Category: OP-ED

So, we walk into a local restaurant not long ago and see a sign at the reception desk announcing that a 3% fee will be added to the bill to compensate the cooks for the discrepancy in wages between them and the wait staff.  It goes on to explain, that while the wait staff brings you your food and receives gratuities, the cooks prepare it and, therefore, deserve a slice of the pie.  Now fair compensation is not the issue.  Every entity has to work out exactly what that means in their situation, and act accordingly.   The question is how that is supposed to come about.
One might muse that, if the cooks are indeed doing the job they are paid to do, why they would be entitled to an extra ‘spiff’ on the side.  Also, this little entitlement is automatic, whether your food was prepared well or not.  That’s like that mandatory ‘20% gratuity’ added for ‘parties larger than six’.  What is the servers’ motivation to not just ‘phone it in’ if they are going to get the same money anyway?  And all of this is in the face of an escalating minimum wage (the discussion of which would fill many pages with macro-economic arguments and be way too boring on a Sunday morning, or any time for most folks).

 

Is the Bay Area-styled entitlement mentality spreading south like some sort of airborne virus?  Is this kind of thinking one of the early signs that the ‘participation trophy’ generation is taking over?  What’s next, an add-on for their 401K?  Why restaurants think this is OK in the first place is the baffler, and where does it end?  A night out can rack up pretty fast already without all of the ups and extras.

 

Why don’t the servers divide their take with the kitchen?  The servers benefit when the food comes out on time and well prepared.  The customer is merely getting what he is paying for.  Why not just have a city tax on top of that because the city would like a little more money, too?  Then it can be like hotels where that $120 room you snagged on Expedia ends up costing you $180 after all the taxes and fees.

 

Long ago some angry restaurateur took out a billboard ad on the Long Beach Freeway that read, “If you can’t afford to tip, don’t eat out.”   Of course, our first response was why is it up to us to compensate your help?  The whole idea of tipping used to be tied to service where, if someone gave you a good experience, you tendered a little something extra.  Now there are bills that come with the tips at various percentages calculated for you, essentially shaming you into picking one of the options.  And if there are six or more of you, you don’t have a choice even if your service is lousy.

 

Nothing against the restaurant or their cooks, but this is a precedent that seems to be proliferating and there seem to be no natural boundaries.  Does any of it ensure a better experience for the consumer?  Oh yeah, them.  What happened to people simply doing the job they were paid to do to the best of their ability?  Or is that not a ‘thing’ any more?

 

KEEP ON TROCKEN?  PLEASE, NO

 

We just had our first exposure to the 2016s from Germany.  We’ve been telling you for to a while now to buy up the 2015s as it is a great vintage, one of the best in recent memory.  Not having a firm impression of the 2016s, we were pleased with the opportunity to work through 80-100 of them.  Our takeaway thus far?  Buy up the rest of the 2015s!

 

The wines (mostly Rieslings) showed a bit here and there, and lacked the characteristic zip that pulled many of those 2015’s together at the finish.  In other words, it looks like our participation in the vintage will be sparse at best.  There are always a few winners in every vintage.  But given what is out there from 2015, and a more few late 2015 releases coming from top sources hitting recently, 2016 looks to be a potentially minor play with, as always, a few stars, though we still have another 100+ wines to taste, including, in all fairness, many of the top Kabinett and Spätlese wines.

 

Frankly, we are pretty tired of every German importer telling us how important trockens (dry) are in German restaurants.  The Germans like to drink their own stuff, we get that.  But this isn’t Germany.  Here we have all kinds of cuisines, particularly Asian (Thai, Chinese, Vietnamese to name a few) that go beautifully with a crisp, classic kabinett or spätlese, the little bit of sweetness playing nicely against ginger, garlic, curries, and other spices.  No other wine pairs as well and as broadly across a multitude of dishes.

 

Plus, if you want to drink dry Riesling, the Austrians, Australians, and the folks in Alsace are making better examples and have been doing it longer.  And that’s just Riesling!  There are all kinds of other dry whites that will offer excellent choices…Sauvignon Blancs, Chardonnays, Grüner Veltliner, and so on.  We understand the Germans responding to trends in their own back yard.  But aside from Germans drinking German, we can’t see why the vintners are so intent on competing in an arena where they are at a distinct disadvantage outside their borders   Most trockens are sadly undernourished and lean, and far too many are simply not pleasurable.

 

There are those that will point to the GGs (Große Gewächse), the relatively new category of dry wines from ‘Grand Cru’ sites, as the example of elite dry German wine.  Alright, sure, some of them are pretty good but they are also rather expensive for what they deliver, many in the $50-80 range in stores and much more on wine lists.  There are certainly many more exciting choices for less money.  Yes, there are places like Baden and the Pfalz where dry wines have been the tradition for a long time.  But the Mosel’s delicate, racy demeanor does not translate well into trocken.  They are a little better in exceptional, warmer vintages, but rarely ‘great’.  The persistent question is ‘why?’

 

Given over 1000 years of viticulture in these places, where certain styles developed because of the terroir of the region, we have to wonder who came along and decided all of that was nonsense.  One of the great discoveries of modern winemaking is that, no matter how much technical wizardry one can employ, the most successful wines are the ones that are true to the place that they come from…essentially the same thing the monks figured out all those centuries ago.  They drink a lot of spätburgunder in Germany, too.  Doesn’t mean we’re obliged to do so.

Fair question from our perspective and it is that perspective that defines our position. Granted we have pulled no punches in calling out by-the-glass failures, wine list pretense and sommeliers who have more attitude than anything else. But, as much as we have great expectations about what the fine dining experience should be, we do like to eat out and enjoy an innovative menu.

