April 10 2008
Just the mere mention of IBM and I sense a somnambulistic state with eyes glazing, head bobbing, as if in a dimly lit and warm hotel conference room after a catered luncheon, a lumpy, middle-age fellow wearing Khaki’s, a logo’ed company button down and Rockport’s talking about something vaguely important, assuming incorrectly that it makes sense to his audience.
Alternatively, maybe that is just me channeling the seven years I spent in the IBM channel working for and with IBM resellers.
Nobody cares about those experiences or IBM, at least nobody that reads this blog, I presume. I understand that, but I want to draw a quick correlation because the way IBM (and many large technology companies) conduct their channel development and support is the model that I believe the wine industry is going to evolve towards.
Since I was nominated in the Best Wine Business Blog category of the AWBA, I figure if it walks like a duck and talks like a duck … it must be a duck, hence a post on some mechanical items in the wine biz.
The Context
Josh from Pinotblogger wrote a very nice piece earlier this week that covered a lot of ground, but the thing that sparked a notion is that the author of an article in which Josh was quoted puts words in Josh’s mouth about the potential demise of fine wine retailers, and in particular, ties that assertion to wineries selling direct. Josh, obviously, refutes this bit of creative license by the writer of the article.
Just as Josh notes, I would say the same thing. Fine wine retailers are not going anywhere. I do not care if a winery can ship to all 50 states in quantities that they desire, it is not going to happen. What will happen is wineries that cannot traditionally access the market will have increased DIRECT opportunities. But, to think that the three-tier or fine wine shops are going away is folly.
However, what could happen is the same thing that happened to IBM.
Now, let us throw a couple of things out of this conversation just for simplicity sake: let us throw out importers and let us throw out the online component; we can deal with that later on. Secondarily, let me say that pieces of this model already exist, but not at the scale that I think it will in the next 10 years. And, finally, let us, for the moment, discard the whole “distributors stink” conversation, particularly as it relates to the restriction of free trade, lobbyist money, etc.
Consider IBM as “the wine industry.” Forget that at about $91B in annual revenue that IBM is approximately 30X the size of the domestic wine industry, too.
What does IBM have to do with Wine?
Basically, the bigger you get, the greater the need to service customers. In addition, IBM is a hulking big ship, only able to make a turn with 18 miles worth of notice. And, sales people are expensive, and IBM has many products. Too many products in fact to have sales people covering all of the different types of customers—small, medium, enterprise, and on down the line.
So, you develop a channel program and in addition to having a couple of distributors through which all of your hardware and software sells through, you also have resellers that, yes, work directly with the customers in the various industry verticals and niches.
This is not any new idea; it is the same general notion as the three-tier system.
But, here is the rub. Years ago, IBM knew that the technology lifecyle creates downward innovation pressure on products that would create commoditization if their was not a “value-add” component. So, they put restrictions and incentives in place for both the distributor AND the reseller, who is now known as a “Value-added Reseller” or a VAR. Both the distributor and the VAR get more money and, essentially, are locked out of engaging with customers if there is not some sort of services component to their transaction. They restrict the heck out of you until you demonstrate that you are adding legitimate value with the end-user in some sort of solutions form.
This, is where I believe the wine industry is headed. Basically, the three-tier system is down to the very large players and the very small players.
It is a broken mess and nobody is happy about it, otherwise the big guys would not keep consolidating and the small guys would not keep bubbling up.
An Evolving Model?
I think the eventuality is that the large wine distributors are going to morph towards being just that—a distributor. The provider of logistics. Moving boxes from point a to point b. In the IBM model the distributor sells to the reseller who sells to the customer, the business.
However, the area akin to our IBM analogy that has not fully taken shape in the world of wine is the “Value-added Reseller” part, the guy that works with the customer. Sure, the distributors say they do it now, but not to too many people’s satisfaction in the fine wine portion of the wine business. In this case, and in my crystal ball, there is actually going to be a fourth-tier.
Assuming that the big guys morph into pure play logistics providers, I think that these small distributors can and will eventually morph into value-added services providers to retailers, selling through wine, for a mark-up, without ever, necessarily, taking wine into their possession. So, small distributors aren’t going to grow up in the wake of big distributor consolidation, they will actually evolve into something different that complements the needs downstream with retailers and end customers.
Small distributors will morph into being a services company. They will be the sales ombudsman on the ground, the retail event planner, the consumer tasting provider for tightly staffed retailers, the content developer for retailer blogs and web sites, the extended marketing team—basically anything that adds an additional service that the retailer cannot capably provide that is separate from actually getting wine from point a to point b, which the distributor will do, albeit at a much smaller rate than the current 30-33% mark-up plus chargeback’s and spiffs.
This new fourth tier will pick up the margin slack from the distributor who no longer adds value commensurate to the 33% while new logistics providers, from outside of wine will enter the fray; they are skilled at moving stuff and will enter the game because they won’t have to find and sell to the retailers, they just have to sell to the value-added resellers. And, well, anybody can get a bonded warehouse for wine.
Maybe it is a pipedream, but I would not bet against it. If I were a small distributor, one of the first things I would do is hire a copywriter for retailers to use for their newsletters and hire an event planner to lead the organization of retailer-driven events.
Is this a pipedream or am I smoking a pipe of a different sort? What do you think?
Posted in, Wine: A Business Doing Pleasure. Permalink | Comments (8) |
The theory would be sound if it weren’t for the role that big money plays in the wine business
Take the world’s largest wine company for instance. A huge collector of wine brands and corporate consolidator of the first water, but with big financial problems. Their strategy has been to leverage the last acquisition to make a new one, which has reduced the value of their stock to “junk” status, and rightfully so.
