Sunday, August 17, 2014

Do Tasting Rooms Take Away Sales from Distributors?

Procter & Gamble has long been respected for it's integrated product development, integration of acquisitions, and brand marketing. Consider the number of iconic brands they hold like Ivory soap, Pampers diapers, Duracell batteries, Gillette razors, Tampax feminine care products, Crest toothpaste, Tide detergent, and the list goes well beyond that. P&G has more billion dollar brands than any company in the world ... but they don't sell wine. If P&G sold wine people would be running to their mailboxes for free samples and the TTB would not be happy about that.

P&G figured out that sampling had a cost, but the cost was more than recovered when consumers got to the store and with the knowledge of how that product impacted them, were able to make a preferred decision about a purchase.
Somewhere in the 1960's Procter & Gamble reevaluated their thinking and decided that their shotgun approach in sending Crest to everyone might be less than effective with someone who had no teeth. The reality was back in the day, P&G had no idea who had teeth, who had kids, and who were screwed up bankers that never cleaned their nails or brushed their teeth.
Today big data gives marketers more information than anyone ever thought possible, and at some point I think we are going to see free samples back in the mailboxes. For today however, sampling for consumer products takes place with consumers going to the companies asking to try their products. And if you ask, the producers will send you free stuff to try or coupons making something almost free. But that doesn't work well with wines.
With wines, one of the most important determinants of a sale is familiarity with the wine; a prior experience and if not, a recommendation from someone trusted. We can get into the discussion of YELP versus Robert Parker but lets stick with sampling products.
Two weeks ago when I spoke with a large winery and their wholesalers, I asked about their feelings about tasting rooms. Unsurprisingly to me, the wholesalers had a sense that they were The Sherriff of Nottingham and the wineries with tasting rooms were like Robin Hood; taking from the wholesalers and giving to themselves and their customers.
One of the wine company folks there thought they had an approach dialed in that was fair - and looking from one particular way, it is fair. What they do is only sell wine out of their tasting room that isn't sold wholesale. My perspective with that is that is 180 degrees backwards.
Tasting rooms are the modern day equivalent to P&G samples in a consumer's mailbox. People don't really buy a lot of wine from the winery. They try wine in tasting rooms - they sample - and they buy the wine at a restaurant and grocery store because they recognize the wine. If they join a wine club, they are going to get a delivery of vino. But even a wine club is a form of sampling. Furthermore, those few albeit core consumers who do join wine clubs seldom stay in the club for more than 3 years ... so maybe they are getting 4 or 5 cases? I don't think that should be a fear for wholesalers.
The reality is wholesalers benefit when consumers walk into tasting rooms and gain first hand experience with a wine. The producer is really supporting the wholesaler when they sell wine from their property. If Procter & Gamble could sell wine, they would absorb the costs of trial and sampling and I guarantee they would sell wine from their own tasting room! And that brings up the point of price in the tasting room.
With the winery absorbing the sampling costs and overhead associated with bringing consumers to their property, should the winery need to coordinate market prices with the wholesalers prices and not "undercut them?"

The consumer is often expecting a discount when they come to the tasting room. How will they feel when they find the wine less expensive at Safeway the same day? In my opinion, the wholesalers ought to be happy with the trickle of wine sold from tasting rooms relative to what they sell in the market - and they should be fine with the winery's discounted pricing. If the wholesalers were handling the sampling function they would be trying to figure out ways to cupon (that's discounting) and offering free sampling like any other consumer product.
Time to wake up wholesalers. Your producers are giving you a gift by selling wine from the tasting room - even at a discount under your suggested retail price. You don't want to provide free samples and trial offers. Wineries aren't a competitor. They are a gratis marketing agent.
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What do you think? Do you have any stories to pass on about how your wholesaler considers your wine club and tasting room?

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  1. You're kidding, right? Distributors thought tasting room sales were stealing from them? The entire DTC market is less than five percent of the entire U.S. wine market, so tasting room sales are even less than that. So distributors are getting their vig on more than 95 percent of the wine sold in the U.S., and that's not enough for them?