We have a lot of friends in the restaurant business, so it’s not like we’re against eating out. But we do have a little bit of an edge developed over the years working as ‘second class citizens’ in an industry that treats eateries with kid gloves and creates more advantageous programs with minimal purchase requirements for them. Why should a restaurant literally pay less, sometimes substantially less per bottle, for a two case wine order than a retailer for an order 10 to 20 times that size?  There is no business logic for that, particularly when one takes into account that restaurants are one of (if not the) highest failure rate businesses in the country. Yet it has been that way since we started.

We have had plans to address this fine dining issue for some time, but more in the context of what we see happening around us. We’re talking about the disappearance of the ‘white table cloth’ venue. Yes there are still a number of them that have opened in hotbeds like San Francisco, New York and Las Vegas. But the upscale burger palace and pizza spot have been proliferating at a much faster clip than what one would consider ‘traditional’ restaurant concepts.

Yes there are still steak houses. But how many have opened recently around you? You are much more likely to see places that serve ‘gourmet burgers’ (at $20 or so) and have an extensive selection of IPA beers, with wine service that has been given little thought beyond having both colors (red and white). The point is that places like fancy burger joints, upscale pizza places and, of course, those places dedicated to permutations of the chicken wing, are essentially a step up from the fast food the ‘next generation’ grew up on.

Is this upscale dining these days? Does Michelin have a special section for ‘gastro pubs’ and ‘wine bars’? Given the rate at which these types of venues are opening these days, they surely must be popular. But what kind of experience is the diner getting for these elevated costs? By the time you have a couple of cocktails and a couple of upscale ‘angus burgers’, the costs aren’t insignificant. Is this the millennials idea of ‘living large’? Or is this what they can afford simply because true ‘fine dining’ has become prohibitively expensive?

The other day we heard an interesting term from a well known vintner who, though he put it in a nice way, suggested that they were deigning to visit retailers like us because of the ‘restaurant crisis’. Huh? There was a clear vision in this fellow’s mind of restaurants being ‘costed’ out of existence. Rents for certain places have become almost laughably steep, food costs have been erratic, and little employee amenities like extra ‘paid’ sick days and medical insurance mandated in places like San Francisco have made profitable operation quite a challenge.

As this gentlemen went on to say, “restaurants can’t make money on food any more” and are forced to rely more on “beverage” for their profits. Essentially that translates to restaurants demanding even heavier discounts and favorable pricing to improve their bottom line from suppliers. Also, he pointed out that a lot of restaurants are raising the ‘multiples’ on their wine lists, making, say a $20 wine that would have been $60 under the old system, now closer to $100. First of all, restaurant wine was expensive enough before, so making it more expensive hardly seems like a well thought out solution.

Second, you can’t bank ‘percentages’. You bank dollars. So raising prices could (and usually does) have the opposite effect by lowering sales and thereby potentially decreasing profits. With all due respect to Uber, the stricter alcohol laws have probably lowered ‘on-sale’ wine sales over the years anyway.

So what do we have to look forward to? Well one might presume those large, cozy restaurants are a thing of the past, unless they are underwritten by a hotel or some other entity for which the restaurant is a draw that pays off in other ways. Restaurants have been seemingly getting smaller by virtue of the costs of rent and labor. Usually the sizeable venues are going to be chains that can survive based on economies of scale. This of course comes with the corporate mentality that can tone down the innovation part of the dining experience.

An emerging scenario is the deliberately small, fixed menu establishment. Something on the order of 18-30 seats, which makes the staffing needs less, with a fixed menu so food costs are much more controlled. This seems to be the ‘new wave’, gives the chef great latitude in what to serve since they know exactly what they will need, and can provide an amazing experience. Of course these experiences seem to come at a considerable cost. Dinner for two, a couple bottles of wine (with those hefty markups), tax, tip, some sort of add-on percentage for staff health care or some such, and an Uber, can run well over $1000. That’s a lot of ‘wings’.  Also, they are charging for the meal up front.  So lord help you if you get the flu. Talk about the hidden costs of illness.

Where is this going? Well, certainly the restaurant landscape is going to continue to change. Restaurants (and menus) are trending smaller, and more of the middle tier of restaurants, mostly chains, is proliferating. For a lot of folks, that’s OK. There are lots of people that like to go to the same restaurant, sit in the same chair and order the same thing (we find fine wine buyers to be substantially more adventurous as a rule). And, yeah, there will b a good number of ethnic places, too. But we may be seeing the last of a certain ‘maverick’ breed that has influenced the food scene over the last few decades.

Where are the next icon eateries going to come from? Great chefs may have to start with food trucks because of the prohibitive costs of opening a brick and mortar venue. Maybe everyone will be cooking in business parks and serving via UberEats or Eat24, or in a food court of some sort. The problem we see is that the next generation of innovators, new versions of places like Spago, Valentino, Providence, French Laundry or Boulevard, will have a much lower chance to survive and become an icon. It has never been easy. But with the current rent scenarios, mandated entitlements, and, of course, a near-double minimum wage, the road is going to be much harder for aspiring chefs and their investors.

For our part, we like to eat out, though we do have a little bit of trouble with a meal costing as much as a house payment. We, like everybody else, will see what develops. The only thing for sure is that it will continue to change, and not necessarily for the better. As for the ‘restaurant crisis’, what our vintner friend was talking about is real for wineries. With an ever increasing number of premium wine labels, serious competition from imports, and what promises to be a lot fewer places dealing in those kinds of wines in general, a lot of ‘upscale wines’ will have trouble finding homes. Then what?.