One solution for this problem is to demand that your distributors take margin reductions and buy enormous quantities of wine that are not commensurate with sales. If this tactic is successful you take 3 to 4 percentage points of margin from distributors and put it in your own pocket so that your profit picture is artificially rosy.
Here’s where your theory falls apart. Small distributors simply don’t have the resources to play this game, so the largest wine companies will treat them like the plague, leaving only the mega-distributors who have the where with all to play.
As long as major wine brands are owned by public ally owned companies the distribution channel will be set in stone, because only the wealthiest distributors can play the game that the brand owners must play to survive.
Wine as a commodity suffers from lack of brand loyalty, and as a result, the inability of brand owners to accurately forecast sales results in a manner that is recognizable to Wall Street. The lack of accurate forecasts leads to continual over statement of expectations that if unchanged, would sink these companies in a heartbeat, so the trick is to fool the investors into thinking that the forecasts mean something.
Distributors are required to load in every quarter, and to really load in at the fiscal year end close, so the financial reports of the brand owners pass muster.
The wine business in not about service to the retailer or the consumer. It is about keeping the brand owners afloat.
zinman
While I think the previous comment makes many excellent points, I also believe the commenter sees the future as the present.
I agree with Jeff Lefevere that the three tier system is in a mess and that consolidation is a symptom of systemic sickness. I would compare the current state of affairs to the health care industry (a much bigger train wreck). The big insurers keep consolidating because no one wants what they have to offer. So to get more clients they consolidate. If the system stays unchanged (a poor service b2b model) I don’t think there is a lot of incentive to change. Like health insurance the wine distribution model is functioning poorly and there is little pressure to change.
Fortunately, farsighted companies can change the future of industries. While IBM is a great example another would be Netflix. The video rental industry was a mess with Blockbuster running the show and there was little incentive to do anything other than other poor service and high late fees. If you wanted videos then you had to go there. Until Netflix came along.
I believe (or maybe I hope) that if a small service company enters the market I think they could fill a market niche and succeed. I don’t think they will gain a lot of market share but even a small amount would put serous pressure on the big players to change or become dinosaurs wondering why it is suddenly so cold.
Glen makes good points particularly about the Netflix revolution in the video rental business.
The reason they were able to do that is that there are no government sponsored monopolies in the video rental business. As long as the distributor business is protected from real competition there will be no revolution in beverage distribution.
Selling wine on the internet to licensed customers would be an earthquake, shaking the industry to it’s roots, but the law as it stands has been upheld by the courts as recently as this month (Costco vs WA).
It’s one thing to take on a rich lazy company and win. It’s unreasonable to expect small distributors to take on rich lazy companies and the government at the same time.
Zinman
Wow, guys. Thanks for all of the very insightful commentary.
In my model, I’m less speaking of the very large public wine companies (or very large private), I’m more talking about how fine wine is going to get downstream.
I think distributors will be logistics providers, pure and simple, and wine at this very large-scale level will morph into a branded product like Coke, Pepsi, or campbell’s soup. At that point, it’s about financial incentives, slotting allowances, etc in addition to getting it from here to there. This is even more important than what’s in the bottle.
I’m going to follow-up on this a bit, so keep an eye on the site and thanks again for reading.
Hi Jeff,
I think you’re already seeing the development of this fourth tier, but not exactly as you’ve laid it out. This fourth tier is the broker, who usually works for a smaller cut (say, 10%-15%) in states where a winery has a distributor too big to pay the attention that the winery wants paid to their wines. Its problem is that it’s an inherently unstable relationship. If the winery becomes more successful, they either realize that they don’t need the services of the broker or they decide that they don’t need to share the broker’s attention with other brands, and replace him or her with an on-staff salesperson.
I look at a broker more as a cheaper version of a salesperson than as a smaller version of a distributor. The distributor does the work of trucking, warehousing and delivering the wine. The broker makes the sales.
From what I can see, being a broker is a rough way to make a living in the world of wine.
But, I think you’re right that distributors will be moving toward the just-bring-it-in-and-deliver-it model, and small and medium-size wineries will have to figure out how their brands will get any attention among the thousands of SKU’s in their ever-growing distributors’ portfolios.
Thanks for the great post!
-Jason
Hey Jason,
Thanks for commenting and reading the site.
I’m working on a visual for the IBM post—kind of a “Picture says 1177 Words” kind of thing. I understand what you are saying with the brokers, but I’m also seeing the brokers morphing by providing enhanced services. I think we’re essentially saying the same thing, though.
Thanks again. And, thankfully, you guys are distributed in Indiana, too. Good wine isn’t always that easy to find here.
All the best,
Just one more thing….
Fine wine is mostly distributed by the same people who distribute not so fine wine, but there are regional variations that help the process.
In states where there are two huge liquor distributors that also distribute wine, brokers pop up, particularly if state law requires that retailer are offered credit. The credit law discourages small distributors who don’t have the resources to carry retailers for 30 to 45 days.
In states where distributors work COD, small distributors are viable and provide a lot of the same services that brokers do elsewhere.
It comes down to wine knowledge. The fine wine customer wants to deal with someone who “gets it” and is willing to work with the right person regardless of their job title.
As Jason points out, once a brand becomes successful often the fine wine broker or distributor is left behind.
One of the great mysteries of the wine business is that for all the moaning small wineries do about big distributors, when the lightning strikes and they have a brand that takes off, the old distributor or broker is replaced by one of the giants.
Interesting thread. Thanks for the opportunity to speak up
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Having familiar with the model in the telecom world it sounds plausible in some regards but who sells to the Safeway’s or WalMart’s (any mass scale outfit) the distributors? I guess over time it would be the bigger of the resellers just like normal channel sales but the model would take time to mature to that…