How to make money in wine retail: What almost nobody understands

A student in one of my classes asked me to clarify why profitability depends on markup, investment, turnover and supply lines.

The turnover question is a very important point most retailers do not understand.  The way to make money in this business is through return on investment, not on markup alone.

Say you are selling reliably one case per week of Chateau XYZ for $150 and replacing it for $100.  You are making $50 per case and reinvesting the $100 in next week’s case.  In a year, you will have made $50 x 52 weeks = $2600 profit for a $100 investment, a 2600% return on investment.

Now the distributor offers you the chance to save 10% if you buy 10 cases at a time.  Most retailers jup at the chance to make an extra $10 per case.  Now you are paying $900 initially and making $60 each week, so your yearly profit is $3120, but your investment was $900, so your ROI is $3120/$900 or 347% instead of 2600%.  You could have spent the other $800 on other products and made a lot more, or made almost the same money for a fraction of the investment.  Not to mention the cost of storing those ten cases.

Now suppose the supplier will sell you one bottle every time you need it, for a broken case charge of $1.  Now you pay $8.33 + $1.00 = $9.33 ($112 per case) and profit $38 per case x 52 weeks,so your ROI is $1976 / $9.33 = 21171%!  You spent less than $10 that year to earn almost two grand.  And no storage costs at all.

NOW, suppose you drop your price 10% and the result is that you sell two cases per week.  Ignoring the side benefits of having people flock to your store, you have cut your revenue per case from $150 to $135 and your profit per case from $38 to $23.  So now you are making $23 x 52 weeks x 2 cases per week = $2392 instead of $1976, so your ROI increases to 25629% on your lousy ten bucks.  You make more by charging less.

This idealized example depends entirely on the re-supply lines.  I live right down the street from a restaurant with exactly this deal going.  I will deliver that next bottle any time day or night.  This is the advantage of local wineries.

Pairing wine with Middle Eastern music

Bonjour Clark!

How are you?

I just listened to the FWS Seminar that you hosted and I wanted to thank you for sharing your experience, your theories, your knowledge and your time. I am completely fascinated by your views!

Being a singer-songwriter, I am especially intrigued by the co-relation that you make between music and wine! One question… What kind of wine would Middle Eastern music inspire you to drink?!

I look forward to reading your book!

Hope you are well!

Merci et Santé

Mymi

Clark writes:

Take a look at http://www.postmodernwinemaking.com/wine-and-music for a full discussion and some stream downloads.

My idea is that as Liquid Music, wines carry emotional modalities just as music does.  There are joyful songs, sexy songs, sad song and angry songs, and these pair with like emotions in wine.  In general, Rieslings are joyful, Pinot Noirs are romantic and Cabernet Sauvignons are angry.

In this context, one cannot speak of a genre or even an artist.  Garth Brooks mostly does happy-go-lucky songs like Friends In Low Places, but he also does very dark pieces like Wolves and Thunder Rolls.

Therefore, asking what wine goes with Middle Eastern music is like asking what wine goes with French food.  You need to be speaking of a specific piece and performance.

I would love it if you could send me some MP3s of your work, hopefully depicting a good range of emotions, and I will experiment with pairings.  You can also do this yourself.  Your opinion is as valid as mine, and it will be fun to observe the level of agreement.  What this experiment shows is how aesthetically connected we all are despite the vast range of preferences.

Thank you for your interest in my work.

Brett in old wines

Hi Clark,

I have been meaning to ask you this question for a while:

Why we never see anyone saying that an old bottle of wine (let’s say older than 20 years) has Brett (or high levels of 4-EP if you prefer)?

I don’t know if you agree with this proposition, but I don’t recall ever in my life having opened an old bottle and going “ouch! barnyard!!”. Assuming that it had Brett in its youth, what happened?

Very best,

Luiz Alberto, #winelover
Founder & CEO
Member of the Circle of Wine Writers

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Luis,

This is an area of some controversy.  To begin with, I have seen plenty of old bottles that are quite Bretty.  But I also observe that the apparent Brett has everything to do with the integrative power of the wine’s structure, which will vary over time.