At the end of our last op-ed piece, which discussed large trends in the wine business past and present, we said, “There are a couple more things we’d like to hit, like ‘sweet’ reds and kitchen sink blends in ‘cool’ packages (aka ‘Prisoner’ envy).  In many cases they are one-in-the-same.  Those are definitely trending upward much to our chagrin…”  People will say that, if such wines are popular, what’s the problem?  That’s a complicated question.

One can always make the case that any time you have something that the public is latching on to, that’s a positive.  From that perspective, it is tough to argue.  One thing that previous ‘trend’ wines like White Zinfandel, Merlot, and fizzy Portuguese pink wines in the 60s and 70s have done was create more wine drinkers.  But the backlash suffered by each and every one of these genres after they went out of vogue was rough to say the least.

One of the great quandaries for the industry over the last decade has been how to appeal to the next generation of wine drinkers, the ‘millennials’.  In thus hunt, the current trend towards reds with residual sugar and/or ‘red blends’ seems to be striking a cord with the ‘Pepsi Generation 2.0’.

The wine we would credit with starting this whole new genre of ‘sweetish reds’, made from diverse and not necessarily complimentary grapes, is “The Prisoner”.  Dave Phinney, the ‘inventor’ of this concept, candidly admitted before an interview here one day that the whole thing started as a mistake.  He had a batch of wine grapes that got a ‘stuck fermentation’.  Let us explain briefly, and not particularly technically.  As you are aware, grape juice becomes wine as the yeasts convert the sugars to alcohol (roughly in a ratio of .55 degree of alcohol for each 1 degree of sugar).  Sometimes the yeasts die before the fermentation is finished, which results in the as-yet-unfermented sugar remaining in the wine and the wine tasting sweet.

In any case, rather than try to force fermentation by introducing more aggressive yeasts, Phinney worked with blending. There are other winemaking ways to try and solve the problem, but they don’t always work. The key point is that there is noticeable sweetness in lots with that issue.  In the old days, such wines would be bottled as ‘late harvest’, telling the customer that it was ‘dessert’ style.  That made it a niche wine that people would fit into an occasional scenario but generally avoid because it was ‘sweet’.

While the discovery may have happened accidentally, the process of dealing with it was a fresh, innovative approach to the situation in creating a whole new identity.  Blend in the residual sugar lots with other wines to get it to a particularly appealing level with the perception of dryness, give it a cool name, and put an attention getting label on it.  Oh yeah, and charge a premium price.  This was genius, though not unprecedented.  Jess Jackson built an empire by making Chardonnay with a little sweetness.  The old adage people talk ‘dry’ but drink ‘sweet’ has always been true, the ‘catch’ being you simply can’t tell them it’s sweet.  But the upscale marketing was an innovative twist.

Phinney’s success in doing it with reds was a breakthrough, quality wine and the guy got paid big money for his idea. He figured out that you don’t need a lot of sweetness to fill in the cracks and round out a wine. Good for him. He used that success to ‘double down’ on the quality, locking up top vineyards sources throughout the Napa Valley to produce The Prisoner.

But his success spawned what we like to refer to as ‘Prisoner envy’.  Another winery took the leave-a-little-sugar-in-it approach to Pinot Noir and created a hugely successful brand that also sold for millions.  But the majority of the new renditions of this concept follow the basic Prisoner model of a little bit of sweetness, a ‘cool’ or irreverent label and no varietal identity.  They exist at several price levels as well so there is more market penetration and broad acceptance.  With most of these ‘copycat’ Prisoners it’s more about the label than the juice, and the fruit-sourcing for many of these bottlings has most certainly not been at the level of Phinney’s groundbreaking efforts, though many try to charge a similar price.

This has been the most significant wine trend in at least the last decade, but curiously none of the media ever mentions the residual sugar.  Do they not taste it? Some wines hide it better than others, but it is there.  It was interesting to talk to one of the winemaking principals at a well known Napa address who was also presenting his own version of this new genre.  He said that they had been measuring residual sugars in a number of wines on the market as they were trying to define their own style and found readings in some wines as high as 10%.  To give you some idea, a wine is considered ‘sweet’ if it has more than 3%!

Given the success of Prisoner, Conundrum, and the like, everyone is trying to get into the act with some sort of sweetish red of their own.  Apparently, the world is buying the stuff and, yes, ultimately it may create some new wine drinkers among that hard-to-read next generation.  The thing is that, like with white Zinfandel, Merlot, rosé, etc., the category is now expanding too fast and not everything made is as well considered (to put it politely).  Unfortunately, the wine industry will keep it up until it implodes, as they have so often with categories like those we mentioned.

So, what is our problem if it sells? Well, nothing if we were considering an option to buy stock in one of these projects (though with a definite ‘intermediate term’ frame of mind). The RSR (‘residual suger red’) from a business standpoint might make a lot of sense, particularly given the prices that some corporate entities have thrown down to buy such brands.  Sugar sells, whether the market, or the public, care to admit it.  But we definitely don’t see it as a long-term proposition.  We’ll see.

Our other objections to the wines themselves are personal.  We like wines that are definitive stylistically and have a sense of place.  To do that, you have to pay attention to both farming and winemaking.  It isn’t easy to get all of the components right but we feel the best wine expressions fall into this camp.  First off, with these multi-varietal blends, it seems wineries are ‘stepping outside the box’, but not in a good way.  There are reasons certain varietals have evolved as being able to partner with one another.  Centuries of experience and experimentation have validated certain combinations like the varietal choices in Bordeaux and the Rhone.  They have been proven to stay complimentary as a wine ages.

