Saturday, July 26, 2014

Is it the Right Time to Start a Second Label?

 

Can I have Seconds?

 
It's that time in the cycle again. We are between balanced and long on grape supply in certain varietals and regions and we're facing an unprecedented 'three-peat' of great yields and quality in California after the upcoming harvest. The dearth of balanced supply with inevitably be the dearth of some business models over the next several years.
 
One consequence of these types of atmospherics is that clients start calling to ask me about the availability of financing and want my thoughts on the wisdom of starting a second label. That's an idea on its surface that might seem to be a low-risk proposition - after all, you have been blessed with inexpensive grapes or available bulk - but building a business strategy on a temporary supply issue can make an already bad situation worse in most cases - but not all.
 
There are some instances where starting a second label makes a lot of sense, so please email me if you're a client and want to talk about your specific case. But for the benefit of others in the wine community to spur a little discussion hopefully, here are several real stories of wineries who faced the decision to start a second label in the last 15 years and some examples of success:
 

The Dreamland of Second Labels


Doc Estate Winery has a heavy crop year - right along with all the other wineries in Napa. Their cabernet goes into a $225 estate produced Bordeaux style blend. Merlot was light however so there is a lot of cabernet left after the blending process is complete. Due to the heavy harvest, bulk prices for cabernet are in the toilet. The decision is made to start a 100% cabernet second label.

Happy Winery had a different experience. Sales of their iconic brand were demonstrating strong consumer acceptance and bulk inventory and grape contracts had been built ahead of time to supply the 20% annual growth experienced. Then the Great Recession hit and sales stopped growing. Sales of their $75 wines fell of the cliff. No way could the owner of Happy Winery sell all the wine that was intended for their flagship brand and selling the wine in bulk was a certain loss. 
 
The decision was made to start a second label hovering around the $15 price point and blend down the juice into the second label. They also bought more inexpensive bulk wine to cost adjust the price of the juice justifying the lower price. The bulk purchase also changed the blend further away from the flagship brand.

The Grumpy Wine Club
Sleepy Vineyards farmed for yield in 2012 and was rewarded with a harvest almost three times bigger than normal. The problem was not all the overage could be sold at a price Sleepy thought fair. Letting the grapes waste away on the vine equally seemed like a sin given the weak yields in 2010 and 2011, and this looked like the vintage of the decade! One of their winery friends, Dopey Winery has a brilliant idea. What if Sleepy Vineyards contributes their beautiful grapes to a partnership? Dopey Winery will vinify the grapes, bottle the wine and sell it. Sleepy Vineyards and Dopey Winery will split the profit.

What do all three of these ideas have in common? They each left their winery owners in the Grumpy Wine Club when their second label cost them more than it would have cost had they just taken the loss at the front end.
 

Common Mistakes in Starting Second Labels

 
This is Too Much Wine
Not all second labels are failures, and we'll discuss a few successes, but most of them are destined for failure. The main reason for failure is often the market that created the excess wine.
 
When there is too much wine in a market, getting a distributor to pick up a new brand is very difficult. They will want additional discounts to get the brand started - and that's presuming they take it on in the first place. They will also want a commitment the brand will be on-going versus a one-and-done thing.
 
The second most common reason for failure is a new brand deflects the attention of the sales force away from selling the existing SKUs. In some cases the sales force are even incented with special spiffs to get the new brand moving. That can double the problem and lead to decreased sales in the profitable flagship label at the same you are losing money starting a second label.
 
Brand Confusion
A third issue that comes up is one of cannibalization and/or inter-brand confusion. When there is extra juice on the market and wine intended for the flagship is blended down, a winery has to be careful to not make a wine that is of similar quality as their flagship higher priced label. They have to be careful as well to price the wine correctly.
 
If there is high quality juice in that label, pricing it too low will sell it, but cannibalize sales of the other SKU. Either of those events will cause the traditional brand to suffer. In a worst case circumstance, in the 2000 vintage I remember seeing a new second label get a score from a major wine writer that was higher than the more expensive SKU.  
 
