A Hard Look at Stormhoek’s Collapse

January 7th, 2008 → 2:08 pm @ Josh Hermsmeyer


Thanks to Robert McIntosh at The Wine Conversation for pointing me to this story.

Orbital collapses into administration.

The worst news to come out of this is that the folks with the company (10 of them) have all been laid off. The somewhat better news is that there is still a chance that the business might still be sold and the brand will live on. That’s still not very good news, but at least the ownership group may be able to pay off their creditors and meet their near term financial commitments.

As Robert writes, this is a sad day for wine marketers, particularly people like me with winery blogs interested in social media. Stormhoek has long been the poster child for online and social media marketing success in the wine industry. They’ve won awards, gotten national media attention, more than doubled production and landed large accounts, and I’ve personally held them out as a case study in my talks on wine marketing.

So what went wrong?

I have an email in to Hugh, who I’m sure has had better days, so I wouldn’t be surprised if I don’t hear back from him. Anyone else associated with Stormhoek is welcome to email or call me if they feel like talking about how things unfolded. All I know from the article is that an unnamed source mentioned that “mistakes were made,” and that a major retailer delisted Stormhoek recently because of “a lower retail price available to a competitor.”

Does Social Media Work For Wine?

At this point I think a fair question to ask is: Does this mean that social media, blogs and other internet-centric marketing are a poor fit for the wine industry?

No, I don’t think so. There is more doubt than there was yesterday, certainly, but a number of factors specific to Stormhoek still lead me to believe that there is great potential for (at the very least) small wineries online. Here they are, off the top of my head.

1. Stormhoek is exclusively a retail brand. They offer consumers no way to buy direct. Simply put, direct sales are really the only way to make the economics of wine production work. In most cases, producers that rely on distributors to get their products to market – and then further rely on large retailers to move that product – will have to deal with constant pressure on their margins. There really isn’t a huge amount of money to be made in the wine industry in the first place, and when you can’t supplement your income with at least some high margin sales, business can be get ridiculously difficult.

2. Stormhoek’s price point put it in a class wine marketers refer to as the “fighting varietal” category (around 10 bucks a bottle). In this market segment price is a huge issue for consumers who are looking first and foremost for value. You’re competing directly with a market that is dominated by Yellow Tail types and that is often undercut during periods of high grape supply, ala 2 Buck Chuck. It’s challenging, and creative marketing and branding pays the least dividends in this segment since consumers are not very brand loyal, and you need a lot of them.

3. Stormhoek doesn’t have famous “terroir.” They knew this going in, and Hugh put a brave face on things very early on. In fact it was the only point in the Stormhoek guide to blogging that I disagreed with when Hugh first published it.

Take us for instance. We share a property line with one of Kistler’s vineyards, and across the street is one of the first vineyards planted in the Russian River. Dehlinger is located just down the road, Rochioli just across the river. These things are easy to understand, help place us in the world of wine, and become part of the story people tell about us. I think this quote from Principals and Practices of Winemaking is still pretty relevant:

“It is usually easier to succeed as winery number 50 in a famed district than number one in an unknown area.”

Terroir may be old world marketing, but it is extremely effective marketing nonetheless. Importantly though, terroir is also mutable, and a few 90+ point scores can create interest where there once was none (see Isreal for instance). Terroir won’t sell your wine for you, but it helps immensely if you have it.

So there you go; my attempt at putting lipstick on this pig.

I’m still optimistic that blogs and new media hold great promise for wineries focused on developing relationships directly with customers and selling their wines direct. In fact, I think that small wineries have a huge advantage over large ones in this area, which is a nice change of pace.

I also think that efforts by people like Tom Wark and Free the Grapes to liberalize interstate commerce laws for wine shipping are crucial to the success of direct. And since the future is direct, then small producers absolutely must have unfettered access to markets.

I’m convinced it’s the only way most of us will survive.

UPDATE: A comment on Tim’s post on Winecast from a Stormhoek employee caught my eye.

Hi Tim,

Hope all is well, just to let you know the problem wasnt with the stormhoek profit margins or much at all to do with Stormhoek, the problem was that they had several other wine brands in the stable that were not making money and Stormhoek alone couldnt make up for the losses occured from the these other brands.

Chris

Sounds much much better than what the article linked to above was saying. If indeed the problems were with their distributor only, then Stormhoek should be fine when they find a suitable partner. I just wonder how the article could have gotten the part about them selling off the Stormhoek brand so wrong.