Should wine producers bypass trade customers and sell direct to consumers?
Whilst running Percy Fox, way back in the 1980s, one of our main agencies was Domaine de la Romanée-Conti. Suffice it to say it wasn’t exactly a hard sell. Our task consisted of liaising with the wine press, and allocating the wine to those customers who were likely to position it appropriately – and who were prepared to buy across the range. I can remember wondering at the time why DRC did not simply sell it all from Burgundy, direct to consumers, thereby cutting out two tiers of middlemen: the agents and the fine wine merchants.
This came to mind as I read about Diageo establishing Alexander & James. This is a direct-to-consumer operation for certain of their super premium spirits, which offers, as their spokesman put it, “a white glove end-to-end luxury brand experience”.
The benefits of going direct
The Holy Grail for any brand owner must surely be to have strong relationships with enough consumers so that all sales can be made direct. As any producer with a cellar door operation knows, the value of one’s brand is never as high as at that point. The agent, distributor, wholesaler and retailer are only a means to an end: they are necessary simply because it isn’t generally practicable for producers to achieve their goals without using third parties.
Just think about the reasons why producers might want to go direct to consumers. Firstly, it is possible to control the brand message all the way through to the consumer: no more concern about it being watered down, or misinterpreted, as it gets filtered through the distribution system.
Secondly, the financial advantages are considerable. You take the through profit, get paid up front, and don’t have to worry about credit control. Thirdly, let’s consider trade sector management. You avoid the innumerable pitfalls involved in attempting to secure focus for your brand in both the off and on trades- and their various sub sectors- without unduly complicating your branding by having to consider separate ranges for each sector.
And, finally, it takes away the need to either establish a subsidiary (which represents a substantial investment and responsibility), or find a distributor with whom you have empathy, and who can give you the coverage, impact and focus you require with the minimum loss of margin. Plenty of producers never achieve that particular goal.
In short, it cuts through at a stroke one of the major challenges involved in marketing wine. In my experience, getting the route-to-market strategy right is by far the most complicated (and least thought through) element of the marketing mix.
As time goes on it will be surprising if more and more producers, either individually or collectively, do not contemplate not just marketing, but selling their wines direct to the consumer. As margins get squeezed, and as technological advances make the process of acquiring a database and marketing to it less difficult, the pressure for a radical change in the traditional route-to-market model will surely grow.
The process will be accelerated in the UK where there is likely to be significant consolidation in the distributor sector, and therefore even less room on distributors’ lists for the number of producers seeking to access this market.
So why doesn’t everyone do it?
Yet taking the direct-to-consumer route is not for everyone. If you are a producer with a strong consumer franchise, and relatively small and consistent volumes, then it is difficult to think of arguments for not going direct. The only downside might be if this necessitated breaking long-standing agreements with loyal distributors who had been integral to your success.
However such producers are very few in number. For the vast majority, the risks of radically changing their route-to-market approach are substantial. Even most premium producers with low-volume aspirations lack significant consumer cut-through. They require, therefore, not only distribution through appropriately prestigious outlets to help build their image and sales, but also a distributor (either owned or appointed) to help them build the distribution in the first place.
It might well be possible to bolt on to this framework a direct-to-consumer marketing operation, but actually selling to the consumer, away from the cellar door, risks jeopardising the core relationships with one’s distributors and trade customers. Attempting to get the best of both worlds in this way could easily end up with exactly the opposite result.
Those producers who need to sell significant volumes have a different problem, particularly if their goal is to increase volumes every year and to sell internationally. The direct-to-consumer approach is unlikely ever to be viable. Their only option would be to set aside part of their range for a direct to consumer offering, much as Diageo has done.
Yet another reason to build strong brands
What all the above demonstrates to me is yet another advantage of developing strong brands. Such brands don’t just increase your asset base, give you pricing power and strength in customer negotiations. Ultimately, they will allow you to consider more seriously the possibility of going direct, and thereby securing greater control of your destiny.
It is also another example of how one’s difficulties increase exponentially if one wants to either be a volume player or simply to sell outside one’s domestic market. For a small producer, it may not be that difficult to sell direct to consumers within one’s region, or even the broader domestic market, but if that doesn’t satisfy your success criteria, you will probably have to use third parties abroad.
So selling direct to consumers, across a number of markets, may be increasingly possible in theory, but in practice it will likely remain restricted to a handful of producers. To the rest, this particular Holy Grail will likely remain tantalisingly out of reach. But the fact the Grail is now at least in sight will assuredly affect the dynamics of relationships between producers and distributors, particularly at the premium end.
as Mike rightly points out, if you have a product that is in demand and volume constrained, then it doesn’t really matter what route market you choose as customers will find it. For other products struggling to build awareness then whatever approach you take will cost both time and money – the one in inverse proportion to the other depending which you have any/most of..!
the analogy i would draw is with spirits brands which 20+ years ago were entering the doldrums of being a tired category with an ageing demographic. wine was exciting and vibrant and in short supply if you were selling an australian brand. the roles have reversed and spirits now have the most desirable demographic and are the most innovative category in beverage alcohol. maybe the wheel of fortune will turn again and a global wine brand will emerge…
I agree, Peter, with your point about the relationship between wine and spirits and I hope you are right about the wheel of fortune. Wine badly needs inward investment- both in terms of people and money- yet as a generalisation it is not nearly so attractive a sector as it was.The financial returns have never been on a par with spirits but, as you imply, what wine had going for it was stronger and more consistent growth. This advantage has been, in an overall sense at least, lost.Perhaps we are moving to a new category model where the investment opportunities are either niches at the premium end and wine based beverage brands in the mainstream sector