Note: Yesterday was replete with big box retailer talk, information on category management, and other trends in supermarket retailing. While it was interesting to see the world through the supermarket retailer’s eyes, it just cemented in my mind that a luxury low volume producer has no business even contemplating developing relationships with them. Our price point is too high and our volume is far, far too low. Today is another field trip, and I’ll be playing hooky again to tend to Candace and her dilating and effacing cervix.
In the meantime, here’s some more info on distributors we (and you if you are a small $25 plus a bottle producer) might actually consider using.
Kimberly Brown, Owner of Terra Firma Wine Co. (contact info at the top of the page) is a broker and a distributor. Her company started out just as a broker at first due to the low overhead it provided (she didn’t need to actually buy the wine she was selling) and has since moved into distribution as well. From her perspective, here are the benefits of dealing with a wine broker:
The cons of going through a broker are that they really don’t move much volume, they can have trouble getting wine placements at the ultra-hip key accounts, and it can be hard to find a really good one. Also, because brokers are typically focused on a specific city or geographic area, you’ll need to seek out and establish relationships with quite a few to cover all the big markets in California.
When I asked her, Kimberly said that she didn’t have any trouble getting wine placements at the image maker accounts and restaurants. Yet when you consider that Southern and Young’s Market have a high end wine division with an expense account in the many thousands and that they are told to use it liberally at key accounts to help grease the wheels, it becomes easy to see how her job could become difficult. Still, for small luxury producers, a broker can be an effective part of the distribution mix due to the benefits listed above, with control over placement being the biggest.
Regal Wine Company is a regional distributor that began as an offshoot of Kendall-Jackson for their Stonestreet brand. Regal slowly built a distribution network from the ground up, and began adding more and more brands from the KJ portfolio. Recently they began distributing all of KJ’s product in California and have begun to take on other outside producers not affiliated with KJ.
The reason for Regal’s creation according to Richard Rossi, VP of Regal, is that national distributors want comfortable margins and steady growth across all brands. For instance, if Southern’s top 5 accounts don’t grow at roughly the same rate each year, the ones that were outpaced will call them up and demand growth in line with their competitors. This causes a headache for Southern and so they want to keep growth across all brands even, regardless of demand.
KJ also thought Southern and Young’s were operating on fatter margins than they needed to. KJ, with their clout in the market, felt that they deserved a better price. KJ asked for 18% margins, the big distributors said no, and so KJ went out and created a regional distributor (California only) to test out their theory that their wines were in higher demand than their yearly sales growth with the national distributors would indicate. They also wanted to test whether a regional distributor could function on 18% margins.
After close to a decade, KJ discovered that with better distribution in CA they could indeed grow faster than other distributors were allowing them, but they also discovered that 18% margins were just too lean to operate on profitably. Because Regal isn’t able to pad its bottom line with the more profitable spirits sales, Richard now says that 25% margins are more realistic.
All of this is interesting and it gives great insight into the inner workings of both national and regional distribution companies. From a small producer’s standpoint, the benefits of using a regional distributor like Regal are much the same as the benefits of going with a broker.
The cons are that regional distributors are typically wine only and don’t have economies of scale, so their costs are higher and their margins are lower. This means their sales force will be smaller and their focus will only be on the most profitable markets (think Southwest Airlines). Regionals have no leverage with on premise accounts (“If you want your Jim Beam you have to take a case of Geyser Peak buddy”) like the nationals do. They are also easily outspent by the nationals in key accounts (huge dinner parties in the hippest New York restaurants are very common among distributors). EDIT: I forgot perhaps the biggest drawback to using Regal, which is that the KJ brands they distribute will alwyas come first. No amount of programming or incentives will move you up their priority list past a certain point.
For the small luxury producer the first question you have to answer is what geographic areas and what markets do you want to be in? For producers of less than 5000 cases, the general consensus is to simply stay home (if you are in CA) to concentrate on direct and to use either brokers or a regional distributor to help you build brand awareness in your own backyard.
This is the general strategy we will be using, but success really depends on the particular tactics you use to pull it off. I’ll talk about some of ours in the coming weeks.