Chapter 4: Different Options for getting the wine to the point of sale

Question 1

Two options to getting wine to the end consumer as a producer

Answer 1

• Direct to consumer sales
• Sell their wine through an intermediary

Question 2

Why would a producer sell their wine through an intermediary

Answer 2

The additional work, costs and risks of direct to consumer sales

Question 3

Markets for alcoholic beverages

Answer 3

Markets for alcoholic beverages are seldom, if ever, totally ‘free’.

Governments put controls on the sale and distribution of alcoholic drinks: Tax, Minimize alcohol abuse (chapter 1 stuff)

Question 4

A free market

Answer 4

• Is one in which producers are relatively free to choose whether to sell directly to a consumer or retailer or through an intermediary.
• If the relationship with the intermediary or retailer is not working, the producer can cancel the contract (subject to any outstanding legal obligations) and find another route to market

Question 5

Wine sales are usually split into two broad sectors:

Answer 5

• Retail
• Hospitality
• These are often referred to respectively as ‘off-premises’ and ‘on-premises’ sales (particularly in the USA) and ‘off-trade’ and ‘on-trade’ (especially in the UK).

Question 6

HoReCa’

Answer 6

The term ‘HoReCa’ is used in some markets
for hospitality – an abbreviation of HOtels, REstaurants and CAfès/CAtering. For simplicity, the two categories (i.e. the total of retail and hospitality) will be referred to collectively as ‘retailers’

Question 7

Producers choosing Retailers

Answer 7

• Producers must decide whether to target the retail sector, the hospitality sector or both;
• a producer may be well advised to choose a combination of approaches to spread their risk in the event that one does not work out.

Question 8

Name the options for getting wine to the point of sale

Answer 8

• Selling Directly to Retailers
• Appoint a Distributor
• Establish a Joint Venture
• Use a Broker
• Selling Directly to Consumers

Question 9

Selling directly to retailers advantages

Answer 9

• Producers and retailers do not have to pay any intermediary’s costs and margins, maximising their profits.
• Producers are free to decide which retailers stock their wines. As a result, they can usually have the final say over how they are marketed, so retaining control over their brand image. However, this may not be possible with larger retailers such as supermarkets or large chains of bars and restaurants who may dictate how the wines are promoted.

Question 10

Selling directly to retailers disadvantages

Answer 10

• Increased administrative burden for producers who have to do the work of getting the wine to the retailer.
• This will take up time they could be spending in the vineyard or winery or force them to hire additional staff.
• Such administrative tasks include arranging collection, transportation and delivery of the wine

Question 11

Selling directly to retailers disadvantages (exporting)

Answer 11

• Producer will have to ensure that any import duties and taxes are paid and that the wine, its packaging and its labelling comply with the relevant laws in the country where the wine is to be sold.
• The administrative burden could be reduced if either the producer or retailer uses a competent freight forwarder, but this adds to costs.
• Producer may have to take on the full financial risk of wine being lost or damaged in transit. Again, this risk may be reduced by using a freight forwarder.

Question 12

Producer exporting wine to a foreign market

Answer 12

• it will take time to build up relationships with retailers and to understand that market, its consumer preferences and legislation. To do this properly will involve numerous time-consuming and costly visits to the country in question.
• However, attending trade fairs or tastings in foreign markets can offer an excellent opportunity for producers to meet many potential clients at the same time.

Question 13

If a Producer only wants to sell to a small number of companies – for example, if they are looking to sell high-volume wines to supermarkets or large chains of shops, bars or restaurants

Answer 13

• the administrative burden may not be too great. Some retailers may want to take control over some of these tasks (but at a cost).
• However, if the producer wants to target smaller retailers, they will probably not have the time or resources to approach all potential retailers. This being the case, the producer may prefer to appoint a distributor to act on their behalf.

Question 14

Retailers buying wine en primeur

Answer 14

The global trade in bulk transportation has enabled high-volume producers to sell directly to retailers, such as supermarkets. In turn this has enabled these retailers to meet and retain competitive price points.

