The Changing Face of Retail

With an abundance of wine retailers in the U.S. vying for wine
consumers' attention, who are the winners in the age of the Web
and big-box stores?



Wine Enthusiasts have never had more choice in how they buy their wine. Local retailers, supermarkets and other traditional sources have never seen such a dramatic change in fortune. Who are the winners in the age of the Web and the big-box store?

Only a few years ago, wine industry professionals, market watchers, journalists and other "experts" predicted that virtual stores on the Internet would revolutionize wine sales.
They were half right. The Web is having a huge impact on wine retailing—but not in the way anyone anticipated.

The unexpected role of the Web is one of many recent developments in wine retailing. Just as important has been the emergence of big-box warehouse clubs and the increase of direct sales from boutique wineries to consumers. At the same time, local wine retailers are being pressed by these new, price-focused channels, as are supermarket, retail and discount chains.

That said, it's impossible to make generalizations about wine retailing in America.
Many Americans are surprised when they try to buy wine in states other than the one in which they live. In New York, for example, wine isn't sold at supermarkets as it is in many states. In Pennsylvania, you can only buy wine and spirits from state-run stores. You can't buy wine on Sunday in some states, or even be served Champagne with brunch before noon in others.

We may live in the United States of America, but when it comes to alcoholic beverages, it seems the pre-Constitution Articles of Confederation still apply. Though the U.S. Constitution eliminated trade barriers between states when it was approved in 1789, the 21st Amendment that ended Prohibition seemingly overruled that stipulation by allowing each state to establish its own regulations regarding alcohol. That amendment created a labyrinth of state and local laws that wine companies must conquer before they can sell wine.

One requirement is that stores and restaurants must generally buy wine from wholesalers, an arrangement designed to help monitor and control sales when Prohibition ended. In California, however, wineries can sell directly to retailers. Some wineries, such as Kendall-Jackson, have even set up their own distributors there and in other states to ensure their own control—and a better financial return. Other retailers import directly from overseas wineries, bypassing local importers and distributors.

Seeking to improve its margins, big-box giant Costco has sued in its home state of Washington to allow it to purchase directly from wineries. If the company succeeds, it will undoubtedly take the crusade elsewhere, which could have enormous implications for the wine business—and wine lovers.

Given this tangle of laws, and given the emergence of the Web, big-box stores and discount retail chains, it's clear that the industry has never been more competitive. Consider the pressure California's supermarkets are under.

California Case Study:
Supermarkets Reel from the One-Two Punch of Chuck and Big Labor

California is a very good market for wine. Much of its wine is traditionally sold at supermarkets, as befits a winegrowing state with the cultural assumption that wine is a natural complement to food.

In 2003, however, the state's supermarket chains were hit with a devastating double whammy—a bitter clerks' strike in Southern California and an amazingly popular $2 wine.
"Total table wine sales in California supermarkets were down 8.5 percent in 2003 due to the strike and Two-Buck Chuck," says Jon Fredrikson, a wine analyst based near San Francisco. "And Two-Buck Chuck did most of the damage."
He's referring, of course, to Charles Shaw wine, affectionately nicknamed for its $1.99 price. A natural consequence of vast overplanting of grapevines, it was created by Bronco Wine Company for Trader Joe's, the chain of discount gourmet shops with a cult-like reputation for value. "We started to sell underpriced products to overeducated people," says company founder Joe Coloumbe.

Two-Buck Chuck and other "extreme value" products grabbed 15 percent of the table wine market in California in 2003; these wines not only stole sales but they distracted retailers, who were worrying about how to undersell their competitors instead of how to increase sales and margins.

Trader Joe's has always offered a wide selection of wines, including more expensive brands, but it's best known for bargains. California wines have long been sold for the equivalent of $2 per bottle or less in jugs and boxes, but the Charles Shaw wines seemed more upmarket: The varietal wines are packaged in conventional 750-ml bottles with cork closures just like pricier wines.

The huge impact of Two-Buck Chuck and me-too products on the market created a new category of wines—"extreme value," loosely defined as wines that retail for $3.99 or less. Fredrikson says these wines grabbed 15 percent of the table wine market in California last year, and Christian Miller, director of research at wine consultant Motto Kryla Fisher in St. Helena, California, says the "extreme value" wines not only stole sales but they distracted retailers, who "started worrying about how to undersell their competitors, instead of how to increase sales and margins."