  2. Thanks for the early post WC. Yes its a common thorn in the side of wholesalers - thinking the wineries are competitors. While true the smaller wineries sell 50% and more direct and so a competitor from a certain angle, really the wholesalers don't want to represent those small wineries anyway,

    I don't want to misrepresent wholesalers or make them out to be the bad guys/gals. Hopefully someone from the wholesale side - or a winery with a wholesalers view will post their thoughts.

  3. Its been proven over and over again that when consumers join a winery wine club, or have a great experience at a tasting room, they actually purchase more of that winery's wine via on and off premise. In other words, DTC increases wholesale revenue. Wholesalers need to be working with the winery's DTC programs, not fearing them

    1. Thanks for logging in Beamer. Appreciate the comments. I'd love to see any proof you have as noted in your post. Obviously I agree with your comments, but I haven't seen emperical evidence supporting the contention. Love to see anything you have.

    2. The proof I have is primarily via consumer surveys. When consumers who had a direct relationship with a winery (like wine club members) were surveyed about their in-store purchases, the large majority of them increased their in-store purchases after joining the club. I used to manage DTC marketing for Fosters (now Treasury Wine). We conducted this survey for 9 different brands. The wineries ranged from large producers like Beringer & Chateau St. Jean to boutique wineries like Etude & St. Clement. The results were consistent across all 9 wineries. We considered this proof from a qualitative standpoint. We did not run the quantitative analysis (analyzing sales data pre and post wine club membership), but I'm quite confident the results would be the same.

    3. Nice support Beamer. Thanks for the additional comment and thoughts.

      Side bar ... how many used to work for Fosters/Treasury? Lets hope this company gets new ownership and a positive direction!

  4. This is the "zero sum game" fallacy which has been proven wrong in many other industries, such as the fashion industry. In the late '80's, Ralph Lauren first opened outlet center stores and then boutiques on the Miracle Mile in Chicago in close proximity to his customers, the department stores, who bitched and moaned and then watched Ralph Lauren sales pass $2BB and explode in their own stores as well.

    Brand acceptance, loyalty, and multi-channel purchasing are all enhanced by making product more available and accessible to consumers who want it. This is particularly the case with the long tail of wine.

    1. Hi Ron! Thanks for the insightful comments and example from another industry.

      Hopefully we'll have someone offer a counter to this thesis - just so we cover the discussion thoroughly.

  5. I'm not sure that buyers at tasting rooms are getting prices below retail. I have worked in both retail wine sales and in winery DTC and can tell you that the highest price a consumer will likely ever pay for a wine is at the winery itself.

    I have seen wineries charge $50 in the TR with the same wine available at, for example, Bottle Barn or K&L for $25. This is not an isolated practice but rather the rule. The mistaken assumption being that they need to "protect" the channel. This assumption is often a function of the upper sales management in wineries being more comfortable with sales through the distributors and doing "deals" rather than doing solid consumer marketing (see P&G above).
    In my experience, all the discounting for DTC merely serves to get the direct price down to the price consumers are already paying for the wine through the channel.
    I can tell how serious a winery is about DTC by how wide or narrow the gap in retail and TR pricing.

    1. Thanks for posting Anon 10:52. Since I work full time in the business I seldom buy from tasting rooms so miss the nuance on pricing in wholesale versus tasting room. But I do have visitors come up and have on more than one occasion had a guest tell me the winery I directed them to was gouging.

      I'm pretty certain that's not the result a wholesaler wants from a tasting room visit. You think that customer is going to by a wine on the restaurant menu next time with that belief? You want that person to come away with a good experience and as a wholesaler, then you want them to buy the wine in a restaurant or retail.

      Another obvious issue today is on-line price comparisons on smart phones. Some tasting rooms try and get around that by offering wines without bar codes that aren't sold through 3tier. It doesn't work because the apps today use character recognition of front labels. But again, IMO that is 180 degrees out from what a wholesaler ought to want. They should want the producer to sample wines they are selling in the marketplace.

