Ferment: Opinion from Tincknell & Tincknell

The Roads Ahead; Wine Business in the 21^st Century
by Paul Tincknell, December 1999

As clocks tick down to close the Gregorian calendar's second millennium since the birth of Christ (debate on the true end aside), the wine industry has undergone profound changes in the last forty years, with the last ten the most dramatic. Prior to the nineties, the changes all had to do with the actual making of the wine. While the scourge of phylloxera has forced wineries to continue to evaluate and improve their products, the real action of the nineties has been the changing business culture of the wine industry. In a nutshell, the industry has gone corporate and global. Publicly owned wineries prior to the nineties consisted of one: the Chalone Wine Group. Now, everyone anticipates the next IPO-of-the-month. Big businesses are buying wineries, and big wineries are buying smaller wineries and vineyards in one of the most astounding land rushes in California since '49. Plus, big business executives from outside of the wine industry are being hired in by wineries trying to increase their effectiveness in the New Economy. This is changing the internal cultures of wineries towards a more "Wall Street" mentality, and away from the artistic, "gentleman's business" attitude.

There has also been a seismic change in perceptions about marketing, sales and distribution. The wine industry is still hobbled by post-Prohibition, three-tier distribution and regulations, but wine producers are finally embracing alternate and new methods of selling wine: the internet and direct marketing. In what historians will probably view with some head shaking, this has caused a combative schism between producers and the distribution network of the wine industry. Wineries want to use all methods possible to reach out to customers, and wholesalers are either unable and/or unwilling to accept the rules of the New Economy and the march of technological progress. It will be a long, costly and very messy battle until the issue is resolved, and is likely to blind the industry as a whole from another, very real, potential threat: the product liability litigation storms that are destroying the tobacco and firearm industries (remember: the wine industry is part of the "A" in "ATF," the unholy trinity of modern evils according to our society). Alcohol beverage producers are deluding themselves if they think the positive scientific studies on the health benefits of moderate wine consumption will hold off the persistent temperance movement in America, and sway lawyers from not getting rich off of the potential court settlements.

The fractionalization of industry organizations adds to the threat of the potential product liability litigation storm. Besides reducing the wine industry's political and legislative clout on the direct-to-consumer shipping issue, the lack of unification between the industry organizations effectively means that no one is proactively leading the industry on a number of equally important issues, including industry wide advertising, winning friends in high, political places, etc. The large wineries and vintners are mostly looking after taking care of their own business (Robert Mondavi the shining exception). If the large wineries can't start looking at the bigger picture, and realizing that what may be good for the little guys may benefit them as well, the industry will remain a balkanized confederacy. Furthermore, the smaller wineries have to accommodate the large wineries in some of their efforts. For example, the furor over fruit-flavored wines is just plain silly, as these wines help introduce new consumers to wine-based beverages, yet small, ultra-premium wineries are in an uproar over how they are labeled. The ultra-premium wineries are giving grief to those fruit-flavored wine producers by forcing more labeling regulations, which just means more governmental interference, oversight and scrutiny. Bottom line, though, is no one who enjoys drinking these fruit-flavored wines is going to mistake a $45.00 bottle of chardonnay as being similar. But that consumer may, one day, enjoy that $45.00 bottle - if they don't get stigmatized by the small wineries and the press for the wines they enjoy now.

Wineries are also realizing that what's in a name is more important nowadays than what is in the bottle. Branding, brand positioning, brand identity and brand marketing are the vital strategies in winning consumers' mind share - hence the successful existence of Tincknell & Tincknell and the kind of work we do for our clients. Ten years ago no one talked about a brand's identity, only a wine's taste and style, and whether it got a good score. Today, in our meetings with wineries, how to more effectively communicate their brand's uniqueness is discussed rather than whether the wine is being sent out to the press. The clout of wine ratings will continue to diminish as the qualitative differences between wines become increasingly more negligible, due to the general state of wine quality continuing to improve. People like to develop emotional attachments to products they purchase, especially when the feature benefits between competing products are de facto identical, and score numbers and ratings don't fulfill that need for the masses. (What would you say is the most successful brand name in the wine industry? T&T's choice: Gallo. And they rarely had the good scores after their name prior to the nineties. Runner up: Robert Mondavi.)

