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Selling the Good Stuff

Posted on  | March 25, 2015   Bookmark and Share
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Independents Find Reward in Value Sweet Spots, Avoiding Lowest Price Tier

 

Grocery stores sell $3 wines. Convenience stores have wines at $5. What about independent wine retailers? How low in price should a wine shop go?

I called a selection of wine retailers around the country, and I didn’t find any independent shops that carry bottles of wine under $6. Some carry jugs and boxes of wine that cost the equivalent of less than $6 per 750ml. But ultra-cheap wine in a bottle doesn’t seem to be a good product for wine stores.

Even $6 was on the low side.

“The lowest we’ve had was $6.99. We’ve got two or three SKUs,” Julia Cochran, store manager for The Wine Club in Santa Clara, CA, told me.

Most every wine shop I spoke to, even the most exclusive, carries at least one wine under $10. So the bottom tier in 2015 for independent retailers is somewhere between $6 and $10.

I was curious about the dynamic at work here. In discussing their stocking principles, I learned there are a number of reasons that savvy independents are deliberately avoiding the lowest of the price rungs:

 

£ Super-cheap wines in grocery stores, like the infamous Two-Buck Chuck (now $2.50 even in California) are loss leaders for stores whose main business is not wine. “Trader Joe’s sells Two Buck Chuck because they sell other things,” said Ken Irving, Director of Fine Wine at Westchester Wine Warehouse in White Plains, NY. “They bring people in to buy $2 wine and make very little margin, but they’re also selling chicken and making 100% margin.”

 

£ In states where grocery stores are allowed to sell wine, people looking to buy $5 to $7 wine usually pick it up while buying pork chops and applesauce. “My consumer base is basically the $10 to $20 people,” noted Ken Maykut, a wine manager at Coastal Wine & Spirits in Branford, CT.

 

£ The U.S. wine market is divided. Sales of wine under $10 have been falling, but over $10 have been rising, and over $20 is the hottest of all. Thus, even if stores find a great $7 wine, it may be too cheap for their clientele.

New Sweet Spots

This fundamental rising price point represents a big change from five years ago, when consumers were trading down after the economic crisis. Now, they’re trading up. “The premium wine business is strong and prospects are good,” says wine industry analyst Jon Fredrikson. “All the big wineries—Gallo, Constellation, the Wine Group, DFV—are moving into the $10 to $14 segment.”

In contrast, Fredrikson says wines priced below $9 began steadily dropping in sales in late 2011. In food and drug stores measured by Nielsen, sales of wines under $10 dropped 816,000 cases in 2014, while sales of wines priced $10 to $14 rose by just over 1 million cases.

It appears that the economic or some stores, carrying $8 wines would hurt their image. “We are a boutique, artisanal producer-oriented wine store,” says Mark Mazur, operations manager of Best Wine Purveyors in Pleasantville, NY. “We do not go below about $10 a bottle. We can’t find wines that are good enough to sell that represent the store that we are. The fighting range for us is $14 to $19.”

New York, of course, is a special case because grocery stores are not allowed to sell wine. Given that context, there is a need for stores like Westchester Wine Warehouse. It’s in a relatively affluent area, but it still carries Glen Ellen and jugs. Ken Irving employs “stores within the store” to service multiple different types of customers that come in: “Some are coming in because they want the jug wine, they know they can get it here, and it’s reliable. Then you’ll have the everyday consumer who’s looking for something $8 to $25. Then you’ll have the higher-end collector who wants to buy Mouton-[Rothschild].”

Even with some clients that might be interested in very cheap wines, though, there is an important factor limiting Westchester Wine Warehouse’s purchase of them: margin. “If you could sell $6 wine and you paid $1 for it, you would want to sell it all day,” Irving says. “The margins make it worthwhile.”

For the most part, distributors in New York don’t, and can’t, offer bottles of wine at such low wholesale prices, which means that selling a $6 wine at 20% margin just isn’t as attractive as selling a $15 wine at 20% margin.

States like California don’t have that issue. Retailers can buy direct from many sources, which means theoretically it’s possible to get a wine very cheaply and charge a decent margin on it. However, such a deal would almost certainly have to be exclusive to a single store.

“If I saw a great $5 wine, I might be interested but I’d also be interested in a nice mark-up on it,” says The Wine Club’s Cochran. “We’d look at Wine Searcher and see what kind of mark-up we could get. The effort to bring in the wine, and put it in the system, wouldn’t be worth it for a 20% mark-up.”

The Quality-Price Conundrum

I’ve skipped over a crucial issue about cheap wines in fine wine shops: Even with the worldwide advances in winemaking and hygiene, wines under about $7 usually just aren’t very good.

This has become a huge problem in the United Kingdom, where years of ruthless price competition among the five big supermarkets that dominate wine sales have taught British consumers that wine can be had for 5 pounds sterling. At current exchange rates, that’s about $7.50, so it’s not as cheap as the cheapest wines in U.S. food stores.

However, these supermarket wines have developed a terrible reputation and, rather than nudging customers upscale, as has happened in the U.S., they have begun to drive consumers away to other alcoholic beverages.

For smaller American shops that emphasize a curated selection, it has become very difficult to find wines under $10 that fit the bill. “The less-than-$10 segment is made of world surplus bulk wines,” says Jeff Bitter, Vice President of Operations at Allied Grape Growers in California.

At Best Wine Purveyors, Mazur and his staff write information cards about every wine. They’re not averse to large producers. “We have La Vieille Ferme blanc. That’s our lowest-priced wine,” Mazur says. “It’s a fairly widely available brand, but it’s the Perrin family and it is well made. We’ve also got Thomas Hyland Cabernet from Australia, from Penfolds. I can tell customers the story of Penfolds. And we’ve been able to find small Bordeaux producers that fit in the $10 to $12 range.”

But drop below $10 and that kind of wine with a story behind it tends to drop away, replaced by generic varietal wine from whatever country currently has the cheapest currency.

There is a customer for that kind of wine, and you can see them, state laws permitting, in Trader Joe’s, buying commodity wine by the case. However, as long as the economy remains strong, when customers come to your independent wine shop, chances are good that super-cheap isn’t what they’re looking for. Which means less time and energy invested at that low-margin low end, and more invested in developing a value “sweet spot” that works for your clientele.

Times change, people change, budgets and behavior change. “With gas prices being so low, I’m getting people to step up out of their $20 range and buy a $25 wine,” says Coastal Wine & Spirits’ Maykut.


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