The unstoppable rise of direct-to-consumer wine selling

Thursday, 22. November 2018 - 18:00

Judd Wallenbrock, CEO, Charles Krug

Each year when surveys  announce the best-selling restaurant wines in the US, Jordan Winery’s Alexander Valley Cabernet Sauvignon is always in the Top 10, if not the Top 5. Yet the California stalwart is equally proud of its recent success in selling directly to consumers, or DTC, even though DTC is a much smaller percentage of Jordan’s production. “We’ve grown DTC fivefold in the last few years,” says owner John Jordan. “How? We work hard at it.”

“We’re kind of late to the game, with only 10% DTC sales,” says Judd Wallenbrock, CEO of Mondavi-owned Charles Krug winery in the Napa Valley. “For years, our tasting room was a trailer out front, even though we were one of the first wineries in the valley to have a wine club. Now, we’re having a rebirth of Charles Krug from a DTC point of view.”

Anthony Vietri is owner and winemaker at Va La Vineyards in Southeastern Pennsylvania. “It’s about time the West Coast is catching up,” he jokes. “On the East Coast, DTC is less a matter of choice than it is a matter of survival.”

Increasingly, all US wineries are cutting out the middlemen – wholesale distributors and wine shop owners – and selling a larger percentage of their bottles directly to consumers, whether they live next door or across the country. 

Getting customers to pay more
In 2017, US drinkers spent $2.69bn on 5.78m cases of wine – at an average of about $38.75 per bottle – purchased directly from wineries. That number is expected to top $3bn this year. These 2017 sales figures reflect an amazing 15.5% increase in value and a 15.3% increase in volume from 2016. Today, 10% of total winery sales are DtC, with the percentage much higher for wineries producing less than 50,000 cases. Of the almost 10,000 wineries across the country, 97% fall into this category. For small family wineries, 60% of total sales are DtC on average. For the producer, DtC means much better profit margins, plus access to far-flung consumers not easily reached through the country’s three-tier (producer, wholesaler, retailer) system. Direct contacts also allow wineries to build relationships with buyers to increase repeat sales.

While there is not a similar economic incentive for the consumer, who actually pays more per bottle because of shipping costs, it does gain them direct access to small producers who don’t have broad distribution systems. Plus they can shop for wine the way they shop for many of other purchases – online. Finally, there is the important psychic payoff of having a one-to-one relationship with the person or company that actually makes the wine.

East Coast producers from the Carolinas to Connecticut are generally smaller than their West Coast brethren and have always depended on cellar-door sales to make up in margin what they lack in volume. It is a rare winery in New York or Virginia, the largest Eastern wine producing states by volume, that has even 10% of sales go through distributors.

Three factors have fed the rapid growth of direct sales. One was a court decision in 2005, another a business trend, buying online, and the third a social trend – wine tourism. The legal opinion was handed down by the US Supreme Court and became known as the Granholm decision. Granholm said that if a state allowed resident wineries to ship bottles to customers within that state, it also had to allow producers from all states to ship wine to its residents, a case of interstate commerce trumping state protectionism.

“At that time, 26 [of the 50] states had some kind of shipping agreement with other states,” says Steve Gross, vice-president of state relations for the California-based Wine Institute. “Thirteen of those agreements were similar to what we have today under the Granholm ruling, so they continued business as usual. The other 13 were reciprocal agreements between states, which were no longer legal.”

Under pressure from wine distributors and retailers, some states at first barred, or threatened to bar, all shipments, intrastate or interstate. One argument, a largely specious one, was that shipments would get into the hands of underage children. Even today, states that permit shipments often require adult signatures upon receipt, an annoyance to both shipper and consumer when no one is at home. Nevertheless, 13 years after Granholm, 46 states and the District of Columbia allow direct shipping from US wineries to consumers, although most states still prohibit direct shipping to consumers from a retailer, including internet retailers. 

Increasingly, in addition to their wine club shipments, wineries sell online to everyone. 
Wine clubs, long a staple of winery promotions, provide automatic shipments of a certain number of bottles, usually quarterly, for a certain price. For example, Napa Valley’s Cliff Lede winery has four quarterly club options, with the number of bottles per shipment ranging from four to 12 at $250.00 to $675.00 per shipment, while providing additional volume discounts. 

“As the market has grown, internet companies have developed special software for wineries to better manage their DtC sales,” Gross says, “and we’ve been able to work out wine shipping discounts for our wineries.” Additionally, there are regional wine warehouses that specialise in DtC shipment for wineries. FedEx, one of two major US shipping companies, has developed a program with pharmacy chain Walgreens to allow customers to pick up missed shipments at their local store.

