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Direct to Consumer Sales Fails to Lift the Wine Industry

- Brian D Rosen

Brian RosenMy team and I just returned from a few days in Napa, CA. For those not in the business Napa is glamorous and sexy and romantic. For those of us that are in the business this can be as exciting as a week in Des Moines. I was giving a keynote speech for the Wine Industry Technology Symposium on the nature of retail within the three-tier system and overall health of the industry.

As luck would have it, the day’s speeches were delayed because USA was in a World Cup battle. That battle, that USA would eventually lose, caused me to sit in on a few speeches that I would not normally hear, one of which was the Direct to Consumer movement in California. I sat there for at least an hour, and after hearing the experts spin this yarn, I can tell you with 100% certainty that the DTC movement is not what you think it is and will not provide the added revenue that wineries around the globe are seeking.

I am the Former CEO of the Nations largest grossing wine retailer and the Former Managing Director of the Alcohol Beverage division of PricewaterhouseCoopers.  I have worked with the three-tier system for the better part of 30 years, and it is a bureaucratic mess with peaks and valleys that are nearly impossible to intellectually scale.

The DTC movement is a wonderful idea, and there is no doubt that as regulations soften and technological efficiencies prevail, it will be a sustainable revenue stream going forward. That day is not today.

The larger wineries, the wineries that need national and international distribution cannot benefit from this.  They need logistical distribution, and while it is cute to have a wine club and sell from your tasting room, any real case movement will come from the three-tier oligopoly. The small wineries will have the earliest benefit because they will be able to reach an audience that was not available to them previously, but small is still small.

Let me approach this like a large retailer. You can make a living selling Mouton or make a living selling Clos Du Bois. One has higher gross margin percentage and the other has low gross margin percentage but will scan out of retail more quickly. The winery can use the same measuring tool for their own DTC model. As it stands currently the DTC market is what we would call bolt on sales and not main line sales. There is too much fluid movement of laws, regulations, and technology to really have DTC be a mainline sales channel.

What remains true is the following; the masses buy our wines, and we need the masses to support the operational expenses of the winery. DTC is not a tool for the masses yet. The DTC consumer favors small production, highly acclaimed, and scarce wines. Wine Clubs are such a small number of overall wine sales they are not yet a factor to move the needle.

Our opinion is that DTC will become a leveragable revenue stream in the mid term, but just not yet. The key will be to prepare your production, staff, distribution, and marketing for that day. At Rosen Retail we see this as a 5-7 year horizon at the convergence of technology, deregulation, and national acceptance. The three-tier system is not going anywhere, and this DTC Kool-Aid that we are all drinking is still in its beginning stages, and it will go through many iterations until we can count on it with confidence that it can change our world.

Global wines sales are increasing, and the barrier to wine enjoyment is coming down, so the “disruption” to the three tier system is eminent. The key factors that wineries and the like need to ask themselves is that in an ever competitive marketplace where the average consumer has Parker, Robinson et all in their pocket, what are we doing to put ourselves in a competitive position for when the disruption becomes reality.

Brian RosenExpert Editorial
by Brian RosenRosen Retail Method

Rosen Retail for Alcohol Beverage offers support to retailers and suppliers alike, having created Supplier Boot Camp and Retailer Boot Camp and other award-winning programs that increase gross margin for retailers and cases sold for suppliers. Brian Rosen can be reached at brian@briandrosen.com or twitter @rosenretail.

12 Comments on "Direct to Consumer Sales Fails to Lift the Wine Industry"

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  1. john Martini says:

    This article is too sloppily written to really make sense of. And…what is the point being made? DTC is real and growing, yes it works best for smaller wineries with higher price points and meaningful points of differentiation…so what? This sounds more like the ruminations of a Dinosaur in a tar pit than anything else

  2. Dan Gatlin says:

    Thanks for an even-handed article. I’d just like to underscore how much DTC has been an incalculable benefit for small producers like myself who can now reach serious buyers across many markets in the U.S. If “gallons sold” is your measure of success, of course, DTC will never move enough to really matter. But as I have gotten to know my collectors/enthusiasts all over America, they have made me aware that most of their collectable wine now comes direct, but their everyday wine is still 3-tier.

