Addressing the Dangers of our Industry

This past weekend a brilliant, talented, optimistic young man from our small town was killed by a drunk driver. Jennifer and I are friends with his parents, and our daughter was friends with him in high school. I have no words for the deep heartbreak I’m experiencing over this senseless tragedy, and cannot begin to fathom what his family is experiencing. There are just no words. All one can do is to think loving thoughts and provide what comfort we can if called upon.

This is not the first time I’ve lost someone I knew to drunk driving. Plus, our family has lost loved ones to alcohol abuse. I have friends and colleagues that struggle against alcohol addiction.

If there is to be any sense out of this young man’s death, it must begin with an examination of our souls of us who work in the alcohol beverage industry, and acknowledge the role our products play in countless injuries and deaths each year. If we are really honest with ourselves, we must admit that we don’t do enough to protect our customers.

Slapping the government warning on the label and once in awhile adding the phrase “Please enjoy responsibly” or “Please enjoy in moderation” in minuscule fonts on ads or websites are useless and truly shameful efforts by both the government and our industry. We all know that drinking alcohol carries real risks. Yes, the majority of people that do enjoy alcohol – and I am one of them – do not partake in risky behavior while drinking the vast majority of times. But we would be denying truth that we haven’t ever done so; everyone, and I indict everyone that enjoys wine, beer, and spirits has, at one time or another, driven when we legally shouldn’t have, or done something foolish and wrong under the influence. Most of the time nothing terrible happens. However, that is just us playing the odds when we know we shouldn’t have.

The only people who read the government warning are the label examiners checking for compliance at the TTB. And precisely what does “enjoy responsibly” or “in moderation” mean to the average person? One glass, two? 4 ounces at 48 proof? Over what period? With food or without? The phrases are meaningless without context.

The alcohol beverage industry fought MADD and SADD when those organizations were at their heyday in the 80’s and 90’s. Most alcohol beverage producers worried about losing sales. But I do think the end result was very much for the positive; public awareness was heightened over drunk driving, tougher laws were enacted, and alcohol-involved driving fatalities declined – lives have been saved. But also note that alcohol beverage sales have increased since those years when the movements were at their most aggressive. When given societal boundaries regarding alcoholic beverages, more people responded by being more responsible, and more people buy and enjoy wine than ever before.

Now, it is our turn: the alcohol beverage industry must be more proactively part of the solution. No, we won’t eliminate all deaths and injuries involving alcohol. Plenty of us liberals (and yes, I’m one of them) in the wine industry favor more gun regulations to reduce gun violence, and rail against the weapons manufacturers for stymieing efforts or not producing solutions. We dismiss their arguments that regulations won’t stop all of the bad guys from getting guns; we know it will stop many good people that momentarily lose control and hurt someone. It is hypocritical of us that we do not demand the same from our industry.

We can and must do more. We need to get practical and not be afraid to address the problem, forthrightly and out in open. We can’t worry about losing sales; we must help our customers to better understand the effects of alcohol and therefore enjoy it safely, and with more appreciation. That starts with providing real guidelines, simply stated, about the risks of alcohol:

  • Do not drink alcohol and drive.
  • Do not drink alcohol if pregnant.
  • Check your medications for complications with drinking alcohol.
  • Prolonged, excessive drinking can cause health problems and addiction.
  • Do not purchase for, or sell alcohol to people 20 years old or younger.

Then we must provide real advice for using our products in a responsible manner:

  • Most people can enjoy one 5-6 ounce glass of wine, 12-ounce glass of beer, or 2 ounces of 84 proof spirits per hour without food, and will not experience prominent side effects; weight and size do affect tolerance. Two servings per hour will likely push your blood alcohol levels over the legal limit for driving.
  • Stop drinking alcohol at least one hour before driving; more time is necessary if you have exceeded the above recommendation. Eating and drinking non-alcoholic beverages help slow the effects of alcohol only slightly.

And last, here in the California wine industry we must enforce prudent advice:

  • Tasting room employees, sales representatives, and management should all be RBS certified by the CA ABC.
  • Tasting room employees and sales representatives should encourage spitting instead of swallowing when tasting.
  • The above warnings and advice should be prominently displayed and provided as a takeaway for interested customers.
  • Non-alcoholic beverages should be provided (gratis or sold) to non-drinkers and designated drivers.
  • Every tasting room should have a comfortable area available for customers that need to wait until they can drive safely. Employees should encourage customers to take advantage of such an area when needed, even at closing time.
  • Every tasting room should have mass transit options available and on call for those customers that cannot drive safely.
  • Tasting room employees should receive a bonus for doing safe serving practices.
  • Provide proper serving size recommendations on our wine labels (e.g., one 5-6 ounce glass per hour).

Yes, the above costs money to do. These are our customers – those hurting and being hurt by the misuse (accidental or intentional) of our products. Our industry has an ethical obligation to help reduce injuries and deaths by alcohol. By helping our customers enjoy wine, beer, and spirits safely, they will appreciate it all the more, and hopefully enjoy it more fully and longer throughout their lives.

Let’s bring a modicum of sense to all of those that are senselessly hurt or killed by the products we make. We can save lives together.

Paul Tincknell
Tincknell & Tincknell, Inc.
Wine Sales and Marketing Consultants since 1997

July 19, 2016 | Filed Under Ferment


Getting Wine Pricing Right

Over the last few weeks the T&T team has been tasting about 100 or so wines on behalf of a client along with a professional sommelier and two other industry persons. The results of the tastings have been revealing:

  • The vast majority of the wines are very good – only a couple of corked wines, a couple of over-the-hill wines, and a couple not commercially acceptable.
  • Domestic wineries do not know how pricing works in the three-tier sales channel.

