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.

Oct 22, 2011 at 2:27 PM Permalink

Why you may not be very interesting: The current culture of wine

He Said...
- Mike Willison

The wine industry has long suffered the slings and arrows of people both inside and outside that have cried a derisive, "foul!" at the sometimes prolix, garrulous and elaborate vocabulary that is associated with assessing wine. Even in informal settings it seems that haughtiness prevails when talking about, drinking, or recovering from wine. For many, the need to spout hifalutin prose and wild, complex gallimaufry leaves the casual consumer feeling like a sinner at the church picnic. A simple, "I like it because it smells nice," just won’t cut it when the chap next to you in the Savile Row suit is speaking in baroque curlicues that seem to wrap around your head in ornamental rococo poofs.

Watching football the other day I was reminded of something kind of singularly funny about American culture: I know the rules and specific vocabulary of football (e.g. "clipping", or "encroachment") because I have been exposed, from an early age, to the mores of the game. Even having never played the game in an organized league, I can engage in thoughtful and insightful repartee with just about anyone on the subject ("The Tampa 2 defense leaves too many uncovered gaps against a team with an accurate QB that can move in the pocket"- see, not bad). Whether sitting around with Dad while he hurls expletives and cocktail franks at the television or in a lively group, we are immersed in the culture of football, or baseball, or soccer, or scrapbooking, or whatever. The culture of alcohol, on the other hand, is regarded largely taboo and depicted as evil until we turn 21 and miraculously are now responsible enough to handle alcohol so we go around drinking energy drinks dropped in Bavarian Kräuterlikör and making out with that cute girl that sits behind us in Macro-Economics.

We should be allowed to have our fun. I am 100% pro-fun. I stand behind that platform at all times. If your idea of fun in smashing beer cans on your head then I cheer for you and will be there to drive you to the neurologist when your brain is hurting from dents and aluminum shrapnel. However, I also believe that if alcohol and wine in particular was introduced into our culture at an earlier age that we would find much more ease in understanding the complexities and vocabulary of wine. On the other hand I realize that people tend to skew to the lazy side. Football is spoon fed to us by our old friend the television and our Playstations and adults that still paint their faces while wine is seen as "learning" which is code for hard work. Who wants to work all day and then work really hard to breathe deep of the ancient terroir and painstaking winemaking process when the option of sitting on the couch with a handle of XXX is out there?

Look, every single niche has its dungeonmasters. Paper airplane enthusiasts have a forum online. Drinking and enjoying alcoholic beverages is one of them. I like wine. It tastes good. It makes me happy. I also like wine because it teaches me about history, geography, vocabulary, bio-chemistry, food science, and the simple joys of discovery. I choose this path. If you want to become the Lord of Lego Architecture, fine, but don’t get your feathers in a ruffle when I claim that the wine in your glass is pedestrian plonk ripping with TCA.  I can’t make a nifty village out of little colored bricks, but I can make something that looks boxy.

She Said...
- Carrie Kalscheuer

From a wine-geek perspective, I agree with you. I've chosen to make this not just my passion, but my career. I can, and do, write long, flowery tasting notes. But standing on the frontlines actively witnessing people read the tasting notes has put much of their bellyaching into perspective.

Wine is frightening to most Americans. As you've stated, European culture is more readily accepting of alcohol in general and the wine culture there is merely an extension of their food culture. But ours is a different animal. Wine has a special place of perceived sophistication in our culture. We can’t necessarily discount this or brush it aside as a puritanical holdover and require that people get on board or stop drinking wine.

The combination of the public's general anxiety and inexperience has allowed many in the field of wine to overstep the boundaries of decorum and slide right into blatant pretention. The wine-snob stereotype follows the same rules as most: there's a reason it became a stereotype.

It is part of our job to make wine approachable. This is the step too-often missed by wine professionals. In the case of the hifalutin tasting note, maybe using speech that isn't so unfamiliar would go a long way in educating those who haven’t chosen wine as their profession. Just as I would expect an architect to explain, in layman's terms, what she plans to build if I’m employing her, so I think we owe it to the people buying our wine to make the process as welcoming as possible. I, for one, am happy that not everyone has decided to become a wine expert. It makes for some powerful job security.

Oct 19, 2011 at 10:36 AM Permalink

Great Bottles of Wine: The modern Dodo-bird, or the common Grackle?

He Said...
- Mike Willison

I have had a few great bottles of wine in my day. A paltry few. More often, I have had a reasonably good to fair bottle of wine appear at a perfect moment leaving an indelible memory. Time and again, the garish, Hummer wines of the pricing über-stratosphere tend to fall flat with a whimper rather than raise a mighty huzzah! While I do not agree that any old plonk sloshed into my glass will a happy occasion make, there is plenty of evidence to suggest that the beholder’s eye seldom sees things similarly.

Take, for example, this last New Year's Eve. I celebrated at the home of a friend in what has become our traditional manner with great friends, food, drink, music, games, dancing, and mirth. At midnight we choose a song that makes us wrinkle with embarrassment or giggle with the happy, bittersweet reminiscence of good times, and pop open the bubbles (even though they have been popping for many hours). All the usual suspects were there as well as few less conspicuous characters of both greater and lesser dignity. Call it a coincidence, call it bad luck, but the thing that struck me as funny was that, as we cleaned up the great mess the following afternoon, there was a bottle of Dom Pérignon amidst the rubble left half drunk near some toppled beer cans and uneaten maki rolls. It made for a few good mimosas. What had apparently been preferred, as the evidence accumulated, in great, happy slurps was the Costco classic St. Hilaire from Languedoc-Roussillon.