Question 15

What does a Distributor do?

Answer 15

• A distributor buys wine from a range of producers and sells it to a range of retailers (including HoReCa).
• They are generally located in the same country as the retailers to which they sell, which may or may not be the same country as the producer.
• The distributor may or may not hold stock of the products in their portfolio, and may or may not have exclusive rights to import and/or distribute certain products in their market.

Question 16

Distributor names

Answer 16

There are a number of terms used for these businesses, including importer, agent and wholesaler, which, depending on market, may have slightly different meanings.

Question 17

Benefits of appointing a distributor

Answer 17

• For producers looking to enter a new market, they can take advantage of a distributor’s knowledge of that market, including key players, consumer preferences and current trends.
• The distributor will be able to introduce
  the producer to its contacts, saving the producer from having to go out and find potential customers themselves.
• The distributor will also be aware of different retailers’ requirements and preferences, meaning they can focus on the most appropriate targets for a particular wine.

Question 18

Benefits of appointing a distributor (Administration)

Answer 18

• The distributor will have a contract with a logistics company that can take care of collection, transportation and delivery of the wine.
• They will usually also absorb the risk of lost or damaged wine. If the wine is being imported, the distributor will have the experience and staff to deal with legal compliance issues, such as duty payments and labelling requirements.
• Having a local distributor can be particularly helpful where there is a language barrier.

Question 19

Cost of appointing a distributor

Answer 19

• The distributor will charge a fee to achieve its desired margin, which will reduce the producer’s profits.
• Margins vary from company to company and from country to country, but those selling to the hospitality sector tend to have higher costs and a larger staff than those specialising in the retail sector and may therefore have higher margins.

Question 20

Appointing a distributor (Marketing)

Answer 20

• Distributors will also have greater resources to promote a wine than the producer and will usually take over the marketing.
• While producers may still be expected to attend trade fairs and other events, this should not take up as much time as if the producer was selling directly.
• However, this means producers can lose control over how their wine is marketed and where it eventually ends up on sale.
• The strategy chosen by the distributor may not therefore reflect the producers’ brand image and it is therefore vital that both parties agree a clear marketing and sales plan from the outset and keep it under regular review.

Question 21

Appointing a distributor (Benefits of being part of a portfolio)

Answer 21

• Being part of a larger portfolio can increase exposure of individual producers’ wines
• many distributors organise portfolio tastings attended by a wide range of potential customers.
• Retailers’ wine buyers often prefer buying through distributors, as they find it easier to do business with one point of contact than many separate producers. This means producers can get their wines in front of retailers, which they could not have achieved on their own.

Question 22

Appointing a distributor (Downside of being part of a portfolio)

Answer 22

• Distributors cannot give undivided attention to any one producer, and the overall marketing strategy may not be the ideal one for an individual wine.
• Also, because they have a portfolio of wines, they may drop those that are not selling in sufficient quantities.

Question 23

Appointing a distributor (Size of producer & distributor)

Answer 23

• Larger distributors may also prefer to deal with larger producers.
• However, there are also smaller distributors who specialise in particular wines from particular countries or regions; this can be especially beneficial to smaller producers from those countries or regions looking to enter a new market.

Question 24

Appointing a distributor (finding the right one)

Answer 24

• Producers need to spend time finding the right distributor for their wines; where the producer has a range of wines, it may be that they appoint separate distributors for different wines.
• Clearly, this process costs money and takes the winemaker out of the winery; however, choosing the wrong partner can be even more costly.
• Trade fairs and tastings offer a good opportunity for producers to meet a number of distributors, and getting recommendations from other wineries can help.

Question 25

Establish a joint venture

Answer 25

* Particularly in price-sensitive markets such as the UK, companies in the wine industry are increasingly looking to save costs. * In recent years, several joint ventures have been established between companies at different stages in the supply chain. * This gives the parties greater control over those different stages and potentially greater profitability, as costs are shared and intermediary costs avoided.

