Wine and the People

December 11, 2012

Brian Kilcourse

At RSR, we talk a lot about the value of the customer experience in helping to define the Brand. Although much of what we all buy is commodity stuff that is frankly no different no matter where it’s purchased (can you tell the difference between the Brawny paper towels you bought at Walmart or Target?), there are some products that have to be experienced to be truly appreciated. It might be that evening dress that you saw at Nordstrom (“how do I look in it?”), or those comfortable looking shoes you saw at Clark’s (“are they as comfortable as they look?”). But the ultimate just could be … fine wine. Wine has such a longstanding tradition of giving pleasure, that both the Greeks and the Romans had a god of the grape.

The nice thing about wine is that if it gives you pleasure, it’s just a natural as a holiday gift too. But it turns out that shipping a bottle of your favorite vintage to friends afar can turn into quite a little research project. Since the repeal of Prohibition in the U.S.A., individual states have created their own regulations regarding the shipment of alcohol. While most U.S. states in fact now allow shipments from individuals to enter their borders, the U.S. Postal Service will not accept a shipment of any alcoholic beverage and shippers UPS and FedEx have policies against an individual shipping fruit-of-the-vine (unless the shipper has signed a “wine shippers agreement” that delineates liability, packaging requirements, etc. – more on that in a second).

Notwithstanding these barriers to shipping wine, the last ten years have seen some easing. In 2002, President George W. Bush signed an Appropriations Authorization Act that included a provision allowing individuals to ship wine purchased while visiting a winery to another state as long as doing so is in accordance with state laws regarding how much wine a person can physically walk out of the winery with. And in 2005, none other than the U.S. Supreme Court weighed in, ruling in a case called Granholm vs. Heald that states restricting the ability of out-of-state wineries to ship directly to consumers violates the U.S. Constitution’s commerce clause. In the decision, the Court ruled that states must extend equal privileges to in-state and out-of-state wineries. But the Court was non-committal about states’ rights when it comes to individuals shipping vino, and so the big carriers basically washed their hands of the whole thing (as already mentioned).

For individuals, the aforementioned “wine shippers agreement” is a godsend. For example, my local Postal Annex acquired such an agreement over the summer, and two months ago announced that it could now ship bottles of alcoholic beverages. The result, according to Bob The Shipper, is “8 or 10 packages a week – not a lot but that’s up from zero. The real issue is that people have always shipped bottles, and were probably completely unaware …. Now we’re saying, ‘hey- we can ship that for you!’ That it’s even an issue is a surprise to a lot of people.”

Convergence of a Different Sort

The “opening” that has been created by liberalized laws about shipping booze has converged with other forces affecting the wine industry today. Wine isn’t immune from what’s happening everywhere in the consumer world –pressure to commoditize. Brands in almost all product categories tend to commoditize over time, as manufacturers figure out where that “sweet spot” is between “good enough” and “exceptional” value. After thousands of years, wine may be headed there too- at least to a degree.  Brands are proliferating, and the value often isn’t so much what’s in the bottle but the name on the label. For example, celebrity wines are popping up with increasing frequency; just a casual walk through the names of Napa and Sonoma County vintners includes football legend Joe Montana, moviemaker Francis Ford Coppola, politician Nancy Pelosi, and even Primus bass player Les Claypool.

The problem for these nouveau-viticulturists is that come September, they still have to pick the grapes and turn them into wine and get the final product to market. The model that does that is a traditional three-tiered one: production -to- distribution -to- consumer facing sales and service.

That challenge for newcomers as well as small independent vintners is solved by wine co-ops. They’ll take your grapes and turn them into wine, put your label on the bottles, market and then distribute the final product. These co-ops employ winemakers and sales & marketing teams. The primary objective is traditional: to sell wholesale to retailers and restaurants. To the extent that there is a direct-to-consumer offering, it is only there to help to build the reputation of the Brand. To that end, many co-ops also have wine tasting rooms- and many also offer a B2C (“business to consumer”) website for direct sales (thank you, U.S. Supreme Court!).