The Rise of the Big-Box Stores
Supermarkets were already under siege from giant discount club stores even without the strike or Two-Buck Chuck.

In the last few years, Costco, BJ's and Sam's Club have become the biggest conduits for wine sales in the United States.

Together, Costco and Sam's Clubs accounted for more than $1 billion of the U.S.'s wine sales last year, grabbing 28 percent of total supermarket wine sales of $3.6 billion, according to ACNielsen.

In response, many supermarkets are de-emphasizing wine programs. Safeway is firing its regional wine buyers to centralize operations, for example. "The wine selection at large grocery stores is going to get worse," predicts Cindy Deutsch, the national retail sales manager for Banfi, an importer based in Old Brookville, New York.

People often assume that the big stores are adversely affecting local retailers too, but the former wine director at Costco, David Andrews, thinks otherwise. "I don't think the supermarkets have made wine a focus," he says. "Their selection is often uninspiring, just large brands selected by distributors."

If you haven't visited the wine section of a big-box store, you're likely to be surprised. The wines offered aren't just big cases of low-cost brands, but are often some of the world's most famous wines. Costco, for example, is the biggest seller of first-growth Bordeaux in the U.S. "We can't keep 2000 Bordeaux on the shelves!" says Annette Alvarez, Costco's wine buyer for Southern California.

Sam's Club has more than 538 warehouse stores in the United States, three-quarters of which sell wine. Costco has 318 stores in the United States, and its wine sales last fiscal year were $620 million. According to Bob Paulinski, head of the wine program for Sam's Club and perhaps the only Master of Wine at a large American chain retailer, Sam's Clubs sold about $400 million in wine in the U.S. and its parent, Walmart, sold $1.2 billion worldwide.
Though both Costco and Sam's Club carry only 150 to 200 different wines each, their selections are diverse. Some wines are displayed in bulk on large pallets. These well-known wines are always in stock, typically selling for $10 per 750-ml bottle or less.

Other wines are more interesting to discerning wine enthusiasts. "These are wines you associate with specialty wine retailers or upscale restaurants," says Paulinski. They're typically displayed in wooden boxes on their sides with the most expensive receiving prime positions at the ends of aisles.

Because these wines quickly sell out, they entice customers to visit the stores regularly. "We want a trip to our wine department to be a treasure hunt," says Paulinski.

In the last few years, Costco,
BJ's, and Sam's Club have become the biggest conduits for wine sales in the United States. Together, Costco and Sam's Clubs account for more than $1 billion in U.S. wine sales—and that includes some of the world's most famous wines. Costco is the biggest seller of first-growth Bordeaux in the U.S.


Like Sam's Club, Costco doesn't carry many low-price, big-volume wines. "We have a very limited selection and we have to be selective in what we carry," notes Alvarez. She says, however, that even wines that sell for under $6 do well if the selection continually changes. "Customers aren't very loyal to brands, but they are loyal to varieties."
Both Costco and Sam's work on tight margins, a maximum of 14 percent compared to 30 percent or more for many retailers, and they're serious about competition. "We will be the price leader at all costs," vows Paulinski.

Private labels are a huge part of Costco's food business; the company has flirted with the idea of private-label wines, but seems ambivalent about them. Trader Joe's is unique in that it does well with its own branded wine due to the trust it has gained among customers, but California supermarkets have tried private labels without much success. Many customers are simply suspicious of mystery wine.

Selling Wine Online—
the Dot-Com Dead End

During the height of the Internet boom, investors dumped fortunes into ventures that were supposed to revolutionize the way wine was sold. Unfortunately, they overlooked a few practicalities: Most wine is bought for tonight's dinner, most wine sold is fairly inexpensive, and wine is heavy and costly to ship.

Most of all, state and local regulations make it difficult or impossible to ship wine to half of the states. Though Internet merchants have found ways around some of these restrictions—including buying expensive retail licenses in important states—most of the original players have long since gone.

One company that survived the dot-com crash is Wine Tasting Network, which includes both wine retailer Ambrosia and Winetasting.com. Wine Tasting Network provides "virtual tasting rooms" to 50 wineries and also handles shipping for 150 wineries. Ambrosia's president, Lesley Berglund, is careful to describe her business as direct-to-consumer marketing, not an Internet company. "The Internet is just a tool to help that process," she says.

She says that business has been good at Ambrosia, a high-end direct wine retailer that specializes in aged California Cabernets and other upscale wines. "Our average order four years ago was $340; now it's $817," she says.