Question 26

Establishing a joint venture (keys to success)

Answer 26

* companies need to be of comparable size, otherwise the effect is more of a takeover. * The contractual arrangements also need to be carefully agreed and documented (often through lawyers) to ensure each party knows their responsibilities and obligations. * If the joint venture does not work, the contractual terms will probably make it harder to leave the joint venture than, for example, a distributor arrangement.

Question 27

History of Joint Ventures

Answer 27

* Joint ventures are nothing new. For example, Mentzendorff is a long-established UK wine distributor whose major shareholders are Champagne Bollinger and the Fladgate Partnership (Port). * Importantly, these two businesses are not direct competitors and other companies represented by Mentzendorff have been chosen carefully to ensure that they do not overlap.

Question 28

Newer Joint Ventures

Answer 28

* Another increasingly common type of joint venture has seen producers joining forces with distributors or large retailers to create new wine brands. * For example, in 2007 UK distributor Buckingham Schenk and winemakers Hervé and Diane Joyaux Fabre created the Argentinian wine brand Viñalba, which is now sold in multiple countries worldwide.

Question 29

Acquisition in wine industry

Answer 29

* An acquisition (also known as a takeover) occurs when one company (usually a much larger one) buys another company (usually a smaller one), which then becomes a subsidiary of the purchasing company. * The reason for a takeover is usually to acquire capabilities (such as skills, resources, market share or prime vineyard locations) that the purchasing company believes it lacks, creating a more competitive business. However, some failing companies are taken over in an effort to save them from going out of business.

Question 30

Merger in wine industry

Answer 30

* A merger occurs when two businesses join together to create a business with greater resources and capabilities that should be more competitive than the individual businesses were on their own. * In theory, at least, the two companies should form an equal partnership; however, in reality this is rarely the case.

Question 31

Recent Acquisitions

Answer 31

* There have been several acquisitions in the wine industry recently as companies try to reduce costs and keep down prices through economies of scale and simplification of the supply chain * Some recent acquisitions have seen several of the 10 largest wine- producing companies listed in Conglomerates get even bigger; for example, E & J Gallo has purchased a number of producers. * Others outside the top 10, such as Jackson Family Wines, are using acquisitions as a means of growing their business so that they can compete in more sectors of their chosen markets.

Question 32

Benefits of being acquired by a larger company

Answer 32

* Despite the loss of control over their business, there are many attractions for a smaller producer who is approached by one of these big companies. * The acquisition will usually result in increased investment in the business being bought. * Also, because of the large distribution networks enjoyed by the conglomerates, it can open up new routes to market.

Question 33

M&As outside of production

Answer 33

There have recently been a number of high-profile examples among distribution companies, as they too look to consolidate and reduce costs: for example, Conviviality with Matthew Clark / Bibendum PLB in the UK.

Question 34

Convivality

Answer 34

* Conviviality is an example of how acquisitions do not always work out. * In 2016, Conviviality, which already owned a major national distribution company and several retail chains, acquired Bibendum PLB (itself a merged company with number of distribution and retail businesses), creating by far the UK’s largest wine distributor. * However, in early 2018, it was announced that the new company was in serious financial difficulty. Within days, the company had been put into administration and the various subsidiaries sold off to new owners, C & C Group and Bestway, to allow them to continue trading.[1]

Question 35

M&As outside of alcoholic drink trade

Answer 35

* M&A activity is not limited to companies within the wine or alcoholic drinks trade. * For example, in 2018 the USA private equity firm Carlyle Group bought Accolade Wines. * This acquisition came at a time when a trade war between the USA and China meant that tariffs were placed on USA wines entering China, whereas Australian wines (which make up a significant part of the Accolade brand portfolio) benefitted from a free trade agreement.