How To Sell Cheap Wine
Another problem with a second label is remembering who you are selling to. A winery that is making a $100 bottle of wine, might make a decision to sell a $20 second label. Their rationale is that's an entry point for people to try their wine. Perhaps, but if you are selling high-end wines and have an established following for those wines, the less expensive wines are often produced in higher quantities which reduces the appetite for your second label from your existing buyer. If you are selling to a totally different demographic, you may need entirely different sales strategies to find success.
 

Success Stories can Happen

 
There are many more examples of reasons second labels fail but sometimes they do in fact work out. One reason a second label can work out is blind luck. Someone turning unwanted grapes into juice can turn out to be a win in the circumstance when a big yield year is followed by two weak years. The value of their juice or shiners might indeed go up and they might be able to then sell it at a profit if the market swings in their favor.
 
They also might see success starting a private label for someone, or could even get their new second label off the ground in a market that is suddenly under-supplied. But as I often say, "Hope is not a strategy." I wouldn't depend on blind luck to fall my way. Even if it does, I doubt you will get an appropriate return for the risk you are taking. I would recommend taking your first loss as the best loss in that scenario.

The best situation in which to start a second label is when it's being started without any thought of trying to time a temporary over-supply in the grape market.

 
A second label can often work when its started as part of a longer term strategy to extend a flagship product. Think about it like a BMW 7 series versus a BMW 5 series. I've seen a few cases now where a luxury brand was easily able to sell out, but they were out of supply to sell more of that SKU. So the winery created a second label at that same price point as the first, and then took up their flagship wine over a short period to 2x the price of the new wine. In that case, success comes because you are segmenting your own client base and club - selling the wine in demand to those who truly want it, and providing an alternative to those who don't want to pay the price increase but enjoy the club and relationship.

Another place a second label works is when a volume product is created to fill in productive capacity in a winery with excess capacity. Over time, the strategy is to shrink that SKU in deference to the demand for higher priced wines. Of course there are other potentially smarter ways to make your investment in the winery more efficient such as custom crush or selling private labels.
 
But if you have a good relationship with a distributor, starting a cheap label to soak up the unused capacity can spread overhead more effectively and make the profit margins of your other wines improve dramatically.
 
Success in starting a second label comes when that SKU is started as part of an integrated business strategy, and not in response to temporary supply swings.
 

What do you think? Any success stories or failures you've seen that can be shared?

 

Please join this site at the top right of this page for updates and new posts, sign in and offer your perspectives on this important topic for the benefit of the community.

 

If you think this information and discussion is valuable and want to spur additional discussion, please share this post on your favorite social media platform.

 

6 comments:

  1. Great post! Where can I get some of that Doc Estate Cabernet?

    ReplyDelete
    Replies
    1. Sadly ( .... who was not one of the dwarfs), the second label failed and they disposed of the shiners in the end.

      Delete
  2. Hi Rob

    From my 2009 Finlaysons Roadshow presentation entitled "Making Money in Recession, here are 10 more good reasons from hard won experience not to do it

    1, Cost of supply is often not sustainable
    2, Exchange rates movements destroy profits faster on lower price lines
    3. Anybody can do it and usually they do
    4. In order to compete you need to re-engineer your whole value chain from grape to glass not just change your marketing mix.
    5. Can lead to cash being tied up suboptmimally in assets
    6. Distributors find lower priced wines easier to sell initially so often higher margin lines get ignored
    7. You’re now competing with highly experienced gorillas
    8. Lower priced lines are more price sensitive so retailers push harder for discounts
    9. You now have to communicate with a totally different audience
    10. Once let out of the box…

    ReplyDelete
    Replies
    1. Peter - Thank you for logging in and for the really cogent sound bites.

      Delete
  3. Great post Rob. Lots of wise information here.

    ReplyDelete

Please sign into the community to post. Common-sense guidelines apply: Disagree with author but offer your own thoughts. Disagree with other posters but please attack the post versus the person. Flaming, spamming, off-topic posts, advertising and offensive posts that would not be suitable for work will probably be deleted. Drunken posts will be forwarded to your mother.