Wine market trends
The number of wine distributors is rapidly shrinking, with many of the smaller ones predicted to disappear.
About 250,000 wine SKUs (store keeping units) must funnel through fewer than 700 distributors to reach 450,000 wine-selling locations.
Wine producers are learning that in this down economy, it's much easier to make the wine than sell it, says a Napa, California, wine business consultant.
Barbara Insel, president and CEO of Stonebridge Research Group, based in Napa, shared some "inconvenient truths" about the wine market during her keynote address at the Washington State Grape Society's annual meeting in November. Insel and a group of food and beverage investors founded Stonebridge in 2008 to provide fact-based advisory services to the wine industry.
As consumers have changed their behavior and buying habits in the last 18 months because of the economy, most retail segments are selling less of everything. One of the hardest-hit segments, and one that has direct impact on wine, has been the restaurant industry, she said, noting that two-thirds of consumers are going out less. "Restaurants make a lot of money on alcohol and wine sales. What's really collapsed at restaurants are the wine sales, down 26 percent, but spirit sales are down 14 percent, and beer sales have declined 8 percent."
Restaurants, where new wines are discovered and expensive bottles are consumed, play a key role in wine sales and have a major impact on wine inventory, she said. But in recent years, grocery stores, too, enjoyed the good times of wine, increasing their offerings of wine brands and varietals for affluent shoppers. At Safeway, the number of wine SKUs increased in a just a few years from 430 to 1,400, and wine was the number-two profit generator among all categories from 2006 to 2007, she reported. A SKU (store keeping unit) is a number used to track inventory and represents each wine label. Healthy profit margins of 30 to 40 percent at the grocery store level were enjoyed from wine sales.
"That story of the good times is over," Insel said. Consumers are reaching for familiar brands that offer value and are trading down on price. Big names like Gallo, Sutter Home, and Mondavi have regained market share, wines are being discounted, and inventories have backed up.
Winners and losers
"Wine sales are actually increasing in volume," she said, explaining that consumers are drinking more at home, though not in restaurants. But instead of buying a $30 to $40 bottle, consumers are buying a $15 to $20 bottle. Insel notes that the magic price point is $8.99—above that, wine sales have increased; below it, the wine is viewed as being cheap.
As the margins go down, it's the expensive wine producers that are hurting. But there are some winners in this down economy.
There's been a surge in sales of wines priced from $15 to $40 and a new emphasis on value-priced wines, she said.
"For Washington, you're in the heart of that market segment—if you know how to reach it," Insel said. "The problem is reaching that market."
The consolidation of wine distributors and growing number of wineries and places where wines are sold has changed the wine market dramatically in the last decade and she described a vastly different wholesale picture compared with ten years ago. Instead of 7,000 distributors, fewer than 700 now exist in the United States, a number she thinks will drop to around 600 in the next few months. Wine can now be sold in nearly 450,000 locations, from 7-Elevens to super stores to specialty wine shops and restaurants. With about 250,000 SKUs in the United States, wine is one of the largest single product categories.
"The sheer logistical problem of getting all those SKUs to the market justifies the need for distributors," Insel said. "We love to demonize them, but we can't live without them. All of our product is going through a very narrow trade funnel."
At the retail level, backed-up inventory has caused retailers to destock wine brands, reversing the trend of carrying more and more labels. When grocery retailers carry beer inventory, it usually sells out in a day, she said. Spirits turn over in 30 days, but for wine, what used to be a 3- to 6- month turnover is now a 9- to 12- month turn.
Wine distributors are having their own problems, she said, as they sit on clogged inventory, deal with unpredictable inventory turns, and have high carrying and financing costs. "They can't return unsold product, so at the year's end, the excess wine with low turnover is being deeply discounted to be sold," she reported. Slow-moving brands are being dropped, and wholesalers are cutting about 15 percent of the brands in their portfolio. She predicts that many of the small wholesalers will not be around after 2009.
To avoid becoming orphans, wineries should develop a relationship with their distributors and improve their competitiveness by offering lines that sell, she suggested. They should be ready to absorb some of the inventory burdens, shipping product as it's needed.
"Sit down with your distributors, marketing staff, and discuss sales planning and how much you should be bottling, based on projected sales," she said. "Sales planning rarely happens in our industry. We make things and then hope it sells."
And most importantly, she tells producers to get their depletion data from the distributor. Depletion data shows where product is moving and at what price.
"If you have to change distributors, check the financials of the potential distributor to make sure they won't soon be going out of business," Insel warned.
If movement of higher-priced wines is too slow, producers should think about discounting their price for the distributor or doing events to build traffic. "Either give the consumer a better price or give them something else, like an appearance in stores. You need to give the trade a reason to move your wine," she added. There's a lot of really good wine out there.
Though distributors are key players in the market, wineries need to step up their efforts to ensure the product reaches the market, she said. "Ultimately, you [wine producer] are responsible for building demand for your product and making it profitable for your intermediaries to carry your wine."