When you blend grape varieties that aren’t necessarily complimentary, you run the risk of some flavors overpowering and others cancelling each other out.  Sangiovese, Cabernet, and Petite Sirah with a little residual sugar and oak staves?  Why not? Everything starts to taste simply like ‘red wine’, but wrap it in a hip package and sell the sizzle and you might make it work, though that isn’t our preference.

We like when varietal characteristics show themselves and certain blends (again like Bordeaux or the Rhone) evolve in a more linear path.  That aspect is what makes wine so fascinating.  If you just put together a bunch of ‘stuff’, that’s what it will taste like.  These blends can have size, color and punch, but not necessarily the nuances and complexity that make wine unlike any other beverage.

Take an amorphous blend, tweak it with some oak chips and leave a little sugar in it, and you have a wine-like beverage that varies little from year to year.  Sounds a little like a soft drink or juice.  Plus, when you make wines this way, you have the means to constantly tinker with the blend to get a consistent profile.  But such manipulative winemaking takes away a lot of the ‘soul’ of the wine itself.  The RSRs, which have a lot of punch and roundness on entry, are often front-loaded and simple.  But they can lack finesse, sit heavy on the palate, and do not play well with anything except ribs slathered in BBQ sauce or a cowboy ribeye.

We taste a number of these through the course of what we do, and find it hard to differentiate from one jam-ball red to another, and the sweetness and/or artificial oak notes glaze over nuance and flaws alike.  Are we saying such wines are bad?  Well, not necessarily, they are just not why we drink wine.  They can be tiring to drink, matching poorly with most dishes.  As far as aging, all bets are off because the sweet veneer interferes with the layers of flavor that aging is supposed to bring out.

Curiously, we have rarely read anything in the media that calls out the overt sweetness in some of these RSRs.  In fact, a number of them get good reviews because they stand out in a crowd by virtue of their weight and overt ‘fruitiness’.  Are we the only ones that see this? Actually, we know that isn’t the case because we have had a number of candid discussions with winemakers who are trying to make their own Prisoner-esque concepts.  We think (hope?) this escalation, too, will pass.  There’s room for a few well-done examples but overkill seems to always be the end result.  Also, we are concerned that a lot of people won’t know what ‘wine’ (by our definition) is supposed to taste like, and we’ll admit our own reluctance to get behind most of them.

If this genre creates more wine drinkers, in theory that is OK.  But we have been pretty adamant about disliking the idea of wine becoming more predictable and uniform thanks to this growing manipulative bent in winemaking. ‘Mutt-blend’ RSRs are the most blatant example of this trend.  The ‘cool label’ trend that eschews information is another adjunct issue.  One guy hits a home run and everybody wants piece, at any cost.  Marketing gone wild?  Then again maybe it’s our problem and we sound like a bunch of conspiracy theorists.

 

So last week we talked about the three tier system where importers and producers use a distributor to sell their wines, and whose function it was to buy the wine, pay the winery or importer and make his nut by selling to retailers and restaurants.  This is the way it is in most states and is the time honored system for keeping order in the marketplace.  While there are plenty of folks that would have that middleman function excised from the market, it is a fact that most wineries would function poorly handling that aspect of the business themselves, nor do they necessarily want to.  But there are a lot of things that the consumer doesn’t necessarily see that threaten to undermine the system.

First it should be said that most smaller operations (stores and eateries) would have a hard time functioning without the distribution system as it is.  Most stores and restaurants aren’t going to buy multiple cases of a single item for discount for either space or money reasons, many couldn’t even make shipping minimums with just one item .  So the distributor serves their needs by carrying multiple product lines under one roof and delivering them on one truck.  Those outlets would likely not survive in the fiercely competitive California market without a classic distribution scenario.  Such outlets are a dying breed as it is under the current system.

That being said, the distributors and the wineries are playing dangerous games with each other trying to have it all their way, and it is clear that two particular practices in particular, if they continue unabated, will eventually cause cracks in the dam.  The first one is something that has become common place in the market…’the prearrival’.  Yes stores offer prearrivals, basically taking orders on merchandise they have yet to order in many cases, and simply ordering n  what they sell.

Big stores do it, though usually with the understanding that they have a certain allocation to work with that they should not exceed.  Little stores do it so they appear like big stores, without necessarily having a guarantee of the goods actually being earmarked.  This regrettable practice still goes on some places even in the wake of the whole Premier Cru scandal.  This is not the same as actually buying the items in another market, as we do, and selling merchandise that while own while it is transit. The naked prearrival is a whole different discussion but contributes to what can be a rather tenuous situation in the market.

You see the wholesalers are kind of doing the same thing with a lot of lines these days.  The distributors often don’t order in wines from a new vintage without offering it to the customers first, taking orders and then placing their orders with the importers.  Smart you, say?  Keeps inventory down, you say?  OK, sure, but then are they really representing the lines if they offer only a list with scores as their sales campaign.  Granted, that’s all some retailers do to, but it’s different (and not just because we’re retailers).  A single, or even multiple retailers don’t necessarily represent the only access to the product.  There are multiple retailers that can have a particular wine.

The distributor, however, is the only avenue for that wine to get into the market.  So basically if they just pass around a sheet with no promotion, tasting, or other opportunities for buyers to evaluate the wines, are they actually ‘distributing’?  If all they are going to do is order what we order from an importer back east, and ship it to us, have they really done enough for the brand to deserve the exclusivity that comes along the the distribution rights, which is usually one entity for an entire state?  Are they performing enough of a distribution function to be entitled to the markup?  We say no, but that is becoming more and more of a modus operendi among distributors.

