Sunday, September 24, 2017

Is Opening a Downtown Tasting Room Smart?

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The Regulatory Landscape

Falling on the heels of a growing anti-tourism movement, of late I've taken calls from officials in three particular cities that are now considering tightening regulations, or altogether banning the growth of downtown wine tasting rooms.

What else can officials do to make the wine business more difficult? That's what many are asking. Why are municipalities working so hard to hinder success of an industry that helps pull in millions in local occupancy taxes, and donates many more millions to charity? Answer: It's just politics.

The wine industry isn't sufficiently engaging in the debate so we have ourselves to blame in part. We have a fight on our hands but don't show up in force to planning commission meetings and support applications.

We make it harder on officials who only hear from their constituent nay-saying minority. To the credit of the officials, one thing they are doing is asking around for data and facts that might help balance the debate, but I'm wondering if opening a downtown or urban tasting room is even a good business decision in the first place?

Banning Tasting Rooms

Should local officials ever consider a moratorium on new tasting rooms as we read is the current case in some towns? My answer is absolutely yes they should debate and consider it because land-use and sensible zoning can have a positive impact for everyone in a community, including wineries. It's a worthwhile conversation. No town needs all tasting rooms, grocery stores, or food trucks. Parking is another consideration for any business use.

A well-considered downtown with tourism as a draw should have complimentary businesses to pull in visitors. Getting the right blend of business isn't easy though, especially when anti-change elements dominate the discussion, as has happened in Saint Helena CA. St. Helena is in serious financial distress and is the poster-child for the unintended consequence of wishing things were like "the good old days" and ignoring tax and fee opportunities from tourism. 

But there are other important business questions to be asked before getting to the permit stage:
Is it a good business decision to open a downtown tasting room in the first place? Will it be successful? What conditions will make it successful or kill it? If there are already a lot of tasting rooms, is there room for one more or will that be one too many?

Success Isn't Guaranteed or Well-Defined

In truth, urban tasting rooms are a relatively new phenomenon and the jury is still out on their true effectiveness. But how is effectiveness defined? Winery owners get locked into thinking that if there is tourist traffic, the exposure alone will be good for the brand and they move forward with the concept. But is traffic truly success? From my vantage point, the number of visitors and incremental tasting fees are not the most important metrics. But take San Francisco as an example. There you have plenty of tourists and foot traffic.

Several wineries have tried opening in San Francisco with decidedly mixed results. I've had several clients attempt it and eventually leave. But I still have some who think they can be successful and are trying now. 

Those who left San Francisco came to the conclusion that the tourists going to S.F. were going for specific reasons, and wine tasting wasn't on the list. They discovered if visitors came in the tasting room, the tasting experience was more like a bar and visitors neither joined the club or took wine home with them.

Opening in a tourist area isn't necessarily a key to certain success. While the tasting bar might glimpse improvement in added tasting fee income for the business, tasting fees alone wont cover your costs. Selling your limited selection of wine one ounce at a time, isn't going to scale into a business either, unless you are at an airport and sell a lot of different brands. 

In the planning stage, another mistake is made when owners believe the conversion rate to the wine club can be as good at a downtown location as it is at the winery. It's not. And finally, owners forget the context. There are other wineries in a downtown area who are delivering their products for a certain size tasting fee. No matter what your fee is at the winery, you have to fit in or clearly justify your tasting benefits and fee structure, within the downtown context.

Too Much of a Good Thing

There are two benefits of a tasting room. The first benefit is giving your guests an experience and in so doing, hopefully you etch a mental marker in their mind about the wines you make. It's getting them by the trial component of the purchase decision, but the type of experience plays into that, locking the brand in their mind. 

The second and more important thing you are trying to do is get them into your wine club, or at a minimum collecting visitor contact data. As far as I can tell from polling wineries over time, the conversion rate of visitors into the wine club in a downtown tasting room isn't as high when compared with the tasting room at the winery. It's a different experience.

There are economic concepts called Cluster Theory and a related one called the Agglomeration Effect. In retail, these are the notions that explain the development and success of malls, and it helps to explain one good economic reason to have concentrated tasting rooms.

People come together in a mall or urban tourist area for an experience and convenience. Complementary and cooperating companies can do better together in a condensed location versus being spread out in the hills. That works well as long as the mix of companies is correct and price wars don't escalate among shops selling similar goods. 

