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February 17, 2010
By KATRINA HERON
NAPA, Calif.
TOM DAVIES was driving last fall down Highway 29, the two-lane blacktop that serves as the Napa Valley’s main drag, when he saw something that literally stopped him in his tracks. “There was a sign on the side of the road that said, ‘Cabernet Grapes for Sale,’ ” he recalled, still incredulous that economic desperation had forced a Napa grower to hawk the region’s hallowed fruit like a load of zucchini.
In the 30 years that Mr. Davies, the president of V. Sattui Winery and Vineyards, has worked in the Napa wine business, he has never seen a sight quite so unsettling. “Grapes were left hanging on the vine last year,” he said.
This unusual predicament is not easily remedied at a time when vintners are awash in wine. Highly touted Napa releases in 2009 did not sell out, which means that inventory is backing up, which in turn means that much of the 2010 grape harvest will essentially have nowhere to go. Some winemakers have even debated skipping a vintage, which would amount to wiping a year off the calendar.
Not so long ago, it seemed a given that Napa wines would forever be immune from oversupply.
But in 2009, sales of wines priced at $25 and above dropped 30 percent nationwide, according to Nielsen. While global wine sales increased, California wine shipments fell for the first time in 16 years. Searching for a way out of the crisis, many Napa wineries are increasingly pinning their hopes on direct-to-consumer sales.
The hottest topic in the business is the so-called “retail room,” meaning the combined forces of the winery tasting room, the now-ubiquitous wine club and, most of all, nascent e-commerce.
This isn’t exactly a new idea — the winery tasting room became a profit center during the boom years, offering a preview of the possibilities. But on average, direct sales make up a meager 10 percent of local winery revenues, according to Brian Baker, a vice president at Chateau Montelena who presided over a recent symposium in Santa Rosa, Calif., on the subject.
For some in Napa, stepping up their retail business means the kind of sales pitch more often associated with a Rachael Ray recipe roundup than a boutique cabernet. Cakebread Cellars serves up a range of food-and-wine-pairing videos set to bouncy instrumentals. And two weeks after Lehman Brothers collapsed, Mr. Davies and a colleague started an online video series called “The Wine Guys,” in which they are not afraid to discuss the unique characteristics of petit verdot while unveiling special deals available exclusively on the V. Sattui Web site.
“The concept of the ‘winemaker’s minute’ is starting to catch on,” Mr. Baker said. Chateau Montelena’s site proudly features video snippets from the 2008 movie “Bottle Shock.” This loose retelling of how Chateau Montelena’s chardonnay took first prize at a tasting in Paris in 1976 “has created a kind of Disney effect for us,” said Mr. Baker, adding that “Shockers” often make up 75 percent of weekend traffic to the winery.
If taking charge of marketing and distribution looks like a silver bullet, it also scares the pants off a good many vintners. It demands technological and social-networking prowess, for which this particular valley is not known. It’s also expensive. But a new acronym has crept into the local lexicon: ERP, or Enterprise Resource Planning, which refers to integrated technology systems that let all the different parts of a business operation talk to one another. It’s heady stuff for wineries just learning to analyze and deploy data on their customers and discovering that a Webmaster may be as important to their future as a winemaker.
Mike Grgich, the founder of Grgich Hills Estate, distrusted computers so intensely that for decades he insisted on handwritten accounting. No more. At 87, Mr. Grgich recently bellowed to his staff: “We have to upgrade everything! Get me Facebook and Twitter!” recalled Ivo Jeramaz, a vice president at the winery who is also Mr. Grgich’s nephew.
“We nearly fell off our chairs,” Mr. Jeramaz said.
Those who attended the symposium on direct-to-consumer sales listened in rapt attention to a keynote speech on Gen Y — also known as the millennials.
Rick Bakas, a panelist at the symposium, joined St. Supéry winery last August with a title heretofore unknown in the valley: director of social media.
St. Supéry, which produces 100,000 cases a year, now has the requisite Facebook fan page, in addition to which Mr. Bakas has inaugurated Napa cabernet and pan-California virtual wine tastings via Twitter.
“Where wineries need to focus most is on signing up new wine club members through social media,” he said, rather than rely on cementing relationships with tourists who drive up to the tasting room.
Mr. Baker estimated that only about 20 percent of Napa wineries are on Facebook so far. Mr. Bakas, who last worked at a Web start-up that folded, said his spiel on new marketing techniques still meets with bewilderment and reticence in some quarters. “Wineries will say they say they can’t afford to learn about social media,” he said. “I tell them they can’t afford not to, and the economy is pushing the reluctant ones whether they want to or not.”
In short, Napa’s winemakers are in the throes of a classic market disruption. They can’t go backward, and the way forward is still largely unknown.
The only certainty is that they can’t stay where they are.
“When I talk to my local colleagues, they try to deny what’s happening at first,” Mr. Jeramaz said. “Then it comes out that their sales are down 30, 40, maybe even 50 percent.” At Grgich, sales are off about a third. “In 2009, 20,000 cases went unsold,” he said. With sales in free-fall, the wholesalers who distribute wines to restaurants and retail stores have demanded — and received — price cuts.
“It’s an understatement to say it’s a buyers’ market, even for a smaller distributor like me,” said Lou Bock, whose wholesaler business is based in San Francisco. “The guys in Napa are shellshocked.”
“Wineries that need to move inventory have gotten desperate,” said Peter Mondavi Jr., president of Charles Krug Winery. Like a few other major, time-honored brands with ample lower-priced offerings, Krug has been shielded to date from such dire scenarios.
For the less fortunate, haggling from wholesalers is merely insult added to continuing injury: Recent consolidation in the distribution industry has left many wineries believing they’re getting the bum’s rush. Distributors, they say, pay attention only to their biggest accounts, while small independent wineries, which predominate in Napa Valley, have to figure out ways to promote themselves.