So what does the 21^st Century hold in store for the wine industry? Prognosticating is both fun and foolish; right up my alley. I think that there are two roads ahead, and the wine industry is at the fork now. The convolutions of other industries cast light on the tea leaf pattern at the bottom of the wine industry's cup.

Down the right fork in the road, the corporatization of the wine industry will continue; the big companies will get bigger, swallowing successful small businesses. The independent mid-size winery, say 35,000 to 100,000 cases produced annually, will be fair game for the big wineries bent on increasing profits through acquisitions. Such ongoing consolidation will keep prime vineyard land prices high, keep ultra-premium wine prices high, and lower prices for premium and super-premium wines. Those big companies will use their brands' identities as the primary marketing tool. They will need to invest in the distribution of their own products to lower costs further and increase margins. And they will need less restrictions and regulations in marketing and selling their wines to compete effectively. Pressure will be put on state and federal legislatures to change laws and regulations for easier access to domestic markets.

Down the left fork in the road lies the little guy. As big wineries get bigger, the niche for very small, artisan winemakers crafting distinctive, uniquely styled and esoteric wines grows too. Micro-wineries of a few hundred or couple thousand cases will satisfy that ongoing need in our society for the arts, originality, personality, creativity, spirituality. But these fun little micro-wineries ultimately won't be as plentiful in California as they will be in the other 49 states. The big wineries will own the best vineyards in California, and they will make stunning wines from them. But there is no systematic protection of vineyard ownership by heritage here in the US like there has been in France. It will be increasingly more difficult to own a small Napa Valley cabernet sauvignon vineyard and not sell the fruit to a bigger winery or sell out for mega-bucks. Where to make wine is a big challenge for such a vineyard owner, as the days of small to mid-size wineries owning rows of gleaming stainless steel tanks and shiny, new crushing and pressing equipment are numbered. The costs of having that investment 12 months a year only to use it for two months is not reasonable in the economies of mid-size and small wineries. Big custom-crush cooperatives do not give artisan winemakers the kind of control or allow for the experimentation in craft that is needed for making great wines.

Artisan winemakers crafting wines under their own labels will be forced to find promised vineyard lands elsewhere. Increasing quality and a new trend towards regionalism in consumer purchases will make them successful. They will need to establish small wine cooperatives that share the investment in equipment costs among a small group. Wildly successful wines will be sought out globally, thanks to the internet, while modestly successful wines will not need to expand distribution beyond a local, geographic region. These artisan winemakers will keep the esoteric varietals alive, creating new, unique and intensely personal wines that display true regional and stylistic traits. And ultimately, the wildly successful artisan brands will be bought out by the big companies trying to continuously expand their profits by expanding their brand portfolios.

One of the most interesting effects the above will have will be on the wholesalers' future. Disintermediation by the internet and the explosion of efficient, fast common carriers is inevitable, yet wholesalers are largely denying it. The need for distribution won't go away - indeed it will become more necessary - but the need for wholesalers to sell wine is disappearing. As the size of wine producers grow, the control of marketing wines will be handled internally, and on a national scale, just like the large brewers and spirit producers. On the other side, the internet allows small wineries to communicate and market directly to their customers (trade and consumers) inexpensively. For them, regional distribution isn't that big of a challenge, as small delivery companies can suffice, and the international common carriers are there to service the rest of the world if necessary. Big wineries will want to own their own distribution networks. Smart, big wholesalers will have to abandon the sales side of their business and strategically align themselves or merge with those producers to focus on their core business: efficient, fast distribution of goods. The not-so-sharp wholesalers will get flattened by the big guys and the march of technology. Witness the new distribution models being developed by Wine.com and Wineshopper.com. Their wholesale partners are not responsible for selling the wine, just delivering it. Ultimately, those new delivery service wholesalers will not want to own the product any longer, and so incurring potential liability, but just transport it. The writing is already spray-painted across the wall ... .

If the above unfolds as I have foretold, then the end result is that there will be more good wine more accessible to more people than ever before. I don't think that is a bad future at all. But the 21^st Century will bring about more change - of that one can be certain. Some will be good, some will be bad, much will be disruptive, and all will be exciting.

Be ready.

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