeks/months.  Just this week I saw Beringer, Private Reserve Cab at Costco for below $52.  Isn’t that normally a $100 bottle of wine?  Insignia’s 2006 is in the market for sub $120, but $200 at the winery.  How’s that for erosion? As a wine shop owner I know firsthand how sacred the brand is and we fiercely fight to protect it.  The sites that last will be those providing exceptional value to the winery, the consumer and benefiting each beyond the “flash” event.  Scarcity is always linked to demand and hence price, and now many of the perpetually hyped “scarce” wines are not all that scarce and the wine drinking public should rejoice.

On 07/09, Rob McMillan wrote:

One has to separate out mass produced wines from small lot production to have the discussion make sense. More than ever, there are pure substitutes to moderately priced wine ($10-$20) that can be produced from countries with cheaper costs to produce. Those wines can be shiped to large production facilities and a large percentage of the consuming public will enjoy those wines. They are made without flaw, or distinction I would add.

With the wineries making hand made winers, its simply a question of math. Discounting is not possible long term. I see the private financial statements of family wineries. Family wineries - before tax, make on average 5% profit. They compose perhaps 90% of the wineries in number, but perhaps 15% in volume produced. (I’m using dated stats so using the numbers for framing the discussion only). Unlike many business who can filp a switch and lower costs by sending manufacturing to Thiland (or import wine in bladders from Chile, Argentina, Spain and Australia), fine wine that is appellation based has a fixed real estate component. You won’t make a Sonoma Pinot in Thiland.

Destocking is a phase. Its already largely ended in warehouses, and wineries are starting discussions with their distributors about pulling back on trade discounts and allowances - just like restaurants are moving away from focusing on low price to entice visits. That phase of the correction is coming to an end. The luxury web discount sites do not have consistent relationships with these producers of wine, and will be the first chanel to be abandoned as a consequence. It doesn’t mean the site has to end, but as it relates to discounted hand produced luxury wines, they will not find takers when those same wines can be sold direct to conusmers at much-much higher margins.

Those who want to read more can check out the Annual State of the Industry Report put out by Silicon Valley Bank:  http://www.svb.com/Publications/Sector-Trends/Wine-Industry/2010-2011-State-of-the-Wine-Industry-Report-(PDF)/

On 07/09, Blind Spectator wrote:

It makes perfect sense: the price of many wines, especially wines over $30, is not directly related to quality. For that reason, a wine that sells for $50 is (usually) not more correctly priced than the same wine at $40 or $60.

Allowing the market to play a little with the prices and offer big discounts to customers who are looking for them seems like a natural response to the arbitrary factor in the original price.

On 07/11, .(JavaScript must be enabled to view this email address) wrote:

I left a similar comment on Vinography about this…

Don’t forget about the bulk market. That’s the first way for wineries to adjust their inventories. Don’t assume that everything a high-end winery produces ends up as bottled inventory. Very famous wineries have unloaded huge blocks of wine on the bulk market. So the Cameron Hughes, Castle Rocks, Banshees and other negociant brands (and countless private label wines) will have some pretty damned good wines over the next few years. For high-end producers, this is usually a great way to get their inventories down to a controllable level, *fast*, and in a way that doesn’t touch their brand value.

The flash sites are usually a winery’s *last* way to blow out already-bottled inventory.

Rob is absolutely right. It just doesn’t make sense for high-end wineries to continue producing wines they make a loss on. They’ll bulk out wines, then they’ll cut back on fruit they buy from growers. They’ll stabilize their inventory to match demand. That’s the way it works.

The flash sites that have a chance of surviving over the long term will have to actually provide some value to the wine brands they sell (i.e., not just be a clearance bin). WTSO will be the first to go, that’s brand death central…

On 07/12, Rob McMillan wrote:

.......and to the point about history, recent history is a good indicator. In the early 90’s Trader Joes was littered with deals as one of the major places where fine wineries dumped product (and cruise/airlines too). By the late 90’s the stuff in Trader Joes was really bottom of the bin stuff. Why? The imbalance worked itself out.

Electronic sites are nothing more than a reflection of the physical. They aren’t adding a sales channel. They are repeating what has always happened, but with a tech spin. But history will repeat itself and inventories will come into balance, we believe this year. When that happens these sites will need to evolve too. Business models can’t be built on temporary oversupply. That is historical business fact.

On 07/12, Winethropology wrote:

Totally agree that business models can’t be built on temporary oversupply.  Except that in this case, the temporary oversupply has been consumers’ appetite for overpriced wine.  In the context of historical reference - and global economics - the demand of the past decade has been an anomaly.  Put differently, a temporary oversupply of niche demand.

On 07/13, Rob McMillan wrote:

Winethropology -
Don’t confuse a change in price with oversupply. They are different economic variables used to describe a demand curve (price and quantity). You correctly note that there was a demand shift (supply-shock) that reset prices downward. If price were maintained at historic levels, you are right and there would be oversupply. But price has dropped to meet the market and in fact, volumes of wine sold are up - not down and thats reflective of that fact. So there isn’t a building supply out there. I know from numerous information sources noted above in a prior post, we are getting near equilibrium on supply. There is no overhang of non-bearing acreage this time. It is a temporary situation that is nearly resolved. To be clear, it doesn’t mean price will return to what we had 3 years ago either, but we will see discounting come to an end. Its already begun. And WRT these discounting sites, outside of moving product fast and cheap, there is no value to a wine brand and these will feel the pain in short order without a change to their models.

On 07/13, Mart S. wrote:

Wow! Too much information. I never new wine business is really that complex. Cheers!

On 07/14, Rob McMillan wrote:

The wine business is that complex, risky, capital intensive, and produces the nectar of the gods when done well for modest producer returns. Its a labour of love for most family producers and calling worthy of saints.

On 08/29, .(JavaScript must be enabled to view this email address) wrote:

Wow, this is an awesome conversation. One site not mentioned up there is invino: http://www.invino.com

Does anyone have any thoughts about this one in particular? I’ve really enjoyed using this site, particularly because I think they do justice to selling what’s inside a bottle instead of the price tag stuck to it.

On 05/20, TN Pas Cher wrote:

this site, particularly because I think they do justice to selling what’s inside a b

On 11/03, homeimprovement-inn.com wrote:

Does anyone have any thoughts about this one in particular?

On 09/12, Archetype Trading Company wrote:

We supply some of the sites mentioned in this article.  Generally, broadening the market is a good thing and I do not think wine brands are “degraded” by flash sales. There are only so many bottles produced for each vintage and it is my belief that one poor year and the corresponding lower price would have more of a “degrading” effect than a flash sale. 
http://www.archetypetradingco.com

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