But even wineries with good distributor rapport need to recognize that times are changing, Mr. Mondavi said. “Direct-to-consumer sales are becoming more critical,” he said. “We want to grow that segment of our business.”
This may seem a no-brainer for Napa winemakers in an era when many industries are cutting out the middleman and going straight to the end user. It’s a bit more complicated than that, thanks to a long history of state-mandated prohibitions on direct shipping. According to Steve Gross, director of state relations for the Wine Institute, an industry trade group, 38 states and counting have dropped their shipping embargoes, but wineries typically still need a separate license from each state where they do business.
Distributors, meanwhile, will continue to control a major portion of the wine market, given that only 10 states currently allow a winery to ship directly to their retail outlets and restaurants.
For customers, the potential advantages of the drive toward direct sales include better prices, more varied selection and long-term personalized service. For the wineries, the immediate lure is the chance for a bigger bite of the profits.
“Let’s say our chardonnay’s suggested retail for a one-bottle purchase is $60,” Mr. Jeramaz said. “When we sell through a distributor, we give them a steep discount — we only get $30 for that bottle. If we give the customer a 20 percent discount, it’s a better deal for them and for us.”
But the notion of offering discounts at the winery is still radical in much of Napa. At many tasting rooms, one feels warmly welcomed into a curious time warp, where tasting fees and wine prices are the same as (and sometimes higher than) they were before. On a recent Saturday, Stag’s Leap Wine Cellars was selling its 2006 merlot for $45. Earlier in the week, the same bottle had been spotted on the shelves of a couple of Target stores in the Bay Area priced at $31.99.
For Michael Haley, a grape grower and aspiring local politician, Napa’s vaunted prices — nobody batted an eye at bottles costing $100 and up — are themselves a major part of the challenge. “For a good while now, Napa’s specialty has been high-end wine, and that business has fallen off a cliff,” he said. “We’re talking here about a major case of denial.”
In fairness, not all of Napa’s wineries went to the last decade’s velvet-rope party. At Smith-Madrone Winery, in the hills above the town of St. Helena, the brothers Stuart and Charles Smith produce 1,000 cases of wine a year from their own grapes and sell them for $30 to $45.
Devoutly untrendy — Charles Smith’s desk in the wine shed doubles as the tasting counter — the Smiths came to feel like an anachronism in recent years. “We got a hard time from other vintners,” Stuart Smith recalled. “They said, ‘Why don’t you raise your prices? You make everybody else look bad.’ ”
Today, the Smiths appear to be ahead of the curve, beneficiaries of both their moderate prices and their early decision to tend to their customer list with the same care they lavish on their vines. This year is going to be every bit as bad as 2009, Stuart Smith said, “and we would be in very tough shape if it wasn’t for our on-site and Internet sales.” He added that Smith-Madrone never placed undue faith in its distributors, three of which went out of business last year.
Though they anticipated the pitfalls of the traditional sales channel, the Smiths along with a good number of their brethren are feeling pinched by another legacy system, this one home-grown. The trouble is that, in the eyes of Napa County’s body politic, not all wineries are created equal.
At issue is an increasingly controversial piece of red tape known as the Winery Definition Ordinance. Enacted in 1990, it piggybacked onto a use-permit system set up in 1974, a date that quickly became the dividing line between the haves and the have-nots. Among other things, the ordinance dictates the number of guests a tasting room can admit in a day — and whether they can just show up or need to make an appointment — what kinds of memorabilia the wineries can sell and what kinds of events they can hold.
Generally speaking, elder-statesman wineries like Charles Krug, Sutter Home and Beringer, along with historic-winery descendants like Rubicon Estate, are exempt from the strictures. (Not always, though: some years back, Francis Ford Coppola was ordered to remove an illegitimate espresso cart from the Rubicon terrace.)
“What we have created, in effect, is class warfare,” said Mr. Haley, who is running for a spot on the Napa County Board of Supervisors with a pledge to overhaul the regulations and let a thousand marketing incentives bloom. New pricing structures, delivery systems and technology are crucial, Mr. Haley said, but they can’t help Napa compete in the 21st century “if we hang on to our anticompetitive habits.”
Dario Sattui, who started his wine business in 1975 with borrowed money and a VW bus for a bed, offers a glimpse of what life for Napa’s new guard may look like were freer trade the norm.
His great-grandfather, Vittorio, made wine and sold it out of a storefront in downtown San Francisco. Following in his footsteps, Dario Sattui created a line of mostly inexpensive wines for sale directly to consumers. No wholesaler or retailer has ever gotten hold of a V. Sattui label.
Mr. Sattui’s marketing acumen extended to securing commercial zoning for his property, a loophole that makes V. Sattui one of just two Napa wineries (the other is Krug) allowed to host weddings. V. Sattui is the friend-of-the-people winery, the Everyman. The tasting room, where $5 buys a “classic” tasting, also sells Coke and Red Bull, and an adjacent deli gives the Dean & Deluca outpost across the road a run for its money.
If Napa’s high-minded denizens consider Mr. Sattui’s winery garish, they are in awe of his prescient direct-sales approach. V. Sattui’s wine clubs have 40,000 active members, and today about 35 percent of its business is done via mail order or on the Internet, with the balance handled on site.
Mr. Sattui instigated the legal challenge to the distributors’ lock on wine shipments that culminated in a 2005 United States Supreme Court ruling paving the way for wineries to sell directly to out-of-state consumers. Like Mr. Bakas, his goal now is to get Napa with the program, using his own experience as a guide. “Making wine — that’s the easy part,” Mr. Sattui said. “It’s selling it that’s hard.”
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