Direct sales programs in today's wine industry - Other Articles

By Scott Ferguson, Wine Business Monthly
January 2002

After months of bad economic news it was officially declared in November that the country was in recession, news that certainly didn't come as a surprise to the members of the wine industry, struggling to keep sales from sliding down with the economy. As traditional sales channels sputter, some wineries are taking another look at direct sales.

On-premise sales in particular have suffered from the effects of recession and the events of the September 11 tragedy; cautious consumers have curbed their appetite for eating out. The silver lining is that more people are drinking wine at home, spurring-off-premise sales a bit, but not enough to compensate for the significant slow down in restaurant wine sales. For those many small, high-end producers who ship a high percentage of their wine to restaurants, direct sales are being considered a significant supplement to overall sales.

Through wine clubs, direct marketing and the Internet, wineries are finding they can make a much better profit margin per bottle when sold direct. Smaller wineries, which historically have had difficulty getting distribution within the three-tier system, are lured by the boosted bottom line.

"For every bottle that you sell online direct to customers, you have to sell three bottles through the three-tier system to make the same profit," said Jeremy Benson, president of Benson Marketing. "You don't need to sell a huge amount to see a significant impact on your bottom line."

He said that during times of economic downturns, the direct channel of sales is becoming "much more important" to sales strategies. "You can communicate directly with your loyal customers and it acts as a way to ride out the storm," he said.

Scott Chafen, owner and winemaker of Napa Valley's Dutch Henry Winery, said selling direct is the only way his winery can exist.

"We're a neighborhood, tiny winery and we give customers individual attention, and over time we have developed a great clientele," said Chafen. "Hey, we sell as much retail without the middleman than we would sell with him."

He said a winery the size of Dutch Henry, (5,000 cases annually) can have difficult time in the three-tier system simply because it doesn't produce enough wine to keep the distributor happy or make a decent living.

While wineries can only legally ship to 21 states, 40 percent of the wine drinking population, that's still a significant market, according to Benson.

He also said some wineries are actually pulling wine allocated for three-tier distribution and reallocating it into their direct sales programs. Some of those wineries are actually creating new labels for these wines set aside especially for direct sales, said Benson, who consults wineries on marketing, public relations and direct sales.

The reason wineries are creating new labels for direct sales: fear of retribution from their distributor. Wineries don't want its distributor to know that it's re-channeling wine from its distribution system and putting it toward direct sales; it could result in the distributor dropping them altogether. Moderate-sized wineries still need to work with wholesalers, unless you're an aberration like V.Sattui Winery, who sells all 40,000 cases direct retail.

While Mindy Kearney, director of sales at Frog's Leap Winery, said the relationships with their distributors are "sacred," she hopes take advantage of direct sales through an upcoming wine club.

"For some reason, it's a very tricky issue," said Kearney. "I know distributors are fearful of direct sales and the loss perceived revenue." Many believe that fear is exaggerated.

Robert Sinskey Vineyards is another medium-sized producer leaning toward direct sales. "We're focusing more on direct sales through our wine club and through our Web site," said Meg Barkley, Robert Sinskey sales manager. "I think our increase in direct wine sales has to do a lot with our already strong web presence."

"No doubt direct sales is growing. There isn't that loyalty to wholesalers like there used to be," said Scott Meloney, president of MicroWorks Software, a Napa-based company that implements point-of-sales systems and direct marketing consultants. "In the old days wineries held back only a small amount of wine for their wine clubs and other direct marketing programs. That's changing."

He said that with direct sales, through direct mailers, email blasts or a winery's Web site, the same bottle you sell to your wholesalers for $8 you can sell direct to your customer for $25.

"There really seems to be a lot more human resources shifting toward direct marketing," Meloney said. "The mentality has changed as far as a winery's loyalty to distributors, just look at the economic balance between keeping your distributor happy or making money."

Selling wine through a Web site is becoming a more viable method of selling wine. Even before recession forced some wineries to find additional sales channels, other wineries were already putting more resources into their Web site and ecommerce capabilities, according to Nicole Griffith, communications manager for Napa-based Freerun Technologies.

"More wineries are making the commitment to having a unique, strong web presence and a sophosticated e-commerce engine," Griffith said.

Benson believes that the "pomp and circumstance over wine e-tailers" has faded, and the next evolutionary step of web wine sales has begun. "It's version 2.0 of wine e-commerce," he said.

"This next wave of wine e-tailers may not be as sexy a news story, but frankly there's been a significant shift on how the wine business does business," said Benson.

While a strong web presence has been an effective tool to selling wine direct, Benson said the direct e-mail campaigns have been very effective as well. He said database management is crucial to do an efficient e-mail blast.

Marketing director for Winebase II e-commerce software Brad Asmus, agrees: "It's a much lower cost per contact, in fact it's almost free to reach your customers."

He said that smaller wineries have to sell more direct to make it, but larger wineries also getting into the action. "Larger wineries like Franciscan and Kendall-Jackson, want a piece of that higher margin market." He said that it helps move surplus inventory.

Asmus said he's seeing mostly super and ultra-premium wine concentrating and being successful at direct sales.

"It's just a creative way for wineries to spur slumping sales and increase their bottom line," Meloney said. Wine Business Monthly

Scott Ferguson occasionally descends from his eyrie on Cobb Mountain to write about wine and the wine industry. He can be reached at scott@fergwords.com