4-ethyl phenol (4-EP) is not synonymous with Brett, merely a good indicator.  It smells like shoe polish and is not particularly offensive on its own.  Linda Bisson at U.C. Davis has shown that the Brett genome varies wildly from country to country, and doesn’t even have a stable number of  chromosomes. As a result, the mix of 4-EP, 4-ethyl guaiacol (a smoky/meaty aroma), isovaleric acid (the vomit small), VA and the mousy compounds varies greatly among strains and vigor within a strain.  The constituents of the wine are also important.  White wines have no coumaric  and ferulic acids, the precursors to 4-EP and 4-EG, and thus smell entirely different.

It is also possible that some of these constituents, such as the volatile phenols and iso-valeric acid (the vomit smell) react with other wine constituents to render themselves non-volatile or even pleasant.  T my knowledge, we haven’t studied this enough to know.  Finally, the masking effects of the wine’s overall aromatic development may incorporate an originally pronounced Animalia into something less apparent and even profound.

I certainly experience in sulfite free reds a “dump” of phenolics about three years into barrel ageing in which the wine appears to shed its skin and emerge as a well-integrated whole.  I would liken this to the transformation from ruby to tawny port, except that there is an active microbial component to the transformed aromas.

Clark

Use of oak chips/powder/staves

Q: Is eliminating the barrel from the equation eliminating the romance of a cellar full of barrels? And do consumers care to know that their wine was oaked in a more cost effective fashion?

-Roger

A:

There is nothing romantic about the corpses of 200-year-old French oak trees stacked in their thousands to impress the tourists.  It’s as reprehensible as it is unnecessary and wasteful.

Don’t get me wrong. I love what a barrel does in terms of slow aging, settling, marrying, and combining oxidative and reductive chemistries to create amazing aromatic complexities.  But a fifty-year-old barrel, just like an old violin or guitar, does these things so much better than a new barrel.  Barrels ought to be cherished and outlive their buyers.

Instead, all over Bordeaux, La Rioja and California, barrels are cut up for firewood after a single filling.  It’s environmentally reprehensible and makes terrible wine.  Well-made chips made from the 75% of perfect wood left over from the barrel construction process and roasted in rolling drums like coffee beans are much easier to control in extracting the proper compounds in the right amounts.

You won’t find a lot of winemakers who’ll tell you this, but it’s a point of view I feel strongly about, the subject of a whole chapter in Postmodern Winemaking.  Consumers should also consider that this ridiculous practice adds about $10 to the cost of their wine.

In my colleagues’ defense, I will stipulate that there are an awful lot of badly made barrel alternatives out there, but there are also plenty of lousy barrels, and even the best have technical problems intrinsic to the challenge of firing a barrel for flavor simultaneously with its real job, which is to bend the staves.  Also, barrels have their untoasted wood buried deep in the stave where it rests until the wine has penetrated deep enough to extract it, just at the worst time, immediately before bottling.

Winemakers are an extremely conservative bunch, and barrels are all they know. Every year, alternatives improve in quality and more and more winemakers come into my camp as they cautiously experiment with them.  We all can help by educating consumers about the logic of barrel conservation, even for the top wines.  I haven’t bought a new barrel in twenty years, and you can bet I age my $100 Cabernet in the oldest barrels I can find.  If I need oak extractives, I will use chips.  So shoot me.

2014 Harvest Proves Difficult

Matters this year are rather challenging all over.  Europe has sustained very poor weather, and, for example, the Italian crop countrywide is estimated to be down 13%.

 

Deep and repeated frigid spells last winter have wiped out a considerable portion of the American Midwest and Northeast, with spring frosts, poor set, mildew pressures and summer hail eradicating much else including in Texas and the California’s North Coast, where crops are in the lower areas off by as much as 30%.  California’s extreme drought challenges many growers to bring unshriveled crops to the crushing station, and the prospect of smoke damage looms large.

 

Meanwhile, demand for wine continues to increase.  None of this is good news for the consumer.  Prices are already up and are likely to climb as shortages mount.

