There is no Magic Wand in the Wine Industry

For reasons I can’t explain (particularly given that I’m based in Indianapolis), I get an email or a phone call a couple of times of year from different wine entrepreneurs who are interested in receiving feedback on wine-related business plans or concepts.

I always meet up with these optimistic would-be wine titans in person or on the phone.  Six years ago, pre-blog, I was the earnest entrepreneur seeking feedback and I was always pleasantly surprised by the willingness of wine-related people to lend a helping or a gentle guiding hand.  It only makes sense to return the gesture in-kind while hoping these entrepreneurs find the fortitude to move forward that I couldn’t muster.

Now, that said, the message I give isn’t always so precious or fuzzy. 

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There are two key things that are very important to remember in business planning of any sort:

1)  What does the total market opportunity look like?

2)  How will you address a need or appeal to a specific sub-section of that market?

It doesn’t sound complex, but we’re all guilty of losing sight of the forest for the trees, particularly in the wine world, and especially when facing the realities of business and creating an ongoing concern that addresses a need or a market. 

In addition, the blind spots in wine industry research are abundant.

The reality of wine industry research, from the following three different resources should act as a calibrating compass:

1) Barbara Insel, CEO of Stonebridge Research Group (Macro marketplace)

2) Nielsen sales data / Wine Business Monthly (Sell-thru data)

3) John Gillespie, Wine Market Council (Who and how many drink wine)

(As excerpted from Barbara Insel’s comments at the Vino2010 panel discussion on the, “Future of Luxury Wine,” as transcribed by Alder Yarrow at Vinography): 

“By best recokoning there about 250,000 wines for sale in America.  These wines are sold by producers to less than 700 distributors, which are then responsible for getting them to at least 431,150 places that sell wine.  These outlets include approximately 143,864 off premise outlets (i.e. retailers), and 287,286 independent on premise outlets (e.g. restaurants, hotels, etc.).”

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“These distributors are (a) very narrow, and shrinking, funnel that all wine must pass through.  In the last 20 years the number of wholesalers/distributors has declined from roughly 7000 to 700 outlets.  These remaining wholesalers are under intense pressure to stay profitable, and this results in primarily one thing:  the reduction of inventory.  Everyone is trying to unload slow moving inventory.  Most wholesalers report dropping about 15% of their brands, and smaller wholesalers are going out of business because they can’t move their stocks fast enough.”

Eek.  250,000 wines for sale going through a funnel of 700 distributors, enough to give pause to anybody.

Nielsen sales data (presented monthly in wine industry magazine Wine Business Monthly) with the occasional review of table wine price tiers:

The specific graph data isn’t as important as the overall point:  88.7% of the wines they track are under $14.99

Also excerpted from the, “Future of Luxury wine” presentation and Barbara Insel:

“One of the problems those of us who track the trends in the wine industry have is that the primary source of sales data, Nielsen, doesn’t track what’s happening in the off-premise space (i.e. retailers), and it only covers the lowest 20% of the pricing spectrum, so we don’t really have industry-wide sales data on luxury wine.”

According to Jay Wright from Constellations, paraphrased in Wine Business Monthly:

“…the $20 and above category represents just 3 percent of total wine sales volume and 6 percent of the total dollars in the wine business.”

So, what we know so far is the following:

• There is one wine for every 1.7 places to sell that wine
• The predominant majority of wine is flowing through a declining number of 700 distributors
• The over $20 wine segment represents 3% of volume and 6% of dollars in the domestic wine business

Now, as we get to the consumer aspect of industry macro economics, the story doesn’t get much prettier.  Excerpted from John Gillespie and the Wine Market Council:

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Core wine drinkers (defined as somebody who drinks wine at least once a week) represents about 16% of the population, but they drive anywhere from 80-90% + of the wine market).

To make matters worse, the recession has caused marginal drinkers (defined as somebody who drinks wine at least monthly) to decline in numbers.

The net of the Wine Market Council is that wine drinkers represent a growing, but small percentage of the population and the wine business is highly leveraged against a small band of consumers with Millenials and Generation X representing the growth engine of the future.

At this point, a wine entrepreneur, before she has even gotten to actual marketing, might be very discouraged and that leads to the next decision path that needs to be tackled—strategic intent or pragmatic reality – and the difference between the two is significant.

Simply, developing a business with strategic intent means you envision a future and create a path towards a future that doesn’t exist; this then drives all of your decision-making for product and market – Cameron Hughes Wine and Crushpad both represent this kind of thinking.  Or, alternatively, you can develop around a pragmatic reality by trying to fit within the existing market realities—virtually everybody else fits into this category.

Even if working within existing market realities, I always recommend identifying a specific market, understanding that market, and creating tactics specifically for that audience.

Take Millenials for example.  It’s been a frothy topic in wine for at least six years and continues to be a hot topic – how to address Millenials. 

Tools to help do so include:

Claritas Prizm Segmentation System
Pew Internet Research (Millenials)
Growth Panel marketing planning tools

Even if an entrepreneur gets to this point, there continues to be a slew of additional knowledge that is required – the least of which is additional macro information as provided by Adams Beverage Group or even compliance information as provided by Six88, not to mention technology-related information and enough funding to see you through the law of the thirds which says everything costs 1/3 more and takes 1/3 more time than anticipated.

There is no magic wand in the wine business and the money would seem to be better spent on lottery tickets, but the business continues to hold allure for many.  My take-away message is always to research until you create self-doubt, plan until you go cross-eyed, account for the worst, and please give me a trade discount on your first case.