Direct Shipping Is Not a Zero-Sum Game

November 2017
by Jason Haas

Earlier this year, I was having lunch in Boston with a key account manager from our Massachusetts distributor. We were talking about what I’d done dduring my last visit, which included a really cool dinner at Blue Ginger (sadly, now closed) that had such a large consumer response they had to move the dinner into a larger room. I also conducted a sold-out tasting seminar at the terrific retailer Gordon’s in Waltham. I mentioned that we’d sent news about the events out to our mailing list and wine club members, and that I thought this was a big reason why we’d gotten such a good turnout for the events. His response took me by surprise, though it shouldn’t have. He said, “I know, we oppose direct shipping, but I guess it can have its uses.”

I’ve been meaning ever since to write about how misunderstood direct shipping is among most actors in the wholesale market, and how short sighted their opposition to it is. After all, our wholesale business in Massachusetts is up 38% this year and was up in 2016 and 2015 after nearly a decade of essentially flat sales. Our Massachusetts wholesaler is on pace to sell 55% more wine than it did in 2014. Most businesses would kill for this sort of performance. So, what turned things around?

I would submit that the biggest factor was that in February 2015, a new law brought Massachusetts into the growing majority of states that allow direct shipping of wine.

At first, it seems counter intuitive that opening up a state to shipments from wineries in other states should help the sales of that winery’s wholesaler. Doesn’t each sale offset another in-state sale? Not really. Here’s why the ability for a winery to ship to a state should generally increase their wholesale sales there:

Wineries are better able to make and cultivate fans
This, I think, makes a lot of sense, and it works in at least a few ways. Each year, a winery like ours sees visitors from every (or nearly every) state. Of course, more are from California than anywhere else, and a disproportionate number are from the larger western states, but we see a few hundred visitors from a state like Massachusetts each year.
• If these visitors can’t sign up for our wine club and can’t order wine from us, it’s a lot harder for us to establish a meaningful connection with them. That means that when these people return home and see a Tablas Creek wine on a wine list or the shelf of a wine shop, we’re less likely to have developed enough of a connection with them that they choose that wine over others.
• They are also less likely to bring Tablas Creek to friends’ houses, and therefore the critical peer-to-peer market is harder to activate.
• I also believe (though this would be difficult data to gather) that shipping bans discourage wine tourism from those states, since those consumers are likely to experience some degree of frustration in getting any new discoveries home.

The wines that people order are not the same wines they buy at retail
The idea that consumers will exchange a purchase at their local shop for a purchase of the same bottle online is pretty far-fetched. Consider why:
• Wine is expensive to ship. It’s heavy and perishable, which means that even if (like us) you subsidize the shipping costs, a consumer will see added prices of at least a few dollars per bottle for cross-country shipping. Because wine is alcohol, all packages have to be signed for upon delivery, and the consumer will have to wait at least a few days to get their wine. Add to this fact that wineries have to jump through significant legal and compliance hoops to get shipping permits, and the net result is that it’s not worth it to ship inexpensive wines—or wines that have good representation in distribution—direct to consumers. The average price of a bottle of wine sold in the United States is about $7. Even with growing demand for higher end wines, the vast majority of wines won’t ever make sense to ship direct. From a winery’s perspective, it’s not until you get to the $20 and up category that extra margin a winery makes on a sale consistently outweighs the shipping costs.
• So, what sorts of wine do make sense for both wineries and consumers to order direct? Those they can’t find, or at least can’t find nearby. Direct shipping opens up the power and opportunities of long-tail marketing to wine lovers and producers. We don’t produce enough volume or have enough demand to have wines on the shelves of dozens of stores in each state outside of California. So, in many cases, consumers don’t have any Tablas Creek on the shelf anywhere near them. And if they do, it’s likely that what’s easiest to find is our Patelin de Tablas line, which makes up about 70% of what we sell wholesale nationally. What if they’ve read about our Vermentino, or our new Terret Noir? Too bad. So it’s unlikely to surprise anyone that more than half of what we sold direct was our small-production varietals and blends that aren’t found in distribution, and the Patelin wines made up just 15% of direct sales.
• I would guess that most wineries’ data would show trends similar to ours, and it’s backed up anecdotally. On a recent visit to another high-end winery near us, our server explained that they have two entirely separate lineups of wine for their wholesale sales and tasting room. And, of course, a large number of wineries don’t distribute any of their wine nationally.