The latter point is the most surprising, as it is one of the fundamental “P’s” in a marketing plan, and most of the wines came from producers (wineries) that have been established at least a couple of years if not much longer.

The most common mistake when we reviewed a wine’s pricing was a fundamental one: the supplier left out enough margin for a tier or tiers in the sales channel. We attribute that to a basic lack of understanding the dynamics of the three-tier sales channel. So first, a quick review of the U.S. wine industry’s marketing channels.

Wine in the U.S. comes from either a domestic producer or importer (supplier). Typically, the producer or importer sells to a wholesale distributor, who in turn sells to restaurants and retailers, and those in turn sell to consumers. That’s the basic three-tier sales channel: Supplier > Wholesale Distributor > Restaurant/Retailer > Consumer. Some permutations exist, such as a producer or importer acting as a wholesale distributor in the state they’re licensed in, and of course a winery selling direct to consumers through a tasting room, the internet, or by telephone. But basically the three-tier sales channel is the method of distribution for national sales throughout the U.S.

Each tier wants to make a profit, so each tier must price wine based on the cost of the previous tier. While there used to be somewhat standard margins applied at each tier, pricing has become much more dynamic over the last decade in response to market forces: wholesale distributor consolidation, internet searches, increasing competition, etc. Still, a producer must project pricing for each tier in order to provide a basis for the ultimate price of a wine, the suggested retail price (SRP).

The methodology for projecting pricing is somewhat simple:

Cost-of-Sales (COS; e.g., cost-of-goods) + margin = Wholesale Distributor FOB (FOB; the price of the wine to a wholesale distributor from a supplier)

FOB + laid-in costs (taxes, freight, operations) + margin = Wholesale (WHSL; the price of the wine to a restaurant or retailer)

WHSL + margin = Suggested Retail Price (SRP)

Therefore:

(COS + margin) + (FOB laid-in & margin) + (Restaurant/Retail margin) = SRP
Supplier’s Price (FOB to wholesale distributor) > Wholesale Price (WHSL to restaurant/retailer) > Restaurant/Retail Price (SRP to consumer)

Now a wine drinker reading this might groan at all those costs and margins being added into the price they pay. What they typically don’t realize is how thin most of those markups really are, especially for the producer or importer.

The complicated part is ascertaining what those added costs and margins are. First and foremost a producer must explicitly know their COS for each wine. Pricing wine without establishing your COS is a non-starter; you will lose money.

Each buyer in the three-tier sales channel is going to have differing operating costs and optimal profit margins, which is dictated by a dizzying number of factors such as the local market, distance from supplier, local taxes, rents, salaries, etc. Often a supplier will add yet another tier, such as a national sales agency or a regional wine broker, who needs to realize a profit out of the pricing of the wine. Complicating the process even further is that each tier typically demands some sort of price support through discounts, promotions, or free goods. These complexities absolutely must be factored in by the producer in projecting a SRP for a wine.

This is clearly much more complicated than the prevailing yet bizarre industry pricing formula myth that half of SRP = FOB. No no no no no.

Pricing therefore is more of an ongoing process than the price-it-and-forget-it practice that most suppliers adhere to. Indeed, for mid-size and larger producers, each market will likely have its own channel pricing. Adding complexity is the practice of setting a national SRP for a national chain; that SKU may have a differing FOB and WHSL price in each market based on the local market and quantity purchased by the chain.

What we quickly discovered in the tasting evaluations was that most producers were pretty much arbitrarily setting channel pricing with far too low margins to be workable on a national scale. Now many of the wines were from exceedingly small producers – under 1,000 cases annually – so weren’t selling nationally, or even selling much wholesale in California. But mis-pricing a wine can lead to complications if a producer has plans to grow production … or it becomes necessary to work with a wholesale distributor or a wholesale broker in-state.

Last, pricing is a strategic marketing asset. Supply and demand do factor in (hence why Screaming Eagle is so very expensive), as do branding. Both may add or lower pricing significantly.

Indeed, in the tasting evaluations the packaging was a key factor. Tasters tasted the wines not blind, e.g., the labels where displayed and reviewed. Pricing, however, was mostly unknown, and each taster was asked to provide a SRP based on the wine quality – and the packaging. In many instances there was a significant amount of opinion that affected perceived pricing due to a wine’s label (and most often, negatively).

The result of mis-pricing wine is that the variations of retail prices can fluctuate greatly market to market; a real issue in this age of easy internet searches. If not enough margin is added for each channel partner, the result is higher retail prices in out-of-state markets, forcing wholesale distributors to work on less margin, or having to provide greater price support. Each of those results can make your brand less desirable to the sales channel buyers; there is also the added resentment from buyers when a supplier clearly favors their home state or tasting room with lower pricing. A wine without adequate supply/demand forces or brand recognition can easily be priced too high, creating slow sales or push-back from sales channel buyers demanding continual discounting – in effect resetting your wine’s market pricing. We noted both instances of pricing imbalance in our tastings, with some clearly mis-priced too low and others too aggressively priced given the lack of brand recognition (essentially none) compared to peers in quality being more sensibly priced, and therefore a greater value to a buyer.

If you are not creating a pricing strategy based on your COS, branding, marketing objectives, the three-tier sales channel, and pricing support, then you are not ready for the national U.S. wine market. Remember, it’s easy to lower pricing but exceedingly difficult to raise prices – so getting it right the first time makes life easier. In our current industry climate the supplier has the least amount of persuasion in pricing through the three-tier sales channel due to wholesale distributor consolidation and competition.

Pricing is a critical component of wine marketing and sales, and therefore creating a successful pricing strategy that is updated with every new release, review, and label change is necessary for success.

October 30, 2013 | Filed Under Rackings

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