Consumer-Direct Sales

The Role of Consumer Direct Sales in the U.S. Market

The size of, and inherent competition in the U.S. wine industry requires a system of distribution that can ship and deliver large volumes of efficiently and cost-effectively. The current supplier > wholesale distributor > on-premise/off-premise distribution path that is the U.S. three-tier sales channel would exist even if all legal barriers to consumer-direct sales were eliminated. For the last 20+ years, wholesaler distributors have fought to keep in effect and reinforce state laws prohibiting or limiting consumer-direct sales in order to protect their local franchises. In many states, the alcohol wholesalers’ lobbies are the largest contributors to state legislature election campaigns and political causes.

The arguments given by the wholesale distributors to limit or prohibit consumer-direct shipments of wine and preserve the three-tier sales channel are that the secondary and tertiary tiers:

• Prevent underage persons from receiving alcoholic beverages;
• Ensure the collection of state taxes on sales;
• Reinforce moderate consumption;
• Provide broader selection;
• Create more competitive pricing.

Studies and experience are beginning to show otherwise; there is a growing body of evidence that shows consumer-direct sales create more sales through the three-tiers. Furthermore, consumer-direct sales via the internet create more competition, which affect selection and pricing positively for the consumer. Each argument made by the wholesale distributors is either not true or can be easily corrected; for instance, collection of state sales taxes is easily accomplished by various forms of compliance services, from firms to online mechanisms such as ShipCompliant.com. All states that allow consumer-direct sales mandate that common carriers require an adult signature to deliver alcohol. Eliminating those issues (and the one about temperance, which should not be in the purview of a commercial business IMO), wholesalers’ arguments about their legally protected role makes a market more competitive is hooey: barriers to market access never make a market more competitive – ever. Barriers to market only protect certain business interests.

Consumer-direct sales can only replace the three-tier sales channel for wineries that have very small production. Indeed, the three-tier sales channel is often inefficient and not cost-effective for smaller wineries or small-production wines. The volume produced cannot support the incurred marketing costs of supporting sales through the three tiers, especially given the consolidation in the wholesale tier over the last two decades.

Wineries that must utilize the three-tier sales channel due to the size of their production supplement, not replace, those sales through the marketing actions to promote consumer-direct sales. Excepting only extremely high-demand wines, consumer-direct sales do not cannibalize sales from the secondary and tertiary tiers; the volume needed to replace three-tier sales is not feasible consumer-direct.

Instead, consumer-direct sales have shown a causal link to building sales in the secondary and tertiary tiers through building beneficial relationships with key consumer opinion influencers in local markets.

Consumers that make an effort to have a relationship directly with a winery often are more serious about wine than a typical wine buyer. Likely, such a consumer is an opinion influencer, since their interests often make them a source of information for other consumers less serious or knowledgeable about wine. Opinion influencers – for any consumer good – are the point-of-contact for creating word-of-mouth (viral) marketing. Marketing consumer-direct sales effectively reaches a winery’s key customers that are likely to be influential among their social circle in respects to wine, and create new customers for the winery. Similar to the effect of the latest internet meme (currently chatroullete *eyes rolling*), positive word-of-mouth spreads out from the point-of-contact.

Indeed, studies show that word-of-mouth is the most influential form of marketing channel, and especially among younger demographics. Social networks and online media such as Facebook and Twitter are the new form of socializing, and this connecting socially via technology will only grow. Social media marketing is influencing online word-of-mouth, which amplifies the effect through Twitter followers and Facebook friends that are remotely connected to the word-of-mouth source. Most of these remote connections won’t purchase direct from the winery, but may if they encounter a brand they’ve heard/read positive reviews of from their social connections. This builds sales in the market … through the three-tiers.

Like many entrenched industries the internet has changed the market conditions faster than acceptance by entrenched industry players and, in the case of wine, legislation. However, like those other entrenched industries there is no turning back the clock on the internet’s effect; for the wine industry that will ultimately mean access to consumers by any licensed supplier, be it winery, retailer, importer, or wholesaler. It may take decades but it is inevitable. Those who ride the change embracing it will make the most money in the end. Distributors can either be the Apple iTunes for wine in their market, or the Tower Records watching their sales of CD’s collapse due to the effect of the internet.