While the practice of prearrivals in more prolific now, a few aspects have improved.  Previously the wholesale would present the ‘prearrival’ to a store and not even tell them what they were going to get from their order or when it would arrive.  Whatever it turned out to be would simply show up one day unannounced and at that moment the clock began ticking on your buying terms.  The issue is that the wholesaler is supposed to function as a ‘stockist’ (as the Brits call them), delivery facilitator, and financier.  There’s not a lot of ‘stocking’ going on.

If they are not doing those things, they are not performing their function, and cannot justify a significant finger in the pie.   We could regale you with stories of how many times importers have come to us with offers based on a price understanding, and then their distributor wants to charge a full margin for doing nothing more than passing it through.  Must have run it by the ‘anti-sales’ department.

The other catch is the wineries undermining their own distributors and outlets by offering better pricing to consumers than the distribution system can offer.  A recent example illustrates our point. We won’t name names, but a winery with a rather well-known reserve bottling got some good recent press.  As we explored the options for an offer, we noticed the standard markup based on the wholesale cost (not that we go by that price) was substantially higher than it should be based on the reviews.

We went on-line to the winery site and noted that any consumer could call the winery and join their club (at no cost), get and additional discount, and take home the wine for about $205 per bottle.  The matrixed cost under the traditional distribution understanding extrapolated to about $269 and, even offering a 20% discount we could not get close because the wholesale price was set to high for the actual retail.  Also note that we are a lot more aggressive than most of the market price-wise, so we can only guess how the ‘full markup’ people feel about this sort of thing.

This undercutting the market by the wineries is a growing practice as they try to expand their direct-to-consumer programs.  Not seemingly a good long-term practice in that it could undermine the overall market, anger customers, and lose placements.  It is especially annoying that this practice is coming from Napa Valley types that have spent the last three decades yelling at us because we were too aggressive.

We have another very popular Cabernet that not only allows a far below standard margin based on their wholesale and retail prices, but they insist you buy other items from their portfolio and maintain high prices on those for the ‘privilege’ of selling their Cabernet.  Pot/kettle? Hey, we’ll be saving a lot on Christmas cards this year, and good luck selling those not-so-in-demand items yourselves.

Meanwhile, the point is that the ‘system’ either works for everyone, or no one.  If everyone wants to have their cake and eat it, especially on such fundamental points, the ‘tiers’ are a little too fluid, and there really is no system at all.

The term ‘three tier system’ is used to describe how the alcoholic beverage market works in most states.  The term is tossed around rather liberally, particularly in articles regarding the ongoing battle of shipping wine to adults across state lines.   This has been a hot button issue for at least the last quarter century, and we are sure a lot of consumers wonder what all of the fuss is about.  We thought it might be a good time to touch on this issue.  It’s complicated, and we should definitely recuse ourselves as we have a definite bias.  But here goes anyway.

So what is the three tier system?  The explanation is simple enough.  It is a system in which each segment of the market is focused on a specific aspect of that market.  At the origination level, either wineries (distilleries too for that matter) are producing wines which they then sell to wholesalers or importers are bringing in wines (or sprirts or beer for that matter) which they in turn sell to wholesalers.  The wholesalers in turn sell the products to retailers and restaurants who, in turn, sell to the public.  The flow chart is simple

Producers/Importers sell to>Distributors who sell to>Retailers/Restaurants

Couldn’t be simpler on paper.  But in this ‘eliminate the middleman’ world we live in, there will be someone who will ask the obvious question ‘why do they need a wholesaler?’  Why not just sell direct to those retailers and restaurants?  Wouldn’t the price be better without the extra markup?  Pretty logical, right?  Well, not really and, of course, it’s all about the money.

As you may know, some wineries do sell direct.  Usually though they are limited volume brands that have a very tight control on where their wines go and don’t have to spend a lot of money on sales.  Their brands are popular enough that buyers seek them out or consumers demand that the outlets carry them.  In those cases it is often the case that the cost savings is minimal because the winery would just as soon pocket both ‘cuts’ of the distribution system.  Also, out of state, wineries need to have a distributor either for the sake of functionality, or (often) by law.

Because they need to leave a little space to allow the wholesaler in the other states to make a profit, the winery will fix the ‘export’ price at one level (FOB) and then charge the  ‘wholesale’ price here in state and keep that portion themselves, effectively selling it to everyone nation-wide at the same price.  This provides what the wineries love to call the ‘level playing field’ for one and all.  We could go off on quite the rant about how ‘level playing fields’ are like unicorns and leprechauns in that they are an interesting myth (and we still might do that someday).  But today we are more on about the ‘why?’.

So why do wineries need distributors at all?  Don’t they make more money if they sell it in the way described in the last paragraph?  Yes, they do.  But only a tiny portion of the winery roster has that kind of clout in terms of demand and can afford to put their own small sales force out in the market for business development and maintenance.  Others that don’t necessarily have the situation to support their own sales force will offer their wines through a brokerage, paying a small commission to the seller.

So there still isn’t a reason to go with a distributor, you say.  Why not minimize that middle tier cost?  Like we said, it’s about the money.  Usually brokers can’t sell enough of one winery’s produce to make a living.  So they will assemble and represent a group of wineries, giving them more wines to offer clients.  On the flip side, there is less time to focus on each of those individual wineries because there are still the same amount of hours in a day (except today of course) and they must attempt to sell everything.  So the winery’s ‘sales force’ is marginalized as the representatives must spread their attention among the group. And at the end of the day, the winery themselves are responsible for collecting the money for the wines that the brokers have sold.  That is easier said than done.