But what's the right number of tasting rooms in a town? In my opinion, the regulatory choice to limit tasting rooms to one per block as was done in Healdsburg CA isn't a good solution. It's more effective to locate 3-4 tasting rooms in clusters on a block. That draws tourists and allows the wineries to create clustered experiences with adjoining and cooperating tasting rooms and businesses. Tourists more effectively shuttle into better defined areas within a city. which helps traffic flow and parking. But there is a limit. How many urban tasting rooms are too many? It turns out we have a good example.

The Curious Politics In Santa Barbara County

The towns of Buellton, Lompoc, and Los Olivos have ended up with too many tasting rooms, paradoxically because Santa Barbara County is trying to protect the rural character of the county by discouraging visitation at the wineries themselves. 

The result of being unable to host visitors at the winery is that the owners had no choice except to open tasting rooms in the towns. It has created a less than ideal consumer experience for the wine buyer. 

The tourist traffic that otherwise would have been spread out throughout the rural countryside, has been focused down into local choke points within the towns which is just poor traffic planning. The situation has negatively impacted both the town and the wine business. 

Los Olivos is a prime example. It's a small unincorporated area of about 1,100 people. Above is a map of Los Olivos overlaid with tasting rooms. I can't get the precise number today, but there are somewhere around 30 tasting rooms crammed into roughly four to five blocks. Parking on the weekends is difficult, and the visitor experience is sub-optimal.

While owners and employees do the best they can in Santa Barbara, for some visitors the experience is closer to a pub crawl versus a luxury experience. As a result, the County of Santa Barbara has some of the worst performing tasting room and club metrics compared to the other major AVA's, as noted in the headline slide on wine club growth.

The conclusion of a recent industry conference in the County was the visitors from Los Angeles were stopping for lunch, but driving through to Paso Robles where tourists get better experiences at the wineries. 

The Right Circumstances For Opening Urban Tasting Rooms

In Santa Barbara regulations have created a bad situation which leaves the winery owners with fewer options. An urban tasting room might be their only choice. But even then trying to better plan tasting rooms into cooperative clusters and coming up with a collaborative coherent story within clusters would improve the experience. I recognize changing what already is in place is pretty difficult.

Another good reason for a downtown tasting room is the situation in Woodinville Washington where the growing region is remote from the major population center. It's not ideal but getting customers to the hinterlands is equally difficult. Some wineries are now trying to open remote tasting rooms in Seattle to change the model, but once again, the jury is still out.

My encouragement is to think hard before opening an urban or downtown tasting room and define success metrics more clearly. There are good reasons to do it but getting tasting room income from fees isn't the right one. Getting people into the wine club is the best one but downtown is a harder sell for club conversions.

Find efficient ways to collect visitor information. That's perhaps the most important metric to track and a key to winery success. Each contact is an opportunity to engage visitors who have tried your wine. Another consideration is to find ways to work with adjoining businesses on the block to help improve the visitor experience. Make your business cluster the most desired one in town. Think about 'the neighborhood' and become a part of a few tasting rooms that will in cooperation attract more traffic.

I'd make sure the story was told about the winery in the remote tasting room. You have to have the connection to the site where the wine is made, and hopefully encourage visitors to make a visit there. Pictures, wine making equipment, soil samples, barrels filled with wine for a barrel sample option is a possibility, and videos are all good options to tell the story. 

There are a range of design options that are suitable and differentiation is still important. You might find success opening a tasting room with a few wineries to share employee costs - though you also have to share contact acquisition. Cross-over marketing opportunities that partner with another local business such as a cheese or chocolate shop might also be good. But in the final analysis, you are selling wine. The facility has to be authentic and represent the winery and brand. If its looks more like a themed restaurant or sports bar with antiques and memorabilia on the walls, you're selling the wrong thing. Does anyone think a bar selling one brand is a good idea?

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  1. Rob, what about opening inside a hotel?


    1. John - interesting question and I think the answer depends on the location and the plan.

      A hotel in a major city, even a tourist based city probably isn't effective. People aren't coming for a wine experience. Opening in a hotel near a wine area might be OK, but it depends on the success metrics and overhead.

      If you're in a hotel with a gratis space, that's a start. If you then measure success by breaking even in operations, but make conversions to the wine club, collect visitor information, and direct tourists to the winery itself, then that is probably a worthwhile endeavor. Staffing is always going to be another issue, along with potentially being at cross purposes with the bar operations.