Berglund notes that the wineries that are doing well selling directly to consumers are really working at courting existing customers and club members with sophisticated email campaigns. "It's very challenging to acquire new customers online," she says.

One of the other few remaining Internet players is wine.com, a new name for evineyard.com, which bought the evocative address from a failed venture. Wine.com circumvented state prohibitions on direct shipping by getting retail licenses in 11 states. This allows the company to ship to a total of 28 states.

But it's been a challenge. "It's not cost effective to have all these retail permits," says CEO Peter Ekman. The company has stores in Florida, New York, Massachusetts and Ohio, but closed its outlet in Texas when that state opened to direct shipment. The site now ships into Texas from California.

Surfing's Up! The Internet as Sales Tool for Web-Savvy Retailers
Surprisingly, the biggest winners in the e-commerce battle have been conventional wine retailers. "The established brick-and-mortar stores have been most successful using the Internet," says analyst Fredrikson. Some are new companies, some old, but most regard the Internet as a natural extension of their conventional walk-in, telephone or catalog businesses.

"People surf our Web site, then they order over the Web instead of by phone or fax," says Michael Aaron of New York's Sherry-Lehmann. "Twenty percent of our sales volume comes from our Web site," he says.

Calvert and Woodley, a leading wine merchant in Washington, D.C., has an active Web site, too, as does ABC Fine Wines and Spirits in Florida, but both find that many users depend on the Internet more for looking than buying.

The same is true with Sam's Wine and Spirits in Chicago. "The Internet and email are very important to us," says Wine Director Todd Hess. "A lot of people look for specials on the Internet and we email specials to customers." Sam's sends an offer every day, and has a secure site for ordering online. They deliver in the Chicago area, but, says Hess, many people still like to buy in person.

Not surprisingly, Californians are big fans of the Internet. The state is big and spread out, so a favorite wine store can be a long drive away. The Wine Club has exploited this situation well. Though it has stores in Orange County, Silicon Valley and San Francisco, it does 60 percent of its business by catalog and Internet. "Customers in other states are a big part of our business, too," notes the company's president, Jeff Linholm.


Costco also has an active online wine program; Paulinski says that Sam's Club will launch a similar effort soon. He says it will offer wines not available in the stores, including many boutique selections.

Beverages & More—aka BevMo—is another retailer that has taken full advantage of the marketing side of the Internet. Though the chain has stores all over California, it has a big presence on the Web as well.

BevMo Chairman Bannus Hudson is very pleased with the progress his company has made using the Internet. He says many customers order on line, and exercise the option of picking up their orders at a nearby store. "We've very skewed toward store pickup," he says.

Part of BevMo's secret is its Web voice, Wilfred Wong, a wine expert who works tirelessly to taste and evaluate wines and post his findings online. "The Internet is the wave of the future," says Wong. "Anyone in his 20s gets the Web."

Another pre-Web activity that's exploiting the Internet is wine auctions. Though some buyers may hesitate to buy wine from individuals because they don't have confidence in how the wine has been stored, a number of sites auction wine. The Internet also has provided an ideal tool for serious auction bidders, especially those who live far from big-city auction houses.

Innovative Retailers Rise to the Top in a Competitive Market
Even with all the new competition, many traditional retailers are doing just fine. All admit, however, that it's not easy.

"It's hard work," laments Peter Morrell of famed wine retailer Morrell & Company in New York. Morrell, who is celebrating his 41st year in the wine business, has clearly worked hard—and smart. His business started with a store, but since New York law only allows it to have one retail location, he created a restaurant, then a wine bar, then a second restaurant. The company now offers wine storage, auctions, on-line retailing, corporate events and wine education. "Our wine school is extraordinarily active," Morrell claims, "and education leads to sales." Morrell also keeps his customers happy by pre-tasting and qualifying wines.

A loyal customer base is always a key to retailer success, of course, but leading wine merchants seem to have also adopted one of two strategies—either narrow specialization or wide selection and access.

Among the prime examples of a regional leader who dazzles the customer with choice is New York's Sherry-Lehmann, which is consistently ranked among the nation's best wine retailers. Owner Michael Aaron says that his store carries 6,500 different offerings priced from $4 to $10,000 a bottle-and much of it in high volume. "We sell 30,000 to 40,000 cases per year of many wines in the $10 to $15 range," says Aaron, "and more classified Bordeaux than any individual store in America."

