Even “crowd endorsed” wine discoveries on Social Media have major problems

Monday, 14 September, 2015
Dave Jefferson
In 2015 Direct to Consumers (DtC) wine sales totaled $1.8 billion, up 15% over the previous year. Volume reached 3.9 million 9 liter/12 bottle cases. Clearly this provides encouragement to many of the now 8,287 licensed US wineries. Unfortunately, these sales are barely over 1% of all US wine sales.

A scant 30 wine companies represent nearly 90% of the domestic wine sold in the US. The top three companies represent more than 50% of case sales. That leaves 99.6% of US wineries to fight it out with all the imported wines for about 10% of the market! These are tough odds for any small winery trying to gain adequate consumer awareness outside its own backyard.

Despite this highly competitive situation, DtC represents a small glimmer of light for most wineries. According to www.shipcompliant.com, an industry leader in DtC advice and services, “wineries have access to 43 states for direct shipping.” Theoretically, 90% of the US population can now buy wine direct. [Polite tennis applause … oh, if it were only easier.] The largest distributors continue to maintain a strangle hold on wine distribution in the US, thanks to a maze of state laws, originating from the repeal of Prohibition in 1933 and then understandable fears of the Mafia continuing to control the liquor business.

Be that as it may, the dream (if not prayer) of many small and imported wineries is that their newly released, highly acclaimed wines (which may be relative bargains retailing for perhaps $15/bottle (30% to 50% of comparable and “established” quality brands) will generate great Social Media buzz and thousands of buyers will suddenly appear around the country. Theoretically this could happen, but the inevitable problem will be: How does the consumer actually get their hands on the wine? This is not a small issue as the likelihood of an existing distributor in any given state already carrying the new, obscure brand is almost zero and therefore very few (if any) retail wine shops will be able to stock the “hot brand.” (So while many thousands may Twitter away about a great Pinot Noir or Pinotage, “market unavailability” is the present reality of the alcoholic beverages world, thanks to the 21st Amendment (repealing Prohibition), and the minefield of resulting state legislation.

Accordingly, most small US wineries must hope that their potentially eager consumers will contact them via phone or email and purchase the wine directly. And yes, some may do this but further aggravation awaits since over 63% of the wineries are located on the West Coast (CA, WA, and OR) where at least 90% of the wine produced domestically comes from, and a very high percentage of the wine drinking population lives east of the Rocky Mountains, the shipping costs and related permit issues are substantial.

First of all, most states require any winery shipping wine to their state have a license issued by that state to do so. The fees for such licenses vary widely, as do the continuing reporting requirements. Accordingly few small wineries are willing to lay out such expenditures for an initial (perhaps single) order into a foreign state.

(See list of all US state excise tax rates and their particulars: http://www.wineinstitute.org/files/State%20Wine%20Excise%20Tax%20Rates.pdf )

Not to tout the Ship Compliant company excessively, but they recently shared with us a tool http://info.shipcompliant.com/roi-calculator which we believe is brilliant! On a state-by-state bases, it permits wineries/suppliers the ability to estimate the minimum compliance cost of entering any give state. The free tool is to locate the most profitable direct shipping states for each winery; it calculates the number of orders required to break even against license, tax, and report generation costs. Not using this comprehensive tool is crazy.

Legal compliance aside, the cost of shipping is a major issue as it costs the same to ship by a major courier service whether the bottle costs $5 or $50! Assume the average cost to ship a case of 12 from CA to the Midwest/Eastcoast is $40-$48 for UPS/Fed Exp, $12 for the protective “shipper,” plus $5- $10/labor to box and handle, we are close to $60, or $5/bottle. If the retail bottle cost is $15, another $5 is a 33% cost increase, a not insignificant hit for a new customer. Further, expecting a consumer who has never tasted your wine to buy a case from the Get-Go is pretty optimistic. Ignoring sales taxes, 12 bottles at $15/each means a case cost of $180; a lot of cash to risk on perhaps not liking the wine although many others raved about it. Stick on another $60 for shipment, and we are up to $240/case, or $20/bottle a real threshold for many consumers.

Many wineries selling $40 retail wines may be willing to absorb some or all of a $60 shipping cost for a case selling for $480. (Note that the average price of wine sold DtC, is close to $40.) However, as the retail price drops, the shipping costs rise dramatically as a percentage of the bottle cost. Wineries and the market will work this out, but the total DtC delivery cost is a significant impediment for many at this lower price level.

Perhaps the most viable solution is for small US wineries to offer the sale of an initial single bottle (into states where it is legal or low cost), absorb the UPS/Federal Express cost, and see if that leads to future larger sales. Hopefully, the consumer so loves the wine that his next order is for a case! Alternatively, he can lobby his favorite wine shop to ask a distributor to take on the brand. (Good luck, but that probably is not going to happen. Even if a distributor has the brand stocked in their state, unless a consumer commits to purchase a full case, few retailers will buy 12 bottles and risk not being able to sell 11 of an unknown brand.) Further, the winery associations should also lobby the states for a blanket exemption to state licensing until a winery’s annual wine sales into each state reaches some threshold level, perhaps at least 12 cases/year.

Worse yet, in general, US importers of imported wines do not have any rights to sell directly to consumers at all; that privilege to date has been granted only to wineries domiciled in the US proper. (Further, out-of-state wine retailers can only legally ship to 14 of 43 states, and those retailers usually must have supplying wholesalers.) So unless a foreign winery sells its wine to a US winery, and that winery is willing to sell the imported label, perhaps in competition with its own production, imported wines are largely out of luck for the DtC channel. A further hurdle for small foreign wine makers is that they don't enjoy the same excise tax rate as small domestic wineries. The difference is $.17 vs $1.07 (or $.034 vs $ .21 per 750ml). This small disparity is, nonetheless, a non-tariff trade barrier that is ignored by the U.S., even after an adverse ruling by the World Trade Organization. For importers, the long legal slog to change the laws such that both domestic and foreign wineries are on an equal playing field… is only beginning.

This discussion undoubtedly has missed still more costs and impediments to DtC wine sales but it certainly outlines the major hurdles for both struggling small US wineries, importers, and Internet savvy wine consumers. Social Media buzz will illuminate some new wine gems among Internet-savvy prospective consumers but actually making sales and getting wine into new consumer hands remains a very uphill battle.

Dave Jefferson