There are a lot of good operators out in the retail/restaurant marketplace, but also a lot of flakes.  It doesn’t take long for a few slow-pays or bad-apples to run up some serious arrears that amount to thousands of dollars.  Such sums can be crippling to a lot of wineries.  As we have stated before in other pieces, the winery rep has to work very hard just to even get a placement in most restaurants, and then if they have to go back and try and collect that money, even if they are successful, it takes time away from selling.

The distributor model takes away all of that financial risk by buying the wine and reselling it,  But they will need to be compensated not only for their investment, but their expenses of maintaining a sales force.   And the distributor doesn’t necessarily want to operate as a de facto collection agency.  They want the ‘good apples’, to.  So typically the arrangement is all or nothing.  The winery geets a smaller cut, but their money worries are greatly reduced.  The distributor’s existence, the maintenance of an infrastructure, sales force, and as a collection arm, has to all be financed by that extra margin.  Wineries love restaurants over retail 90% of the time, but restaurants are still one of the highest failure rate businesses, making money problems part of the territory.  It’s not rocket science.  Physics is much more predictable.

There is also the delivery system, and the maintenance of other services that the winery would otherwise have to arrange themselves.  This model, as we said, largely eliminates financial risks (we say largely because sometimes distributors go under, too, though rarely).  It also affords the winery to concentrate on production, broad market planning, going to lunch (see ‘broad market planning’), or whatever they feel they need to do.

Are we saying we embrace the distributor model and feel it is important to maintain the ‘three tier system’?  Sort of.  We are saying that the model exists for good ‘market’ reasons.  In a lot of states, the arcane laws give the distributors almost ‘gangland-like’ fiefdoms, but that’s just the way it is (money, politics, etc.).  The bottom line is there is a need for some manifestation of this service in virtually every market.

A winery could sell all of their wine to a big-box store or national chain.  That would eliminate the need for a distributor.  But they also wouldn’t end up with any other customers and pretty much be at that store’s mercy in time.  Distributors ideally mediate that by spreading the product far and wide.  It’s just like ‘diversifying your portfolio’ by establishing a broad and varied customer base.

So as to our take on the three tier system is, ‘we don’t have a better idea’.  It works well enough and stabilizes the market enough that we can spend time looking for the seams and cracks and pockets where the ‘deals’ reside.  The ‘system’ provides options for us to get the things that we want.  The middle tier does serve a purpose because the market needs those services and they also absorb some risks.  This is from guys (us) who are less in need of those services than most.

What we aren’t keen on is how some of the ‘modern’ distributors are playing fast and loose with the system, and how some of the wineries and importers are playing fast and loose with the distributors.  Something’s got to give, but we’ll get into that another time.

Essentially from our previous pieces, we have suggested that the whole wine landscape has changed over the last twenty years as wine became more engrained in a larger segment of the population. However as the baby boomers, the first generation to really embrace wine, pass from the active market place the wine industry will have to reevaluate itself. That is something it has failed to do thus far with one of the most monumental changes in the history of mankind, the internet.

We have posited that the new, millennial buyer is more likely to be comfortable with wine because they grew up at a time where many more households had wine on the table on a regular basis. They will have more information at their fingertips 24/7 that they can access instantaneously via a number of devices. There will be no reason to wonder any more about anything but the most arcane aspects of wine, and even a lot of that info is out there if someone wants to dig a little harder.

Most will think of wine as an acceptable beverage, but we suspect fewer will have the opportunity to have that first ‘epiphany’ because this is a faster, noisier, more instant gratification group for whom burgers, pizza, buffalo wings, and forays into ethnic cuisines, most of which aren’t necessarily wine friendly nor bring with them any kind of wine culture. We’d go out on a limb and say that, in the vast majority of the venues we’ve just mentioned, it is unlikely you will find anyone who knows much of anything about wine. Things are way more casual than they used to be food wise. Millennials go out more, but typically don’t take the fine dining thing particularly seriously and don’t spend as much when they do go out according to studies we have read.

Are we saying that is bad? Not at all, simply that it is and is not the most conducive environment to recruit new wine drinkers. In a world of texting, Facebook (or whatever the hippest new social media platform is), virtual reality and self driving cars, fewer people take the time (or have it) to sit down and have a quiet dinner and a bottle of wine. Fine wine is a special, contemplative experience and that sort of entertainment is kind of out of vogue. We could go in a number of different directions from here but, suffice it to say, the speed and sensory overload of today’s world doesn’t necessarily pair well with an elegant, subtle red.

On a broad market level, the wine industry is attempting by and large to amp up the wines and the ‘kitch’ trying to make an impression. Bold, if not necessarily complex flavors via a little manipulation in the cellar mediates vintage. This uniformity makes wine ‘brands’ more like Pepsi (or Coke, we aren’t biased). It’s a homogenization of wine to a frightening extent. Everything is starting to have annoyingly similar flavor profiles as if a ‘control group’ is dictating styles.

So in the face of that, where’s our millennial generation going to get hit by the wine bug? Word of mouth and random contact with people who have already been bitten will still be a great way. But it’s that person on the street just going through life…where are they going to have that defining moment that changes their perspective? A lot of folks learned wine at an outlet where they found someone to talk to that was truly passionate. But such places are disappearing in California as a function of brutal competition, high rents, and an inability in such an environment to find good floor people.

