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?