Back in January the threat of 100% tariffs on European wine sent waves of panic through the trade. The collapse of an important segment of the industry was a real possibility with small importers and distributors among the most likely casualties. Collateral businesses were at risk, too; bars, restaurants, retailers and the supply chain cohort of wholesale, warehousing and delivery all braced for the worst. Even domestic wineries were considered vulnerable. Credible estimates pegged the drag on the economy at close to 28 billion dollars along with the loss of tens of thousands of jobs.
As we know, that threat never materialized and probably never will, but it’s not because politicians suddenly got smart. They’re just a bit distracted at the moment.
Much has been written about potential changes to come and how COVID-19 is an existential threat to our way of life. What will change and how permanent that change will be is the question. Those of us who would welcome a dismantling of our current social and economic models may have to be patient for the answer. For now, incremental change is our lot. In the U.S. this means a grudging relaxation of state liquor laws hastily designed to keep sequestered drinkers happy and small businesses afloat.
In my opinion, the wine industry deserves better. As the current crisis should have made clear by now, the status quo is not an option.
Change is Good
The current route-to-market for wine and spirits is a clutter of paternalistic state laws enabled by a powerful lobby with roots in the Prohibition era. In other words, it’s not exactly responsive to anyone’s current needs. The system is a chokepoint that favors large players and big brands while leaving unrepresented wineries and creative retailers without access to out-of-state consumers. Even as the courts chip away at this hegemony the middle-tier of the three-tier system is loath to compromise. Consumers continue to suffer from lack of choice and suppliers from limited markets.
Why should this be so, when direct-to-consumer (DTC) sales can solve both problems?
For the wine industry to recover, and recover quickly, governments would do well to simplify access. Since we can no longer depend on a badly damaged hospitality industry to contribute much to the recovery, at least for the foreseeable future, free access to new markets will be crucial for sellers. Fortunately, a template is already in place as the explosion of direct-to-consumer and digital sales indicates. While some of us may wish for the demise of the three-tier-system, some wholesalers will be happy to hear that the system may not need dismantling after all. Instead, they must learn to co-exist with digital and, like it or not, barrier-free interstate commerce.
Is resistance to this change misplaced?
Jason Haas of Tablas Creek in California thinks so:
“I think the data is pretty clear that the ability to sell direct is not (a) death knell for wholesale sales, and in fact is likely to tip the scales in favor of your wholesale efforts.”
Haas’s data shows that the average increase in wholesale sales in the two years after he began direct shipments was a hefty 67% in the states sampled. That’s a number any wholesaler should welcome and evidence that direct contact with consumers can lead to more fruitful relationships for everyone, including the monopolistic wholesale sector.
Tariffs, tariffs, tariffs
There is another impediment to a flourishing wine industry: tariffs. In the fourth-quarter of 2019 we caught a glimpse of its dirty work — trade surveys noted a precipitous drop in wine imported from our beleaguered friends in Europe. Still, for many small businesses committed to the importation of European wine, the 25% tariff announced in October (and continuing to this day) has resulted in a near-fatal hit to cash flow and capital requirements. It doesn’t take an economics degree to understand that any sum of money forfeited in today’s environment can spell the difference between bankruptcy and survival. When looking for ways to stimulate small business recovery, the return of “confiscated” capital and the promise of free trade would be a good place to start.
And while we’re at it, let’s limit access to small business loans, grants and credits to those businesses with less than fifty employees. Early indications are that most of the money set aside in the Paycheck Protection Program is now in the hands of the biggest wholesalers and other undeserving businesses who, with tangible assets and ready access to credit, should be at the back of the line. New funding must address this inequity.
The Other Side of Calamity
Another question is whether small wineries and retailers are even remotely positioned to take advantage of loosened restrictions. Are they set up to sell wine directly to out-of-state consumers?
The simple answer is — probably not.
Inertia is a big part of the problem. The status quo distribution model continues to be a powerful disincentive to digital investment. Like their European brethren who must deal with national borders and different rates of taxation, wineries in the U.S. are not set up to negotiate the complexities of interstate commerce. In a recently published report that U.S officials should review, the Comité Européen des Enterprises Vins outlines a plan to facilitate direct-to-consumer wine sales between member nations. This is in response to the common plight of many small wineries in Europe which rely mostly on tourism and local sales to survive.
Even with the three-tier system in place, wineries can no longer afford to ignore e-commerce and its large, mostly youthful base of consumers who have migrated there. This is a shame because it’s never been easier to gain a foothold in the space. Companies like Commerce7 offer no- and low-cost access to the digital marketplace with direct-to-consumer capability within hours of deployment.
Digital gurus and wine marketers have been beating this drum for a while now and they were right to do so. A robust website with excellent content, a simple and efficient sales platform, and the tools to track customer engagement is today’s Holy Grail. Those who have that capability stand a better chance to survive than those who don’t.
Responsible marketers will add that digital proficiency is by no means a guarantee of success without a comprehensive marketing strategy. I have to believe them. What we can and often do argue about is whether that strategy should include education (ie. geekery) and how the product is best presented to an admittedly diverse audience.
It’s time to put it all together.