What Business Are You In: Part II

With respect to the wine industry, the answers are widely divergent.  As recently as thirty years ago, such was not the case.  As late as 1980, winemaking knowledge was a competitive entry barrier in itself.  In Europe, that knowledge was largely passed down through generations.  In the 50’s and 60’s, Emile Peynaud, at the University of Bordeaux, pioneered the science of winemaking but traditionalists eschewed his methods.

In the U.S., the fledgling California industry of the 60’s and 70’s was more receptive to new ideas and turned to UC Davis to develop modern winemaking methods.  The resulting successes caused Europeans, particularly the French, to gradually adopt a more scientific approach to balance craft.  From there, formalized knowledge coalesced fairly quickly and by the mid-80’s, winemaking was no longer cabalistic.

Nevertheless, wineries persist on wine quality as their differentiating characteristic.  While the winemaker and her tasting group might distinguish subtle nuances, relatively few consumers can.  Rather, they rely on ratings to direct their palates.  Some years ago, the old Pacific Wine Company posted a series of irreverent cartoons skewering wine pretensions.  In one, a customer in a wine shop inveighs against a wine offered for tasting.  The shop owner intones that “Parker gave it a 99,” to which the customer rejoins, “I’ll take a case.”

Lost upon many wineries is that they are really in the luxury business.  At A to Z, while we promote Aristocratic Wines at Democratic Prices®, we have to constantly remind ourselves that for most wine consumers, $19 is an expensive bottle of wine.   Moreover, when a consumer enters a wine shop, he is confronted with hundreds, if not thousands of offerings.  Unable to distinguish the quality inside the bottle, his buying decision will ultimately consist of criteria outside the bottle—label, advertisement, prestige, anecdotal knowledge, a friend’s recommendation or a winery visit.

Once the luxury principle is accepted, the sales rationale can shift away from the simplistic (but nebulous) “because it’s better” claim better suited to a demonstrable can opener or a longer-lasting battery.  In recognizing that principle, the winery is correspondingly accepting that whatever one’s artistic sensibilities, wine like all consumer goods, is a market-driven business.  This realization can be freeing, leading one to examine what is truly unique about the wines and the winery.  And ultimately, uniqueness is the sine qua non of a luxury good.

Through the 90’s, producers primarily depended on fine wine wholesalers to sell and deliver their products to independent specialty shops where fine wines were generally sold. By one estimate, there were 3,000 wine wholesalers in the U.S. in 1990.  Some of these were giants dominated by brands such as Gallo.  Subsequent tiers offered a fit for wineries of every volume and price, down to boutiques producing a couple thousand cases.

In the past decade, however, the number of wine wholesalers in the U.S. has shrunk to around 500.  At the same time, distributors have moved away from selling to concentrate on logistics and fulfillment where technology allows them to manage without the major investment in people which selling requires.  Thus, it is increasingly incumbent upon wineries to undertake their own sales, which makes it all the more imperative to differentiate with marketing.

In the 80’s, wine touring, especially in California, began to attract consumers.  As it did, the business model shifted away from wine production for unknown consumers to a highly engaged one-on-one selling experience that brought wine education, entertainment and the stagecraft of the winery into the equation. Wine quality was simply the price of admission as sales became increasingly dependent on the ambient marketing appeal. Lured by the higher margins of bypassing wholesalers, droves of wineries chased the deceptively simple grail of direct sales, flooding the market and making it all the more obligatory to have a compellingly unique value proposition to attract customers.

Similarly, new trade laws opened many states to potentially lucrative direct shipping.  However, most wineries overlooked but quickly learned that these more liberal trade laws changed the competitive landscape for everyone and that to succeed, the winery had to bring the same unique value proposition to New York as at home.

The luxury principle can be supported in myriad ways.  In the case of A to Z, it is an affordable luxury.  Or, the appeal can be opulence as with wineries that more resemble palaces or, it can be an old barn that beckons to the authenticity of the land.  It can be an exclusive relationship with the winemaker or a wine club where events are lavish.  There are as many luxury opportunities as there are wineries but first, one must get out of the beverage business.