Indeed, were it not for shipping costs and hassles, including payment of state taxes and considerable record-keeping, DtC sales would be even more impressive. Many wineries, however, still love heavy bottles for their trophy vintages, increasing freight costs.

Attracting customers
Getting customers into winery tasting rooms is a tale of two coasts. In the late 1900s, many states with few wineries enacted so-called farm winery laws, allowing local producers to sell directly to consumers at cellar door. This caused a rapid expansion of wineries and winery sales in the East Coast and the interior. Winery tasting rooms quickly became gathering points much like bars, coffee houses and cafes. “Let’s meet at X Cellars and have a couple of glasses of wine,” became a familiar invitation. In time, some wineries morphed into wineries + tasting rooms + event spaces, hosting weddings, bridal showers and concerts with wine serving as a pleasant backdrop. 

By contrast, 20 or 30 years ago, many West Coast wineries didn’t have tasting rooms, even for locals. However, as wine tourism exploded – 3.5m tourists now visit the Napa Valley annually – the lure of additional revenue through tasting fees and wine sales became so powerful that tasting rooms in California are now almost universal. Today, some have even eliminated the need to visit the winery, opening individual or shared tasting rooms in towns such as Napa City and Healdsburg. The concentration of tasting rooms within a few blocks has tempted many consumers to wine bar-hop.

Two wineries provide imaginative examples of DtC marketing. One is Kosta Browne in Sonoma. “We make 22 unique Pinot Noirs and three unique Chardonnays,” says vice-president Stephanie Peachey, “and 85% of it is sold directly to consumers. It costs nothing to join our waitlist for allocations, and we try to spread and share each fall, tailoring allocations to fit the needs of each member, even if the member only gets one bottle.” This summer, the winery opened a gallery at its Sebastopol facility exclusively for club members. Peachey explains that the remaining 15% of production goes to high-end restaurants and wine shops “so we can have a network where our members can always get our wines”.

The other winery is Long Meadow Ranch in St Helena. “Our wine club is growing about 20% per year,” says vice-president for marketing, Jeff Meisel. That’s not surprising, as the St Helena facility is like an entertainment park for wine and food lovers – with a general store, a restaurant and an event space, plus wine and olive oil tastings. “For our wine club members, we have special music events, guest chefs and special library wine tastings,” Meisel says. “Our goal is not only to add club members, but also to retain them.”

Nevertheless, a few dark clouds have popped up on California’s DtC horizon. Rob McMillan’s 2018 annual Silicon Valley Bank state of the wine industry report carries this storm warning: “We have been watching an interesting phenomenon for the past few years now,” it notes. “Tourism is up in the major wine-growing regions. Hotel stays are increasing, and average room rates are up, as well. But, with the exception of Oregon, Virginia and New York, average winery visitation is down. How do you explain the paradox of more tourism in a wine region but lower visitation to the wine-tasting rooms?”

The anecdotal reason seems simple: Napa Valley roads and tasting rooms are often packed, and Sonoma is almost as bad. But the SVB report has a better answer: Younger visitors who may not be crowd-averse are being turned off by high tasting room fees in Napa and Sonoma and are flocking instead to lesser-known Oregon. A standard tasting room fee in Napa, for example, is $38.00, while in Oregon it is $13.00. An average Napa reserve tasting is $66.00; in Oregon it is $25.00. And sharing a tasting – “sharing” being a revered term among young adults – is discouraged in Napa. The golden lining in Napa, however, is that while visits are down, spending per visit is up, with the average visitor, likely to be older, spending $304.00 per visit. The question is now whether total sales will also fall off, and if so, when?

Meanwhile, don’t shed tears for wholesalers and retailers. “So far, there has been no sign of cannibalisation of sales,” the Wine Institute’s Gross says, which may be why most states now allow DtC. Almost all entry-level wines, the bulk of wine sales by volume, and almost all imported wines, are sold through distributors and retailors.

In his report, Silicon Valley Bank’s McMillan traces the growth of DtC sales using the analogy of software-like ‘versions’, now standing at 3.75. “The number of tasting rooms has increased, and the owner focus on tasting-room activities and DtC sales has intensified,” the report notes. “Direct revenues continue to climb, but there is a limit to how far the current strategy will take us. Can we continue to insist that the consumer come to the tasting room for an experience? How is that working in malls throughout the US? In view of clear changes in consumer demand,” the report warns wineries, “now is the time to start thinking about direct sales version 4.0.” 
Roger Morris