    2. Been there done that. Was ok in the 2004-20012 period. Then things changed and it was not. Very not. First, the customers changed. Points travelers don't buy stuff. Second the hotel went for events and weddings. Those folks do not buy stuff either. Then the customers changed to "drinkers" not "wine tasters" as we knew them from history. Last, the hotel opened up a wine bar/store in the main lobby and started giving away food and tastes. That killed it. very very wary of hotel situations based on our experience.

    3. Wine Guy - thanks for the cogent comments. Appreciated by all to have the real time experiences added to the discussion.

  2. Very interesting. I have worked both at tasting rooms at the vineyard/winery and at in town tasting rooms. I'll just say the experience is very different in town vs. at the vineyard.

    1. Anon 8:12 - do you have an opinion on conversion to the club in a downtown tasting room?

    2. I don't think conversion to a wine club at a country winery vs. and urban winery matters. It is the product and experience that matters.

    3. Also, you all are basing the downtown (urban winery) on the premise that this tasting room is a secondary location. What about the urban wineries that make wine on site and bring all the grapes to the urban setting. Totally different business model

    4. Anon 8:12. Yes you are right. I am making a distinction between an urban winery and an urban tasting room.

  3. Couple of thoughts, Rob. The cost of starting a tasting room downtown vs building a winery with a tasting room are two very different propositions financially. One is very easy entry...the other...not so much. The real objective is to build one's database, and the tasting room in town may be a great first step, virtually a test, before leaping into a winery. Re: moratoriums on tasting rooms -- don't you think the market will control that better than the government? Like restaurants, let the guests determine the success of the experience.

    1. Judd - Thank you for the comments.

      Your comments are spot on in my view. 1) Overhead matters when you are deciding on a downtown/urban tasting room. Some do spend a lot on TI's. And the success metrics are really in finding a way to break even AND build the club AND build the contact database AND then follow on with marketing to that group who visited and tasted your wine.

      With moratoriums and virtually all things, I prefer the market over regulation, but I acknowledge the market isn't always rational with land-use and zoning. For example, given a choice of paying for added parking to be built, or just opening a tasting room - a new entrant with a downtown tasting room will just pay for the tasting room. Existing tasting rooms are impacted and probably would prefer a discussion before that permit was issued.

      Research I found shows that in destinations, the lack of parking is the single largest component of failure.

  4. I think you missed the point. In a medium size city two factors come on play
    1. Year round traffic
    2. Ability to host big logo events that is prohibited when weather or drive/logistics is paramount

    1. Michael - Appreciate the thoughts.

      I understand the base thinking is that opening a tourist based tasting room is an opportunity to grab those who walk by. I'm suggesting people walking by, or people visiting aren't the most important measures of success.

      I do like the second point you note. A second location can also be an event center. That's the very thing residents of wine country complain about so having them in a city is a good compromise in part. Still ... there is a cost of a facility that is large enough to host events. Spending time and money on a consistent stream of events in that facility to cover the overhead has to be a consideration. It's a large added cost of the tasting room.

  5. The younger market goes drinking not wine tasting as we used to know it. So if you model your "tasting room" as a wine bar somehow it might work better. Also perhaps as an exclusive wine club bar with signup/greet/simple tasting as a lure? Most clubs work best when you are allowed "on the red carpet behind the velvet ropes" to show off, get "luxury treatment" and enjoy drinks. Perhaps there is an urban "private club" atmosphere scenario? Otherwise check out downtown Sonoma which now has way over 20 (30?) in a 1 block radius off the Plaza (town square). You never see anyone carrying a bottle or "carrier box" on the streets. I mean never. And not everyone is "shipping it home." The visitors go bar hopping from their POV.

    1. Wine Guy - thanks again commenting and for logging in. I prefer to use a name versus Anon X:XX.

      Your observations on the young adult market is interesting to me and that's a vector I'm presently researching in advance of the annual SVB Wine Report. I actually think we have quite a challenge in front of us.

      To your view, we can't define success by the number of visitors drinking at our wine bar. We can't cover overhead pouring tastes.

      The exclusive club is interesting but its a different model and gets away from wine making-production-sales, and more into the added burden of managing a bar/restaurant which isn't easy.

      But we have private dining facilities and I've seen some wineries focus on leveraging the facilities to create a high-end user as part of the wine club. I'm sure there are possibilities for doing that downtown but it's a little risky IMO, and made even more risky when a single brand is the only offering.