Question 36

Using a broker (what is it)

Answer 36

* The term ‘broker’ is used in a number of different contexts in the wine industry. In some markets, it is simply another word for a distributor. * However, in the true sense, a broker is different from a distributor * Whereas a distributor is paid by the producer to sell wine on its behalf, brokers are independent intermediaries who represent neither party. * Brokers do not enter into any deals; they merely make them happen. As they have very low overheads – a small office, a mobile phone and a laptop computer – they charge smaller fees than distributors (usually 2 per cent of the contract price, but it can range from 1 to 5 per cent in different parts of the world).

Question 37

Using a broker (benefit to producer)

Answer 37

* Brokers have intimate knowledge of a particular, often specialised, market. * Brokers have different specialities, some concentrating on sales of bulk wine, others on sales of small-production wine. * Brokers can bring together a buyer (e.g. a supermarket or merchant) and a seller (e.g. a co-operative or grower), saving the parties the time and effort of seeking each other out. * They know what wine producers have available to sell, and what prices they are willing to sell at. * They also know what style and volume of wine buyers are looking for and what price they are prepared to pay.

Question 38

Bordeaux Brokers (courtiers)

Answer 38

* In Bordeaux, brokers (or courtiers) have legal status and play an important role, acting as intermediaries between the châteaux and nègociants. * Here bulk wine is concerned, it is the broker’s responsibility to ensure the correct vat or vats of wine are actually delivered. * Brokers also play a key role in the fine wine trade, facilitating the deal between those who wish to buy and/or sell rare bottles of wine

Question 39

Selling directly to consumers

Answer 39

* An increasing number of producers sell their wine directly to the end consumer rather than using an intermediary. * This allows them to take the full profit from the sale of the wine and also retain control of how the wine is marketed. * However, the potential benefit has to be offset against the additional administrative, logistical and staffing costs the producer will incur

Question 40

Seeling directly to consumers (4 main options)

Answer 40

Direct sales are a particularly important option in wine-producing countries. There are four main options: * cellar door sales * events * wine clubs * online.

Question 41

Selling directly to consumers (Cellar door sales)

Answer 41

* An increasing number of producers have set up facilities on their estate or at the winery to sell wine to visitors. * Whatever form these facilities take, they are collectively referred to as ‘the cellar door’. * While in some cases, visitors quite literally pick up their wine from the cellar door, many producers have invested a lot of money in attractive shops and other wine tourism facilities.

Question 42

Cellar door sales (Customers)

Answer 42

* Cellar door customers range from locals who have come specifically to buy wine to tourists (whether or not wine tourists) who are visiting the region. * The attraction for these customers is the experience provided by the cellar door, with the chance to see where the wine is made, take part in a tasting of the wines before purchasing and learn about the story behind the wine. * Some cellar doors take the experience further and provide tours for small groups, a tasting of exclusive cellar door or reserve wines, and sometimes food and wine pairings, all usually at an additional cost. * For foreign tourists, the wines may not be available in their home country or may be more expensive there (due to import and intermediary costs). For example, producers in Alsace do an excellent trade with tourists visiting from nearby Belgium, Luxembourg or Germany.

Question 43

Benefits of cellar door sales (tasting room)

Answer 43

* Earning larger profits on their wine and they can engage directly with consumers. * Many have a tasting room where visitors can try their wines and learn how it is made. Tastings have been shown to be an important part of wine marketing. * Many people are nervous about buying wine without knowing whether they will like it or not; allowing them to try before they buy is a useful tool to increase sales

Question 44

Benefits of cellar door sales (branding)

Answer 44

* Cellar door sales also help build up brand awareness and loyalty, which is particularly valuable for new wineries. * It can be a way of promoting brand values, and the ability to forge a more personal connection often means that people who buy wine from the cellar door are more likely to buy wine from that producer in the future. * People who have visited a cellar door are also more likely to recommend the producer to their friends and family. This so-called ‘word-of-mouth marketing’ has become increasingly significant and, importantly for producers, is free. * Such direct engagement with consumers is also an excellent way to trial new products and to get direct feedback from potential consumers, reducing the need for expensive market research.

