Posted on | August 1, 2006
Written by | Laura Holmes Haddad
Paper towels, garbage bags, books, and… wine? Wine aisles are appearing in the most unlikely of places, and stores like Costco, Sam’s Club, and Target are reporting record wine sales, shifting the sales and marketing strategy for many players. Because of their reach, these outlets have changed the way wine is bought – and sold – in the U.S.
There are two channels that encompass these “big-box” retailers: warehouse club stores, which charge customers an annual membership fee, and mass chain outlets, that have stores nationwide and do not charge a fee to shop there. Costco, Sam’s Club, and BJ’s Wholesale Club are the largest club stores, while retailers such as Target and Wal-Mart fall under the mass chain stores.
Beginning in the mid-1990’s, big retailers began selling alcohol and by 2000 it was clear that the wine and liquor aisles were here to stay. Target and Wal-Mart face restrictions due to many state laws that restrict alcohol sales in grocery stores. While some towns are refusing to issue liquor licenses to big-box stores for fear of increasing the availability of alcohol, as well as protecting local wine and liquor merchants from competition, the stores are usually successful in entering new marketplaces. If they do receive a liquor license, some local rules still prevent the retailers from selling every type of alcoholic beverage. BJ’s, for example, is restricted to selling only beer in many markets, including many locations in New York State.
Each retailer has a different approach to wine sales, which translates to a different approach to their customer. This in turn has affected how wine companies and distributors sell and market the wines in their portfolio. “The mass chain stores influence strategy because the retailer in this channel has limitations relative to couponing, merchandising pieces, signage, etc. These restrictions create a more event-driven marketing strategy,” says Marc Donati, senior vice president of national chains, Constellation Wines U.S. “Target, for example, doesn’t allow any paper on their shelves. We’re to a point where an event market strategy is almost forced upon us,” he says.
Donati notes that these marketing efforts are tailored to each retailer, although state and federal laws limit channel, or chain-specific, marketing. “Sam’s and Costco prefer more winemaker involvement and signage,” he notes. “We may hire winemakers to do a bottle signing, and to talk about how wine is made. We may go one step further and do a cooking class with a chef. We have Ravenswood, who is associated with a second tier NASCAR event, where a Ravenswood car is towed around to stores and tied to events in the store,” says Donati. “It’s much more expensive for us because the reach is smaller, relatively speaking, but every store has its own strategy that we have to work within.”
One national sales director, who prefers to remain unnamed, said, “The marketing strategy depends on the brand. We understand which customers are shopping each account and adjust our promotional mix accordingly.” Pete Essig, business development manager, Customer Alliance Group, for Brown-Forman, says that Brown-Forman develops marketing according to the retailer. Smaller wineries, however, don’t have the money or the human resources to create these marketing campaigns, so many choose to avoid the big retailers altogether.
In part it is the retail brand, rather than the wine brand, that affects what wines people are buying. “Their brand is the forefront of the strategy—it’s not about one particular wine brand—it’s about their store’s brand and the supplier has to fit into it.” The retailers each focus on a certain aspect of the wine business that they feel best reflects their brand. According to Donati, Costco is “very trend oriented, as is Target. They will be on trends before the grocery channel catches on. They are committed to quality, where mass channels are followers into the Costco lead,” he says. “Wal-Mart offers great value but not high-end brands.” The number of products offered by a retailer is a reflection of this. “Costco is buying limited SKUs. The average Costco has 200 SKUs while Wal-Mart and Target have 500 SKUs,” notes Donati.
Why consumers are moving to big-box retailers is affected by their overall spending habits. “It’s dollars spent directly related to foot traffic. The time-pressed society we live in makes shopping experiences more limited. You’re still buying the product but just going to fewer outlets,” says Donati. “More people are selling food, and food sales are eroding to stores like Costco. We’re seeing that same shift in the wine category—this is a causal effect. People are saying, ‘I have to buy wine anyway so I’ll get it here.’ This is especially true in the club channel, which has the highest expenditure per shopping visit in the wine category,” says Donati.
The increased shopping trips have made big-box stores appealing not only for customers but for wine companies. Donati says his sales have been “significant; about four times the rest of the market.” “Solid growth” is what Ruth Souroujon, vice president of marketing for Kendall-Jackson Wine Estates, has seen. “All of our off-premise channels have been performing well,” she notes.
More Emphasis on Quality Wines
The number of people that shop at the retailers provides opportunity for wine sales. “The mass/club channel has more than 75,000 households entering their buildings, more than any other channel, which creates opportunities within the wine category. They have quickly understood their potential within the super-premium ($9-$11.99) category and have started stocking even higher priced products in their stores,” says Donati. Costco is the leader in wine sales in the club channel, with 473 stores and $600 million in wine sales in 2005. Although Costco is battling in courts in many states over volume discounts, which states are working to prevent, their strategy is two-fold. Joe Pupo, Costco account manager for Alaska Distributors in Seattle, Washington, says, “Costco is all about quality and value. Once they got into the wine business and realized they could offer both, it changed their whole business. When a customer pays the membership fee they want to make sure they offer them value,” he notes. “They used to be into boxed wines, like Franzia, but by bringing David Andrew on as wine consultant, the chain signaled their move into fine wine.”
In contrast, “Wal-Mart and Target have quickly developed departments that offer products that previously had been sold in liquor stores and specialty stores,” says Donati. And this emphasis is reflected in the price of wine in each retailer. Pupo points to the Blackstone brand as an example of the difference in pricing among the retailers. “They’ve got a Napa Merlot that sells for $11.99 at Costco and $12.99 at Target.” Costco’s pricing structure is in line with their focus on fine, or super-premium, wines. “They want their retail price to be a 30 percent markup,” says Pupo.