 

The good news is that the harvest is extremely early, as much as a month, bringing about the possibility of dodging some of these perils.  Some meteorologists predict heavy rains from El Niño, much needed but problematic if it comes while grapes remain on the vine.  The earliness of the season paradoxically may result in high acidities in some cases, as the fruit has simply not had time to metabolize its malic acid completely.

In general, color and flavor are good, but tannins are low in many cases, so the prospect is for wines that are for early drinking rather than aging.

Private label wines matter more and more?

Brian Rosen argues on his blog that “Private label wines matters more and more” .

I think not.

There was a time, circa 2005, when distributors and large chains figured out that they could get wine MUCH cheaper and with more consistent quality if they were willing to commit to private labeling programs. The smartest of these players developed considerable programs which included the whole supply chain, all the way back to grape contracts and well-cemented winemaker relationships, moving beyond the normal (and very expensive) What-You-See-Is-What-You-Get model.

WineSmith got in bed with a couple hundred restaurants and a dozen savvy distributors and cranked out a substantial business in the early 2000s, comprising in its heyday two thirds of our production. There were predictions that this was the wave of the future that would comprise 25% of California production.

Then it all went down the drain. Despite its impressive advantages, private labeling is greatly out of sync with the short term and risk averse distribution psyche. Dominate the supply chain, make no commitments. If the consumer is willing to eat higher prices and competition can be stifled, why should distributors and retailers invest in value? It’s a toxic situation, but it’s the way it is right now.

Admittedly, distributors in the heyday over-invested in captive brands. A highly respected Colorado independent had thirty top salespeople pushing a thousand SKUs. Suddenly, they tried maybe 25 house brands. The best salespeople ran for cover, and the enterprise tanked within a year. My point: private labels should be a profitable sideline, not a central focus.

The crash of 2007 caused all distributors to reduce inventory. Staff was diverted from promoting top-selling brands to taking out the trash. This went on for years. What emerged was a three-tier system dominated by million-case brands selling standard styles. Want variety? Buy European.

California grape supply goes in cycles of about eight years which disrupt loyalties. When grapes are over-planted, growers suffer, prices drop, and domestic market share increases. Then plantings stop keeping pace with demand (especially when the market is growing) until the growers get back on top, demanding higher prices. Wineries scramble to find grapes, prices rise, and distributors have to start being nice to any supply that will work with them, domestic or foreign.

In Europe, a longer term perspective exists as it does here for other products. Markups of 6%, like Cheerios in Safeway, are the norm for wine also. Wine is understood, standardized and cheap. No sane Frenchman plans to spend more or less than 3.5 euros on his family’s daily quaff. There is practically no private labeling. It simply doesn’t make sense. Get this: wine is not SOLD in Europe, just as, back in the U.S., the latest batch of Cheerios is not presented to Safeway for approval. We make them, we put them on the shelf. That’s the whole deal. Very efficient, very cheap.

The American three-tier system consists of wineries selling to distributors, who mark up 40 to 60%, then pushing products onto retailers, who also mark up 40-60%. The result is that a wine which costs $4 to make costs the consumer $20. For no reason. No value is added. All that cash supports warfare within the distribution system.

The three-tier system is a dinosaur. The future belongs to new models like Cost-Co’s low markup two-tier system which eliminate the middle man.

Any distributor or retailer who wants to man up to the prospect of investing in long term marriages with winemakers and growers has a place in this future. All winemakers dedicate their lives to doing exactly this.

I have yet to meet an American distributor or retailer with this kind of courage and wisdom.

No, I take that back.  The Hitching Post is at least one example of doing it right.  Man up, retail America!

Postmodern Tales form the Napa Quake

Don’t drink milk while watching this astonishing demonstration of journalistic ignorance and willingness to invent the news.

And as winemakers, it’s our own fault. We have lost our connection to educating the press. This is one of a thousand examples. We need to forge relationships that engage the press in meaningful, authentic dialogue. Otherwise, they just make shit up.

Constantly mouthing platitudes like “I do the minimum” has led to similar lunkheadedness in the Natural Wine movement’s own private fairy tale kingdom
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