      I've seen it successful in Hollywood where just members (invited actors and their guests) get access, but wine/spirit/tapas selections were part of the club.

      Your description of Sonoma sounds dramatic. While I go there somewhat often as it's near home, I've not observed who's walking out of the tasting rooms or what they carry. I wouldn't expect they would be carrying wine that often in any urban/downtown setting, which gets back to the right measures for success in the downtown tasting room. The bar hopping .... pub crawl is the worst outcome if that's what is happening in a cluster of tasting rooms.

  6. Rob...a few weeks back you posted a piece and started out saying no one like to hear negative news (the piece about the decelerating growth of premium wine)...everyone "assumes" that there are no competitors to the California wine machine....and NO MATTER WHAT it will keep on going as is...yet around the world businesses are investing many hundreds of millions of dollars to stimulate wine tourism...there are countries who would (and will) do anything to get half the wine visitors that come to California...can the impossible happen? Can a shift happen in taste and appetite that reduces the flow of tourist? NEVER SAY NEVER! Maybe some of the politicians need to think about that.

    1. Good perspective Mark. There is no question that the more established wine regions have officials who probably lean more to being anti-tourist, and anti-wine. It's a strange thing to me to have officials misunderstand the dynamic impact tourism has in sustaining a community and reducing the taxes of locals. But they have the anti-change NIMBYs who recite the NIMBY pledge at the commission meetings (negative cumulative impacts from traffic, water, events, noise, drunk driving, etc) and they get coverage for their controversial views in the press.

      Politicians have a hard job and when the winds are blowing against the industry, we need to show up in planning meetings and publicize another view. That's what I try and do here and in testimony in front of planning commissions throughout the state.

  7. Now let’s place all you’ve said in the context that the DTC channel plays such a critical role for 95% of the wine brands in the country. The wine club is the holy grail for most small and medium sized brands. The primary tool to build that club is an experiential interchange between winery and consumer, and for reasons you’ve already identified, for many brands this interchange becomes limited to the downtown tasting room. These downtown tasting rooms are not profitable, but they are often the only means of building that profitable club. So a critical question each brand must answer: over a three to five year period, can you build your club membership enough to justify the cumulative economic tasting room losses?

    1. Paul - I should have had you write the blog. It was 5 hours out of my Sunday that you probably summarized in 30 seconds!

    2. I've been in the wine industry 18+ years and worked in both vineyard and downtown tasting rooms. This is an exactly correct summation.

    3. Anon 10:07 - I'll presume you mean Paul Hoffman. Nobody agrees with me!

  8. Our winery is south of Santa Barbara. We've watched the Urban Wine Trail develop over the years and evaluated opening a second tasting room in the Funk Zone. My observations were...
    (1) I didn't see enough visitors carrying bags of wine around. Visitors seemed to be tasters, not buyers. Often their car was parked far away.
    (2) The experience seemed to be "tasting with my friends" rather than "find a new wine to enjoy and purchase".
    (3) Its difficult or nearly impossible to have a wine club party in this clustered zone due to limited parking.

    1. Mike - the experience in Santa Barbara isn't the one I would want for the region. I've been in front of the County Planning Commission twice now to give facts about the industry and the need to have direct sales. The politics in your region are pretty unique, but I hope when they killed the last Wine Ordinance, that is a turning point where the industry will better engage the County, and see more tasting rooms at the wineries.

      Yes - tasting with my friends is a good experience for visitors. But unless you are building a wine club, building a database of names on which to market, and breaking even on operations, you have to think hard about the reason for the tasting room in the first place.

  9. I lose $1 for every bottle I sell. But don't worry, I'll just make it up with volume...

    1. Believe it or not, early in my banking career I had a person who was given 4 million dollars by their father to start a business. I made a cash secured loan for them after the bought a local construction company. Mind you, the buyer had no experience. At the end of the first 12 months, I got their statements and they had a negative gross profit before factoring in overhead. I asked how they were going to turn that around and actually got the response you gave above. It's still to this day one of the more colorful stories in my 35 years of stories. I tell it better when you and I had a glass of wine in our hands though.

  10. I might be an odd-ball, I’m a owner/winemaker without a tasting room who loves going to other wineries tasting rooms to see if I’m missing anything. My comments are anecdotal, so take my experience as that, but with a slightly more informed viewpoint considering my current career as winemaker just outside of Healdsburg.