    Most volume retailers (not the boutique ones) and almost all distributors loathe dealing with high-priced wine. The turns never work out, but they tolerate some portion for the appearance of “selection”. Personally, I often speculate publicly whether 20 years from now, they will be happy to just let that business go to DTC and capture efficient profits on everyday wines.

    In the bulk market, I think the real trend to watch is how many “beverage” retailers become full-blown supermarkets, and how many supermarkets become full-blown beverage retailers. In 20 years, they may be indistinguishable.

    Dan Gatlin
    Inwood Estates Vineyards, Texas

  3. Theresa Dorr says:

    My disappointment with the article comes from finding no supporting revenue numbers. Frankly, most revenue “estimates” and “projections” within the industry come from one specific compliance provider who targets large end wineries. Since medium to large wineries represent 87% of wineries, and are based solely on shipments, these numbers cannot actually represent direct to consumer sales (even though every year they make that very claim). I wouldn’t mind that so much if the calculations for such numbers were provided so that readers would understand the standard deviation and potential inaccuracies of the numbers, but when asked, no answer is provided. They stop the conversation by saying how hard they worked on the numbers. and for me, that means something is being hidden. SO where are your numbers that support this statement and from where did they come?

    The actual direct to consumer sales revenues within the US wine industry might just knock your socks off.

    Having a headline like “Direct to Consumer Sales Fails to Lift the Wine Industry” without the numbers to back it up just disappoints.

    Possibly you could gain more insight with a conversation asking wineries “How Direct to Consumer Sales have contributed the Wine Industry?”.

    Best regards to you and the industry,

    Theresa Dorr
    Queen of clubs and D2C

  4. Cheryl Durzy says:

    I have to disagree with this article. As a small, but not micro producer (60K) cases, if it wasn’t for DTC over the last few years, we would have a real problem. The state of the distribution market has become nearly impossible for wineries our size to be successful (i.e. profitable). Our wine club and DTC sales have saved the day. If things continue this way–large producers basically owning distributors and most retailers–DTC is going to be the only way for wine consumers to get wines that are not everywhere.

  5. Theresa Dorr says:

    Congratulations Cheryl for the success with your D2C sales.

    IN another post from Brian he mentioned a statistic of D2C sales. This makes me feel like he is quoting numbers from a large compliance company who only have shipping information from their own clients. That client base is predominantly larger wineries and when they estimate actual direct to consumer sales, they refuse to support their findings by providing any justification for their numbers. They just have self made numbers and proclamations that support their business. Sad, because we could all benefit from sharing that actual knowledge.

    But again Cheryl, Congratulations and I wish you continued success!

    Theresa Dorr

  6. Theresa Dorr says:

    Brian,

    I posted another question and asked you where you found your information. I want to check out the reports and learn more.

    You said that you received your numbers from IRI.

    I asked you if it was http://www.IRIGlobal.com as I could find no articles or reports that cover D2C?
    You may be interested in knowing that IRI only includes POS sales and would not include all D2C sales. This means that their numbers would not represent all D2C sales.

    So I ask again – where can I find the article or report on which you base your article.

