How confident are you in your 2020 plan? The first quarter of the year is that hopeful time when we communicate our ambitions and goals to our distributors. We hope that everything we learned from 2019 will pave the way for a successful 2020. We hope we have more information about the current market so that we can make the necessary adjustments for 2020.
But, sometimes the road map to a more successful future does not feel so sure (or clear). The current market is changing, becoming more consolidated, complex and difficult to navigate. As the landscape is changing, tried and true strategies, like distributor incentives, don’t work resulting in the need to further discount prices and impacting your bottom line. Often, when your annual plan is built on shaky ground, it is the perfect time to hit the reset button.
In addition to everything you are doing, we recommend that you take an honest inventory of your efforts and the chance that you will succeed. This includes having candid conversations with your distributors about the effectiveness of the plans and goals that you have communicated.
Through our experience with our clients, we have found that having an outside, knowledgeable, strategic perspective can help companies reset. A reset often necessitates both a solid understanding of current market conditions as well as well-honed industry know-how. Whether it’s setting a new course or fine-tuning a current strategy, Chris and I are well equipped help you make the adjustments necessary to move your brand forward confidently.
There is no doubt that the US is a highly sought-after market for wine producers from around the world.
The main appeals are twofold: US wine consumers are open to trying wines from regions around the world; and these same consumers are willing to pay a premium for better-quality wine.
Much has been said about how difficult it is for wineries and wine regions to find importers that will embrace their products. Importers have many choices and are more risk adverse than ever. It is not uncommon for an importer to make a small commitment to a new brand and then rely on the producer to build the sales. If the brand doesn’t sell itself, the importer becomes less interested and moves on to the next brand opportunity.
In fact, this is such a common occurrence that there is a west coast retailer that sells in excess of $100 million annually of close-out wines that did not move in the marketplace.
One of the first and most difficult steps to maximizing your efforts when targeting the US is to connect with an importer that is best suited to your brand. This means the importer shares your vision for your brand and is open to helping you build your brand.
In the US, finding the right importer takes market expertise, industry knowledge, strong connections with market partners and time. Unfortunately, this task is daunting. Searching the Internet, sending out emails, cold calling companies or attending a trade tasting to connect with an importer usually only result in a loss of time and money.
Having spent over 30+ years each in sales and marketing for the wine industry, Chris Lynch and I have a comprehensive knowledge of key US importers. Based on our experience, we are able to profile potential importers to understand their portfolio strategies and gauge their interest in your brand. We also have strong relationships with decision-makers and a large network that gets us a response. As the president of Palmateer Consulting, I have led several searches for wineries and wine regions in which suitable importers were identified and secured, thus enabling my clients to successfully launch their brand(s) in the US.
Selling through the distribution channel can be more complicated and costly than you might expect. Lately, I have been working with a few clients where this is true. Up until recently, they’d been selling all of their production direct to consumer or trade. Now, their production level is such that selling it all direct has become unrealistic. So, they’ve decided to seek distribution for their wines.
When I compared their suggested retail price and their cost of goods, and factored in their selling costs, I found that the owners may not have fully considered all the costs of doing business with a distributor.
First, there is a significant up-front cost to getting a target distributor to say “yes,” including trips to meet with them, cost of sending samples, etc.
Once a distributor decides to list a wine in its already crowded portfolio, the best distributors will ask for additional support to help the brand get noticed by their sales team and by their trade accounts.
It’s a different world than 10 years ago. Post-recession, distributors are requiring greater margins from the wines they sell. Today, they run 25% to 33+%, which is an increase of 3% to 5% a decade ago. An easy rule of thumb is that the smaller the distributor, the more the margin they require.
In addition to these initial costs, there are additional expenses that need to be factored in to the selling price:
Launching the relationship: Getting the distributor to list a wine is only the beginning. Then the real work begins: introducing it to the sales team. Building a good relationship with the sales team is essential, and this is the first and best opportunity to make an impression. If they don’t know a wine, or it doesn’t have a high score in the major scoring publications, it makes their jobs harder. So, the expense of getting everybody on board needs to be factored into the wine’s price.
Don’t forget samples: Once upon a time, most distributors picked up the expense of paying for samples. Not anymore. Good distributors have really clamped down on this expense, as this cost can get out of control if not managed correctly. Distributors are now requiring that wineries pay for most of the samples. The launch period mentioned above will be the time when the samples expense will be greatest. In addition, when a winery schedules in-market time, the distributor will generally charge 100% for samples used during the visit.
Today, some distributors prefer to negotiate a small percentage of each invoice be deducted to account for samples. It is generally true that a winery can negotiate a lower percentage over the duration of the partnership. Some distributors will ask a winery to ship “no-charge” cases along with the paid cases to be used for samples and promotions.
Product discounts: Most distributors are willing to lower their overall margins to discount a wine to achieve a “hot” price point. They will, however, want the producer to pay for most of that discount. Many distributors have minimum thresholds that they will not go beneath, so this needs to be factored into the overall costs.
Giving Incentives: Distributors are more likely to want you to pay 100% for all incentives. In some cases, a winery may be able to negotiate that the distributor take responsibility for minor expenses associated with the incentive. I have very strong feelings about the impact of incentives, but will save that for another post.
Event participation: Distributors will typically ask a winery to pay 100% of all costs associated with trade shows, special events, wine dinners, retail tastings, etc. Many wineries will feel compelled to pay for a table at a trade tasting because they want will want to demonstrate their commitment. This is a good practice, but must be considered in the overall costs.
Wine returns: This is a hidden cost than many wineries don’t consider. In their mind, once the wine leaves their facility, it’s as good as sold. Not so. Sometimes the wines come back damaged or out of condition. If anyone drops a wine while presenting or packing it in a warehouse, there is a good chance that the distributor will ask the producer to pay for it. If a trade account returns it to the distributor because he believes that the wine is flawed, they will ask the winery to pay for it. Thankfully, this has become less and less common, and we see less of this happening lately.
I’ve touched on some of the hidden expenses involved in selling a wine through distribution, but there may be others. It is important that anyone endeavoring to build relationships with distributors consider all the additional costs, and to do their best in negotiating a good partnership. It’s the only way to build a sustainable sales channel.
Based on numerous conversations I have had with wine producers who are struggling to penetrate the distribution market, I have come to believe that there is someone out there spreading the fallacy that in the distribution market, a product’s FOB = winery retail x 50%.
The short explanation as to why this is untrue is that cost and margin have gone up throughout the selling channel. Plus (and this is a big one) post-recession level of competition has created opportunities for distributor and retailer margin enhancement.
Let’s take a real life scenario.
Your winery retail is $40, so you were told by a trusted long-time industry veteran that the product’s FOB should be $20.
In the table, that bottle of wine that used to retail for less than $40 is now retailing for $43. This model is only an example and there are many variables that differ from market to market and from buyer to buyer.
So, if a winery employs the philosophy of FOB = retail x 50%, it will be essentially undercutting those distributors and retailers that he is asking to sell and support the wine. If a winery wants to be successful in the distribution market, I would not recommend undercutting your trade customer. Remember, in today’s market, the internet tells all and your price is public knowledge.