With a national buyer who handles the Bordeaux category as well as education, regional buyers are able to fill their local outlets with regional selections. “What they’re trying to do is expose customers to a little bit of everything. Regions do come into play; that’s why they have regional buyers,” Pupo remarks. Costco has also been moving towards private label wines, under the Kirkland brand.
Not to be left behind, Sam’s Club and Wal-Mart are also devoting shelf space to wine. Sam’s Club has a Master of Wine and a national wine buyer that select their wines. A total of 387 stores out of 500 sell wine, and Sam’s Club has 47 million members nationwide. Wal-Mart jumped on board by launching its own wine label in 2000 with E&J Gallo, called Alcott Ridge Vineyards, and keeps wine prices in the $15 and under range. According to ACNielsen data, alcohol sales at Wal-Mart accounted for $1 billion in sales in 2005, an increase of 154 percent since 2000. Wal-Mart’s anti-alcohol culture, however, including a ban on alcohol at any corporate event, has led to different marketing strategies by Wal-Mart, including prohibiting alcohol from the monthly Wal-Mart circular.
Target has 1,148 stores in the U.S., including SuperTarget, and focuses on domestic wines with a price point of $7 to $10. Target works with Master Sommelier Andrea Immer and the stores often provide customers with educational material about varietals and flavors.
Effects on Consumers
Is all this big-box activity good for the consumer, or just one more revenue stream for retailers? “It’s been beneficial to the consumer because they see more product at a better price, because they’ve been exposed to better wine. That exposure was there before but priced a little higher,” says Pupo. Premium wine is clearly benefiting from the club channel. “From the consumer standpoint, the big-box stores have spread the availability of premium wine. Proof of this is that Costco is the largest purveyor of fine wines in America, and the largest purveyor of first-growth Bordeaux,” says Vic Motto of MKF Industries, a wine consultant group in St. Helena, California.
But for some wineries one size does not fit all. Pupo notes that for some wineries, getting a foot in these two channels isn’t for everyone, with attitudes sometimes getting in the way of business. “The less wine you make, the less you want to do business with Costco, because wineries have a notion that if they have wines in Costco it lessens the reputation of the wine,” he says. But for many wineries, volume is the priority. “You want to be in Costco because that’s where the volume is,” he says.
Paul Tincknell, partner of Tincknell & Tincknell, a wine sales and marketing consultant company in Healdsburg, California, notes that not all wine is destined for the big retailers. “It does depend on the brand and the brand’s position in the marketplace. Attitudes have changed greatly over the last decade and a half,” he says. “Many years ago at Chateau Montelena [a boutique producer in Napa] we struggled with being in Costco, and we knew that would upset the independent retailers because of the margins that the large retailers can afford to give to consumers. That was in the early 1990’s, and we finally permitted them to buy the product because we realized that was where our customers were going,” he says. “We did get some severe flak from independent retailers. But the retail industry has changed dramatically. Where price used to determine quality, consumers now look to brand identity, word of mouth, and reputation and are less sensitive to price.”
How Do Wine Shops Respond?
How will this spike in big retail sales affect small wine retailers? Some don’t take a doomsday approach. “It’s a pretty amazing change from the old days where fine wine shops specialized in these wines, and shows how much more broad the appeal is of premium wines,” says Motto. “Consumers need small wine shops to learn about the vintage, styles, and varietals of wine that the small retailer specializes in. This includes hand-selling, a knowledgeable staff, and education that smaller retailers provide.”
At the retailer roundtable with members of the Wine & Spirits Guild of America, the topic of big-box stores was a significant one. Ken Friedman of Bottle King in Livingston, NJ, said, “We’re where people come first to learn about the beverages they buy. Once they’re educated, the next step is price, and then they might be off to the box store.” Loyalty is a strong consideration for Friedman. “We’re selling the same guy’s wine over and over because we care about them. I don’t think big-box stores have that.” Ken Lewis, a retailer from The Party Source in Bellevue, KY, added, “Unlike big-box stores, we are brand builders and relationship builders.”
“There is definitely room for everyone,” says Souroujon. “The benefit that the fine wine bottle shop or the smaller retailer offers is the hand sell. In today’s environment, consumers are hungry for education and knowledge and want affirmation of their choices as well.”
Small wine shop owners are confident that they can carve out their own piece of the wine market and don’t seem concerned about local competition from big-box retailers. “I actually don’t see that there’s been much of an impact because we deal with the wines that they don’t carry at big-box stores,” says Jeff Woolley, wine buyer at Houston Wine Merchants in Houston, Texas. The store has an inventory of approximately 500 wines with a focus on fine wines, and Woolley notes that the nearest retailer is about five miles from the store. “We deal with more boutique wine which tends to have a very dedicated following. We also offer very personalized service that you won’t find at box stores,” he says.
Joe Alter, a partner at The Bottle Shop in Wilmette, Illinois, a northern suburb of Chicago, also has a positive outlook. “We’ve only been here six months, but we went in knowing that stores like Costco and Sam’s Club are players. So we deliberately buy wines that aren’t sold in those stores,” says Alter. The Bottle Shop offers wines from $6 to $100, with the average bottle priced at $15. Alter knows his customers won’t necessarily purchase wine solely from his shop, but he’s prepared to help them make another choice. “We know what the big brands are, so if people come in and say they like the Toasted Head they bought at Costco for $9 we are prepared to offer them something that we think is better at the same price point,” says Alter.
Consumers want choice, and as Donati points out, “the consumer uses many outlets for buying wine.” The big-box retailers are providing that choice, while small retailers establish their own niche. That translates to more wine sales, which can only benefit everyone.