    I’m a frequent visitor to Santa Barbara and the Funk Zone. It has the right mix of atmosphere, food and drinking. My friends who live in SB are wine club members at a few of those urban tasting rooms. If we are “day drinking” my friends pick up a couple extra bottles of the wines they like, we taste at couple wineries and get a quick snack at a food truck or Lucky Penny, maybe stop for a brew at Fig Mtn and head home. If we are out before dinner, we bar hop at the wineries, include Le Marchands for a cocktail or a non-SB wine, and then head to dinner. Everything is an Uber/Lyft ride away and no one has to be a sober driver. Not a bad afternoon.

    If we head up the hill to Buellton, we are eating/take away at Industrial Eats because we know there’s nothing to eat in Lompoc at the wine industrial park. We get to see production facilities and have bought in for the day. We are going with the objective of tasting to find new wines and buy them. Same story for Los Olivos (LO), depending on the route we take, we are stopping in SY Kitchen and moving on or parking it in LO and making a day of it. However, one of us isn’t going to drink and we have an hour plus drive back because we’re not eating up the hill. I like LO because I can walk everywhere, eat, drink and snack.

    In Templeton, Tin City is my new favorite place to taste. Cool vibe in the industrial park, but the same general problem as Lompoc, not a lot of great food choices, so I’m probably stopping in Paso or SLO on the way to Tin City or leaving it at noon/4pm to find some grub. Tin City is a tasting room and production facility wrapped into one with a good diversity of wine making styles. I think it’s a cool model for small winemakers like me. Don’t get me wrong, I couldn’t afford 6,000sq/feet like some of the producers do (the economics don’t seem to pencil to me) but I could afford a split tasting room of 600sq/ft at a $1.20sq/ft to hang my hat which some wineries do.

    Finally to the home base of Healdsburg, CA. I love going to dinner downtown Sunday through Thursday night. It’s harvest time and it’s busy, but it seems busy a lot more often these days on weekends. Less so on a Tuesday in January (crickets). I haven’t been to a downtown tasting room for a tasting experience in over 2 years. I tend to get on the main roads with friends to visit winemakers I know and wines I like. If people come to town, I get into the Dry Creek Valley because it’s beautiful. I’m downtown with friends to eat, not taste wines. Because of the small plates/tapas concept that has over-run Healdsburg restaurants, we restaurant hop as a matter of habit, drinking cocktails or a glass of wine, rarely committing to a bottle. And most of the restaurants downtown have international wine lists, not heavy local only lists with plenty of BTG options. Old Roma Station just a few blocks from Downtown I still believe is a fun place to taste, with only a little turnover in the wineries that offer tastings.

    Of all the places and experiences I’ve just discussed, if I had to make a business decision tomorrow about where I’d locate my tasting room, I might just hold tight and continue doing what I’ve been doing for 10 years. I founded my winery in Healdsburg during the Great Recession; it wasn’t as bright and cheery as it is today. I worry about the next recession and what it means for tourism in Dry Creek Valley.

    1. David - Thanks for the extensive view of taste preferences.

      I do think urban venues have a rational business purpose when run well and when the sucess metrics are defined. It's too easy to slip into other secondary goals that make the tasting room feel more like a restaurant or bar. That's not the same experience as the winery. And while that can work still, the goals have to be getting people in the club, collecting contact data to sell them wine, and pointing back to the winery.

      The wine business is very difficult. The restaurant and bar business is maybe even more difficult.

  11. Great blog and thoughts... timely too.

    I get your point about the urban tasting room and how it may more likely be a wine bar than a tasting room due to the differences in the intentions of the traffic patterns.

    I have been wondering if a secondary tasting room in an urban area might be useful for this use case: engaging the club in a remote location.

    We have lots of club members in a couple of cities an hour or more away from the estate. How might a small tasting room work in these cities where we can offer club members a closer touch to the winery - to taste new releases, to pick up wine shipments, or to simply make it easier to get additional wine.

    I'm not sure this is useful enough to justify an additional location, as it could be simply a distribution point. But, could this help with retention as new members might see the increased club utility of having a nearby location for their wine purchases and such?

    Maybe. Guess it all depends on how it pencils out.

    1. Chris - a secondary facility can work, but the overhead has to be considered along with staffing and event planning. It's not as easy as it seems to make it work.

      I have seen some attempts at what you suggest and they didn't work, but it doesn't mean someone couldn't come up with a separate business model that was a "club" for events with wine club members. I think the problem with a club selling one wine brand is obvious. How will you keep members interested and engaged?


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