Posted on | November 3, 2011
Written by | BevNetwork
The Beverage Network sat down with Tom Steffanci of W.J. Deutsch & Sons to discuss the under-$10 wine segment, sweet spots in pricing, important consumer trends and some unlikely new spirit brands.
On W.J. Deutsch
The Beverage Network: This year, Deutsch celebrates 30 years of being in business. What is the key to achieving such continuous growth?
Tom Steffanci: Adaptability. Bill and Peter Deutsch are amazingly flexible and intently curious about what consumers really want. They are quick to act when it appears consumer tastes are moving in new directions. For example, we launched the brand Ruta 22 in Argentina in response to the growth in that category, and created a joint venture with our New Zealand winery partner, Aeger Sectus, to release Nine Walks Sauvignon Blanc for $10.99 compared with our first collaboration, The Crossings at $13.99, so we can capitalize on the surging demand for New Zealand Sauvignon Blanc.
TBN: Deutsch is a big player in the value arena. What changes can we anticipate in this segment?
TS: The massive trading down we witnessed might have been ignited by the recession, but people were pleasantly surprised by the quality they could get at lower prices, and this category will stay very strong. If you adjust for inflation, there has never been a time in history with a better selection of quality wine under $10. It’s not new for us. Bill started this business with a simple premise: Source really great wine that over-delivers for its price. The Georges Duboeuf flower label was the first French brand to hit a million cases in the U.S. and [yellow tail] is the number one imported wine brand for this reason.
TBN: Yet there’s also turmoil in the under-$10 category. How does[yellow tail] still manage to grow?
TS: A lot of [yellow tail]’s direct competition—$5.99 to $6.99 for 750ml and $10.99 for 1.5L—have brought prices down, so there is tremendous noise happening below our price point today. We did grow 2% last year off an enormous base, but that growth did not come easy. We are now spending $20 million in marketing, specifically television. Since many other brands have pulled back on advertising, we are consistently the only wine brand on TV. Our new television ad campaign is based on language we heard from consumers in focus groups: [yellow tail] is their “go-to” wine for casual gatherings. This coming fiscal year we anticipate 5% growth for [yellow tail], due largely to the introduction of Moscato. The quality is extraordinary—it’s a $6.99 wine that was awarded a double gold at the San Francisco International Wine Competition.
TBN: The numbers also show growth in premium and super-premium wine categories. What do you make of that?
TS: Consumers don’t behave in a simple way. If you look at Nielsen numbers, you will see price points above $20 and $25 showing rapid growth. But when you dig into that data, you will see that a lot of those wines were priced at $30 just a few years ago. In other words, consumers are trading up where they perceive good value.
TBN: What do you think the sweet spot in pricing is?
TS: There is a migration, rather than a stampede, back to higher prices. Yet,still only 15% of wine sold in the U.S. is over $15 and I believe that will continue. The sweet spot is between $10 and $15; this represents really good value and allows you to make really great wine. It isn’t growing as fast as higher-priced wines, but it’s off a much larger base—it’s where the real action is.
TBN: What are some of the most significant consumer trends you see today?
TS: We see the trend towards home consumption staying strong, quite independent of the financial crisis at this point. It’s a lifestyle choice: People are putting a higher priority on time with family and friends in less formal settings. Also, pretention and luxury are out of fashion. People want to impress guests with wines they will enjoy, rather than some trophy bottle. This doesn’t mean you can’t sell expensive things—I think Audi’s recent ad campaign titled “Goodnight Old Luxury” for their A8 model (a $100,000 car) is a great example. The word luxury has a negative connotation today.
TBN: What sort of wine producers are you looking to partner with as you build your business?
TS: We want to work with people who share our values about commitment and quality. A great example is Joseph Carr, one of our newest partners. We found out about him through one of our distributors, and he has what Bill Deutsch calls “shoe leather”—he built his brand by sharing it with sommeliers and consumers through hundreds of tastings and wine dinners. The Napa appellation Joseph Carr label is priced at $19.99. The second label, a North Coast AVA, Josh Cellars, is at $14.99, and we think this could easily be a 500,000 case brand before long.
TBN: What is your expectation for Deutsch’s new and developing spirits division?
TS: Last year was our first fiscal year in the spirits business. Our goal is to make it a meaningful part of our business; we want to be doing $60 million in spirits in five years. Currently, we have a mix of new and established brands, such as Luksusowa, which came to us with some significant volume and was growing at 30% when we got it.
We have a very open mind—a brand like The Original Moonshine was not on our list initially, but we saw the potential. There is a fear factor with moonshine, but it’s really the purest way to taste whisky. The Original Moonshine is produced with the brand’s founders, third generation master distiller Chuck Miller and acclaimed chef Adam Perry Lang. Being open to new ideas also brought us Adult Chocolate Milk, the newest addition to our spirits portfolio. Adult Chocolate Milk is a blend of premium chocolate, vodka and other ingredients. This is a beverage completely conceived and developed by two consumers, not industry executives, and it’s been immediately successful. We see value in keeping all of our partners involved and learning from them. Peter and Bill have always been great about ceding control to our partners in their areas of expertise—leadership is just as much about the ability to follow.
TBN: Many recent product launches in the spirits world have been in nontraditional categories. What does this say about consumers?
TS: Our industry has silly classifications that don’t reflect how consumers think. The Crown Royal drinker isn’t a Canadian whisky drinker. If the bar is out of Crown Royal, he might drink vodka. The fact that [yellow tail] is from Australia is not known by roughly 1/3rd of our consumers, and HobNob’s French roots couldn’t matter less to its Millennial consumers. The point is, brands often transcend categories. Another example is Adult Chocolate Milk, which defies categorization. At 40 proof and SRP of $18.99, it’s a low-alcohol option with women over 30 as the target consumer group (there has been some misconception that we were aiming for a younger audience).
TBN: Finally, any sales tips for retailers as we approach the holiday season?
TS: Retailers that work hard to impress and amaze their customers rather than just satisfy them always perform the best. Focus in an unpretentious way on getting consumers to enjoy wine—it isn’t helpful to wine-geek out on them. For the most part, consumers don’t care about winemaking, they only want the knowledge that will enhance their enjoyment of drinking wine. I have friends who gladly spend 10% more at particular stores because those retailers have taken the time to educate and build a relationship. Also, it helps to remember that wine is still an impulse buy, so displays are critical. Crowded shelves with single facings are mind-numbing.