The beginning months of 2009 seem to have been as fiscally challenging as the last quarter of the previous year for most sectors of the wine business. Volume has stayed fairly steady while price points continue to drop and much of the business moves to the off-premise arena. Both restaurants and retailers are not moving as quickly as they used to through their higher-priced stock and have been slower to bring in new inventory, making the wholesale side of the business more competitive than ever.
Despite the recent spate of consolidations, it remains hard for anyone but the largest distributors to make major acquisitions. However, a few major mergers--which some might call acquisitions--are considered likely to go through, such as Glazer's Distributors and Southern Wine & Spirits (SWS). These two companies announced last year their intention to merge though the merger has not been finalized.
Many markets continue to be home to, and downsize toward, having only two major distributors which makes the current wine market a continually more competitive environment for smaller wholesalers and brands.
Big Brands, Primarily, Dominate
Large producers and distributors have, for the most part, had the foresight and funding to focus on value-priced brands that have sold well during tight economic times. Many key winemakers' focus on well-publicized labels at key price points has also been solidly supported by top distributors. These bigger wholesalers have, more than ever in tough times, poured their energy into supporting their big player wineries who have been long-term partners.
"We are really focusing on our core brands and business partners," said Bill Cascio, the San Francisco-based vice president and director of winery relations for Glazer's Family of Companies, describing a process most wholesalers refer to as rationalization of portfolios. The focus on primary brands is essential for Cascio and other wholesale houses as major distributors don't want to lose on- and off-premise representation for their key brands so they ideally will still be part of the lineup when the economy rebounds.
Alan Dreeben, a San Antonio, Texas-based partner in the Republic National Distributing Company (RNDC), agreed that his company really has to "prioritize brands we have selected as our strategic partners." He added that he is cautiously optimistic about the process.
New products, from entirely new brands to line additions, have generally been a difficult category for wholesalers to introduce and promote in the current economic climate. "It's challenging to introduce new products as the trade is not willing to take a risk with their finances," said Glazer's Cascio. SWS's Miami-based president and COO Wayne Chaplin added that his company has yet to rationalize its portfolio. The lower-value, commodity-priced brands are also showing greater growth, according to Chaplin.
Some of the smaller wholesalers I spoke to thought the new, ideally "accessible," price points in the current economy might also serve to open a door to lower-volume and lesser-known wines. "People are being forced away from classic [and familiar] wines," said Steve Morey, general manager of the Las Vegas-based Vin Sauvage distributor, which operates throughout the state of Nevada. He added that consumers are now on the hunt for wines that offer both a good price and value ratio. "People are going to have to discover for themselves what value in wine is."
It has yet to be determined if the quest for value will play out in the small, or bigger, players' favor. However, the players with bigger economic muscle generally win the game. All interviews for this story were conducted in late 2008.
The Flee to Value
As consumers become ever-more price conscious, their desire to spend less is being met with an ever-widening range of well-priced wines from around the world. "The new marker is about $12 and down. A year ago it was $12 to $20," said Glazer's Cascio.
RNDC's Dreeben agreed about the central price points that are currently driving the off-premise sector, adding that wines priced at $12 and under have become quite popular.
"We are seeing a decrease in the volume of off-premise, with [average] prices down to $9.99 from $17 or $18," said Eugenia Keegan, president of the Portland, Oregon-based Henry Wine Group (HWG). She added that this downward shift in pricing had been evolving over the second half of 2008.
The On- to Off-Premise Skew
For most of 2008, the wine business has been slowly shifting in small increments, according to all the notable data, to the retail sector. The latter half to quarter of 2008 saw the big transition. For SWS's Chaplin, some of the initial downtick started in on-premise national accounts and then moved to higher-end restaurants.
"The trend is to mid- and low-priced brands and … in-home consumption," said Jay Davis, the Atlanta-based chairman and CEO of RNDC. RNDC's Dreeben added that his company is moving a fair amount of wine to the on-premise, but that much of it is in the more popularly priced category.
Downsizing and Credit in the New Economy
Almost all the wholesalers with whom I spoke declined to discuss layoff or said they simply hadn't let anyone go; the reality and off-the-record story is there have been major layoffs at several of the top houses.
The current economic situation has sent many smaller wholesale houses scrambling to be bought out while the larger houses stay on the hunt for savvy purchases. Glazer's Cascio said that, despite the tight credit situation, the current economic situation is likely to lead to continued consolidation on the wholesale front.
RNDC's Davis added that smaller wholesalers may have as much trouble selling their businesses, due to the credit crunch, as the larger players may have buying them. A large, national wholesaler--who declined to comment on the record--noted that "we might be less inclined to make deals if we have to borrow at these rates."
In Oregon, HWG's Keegan said she has seen a great deal of wholesale consolidation and even outright closures of distributors. She added that she "has been approached by big guys wanting to purchase us and little guys who want to be purchased." She also conceded that "smaller wholesalers suffer from a cash crunch." Vin Sauvage's Morey agreed that the current economic situation is a boon for large wholesalers and added that it might also be "an opportunity for the consumer."
What the Upcoming Year Has in Store
"I think there are going to be some aggressive promotions in the first six months of 2009," said Cascio. And Morey agreed that "in 2009 there's going to be a shakeout."
It's also clear that major wholesalers will continue to want and expect more of their key supplier partners. Several distributors I interviewed, who preferred to remain off the record, said that successful support from their producers would ideally come in the form of market visits and in their desire to help shoulder promotion and marketing costs.
RNDC's Davis added that he had asked his suppliers to be "very conscious of pricing because they are risking a larger than normal drop in sales if they exceed certain price points." He shared his belief that the economy would hopefully turn around by the third quarter of this year.
Added SWS's Chaplin, "Hopefully, by the back half of 2009 we'll see things pick up."
Given our three-tier system, wholesalers may well remain the bottom line in defining--and reacting to--wine trends in the domestic market. While they may also provide the least creative contribution to our business, while taking a healthy markup, they also continue to wield enormous power. For consumers, their presence and function might often seem behind the scenes; however, for producers, restaurateurs and retailers their influence remains huge. wbm