  6. Money Quote right here: I can tell how serious a winery is about DTC by how wide or narrow the gap in retail and TR pricing". Anon nailed it.

    It takes a great amount of fortitude to always, always, ALWAYS! make sure your wine club members are getting the best deals and access.

    For us, the ONLY time we undercut the wine club pricing are small lots of close out wines at industry special events, and even then fairly rarely, and it's usually by the case at those times.

    In addition, we always give our club members discount, on top of any other sale price we might offer on those rare close out conditions.

    I know plenty of winery owners who lament how they can't seem to grow their clubs, and yet undercut the club members pricing all the time, in their own tasting rooms, and in other retail & online environments.

    Why should anyone join a club if they can just get your wine easily and cheaper elsewhere, with no commitments?

    1. Thanks for logging in Eric, and for the post.

      Q: Why should anyone join a club if they can just get your wine easily and cheaper elsewhere, with no commitments?
      A: They shouldn't.

    2. I know plenty of winery owners who lament how they can't seem to grow their clubs, and yet undercut the club members pricing all the time, in their own tasting rooms, and in other retail & online environments.

      Why should anyone join a club if they can just get your wine easily and cheaper elsewhere, with no commitments?

      -- Exactly, the winery owners can indulge in phantasy pricing at the winery with little push back from the TR / DTC staff, while in the channel they soon run up against the reality of a competitive market and adjust their pricing accordingly. National sales managers and distributors know full well the real value of the product in the marketplace...

      That's where the DAs and other special pricing promotions come into play.

      The root problem is spending marketing dollars on pricing discounts to distributors rather than spending marketing dollars on real consumer brand building.

    3. Anon 4:32 - Thanks for the comments. The issue does cut both ways. Winery owners are complicit in accepting the traditional view that the need to not undercut the wholesaler. Winery owners need to reposition this behavior in the market. It's not helping either the distributor or winery owner.

  7. As someone who has worked as a distributor and broker for a distressingly long time I think tasting rooms are a fabulous way to spread the word about a winery. I did have one notable exception however. In the mid 90s the hot ticket Amador winery of the time didn't want to run a tasting room year round so they had a few release weekends for DTC sales. The price was so low, it was not only below retail, it was below wholesale. This caused a lot of problems.

    1. Kurt - Thanks for logging in with a name. It makes it so much easier to relate to a person versus Anon.

      I appreciate your perspective as a wholesaler. First response we've had with the counter-perspective but you've put a hole in my sweeping generalization of wholesalers opinions.

      Its a great point about the Amador winery. If a winery and distributor have a good relationship, the winery has to be able to sell below retail but selling below wholesale - unless there is extenuating circumstances like a winery sale or something of that nature, is also going to hurt the producer in the market as well.

      Its not about colluding on price. There isn't a need for that but instead, a winery owner has to monitor how his brand is being sold in the marketplace and adjust accordingly.

    2. As I said, it was one notable exception. A couple of other clients had me pass out free reserve tasting passes at consumer wine events so we could track whether the wine we were giving away translated into visits. It was a good metric to use an excuse to pass on some of the charity pleas for free wine.

  8. I agree! Wine has the longest linger rate in the grocery aisle. The tasting room is an opportunity to imprint the brand so the consumer recognizes at the WOW (wall of wine.) Any wine that sells retail should take advantage of any opportunity to have the consumer sample it.

  9. Probably a better comparison. Starbucks, another company well known for their marketing prowess, has learned that those small samples in the store are well worth their expense. For every 5 samples, someone buys what they're sampling. Seems like wine is much the same.

    Any talk of 3 tier has to take discounts across the entire spectrum into account, including those end of the month specials that every distributor I know tends to call about.......

  10. Thanks for logging in and for the comments Mark

    Of course sampling is a restricted activity with TTB regs. I'm not sure why Whole Foods can offer sampling ... maybe they have a liquor license? In any case, sampling is a key component in consumer purchase and wineries are serving that purpose for their wholesale partners. Can you imagine coffeee producers offering samples so Starbucks could sell coffee?


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