Restaurants work differently
Although many restaurants offer corkage, where customers can bring in their own wines and have them served at their table for a fee, and there are some states that allow wineries to sell direct to restaurants, the challenging logistics and planning (and cost) required means that nearly 100% of wine sold in a restaurant comes through a state-licensed wholesaler. Does opening direct shipping impact restaurant sales negatively? Not at all. And we have found it is our wine club members (read: superfans) who are the most likely to order our wines at a restaurant. They feel a proprietary pride in the success of their favorite wineries, and when they are dining with friends and see a winery they patronize on a restaurant list, it often spurs the peer-to-peer sharing that starts new customers on the path to fandom. If we can’t ship direct to a state, it’s a lot harder to sign up wine club members. (They can, of course, have wine shipped to friends or relatives in nearby shipping-allowed states, but that’s cumbersome and difficult.) And the restaurant sales those club members will make don’t happen.

Direct shipping changes wineries’ incentives
All those reasons aside, I think the most important reason that we have seen our wholesale sales increase in state after state after that state opens to direct shipping is this last one. Judging from our own actions, it’s not in our interest to lavish the same amount of attention on states where we are prohibited from shipping directly as we do to states where we can ship. I know that before 2015, I hadn’t visited the Massachusetts market in several years, despite that I went to both high school and college in Massachusetts and have lots of friends—and sports teams—I love to see in Boston. Economically speaking, it just wasn’t worth it. By contrast, I went every year to states like New York or Illinois, where we could ship. On a normal market visit, I would go, spend my days working with our distributor reps to get the wines into new accounts, and spend my evenings doing consumer events at restaurants or wine shops. I could help ensure that those events succeeded, making the accounts that host them happy, by promoting the events to our consumer mailing list in the area. And I could come out of those events with a new collection of names that I can add to our mailing list. This makes these people more likely to come out to Tablas Creek and eventually join our wine club or buy wine from us. Everyone is happy. In a non-shipping state, I can still do the work days with the distributor, but I can’t do much to help promote consumer events (so they’re less likely to be successful), and I can’t do much with any consumer contacts I make at these events. Both time and marketing dollars are finite for any winery. Wineries are only behaving rationally by focusing their attention where they can have the greatest impact, which means that states without direct shipping don’t get as much winery-level help with their wholesale sales.

Whatever the reason or combination of reasons, Massachusetts isn’t the only state where we’ve seen wholesale sales increase in the aftermath of the state opening to direct shipping. It has happened again and again. Between 2005 and 2013, our wholesale sales rose an average of 8% per year. Check out how much some of the larger states (that opened to direct shipping over that period) grew in the first two years after they allowed direct shipping.

On average, our wholesale sales in these seven locations increased 51.9% in the two years after we received our direct-shipping permit. Why was Florida the one state to decline? I didn’t realize it had, until I pulled this data. But I have a few guesses. First, it’s a state from which we see relatively few visitors, at least for the size of its population. It’s also a state with a very spread-out population (unlike, say, in New York or Washington, D.C.), and it’s hard to schedule events in places that are central to a collection of mailing list members. We also struggled to set up good consumer events in our early years there, so I doubt we were able to leverage or build our mailing list particularly efficiently. Anyway, the rest of the states show a pretty strong trend, and given that Florida is currently our No. 4 state for wholesale sales and has grown steadily in recent years, I’m not going to worry too much about the one data point.

Instead, I booked flights for my second work trip this year to Boston. I flew in Tuesday. Wednesday, I worked with one of our distributor’s top reps, and we got Tablas Creek into some cool restaurants and (fingers crossed) Fenway Park. I hosted a delicious dinner at Porto in Boston’s Back Bay, where half the attendees were mailing list members. Thursday, I did it all again, and caught the Patriots season opener on TV with some friends who live in Massachusetts. Friday I flew home. And none of this would have happened if Massachusetts—with a push from former Patriot turned vintner Drew Bledsoe—hadn’t decided to open its borders to wine shipping two years ago.

Jason Haas has been general manager of Tablas Creek Vineyard in the Paso Robles wine district of California since 2006. He is chairman of the board of directors of the Paso Robles Wine Country Alliance, a past president of the Rhône Rangers and a former board member of the Family Winemakers of California. Haas adapted this opinion piece from a post he wrote recently for the Tablas Creek Vineyard blog.

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