A nefarious megalomaniac and a malicious microscopic parasite walk into a bar… just kidding. There is nothing funny about how these two industry shattering catalysts striking in secession have brought the business of alcohol to its knees. They could best be likened to the crashing end of the Mesozoic Era. Bye. Bye. Dinosaurs. Forced mass extinction, ushers in the next round of adaptation to survive.
Post-normal can be summed up as the last three to five decades that had set the standard operating procedures and seasonal rhythm to do business accordingly within proven models. Each in coordination of the other, the hospitality and alcohol worlds share the same land mass.
The wine industry is ripe with unforeseeable variables that make staying in business hard. With each year comes different weather. That factor contributes to the quality and quantity, both effect pricing. The next year’s hottest industry widget is decided more by extended growing seasons with optimal harvest conditions than by powerful board of directors with internal marketing teams and highlighted stacks Nielsen reports at the industry’s largest conglomerates. Hell, even hail, frost, and drought can decidedly improve a region’s overall quality to become the next year’s darling.
Many wines spend years being developed in barrel and bottle before becoming available for sale. A string on unfavorable weathered years can financially destroy a region’s farmers, wineries, and finally the American importers that rely on continuity of supply from that region to make enough revenue just to continue operating. The former normal does not have an exact start date, it does have an end date: Oct. 2, 2019.
The Tariff Debacle
While most of America would not have noticed the first devastating blow that struck last fall, it maimed our industry regardless. The Trump Administration rapidly applied a 25% tariff to various European wines and spirits at the worst possible time for the American alcohol industries. “OND”, the final quarter of the calendar year, known intimately as the season of excruciatingly busy thankless head down exhausting grinding. As much as 60% of a year’s revenue can be generated within this three-month span of time.
The things you need to know to understand how willingly neglectful the Trump Administration’s decision was to all these American companies:
1. Pricing on a European wine varies year after year due to weather: plain and simple. While overall quality can affect the price, more importantly the size of a year’s crop can have a much larger impact. Especially when several years of small vintages happen the possible reserve of inventory from larger vintages are not there to help bridge the supply for the demand. Causing prices to flare. 2018 and 2019 has several notable price increases in sought after imported regions so many price increases had already been pushed to the end customer or partially absorbed. Weakening some categories sellability or hitting the margins of importers and distributors that tried to stay competitive pricewise.
2. Imported European wine pricing can change at two points: January 1st if a company is restructuring prices or when the next vintage is released. That is typically between March and May for most wines.
3. OND is such a busy time that most significant placements within restaurants, hotels, and retailers are made by late August or early September. Sometimes as early as June for national accounts. This is because by the time OND starts no one has time to taste, select, and lock in their availability of the product with their distributors and importers that they need to fulfill for a category for their customers’ needs.
4. Because weather affects pricing of a wine each vintage, the concept of a wine having a substantial price increase within the same vintage halfway through to-market life cycle is INSANITY. Especially during OND as unravels all the efforts and commitments of a whole year’s business. Compound that with hospitality buyers being far too busy to reevaluate options to fix this catastrophe.
5. The general timeframe to have European products ordered, staged at winery for picked up to be trucked to port, shipped across the ocean and then finally trucked to warehouses in different states is generally 6 weeks minimum.
The Trump Administration announced Oct. 2nd with it to take effect on Oct. 18th. 13 BUSINESS DAYS in October! It was devastating. Several importers had containers on the water between this time. Meaning decision were made within the parameters of known factors prior to this announcement and then the metrics these importers based their livelihood’s on now would carry a 25% increase once hitting ports in the U.S. Leaving most importers and distributors with the impossible decision of absorbing the cost, leaving them a measly portion of their usual profits. The usual profits they use to budget for payrolls, inventory, trucking, warehousing, etc. Or the importers and distributors could try to attempt the impossible tasks of asking each tier of the chain-to-market to accept a new price while running collectively thinner margins by splitting the losses to hold the pricing that end customers expected to pay.