Most of the people in ‘chains’, if you can find anyone to talk to at all, are not that far from novices themselves and definitely have some sort of employer mandated agenda like selling their own exclusive brands. Big box stores? Good luck finding anybody to ask a question of any kind, let alone something in depth.

Sommeliers? You aren’t going to find one of those in anything but top flight restaurants and, given the markups, it’s going to cost a ‘regular Joe’ a lot more to learn something. The casual dining experience, which seems to be where the restaurant expansion is these days, is less likely to produce that ‘discovery’ scenario. The accelerating pace of life in general (both real and virtual), coupled with fewer opportunities to experience some kind of ‘connection’ to wine outside the home, will make the whole embracing of fine wine as more than a ‘casual beverage option’ much more difficult.

We don’t mean to sound like depressed 1920s poets in some French café. Some will find a way. But today’s environment and generation just don’t seem as fertile a mix for fine wine appreciation. And we haven’t considered the effects of surging factors like home-delivery of meals on an unprecedented scale, presumably bringing food to someone intently engaged in some FPS (first person shooter) video experience who won’t even have a free hand to eat let alone hold and ponder a glass of wine.

Other stuff we think about…

Global warming: Whether you believe that greenhouse gasses are the cause of global warming or that it was an inevitable direction of some 10,000 year weather cycle, there is hard data that it exists. We have extensively studied European vintages back into the 40’s, and seen how many truly crummy vintages there were in the period from 1945 through 1980. In the last quarter century, the percentage of ‘great’ vintages has increased, and true ‘stinkers’ are relatively rare. But even casually saying that the average temperature increases a little every couple of years (we have heard specifics as high as 1 degree per year), what happens down the road is the issue.

Warmer weather has given us a plethora of noteworthy vintages in recent times. So, ‘hooray, global warming’ from a wine perspective? But fast forward a decade or two and think about this. All of the greatest growing sites are ‘great’ because their situation/exposure/terroir allows them to ripen the grapes consistently. Those great sites will eventually become too warm and not be as hospitable to the grapes for which they are renowned. It’s a little early to start planting Mourvedre in Germany. But the thought of doing so is considerably less insane than a couple of decades ago and freak vintages (like super hot 2003 was in Europe) might start coming around more regularly. Maybe these are the good old days.

Paradise Lost: We have often said that the wine industry has succeeded in spite of itself. We attribute that to the times and the innate appeal of the product. There were some very successful business models that worked back in the 70s and 80s that created a number of brands that have been solid for years. Here, decades later, the wine industry still holds those programs (Cakebread, Far Niente, and Sonoma Cutrer among them) as holy grails. But the times they are a changin’.

Labels are still trying to emulate the success those brands achieved ‘back in the day’ by using the same formula of perceived exclusivity, premium pricing, and restaurant focused marketing. The thing is that, back then, there were substantially fewer brands vying for people’s attention. It’s a lot harder to catch someone’s eye in a group of 500 labels than a group of 50, yet the market is saturated with would-be superstars who all want to play the same game. We have exactly the same conversations with wineries about how ‘special’ their wines are that we had three decades ago, only more of them because of the sheer volume of wineries.

The rise of the critic changed how wine was marketed, and the internet changed the world. Yet the wine industry still blindly preaches the mantra of the old days. There’s a lot of unsold wine out there because of ‘the games people play’. Still, as wineries come to grips with their own failures, they still cling to ‘the ideal’. Shhh, don’t tell anyone, there’s a bit of big time wine being dumped at restaurants at a fraction of the price to move it. There’s a lot of wine sitting in warehouses unsold.

We get people coming to us regularly with wine they need to move at heavily discounted prices, many of them good labels, with the request that we sell it for the same price that they did (or clearly failed to) so as not to hurt their image. Our take is that maybe their image isn’t what they think it is. Maybe it shouldn’t have been that price in the first place. If they couldn’t sell it to people who supposedly like their wines within those parameters and nothing else to sell, what makes them think we could do it against our very competitive selection.

Wine Spectator recently published that direct-to-consumer shipping was at an all time high. Fair enough. We’d say that more wineries are adopting that model because they make the most money that way, and there are record numbers of wineries playing that avenue. We also would suggest that without a tout from a significant critical source, that plan is not sustainable and people will tire of paying $60-80 (or more) for a ‘$30’ wine just because it is ‘exclusive’ or ‘rare’. We don’t see millennials putting up with that nonsense at all.

The wine industry has lived a charmed life over the last three (or four) decades. It has been a good ride, but much has changed. If the industry as a whole does not accept the new reality and rethink their approach, they will not only attract fewer new buyers, but are in danger of losing a bit of their existing audience. Finding new buyers is going to be difficult enough moving forward for reasons we have discussed. But it is considerably harder to bring back buyers you have alienated.

Our last piece (Part II) ended with a very telling question. It is based on different patterns of the populace and tries to predict the behavior of the generation that grew up with the internet, cell phones, more ‘less traditional’ households, and, now, the dawn of virtual reality and Wingstop. While we can only predict with limited accuracy (if we were really able to predict that stuff, people would pay us money), there are some reasonable basis for hypothesis.

One is that ‘entertainment’ happens more outside the home in casual restaurants, gastro pubs, pizza places, et al. Clubs, cocktails, and craft beers are much more ingrained in the culture. Entertainment options are at historic highs (since now you’ve added virtual reality to plain old reality), as are the dining choices. A generation of immigrants (we do not make presumptions about anyone’s status), mostly not from Europe, have brought their food traditions with them. There’s an amazing array of cuisines from South and Central America, Asia and the Pacific Rim. Mexican cuisine, longtime staples in California, has countless more regional examples.