    Thank you,
    Theresa Dorr

  7. Brian Rosen says:

    I agree with all the comments. The data comes from subscribing to data services that we @rosenretail pay for. We use Neilson, IRI and a few other less main stream sources. The article, as most things that are published, take a POV and expound on it. If you look at the framework, it is more about the future and not the present. It is about how DTC gets a lot of play and attention yet on a cases sold v cases produced metric it is a small %. While it may be the lively hood for many small wineries it is not nearing sales and revenue capacity for the general wine selling and growing population. Our feeling is that it will be accepted and counted on for the general wine growing and selling community within 5-7 years. Like the Blackberry PDA, if you were a Blackberry user that was your world and you could not understand how anyone did not see your POV, yet the Blackberry population as a whole was less than a 11 share at its peak of popularity. We absolutely admire the passion of the comments and know that DTC is a force in the making and will need to dealt with from both the 3T system and the taxing bodies, but as of this post it is simply big sales for small wineries or small sales for big wineries. Those facts cannot be disputed.
    Brian D Rosen
    @rosenretail
    Brian@briandrosen.com

  8. Theresa Dorr says:

    Brian,

    Again, I ask to see the numbers that are being used so that we can read those, understand what the numbers are based on, the level of confidence in those numbers and standard deviation from the reports so that we can support, disagree or discuss the topic you brought up.

    We seek to understand but your proclamation is bold and requires support.

  9. Brian, it appears to me you’re making a statement, treating it as fact and yet supporting it only with generalizations. That’s bad writing. Being in D2C wine sales for the last 8+ years I have to disagree, as it appears everyone else commenting does.

    The title of your article is “D2C Sales Fails to Lift the Wine Industry”, and yet I know of companies that only exist due to D2C wine sales, Traveling Vineyard, WineShop At Home, many small wineries and wine clubs. There are Millions of Dollars in annual sales out there through D2C. Comments from others on this article state how D2C has benefited them and your own reply to some of those comments contradicts your title, “but as of this post it is simply big sales for small wineries or small sales for big wineries. Those facts cannot be disputed.”

    How can Big Sales for small wineries not be considered as “Lifting the Wine Industry” since it most likely reflects the fact small wineries (of which there are a huge number) are actually still in business because of D2C Wine Sales instead of having to close down or sell to bigger wineries like Gallo, Constellation, Diageo, etc.? And where are your facts?

    If you’re only looking at national sales #’s based on cases moved compared to retail of course it won’t show a huge impact to the huge wine companies. The 3-tier system, as it works now is only a benefit to the large wine companies and will continue to be.

    You say about your article, “it is more about the future and not the present. It is about how DTC gets a lot of play and attention yet on a cases sold v cases produced metric it is a small %.” (where are your #’s that Theresa Dorr has requested?) But the future has to start somewhere, and I believe history shows in new industries or innovations it is the first few individuals or companies involved that set the standard and reap the most rewards.

    D2C will probably never be much of an impact for Clos Du Bois, Sutter Home White Zin and most other Mass-Produced wines, but if you want access to higher quality wines in the future it will most likely be through D2C, and you’d best get your name on a list or connect with a company involved in D2C Wine Sales sooner rather than later to have access to top quality wines.

    Scott Bigelow
    Independent Wine Ambassador
    Boisset Wine Living
    scott.winetaste@sbcglobal.net

  10. Joseph Schmoe says:

    Dan–

    Perhaps you protest too much. If you think BIG, then DTC is not effective.

    But many producers do not think BIG. They think QUALITY, VALUE and CUSTOMER LOYALTY. These same producers may not have the capital to engage the three tier system, dysfunctional and threatened as you point out.

    But what’s your point? Sounds a bit like a defense of your services to mass market providers who are stuck with the behmoths they have created as brands and the corrupt three-tier stakeholders the have taken as partners against their will.

  11. Jason Haas says:

    I wrote an extended response to this article on the Tablas Creek blog. The question of whether DTC is “failing to lift the wine industry” depends on which part of the wine industry you’re looking at. For a small to medium-size winery (nearly 90% of wineries in California) it’s already essential and likely the largest source of revenue. If you’re looking at the average bottle of wine, which is likely made by one of the largest wineries, it’s not likely ever to be a big portion of the product’s distribution strategy. But while Brian’s point is more nuanced, I do think that the headline is misleading.

    http://tablascreek.typepad.com/tablas/2014/08/a-mid-size-winerys-view-on-the-importance-of-direct-sales.html

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