It was total disaster. Fill a dumpster full of napalm and toss a match as you hit it with a wrecking ball. Still that would be less of a mess than what this caused in some many people’s lives. Jobs were lost, companies shuttered, prices climbed, and uncertainty slithered into the next year.
Essentially Becomes a Nightmare
The start of 2020 provided zero indication there would be a pivot back to what once was, tariff free business as usual. No, the year started with what would appear to be the possibility of an additional 100% tariff applied to some already tariff affected products and some previously unaffected by tariff products. The only certainty now was indecision. The industry’s business model cannot function on a third or less of their profits while having the same fixed cost for operations. Companies that were not bludgeon to death financially would soon be notified of their terminal status.
By February, a lot of companies had adjusted by repositioning roles into frankly unmanageable demands and letting go of many employees to survive. Most had requested extended lines of credit from their banks and requested splitting the continued losses to operate with their wineries as this new normal thrust upon them would be impossible to continue otherwise.
The week our nation went on lockdown was the middle of March. By this time, the alcohol industry was 6 months deep in this nonsense. We had begun to live with the fact that “tariffs” had become part of our daily lexicon for shorthand’s and punchlines. Like “burgs”, “cab”, “somm” and “savvy b” among our jargon, it now peppered daily conversations. That kind of normalization, that is collectively unspoken yet accepted to on an inner personal level because the constant worrying of our industry getting smashed again was too much to bear.
The announcement of the nation closing brought about several unusual fear-based consequences. An irrational shortage of toilet paper and equally appropriate record spike in alcohol sells for retailers. America’s gen-pop prepared for the end of their world they once knew. For the alcohol industry there would be no wake, no funeral, and apparently no sustainable bailout for the multitude of businesses they are ingrained with that contribute to the commercial fabric of our great country. Over the next four and half months, our fracted industry will repetitively get financially pistol whipped for the benefit of protecting the interest of America’s most elite wealth-bloated tax dodgers. Wall street. The Airline Industry. Big Tech. Huge Banks. Massive bullshit.
The story of the alcohol industry becoming crippled prior to a global pandemic is another cautionary tale about how willfully ignorant leadership will continue using unrelated areas of commerce to strike back at those that harm their handlers. I wished this ploy is unique in any way. When it comes to protecting handlers, nothing will get in the way of rash decisions to inflict the most perceived damage as possible towards faux foes with zero oversight on actual repercussions succumb by its own people. This is now as its always been.
The Next Normal
The future is uncertain, that is for sure. The following predictions are what I believe will become the next standard operating procedures of our industries, transitions to digital, and the long felt effects that will linger.
Restaurants
The total account pool for on-premise has shrank by 2/3rds. This has caused so many issues but the ultimate issue for our industry is simple: less places to sell fine wine. The restaurants that have remained until now have become incredibly more important even though the volume of usual business is not happening yet. The cornerstone to brand growth in the US is having your wine on the by the glass menu at restaurants across America. The lack of opportunity to showcase unique unpopular, small production wines will add to the increase in popularity of soulless strong brands with an anonymous palate registry.
Big book menus for restaurants are done. The practice of having 7-15 American Chardonnay selections and 10+ selections of California Cabernet are done. Steakhouses and some white tablecloth expense account restaurants will carry the torch but this as a normalcy in mf’ing kaput.
“Somm” had reached main street America and inspired a sliver of the next generation to pursue the study of wine as a genuine occupation. Two decades prior the word “sommelier” had the same professional validity as that of a pet therapist, it was considered nonsense by most in America. The sommelier position that existed in the Fall of 2019 has peaked and now the role seems to be that of an endangered species just four months later. The most talented palates in America were first to be furlough then fired indefinitely. The average future wine buyer in American restaurants is going to more than likely be wine noob AGMs that are now pulling double duty. This is going to create two things: a reliance on low quality strong brands that are controlled by the industry titans AND a lean towards French varietal based wines for any imports that make the cut. IGTs in 8lb bottles and bottles of Burgundy that say “PINOT NOIR” real, real big. You know…the bullshit.