Question 45

Cellar door sales (why producers don't use them)

Answer 45

* Lack of a suitable location, the fear that the cellar will take too much time to run or require additional staff, or a focus on other routes to market. * To overcome issues with location and access, some producers have opened a ‘cellar door’ in a nearby town so that people do not need to visit the estate – these are especially common in the USA, for example in Sonoma and Napa Valleys. * To be financially viable, these ‘cellar doors’ may need to be located some distance away in the nearest large city: for example, some wineries in the isolated Columbia Valley in Washington State, USA, have opened cellar doors in Seattle, over 240 kilometres (150 miles) away.

Question 46

Seeling directly to consumers (Events: Benefits)

Answer 46

* Another way to engage consumers directly is at events where consumers can try and buy wines, such as tasting fairs or wine and food festivals. * Because these events tend to take place in towns and cities and often have other attractions, such as live music, they attract a larger number and wider range of people, including many who would not otherwise be willing or able to travel out of town to visit wineries.

Question 47

Selling directly to consumers (Events: Cons)

Answer 47

* The downside to these events, however, is that the producer will have to pay to exhibit their wine, will incur travel expenses and may have to employ additional staff to run the stand. * Unlike at their own cellar door, they will also be competing with other producers for the visitors’ attention.

Question 48

Selling directly to consumers (Wine Clubs)

Answer 48

* A number of producers have set up wine clubs that offer members (usually for a small annual fee) the opportunity to purchase wine at reduced prices for delivery to their home. * Members usually enjoy other benefits, such as access to wines not normally available to the general public, free tours and invitations to exclusive tastings. * For members, the benefit of these clubs is easy access to wines they enjoy.

Question 49

Wine Club History

Answer 49

* Wine clubs are popular in many New World wine-producing countries, such as the USA and Australia, as part of the wine tourism offering: consumers are usually encouraged to join these clubs while tasting wine at the cellar door. * Many producers sell a large proportion of their stock in this way, reducing the need to find other outlets for their wine.

Question 50

Wine Club (marketing)

Answer 50

* Wine clubs are also useful for marketing purposes. They enable producers to continue to stay in contact with members (through newsletters, websites, blogs, etc.), who they hope will continue to buy their wine and introduce it to friends and family.

Question 51

Wine Club (costs)

Answer 51

* As well as producing newsletters and so forth, the producer has to send out details of what wines are available– this is usually done every three, six or twelve months. * They then have to process orders and ship the wine. Although the members may pay the delivery costs, the producer may take on the risk of bottles getting lost or broken in transit; finding a reliable freight forwarder is therefore essential. * In the USA, the administration involved in dealing with the three-tier system can be very onerous. Legislation is evolving, but not all states in the USA allow direct to consumer sales and deliveries of wine from producer wineries.

Question 52

Wine Clubs (Users)

Answer 52

Wine clubs are operated by all types of estate winery. In the case of some prestigious producers (e.g. Screaming Eagle in Napa Valley), their wine clubs may be the only way to buy their top wines and are therefore more like exclusive members’ clubs, often with very long waiting lists of aspiring members.

Question 53

Selling directly to consumers (Online)

Answer 53

* the value of online wine sales has increased greatly in recent years as many consumers have welcomed the opportunity to buy wine from the comfort of their own home * Many producers have embraced this trend and now sell wine online in addition to their other routes to market. * Although there is the added cost of delivery, which may be paid by the consumer or met by the producer, because there are no intermediary costs it still may be cheaper for consumers to buy online than from a retail outlet, and producers can earn a larger profit.

Question 54

Selling directly to consumers (Online: Issues)

Answer 54

The additional issue for producers who decide to sell online is that they need to set up and maintain a reliable and up-to-date website. Although there are packages available online for creating a basic website, the producer may want to hire an expert to design theirs, so that it stands out from the crowd