Sherry-Lehmann supports both its booming Internet business and other orders with a key customer service in congested Manhattan: delivery. Aaron says 80 percent of his sales are delivered, usually the next day.

Many leading wine merchants are adopting one of two strategies—either narrow specialization or wide selection and access.

Tasting programs, unconventional stock arrangements and direct importing are other tactics being employed to stay ahead of the competiton.

Sam's Wine and Spirits likewise serves Chicago's wine scene with just one store on the north side. It has a huge selection. "We're a category killer," notes Wine Director Todd Hess. "We stock 10,000 wines."

The store sells many expensive wines, but it also offers plenty for the frugal. "Our customers may not want to spend $12 or even $8 for a bottle of wine; what they want is $15 wines for $6," says Hess. "Sam's is very big for value wines." A Trader Joe's is opening across the street from Sam's, but Hess isn't worried about its impact. "No one can touch us for selection, service or knowledge," he says.

Calvert and Woodley in Washington, D.C. also focuses on offering its customers a wide selection from its one location. Owner Ed Sands says part of the store's strategy is to try to do everything. In addition to wine he sells fine food products. "We have more than 300 cheeses," he notes. "That's helped create a broad base of the right kind of customers." To serve and advise those customers, Sands has eight wine consultants.

But when Sands says he tries to do everything, he means it. Calvert and Woodley is one of a number of retailers who import wine directly from foreign wineries, eliminating the importers and distributors that normally take a piece of the pie. Sands says his direct importing and the company's volume lets it compete on price even with big-box stores. Other retailers who also import wines—often from smaller, less-known wineries—include Kermit Lynch in Berkeley, California; Carolina Wine Company in Raleigh, North Carolina; Italian Wine Merchants in New York; and Moore Brothers in New Jersey and Delaware.

Other ways innovative retailers have found to stay competitive include specialization, such as PJ Wines, a New York City retailer that focuses on Spanish wines, Italian Wine Merchants' on Italian offerings and Kermit Lynch on those of France. There are even stores that highlight wines from a specific state or local region. Often, these are adjuncts of winery associations, but Vintage New York, with several locations in New York City, is an independent store featuring the wines of New York State. Being legally an off-premises site of Rivendell Winery, it is governed by winery laws, allowing it to have more than one location and also circumventing some other laws that apply to conventional stores.
Where legal, many stores have found wine bars to be a great marketing tool. This is very common in California and growing in popularity in states where it's allowed. Best Cellars offers tastings in other stores, but its location in Dallas uses a tasting bar as a competitive tool.

"They're going gangbusters," says local wine writer Darryl Beeson. He admits that he thought the store's concept would never work in Texas, where people can also buy wine in supermarkets. The chain, which is also now in Massachusetts, Washington State and Washington D.C., began with a limited selection of wines for under $10 (now mostly under $15) in an unusual store arrangement based on flavors rather than variety or origin. The store recently opened a site in Houston, too.

Chain Stores Dominate in Certain Markets
Many retailers augment a wide selection of wines with a large number of stores, as is allowed in many states.

Representatives of Florida's ABC Fine Wines and Spirits claim to be the largest wine and spirit chain in America with its 150 locations. Like other retailers, it's putting an increasing emphasis on wine. "Ten years ago, our center aisles were stocked with spirits," says Wine Sales Director Brad Lewis. "Now they feature wine."

The chain stocks 4,000 items at its bigger locations, and aggressively markets wine specials with a newsletter sent to 700,000 customers and posted on the Internet. With all these locations, however, its customers tend to walk in rather than order on line.
And California's Beverages and More grew from six stores when it was founded in 1994 to the 32 that now blanket the state. Hudson enumerates three key parts of its strategy: selection, typically 7,000 choices in stores as big as 17,000 square feet; service, with many sales associates to help customers choose; and aggressive pricing. "We offer club member pricing," he says.

Best Cellars is unusual in crossing state lines, with stores in a number of wine-oriented states. Doing so requires satisfying a myriad of confusing laws.

There have been both winners and losers among wine retailers as changing tastes and regulations shape the market, but one thing is for sure: The real winners have been wine lovers.

They've never enjoyed a wider selection or easier access to exciting wines, and certainly not at such attractive prices. Says Jeff Linholm, president of California's thriving Wine Club, "It's a great time to be a wine consumer."

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