In places like Los Angeles and San Francisco, there is a dizzying array of food choices. All kinds of folks are eating all kinds of different foods. The thing is, and we say this in the most objective way possible, the majority of this new, expanded ‘food scene’ are from places with no ingrained wine culture. We interpret that as a potential problem from the standpoint of the learning curve. Everybody who ultimately gets ‘serious’ about wine has an experience or two that tickle the imagination, that motivates them to follow the path.

The typically bustling, high-decibel eating environments of today don’t necessarily support the quiet contemplation of your beverage. Sometimes you can’t even hear the person across from you, let alone talk about the wine. The energy of such a room is part of the experience, but the odds of randomly discovering wine is reduced by the fact there us so much other stimulus. In most Thai, Vietnamese, Chinese, or Indian eateries, if there is a wine ‘program’ at all, it’s usually a small list of ordinary, very commercial bottles selected by a distributor rep without necessarily any regard to the cuisine but rather what they are supposed to sell. Often times the restaurateurs themselves don’t care. Beer is easier (though less so today with the craft explosion).

A lot more people eat at these types of restaurants as a percentage than three decades ago. Heck the extent and diversity of cultural food options really didn’t exist back then, and the ones that did were an occasional novelty for the typical family. The key point is that the expansive landscape of more ethnic fare will provide fewer opportunities percentage-wise for people who have yet to have that ‘definitive’ wine experience.

One would think that there would be more avenues than ever where someone might stumble into wine. But that’s not necessarily the case in today’s world. We old-timers learned by tasting, reading, and finding a few folks to talk to in a wine store. Since all the prices were fixed back in the 70s, a standard wine venue could support itself by carrying ‘the hits’ and a lot more options that grocery stores did not. When price fixing went away, so did a lot of those types of venues because they couldn’t adjust to the new reality. Fast forward today and buying patterns have changed (at least in California) because of the market shifting to a different group of venues that provided convenience and price advantages.

People today are a lot more harried. They will shop ‘specialized’ for big purchases, but most would like to take care of the day-to-day stuff in as few stops as possible. So they are less likely to make the extra trip for wine when they can find something palatable in the now-somewhat-expanded grocery store selection or ‘big box’ set. Are they interested in trying something new? Maybe, but there is little information on the shelves in such places save for an occasional point score from some publication that they may or may not know. It’s not likely there is anyone that can answer even the simplest of questions, either.

Big box stores? There’s a modest selection of ‘the hits’ and no one that knows anything on the floor. So unless you know what you are looking for, you’re flying blind and likely to just buy the same old things. Is just buying the same old thing wrong? Not for a lot of people. But even if you have the desire and motivation to expand your horizons you might need a little help. In such venues, if there even is anyone ‘working the floor’ (which is rare), it’s usually some supplier rep with an agenda to sell their own stuff.
The wine store of old is generally gone, replaced by more hybridized versions that have passionate buyers and innovative selections. The problem is that most aren’t going to have many of those old familiar favorites for you to fall back on because ‘big brand’ giveaways by grocers and big box stores have made these brands untenable even to carry for convenience. So basically to make that extra trip, you have to have made the decision that you want to get out of the ‘rut’ and get into wine. That’s a big commitment for most people.

What about those alcoholic beverage chain stores that advertise they have ‘experts’ on the floor to help you? Good luck with that. The term ‘experts’ is tossed around rather loosely, and most of them are only trained to move you into that high margin ‘store brand’.

Restaurant-by-the-glass programs should offer the best opportunity to learn. But there are a host of problems. In a busy, noisy restaurant, the likelihood of being able to talk to someone who actually can spend the time to help you and knows the wine is small (though they are out there). Plus, as we have mentioned in other pieces, you don’t know if the wine you’re tasting is representative of the genre it represents if you don’t already know the genre. Moreover, given the generally marginal condition of most ‘back bar’ wines, where you have no idea how long that particular bottle has been open, you don’t really know if the juice in your glass is even representative of that wine. Given that, it is fairly remarkable how much energy wineries put into wine-by-the- glass offers since they have little idea what the customer is actually drinking. They could be turning off potential wine drinkers to their brand or wine in general with some half-dead white or decrepit red.

As for experimenting with wine list at restaurant, where you see them open the bottle, you can learn that way provided it’s an eatery with a more enlightened yet still consumer friendly list. It’s no easy task to find one of those, and the learning curve will be the most expensive of any. This of course also presumes the person running the wine program is actually concerned about the diners themselves and doesn’t have some sort of personal agenda.

There are suggestions of forming tasting groups where a bunch of people all learn together. They work, but they are at least step B or C. At that point you have already gone to the next level of interest and aren’t a novice any more. The same goes with wine education classes. The passionate will find a way. Our point is that the person who might potentially be interested in learning more will have a much harder time in today’s market stumbling onto that formative ‘aha’ moment that will give him/her the fire. More to the issue, those who might have it may never find out they do because, under a wide range of scenarios, the situation may never present itself.

The ‘next generation’ of wine drinkers, whoever they might be, will have the most to do with how the next couple of decades play out for the wine industry in general. They are likely to be more open to wine as a beverage choice than any generation to date, but less likely to go far beyond that (other than the occasional tech millionaire who wants to fill the wine cellar in the mansion he just bought). As the prices of better bottles get to be more expensive, and the range of beverage choices competing for the consumer dollar continues to expand, wine geekdom will likely be even more ‘the road less followed’.

Pricing, marketing, global warming, is it the ‘juice’ or the ‘show’? We’ll take a swing at that stuff in a couple of weeks…