Now, I admit we were enjoying ourselves and that our palates may not have been 100% keen throughout the evening, but there is little doubt that the empty bottles were the result of people enjoying the wine, again and again. Great wine, in this case, is merely well-made wine with little pretention or fanfare served in a favorable atmosphere.

"Success is a science; if you have the conditions, you get the result." –Wilde

She Said...
- Carrie Kalscheuer

Essentially, what you are saying here is that if one gets drunk enough, the "plonk" doesn't really matter. It seems that these are the "conditions" for the success of the Hilaire. So, as long as the eye of the beholder is, well, wearing beer goggles, things like "good" and "bad" don’t really apply? I've got to disagree.

Sure, I've had okay wine at a fabulous party, but it was the party I remembered, not the wine, and this seems to be the case with your New Year's fete. Did anyone stop to think about the wines as they drank them? I would argue no.  A great bottle of wine shouldn't be confused with a great party. A great bottle of wine stands alone. It is something to be remembered, cherished. It is not something that is "consumed in great, happy slurps" by the case-load. Those are good bottles, sure, but not great. A great bottle is something that happens rarely, infrequently and in paltry few sums. That is what keeps us coming back for more. After all, if we were all content to chase our next buzz with any old swill, would the pricing uber-stratosphere even exist?

Oct 5, 2011 at 10:38 AM Permalink

What Business Are You In: Part I

In the Spring of 2008, David Collis, then of Harvard, and the late Michael Rukstad, coauthored an article in the Harvard Business Review titled Can You Say What Your Strategy Is? Professors Collis and Rukstad challenged executives to distill the objective, scope and advantage of their business to 35 words or less. In the research leading up to the article, they found that few people could and offered the obvious conclusion that if they couldn’t, neither could anyone else.

The business one really is in is often not the same as the business one is apparently in. Many years ago, after acquiring Taylor Wine Company, Coca-Cola subsequently purchased Sterling Vineyards with the idea of vertically integrating into fine wines. While Taylor had successfully fit Coca Cola’s business model, the Sterling acquisition was a misadventure.

Why? Because while Coca Cola well understood that its distribution capability was a core strategic asset, it neglected the fact that it was not adaptable to every beverage. Whereas, Coke, Sprite, Taylor wines and Minute Maid beverages all had common channels in supermarkets and the growing convenience store segment, fine wine was not sold in these channels. It was a classic example of over-estimating the scope of one’s strategic assets.

Similarly, Harry & David, the longtime mail order provider of elegant fruit gift baskets, decided to enter the direct retail segment and opened stores in upscale boutique malls, a move that contributed to the company’s ultimate bankruptcy. Harry and David forgot when and why people bought their products. Potential customers kept the Harry & David catalog on hand and, as needed, ordered gift baskets to be shipped. Besides incurring the learning curve of competing in direct retail, Harry & David failed to consider that shoppers will tend to focus on items that can only be purchased in that particular venue. Thus, the retail outlets became redundant as customers still went home to order by catalog rather than squander shopping time at their favorite boutique before having to pick the kids up at school.

Retailers long ago realized that they were in the business of buying and selling goods. They only needed access to a storefront—they didn’t need to own it. Before that, airlines determined that they were in the business of quickly moving people from one point to another. (Remember, I’m talking about a long time ago.) Similarly, airlines didn’t need to own aircraft but only have access to them. Thus were born the commercial real estate and equipment leasing businesses. Someone’s back office is always someone else’s front office.

Nuances of what seems to be the same business strategy can make the difference between success and failure. Blockbuster designed and marketed itself as a neighborhood storefront provider of films on CD and cassette. Netflix structured and positioned itself as a distributor of films. In this critical distinction, Blockbuster went the way of the telegraph and fax machine, its strategic assets fixed in a passing technology. Netflix, by keeping its focus on being able to most efficiently distribute emerging technologies such as streaming, continues to sidestep obsolescence.

Because of the warp speed of technological change, high-tech companies tend to have short shelf lives. For example, when laptops first emerged, competitive advantages were about speed and performance. Now it’s about battery life and wireless connectivity.

Few companies have the ability to adapt beyond their initial advance or subsequent enhancement thereof; far fewer have the ability to remake themselves completely. In the 90’s as the world moved away from mainframes and stand alone mini-computers to PC’s and server based technologies, IBM was slow to adapt and many gave the company up as a relic. However, IBM was using its considerable resources to carefully determine what business it could endure in.

So while most incumbents in the computer industry chose to compete in the soon-to-be commodity market for personal computers, IBM looked for opportunities where it could create entry barriers with its advantage of enormous cash and technical resources. The result was that while IBM nominally competed in the PC market, it turned its greater attention to developing complex control systems for such diverse applications as manufacturing plants, refineries, railroad traffic and urban traffic management. In this instance, IBM redefined itself from a manufacturer of computer hardware to a provider of software-based solutions for complex systems without regard to an applications niche. Thus, like Netflix, it avoided the trap of technological obsolescence by creating a strategy that naturally evolved with emerging technologies—whether it created those technologies or not.

The underlying principle—for better or for worse—of these examples is the importance of understanding a company’s strategic advantages and how best to deploy them to create entry barriers and sustainable competitive advantage. Most companies nominally define the business they are in which tends to foster obsolescence or misguided expansion. Blockbuster failed to account for the shelf life of its business model while Harry & David forgot when and where people buy. On the other hand, Netflix and IBM matched their business strengths and strategies to the reality of technological and market development.

Part II will look at how this applies to the wine industry.

Oct 3, 2011 at 2:29 PM Permalink