Trimming waste will push the digital transformation that is past due. Millennials are environmentally conscious. Paper and printing benefit no one. By design, 1/5th of the beverage directors time is spend managing the listings offered on their paper menus by reformatting and editing an already electric document. A better way has existed but the cost of hardware (iPads), slow processing speeds, and weak tech have made the option not worthy of true consideration. The leap in tech of smart phones now replace any hardware cost needed prior to transition a program going digital as guest can use their own phones instead of restaurant provided iPads. Wine list tech has greatly improved in the last 6 months to justify any reluctance in moving forward. The age of Covid is forcing restaurants to have disposable single use menus. This makes anyone leaning to printing as their 1st option, nonsensical. Forcing change by the bottom-line.
Ghost writing wine menus or quality wine list templates for running a wine program are now a necessity. The smaller pool of restaurant with lower occupancy numbers will require more of an experience for diners that will demand more exciting selections on smaller list to keep their interest. Restaurants surviving on shoestring budgets removed their most skilled wine workers that could make smart buys to increase margins. Wine Directors have the years on knowledge to know and find values to write a concise offering on small sized menus. If a restaurant can not pay one full-time, they still need that service regardless.
Distributors
The name of the game moving forward for distributors that will dictate all decisions moving forward is going to be fat percentages over standard operating GPMs and “FREE” labor. The majority of the importers that have survived it until now are going to be battle against their alias (distributor partners) to maintain their current standing.
In the coming age with less money available to support multiple selections for a wine category because of smaller list and stronger competition due to less accounts available to sell to. Pricing and margins are going to be everything. This makes the business model of being an importer more and more at risk. If a distributor needs to whittle down selections of categories, their best option for winning prized slots on wine menus is going to be lowest pricing on a quality product, *unless they have the category leader for the region. If pricing is the edge to winning, then knocking out the margins of their Importers is going to be the easiest way to continue offering the brands they’ve help build while increasing their GPMs (fat percentages over standard operating GPMs). All while being able to offer cheaper wholesale prices. It is a no-brainer and no one is talking about it.
Wineries, Wine Groups, and Importers
The glorious days of being a supplier doing weekly 3hr lunches and trips are going to be nothing of what they used to be. How the largest Distributors in the country have always provided merchandisers for their biggest retail accounts as a wink and nod for garnering x amount of shelf space for all the free labor. Well the supplier gig is now going to be Merchandisers 2.0. The amount of inventory and priority distributors will commit to Wine Groups and Importers is going to be directly indicative to the number of boots on the ground they can provide. These roles will not be the traditional overlay positions to help manage the distributors and put eyes their local market share, no. These will be running wide routes, grabbing last minute orders for delivery and relentlessly demoing wine in grocery and wine shops as soon as possible. Grunt work in the trenches.
Midsized US wineries with a national team of 3 regional managers and national sales manager were clicking nearly $700-$900K annually in salaries and expenses to manage a handful of wines from one property. These days are over now. If the account pool is smaller, the possible work is less to present wines and the edge for business here is going to be hiring a national sales manager that can organize messaging and programming to regional brokers that have strong ties in prized areas across the country. The $400k-$650k cost for 3 regional managers is far better spent divided between 6-8 brokers with strong local ties to clients in this business climate.
DTC is everything. As distributors take stabs to grab rights from Importers to represent certain brands within their states. Importers will wholeheartedly lean towards DTC to continue to prove their value to their producers and then shift contracts with distributors to sell their goods on-premise only. This is going to be insane to watch.
As daunting and as dismal as this all sounds, it is. Tariffs are still here. Covid is continuing to wreck our institutions. The damage is too far done to rely on old strategies. There are no laurels to rest on. Trim bureaucracy. Get lean. Losing traction after restructuring is going to be permanently unforgiving. Change is hard but shoot your shot while you still can.
No one affected by these changes last Fall had a voice in the decisions that were forced upon us. Vote tariffs out.
Your greatest chance now is finding new angles. Follow the margins, factor them into choices. Focus on things with longevity to your company, brands and people. Hire people that move the needle. What new thing you do next is going to position yourself far better than hoping on hope. This time can be as exciting as it is scary. Adapt to thrive in the next normal.
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