A New Model?

It’s bound to happen that once a product category starts down that slippery slope to commoditization, someone will come in with not just an optimized profit model, but a whole new one. One such disruptive offering in the wine business, Nakedwines.com, was featured in last Sunday’s edition of the San Francisco Chronicle, in the Business Section (http://www.sfgate.com/business/article/Nakedwines-com-strips-out-middleman-4101023.php).

Like the co-ops, Nakedwines buys the vintner’s harvest and turns it into wine. But the B2C company boasts that by cutting out the middlemen (distributors and retailers), it can offer fine wine direct to consumers at a very low cost. And here’s a twist: customers “invest” in Nakedwines for a monthly fee. Investors (or “angels”, as Nakedwines calls them) are then privileged to buy wine at wholesale.

In the SF Chron article, co-founder Rowan Gormley says that the money from fees is used to “build up a float and (we) use it to buy everything – grapes, equipment, barrels, bottles, even a work studio – so the winemaker has no expenses and no risk, making it possible for them to sell at wholesale prices.” The value for those consumer “angels”? According to the company’s website: “Angels invest in our winemakers by saving $40 a month toward their next order. In exchange, they save at LEAST 40% every time they buy wines from us. And they get a bunch of cool perks like $1 sample bottles and invitations to exclusive tasting events. Angels take care of our winemakers so our winemakers take care of the Angels.”

All of this is facilitated by the easing of laws and regulations about shipping to consumers. But what is stripped away from the product is the experiential value that end-point purveyors add, for example, a great meal to go along with that great wine.

Is It Enough to Break the Old Model?

The reason that wine is an interesting product to think about is because it is an almost perfect example (in the negative) of what RSR is talking about when we say that disintermediation (producers taking out the middlemen) will work best with products that are easily represented by information about that product. The finer the wine, the less information about it is sufficient to seal the deal with consumers.

To bounce these thoughts off a professional in the industry, I called an old college mate, Paul Torres. Paul is a Vice President at The Napa Wine Company, a large Napa Valley co-op. The company produces some of the most respected Napa wines available, for example the Ghost Block brand. Although that brand has only been available less than 10 years, it is already popular with fine restaurateurs.

As part of his job, Paul is a member of an industry advisory group, and he mentioned a recent meeting: “there were some really big names in the room- some of the most famous brands on the planet, and they agreed that they wanted to move towards an 80% ‘direct’ model. But when I was asked, I said ‘I believe in the three tiered system.’ Direct-to-consumer is a bolt-on to, not a replacement for the three-tiered system.”  Paul went on to say, “customers aren’t getting a deal when they buy direct! I sell a bottle of Ghost Block from the shelf at $60. ‘Want to know what the direct price is? $60 plus shipping.” He went on to explain that they have to protect the channel – they can’t undercut their own mainstream distribution network. But, he added, “all details – including the price anywhere in the country, are transparent because of the Internet. Peter Luger’s is the oldest steakhouse in New York. It’s $150 for a steak, cash only, and it takes months to get a reservation. Ghost Block wouldn’t be at Peter Luger’s if it was going direct. I actually think that by using the three-tiered system and getting placements at the French Laundry or Peter Luger’s or Bouchon in Las Vegas, that that builds the image more than anything!”

The “piece of information” that cannot easily be separated from the product that Paul is talking about, is the personalized experience of drinking the wine in conjunction with the value-add of the meal. Although a consumer may choose to send friends a bottle of the same wine that he or she experienced at the meal, it’s still the experience itself that made it happen. Strip that away, and the rush to commoditization would actually accelerate. According to the industry insider: “Without that personalized experience, wine is just alcoholic grape juice.”

The opposite is true as well; the way to keep the brand value high is to place that product in a great experience. Tying that thought to one of RSR’s über-themes, the future of the store, the connection is clear. To stave off disintermediation by pure-play B2C providers, it’s as much about the personalized experience as the product.

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