Sunday, September 24, 2017

Is Opening a Downtown Tasting Room Smart?


<<click on picture for better view>>

The Regulatory Landscape


Falling on the heels of a growing anti-tourism movement, of late I've taken calls from officials in three particular cities that are now considering tightening regulations, or altogether banning the growth of downtown wine tasting rooms.

What else can officials do to make the wine business more difficult? That's what many are asking. Why are municipalities working so hard to hinder success of an industry that helps pull in millions in local occupancy taxes, and donates many more millions to charity? Answer: It's just politics.

The wine industry isn't sufficiently engaging in the debate so we have ourselves to blame in part. We have a fight on our hands but don't show up in force to planning meetings to support applications. 

We make it harder on officials who only hear from their constituent nay-saying minority. To the credit of the officials, one thing they are doing is asking around for data and facts that might help balance the debate but I'm wondering if opening a downtown or urban tasting room is even a good business decision?

Banning Tasting Rooms


Should local officials ever consider a moratorium on new tasting rooms as we presently read in the press? My answer is absolutely yes they should debate and consider it because land-use and sensible zoning can have a positive impact for everyone in a community, including wineries. It's a worthwhile conversation.

A well-considered downtown with tourism as a draw should have complimentary businesses to pull in visitors. Getting the right blend of business isn't easy though, especially when anti-change elements dominate the discussion as has happened in Saint Helena, CA which is the poster-child for unintended consequence of following that path. 

But there are other important business questions to be asked before getting to the permit stage:
Is it a good business decision to open a downtown tasting room in the first place? Will it be successful? What conditions will make it successful or kill it? If there are already a lot of tasting rooms, is there room for one more or will that be one too many?

Success Isn't Guaranteed or Well-Defined


The reality is the jury is still out on the true effectiveness of downtown and urban tasting rooms. Winery owners get locked into thinking if there is tourist traffic, that exposure will be good for my brand. But winery owners miss defining success objectives when they think in terms of the number of visitors and/or the higher amount of tasting fees they can attract. Those aren't the most important metrics.


Several wineries have tried opening in San Francisco with decidedly mixed results. I've had several clients attempt it and eventually leave. But I still have some who think they can be successful and are trying now. 

Those who left San Francisco came to the conclusion that the tourists going to S.F. were going for specific reasons, and wine tasting wasn't on the list. They discovered the tasting experience was more like a bar and visitors neither joined the club or took wine home with them.

Opening in a tourist area isn't necessarily a key to certain success. While the tasting bar might glimpse improvement in added tasting fee income for the business, tasting fees alone wont cover your costs. Selling your limited selection of wine one ounce at a time, isn't going to scale into a business, unless you are at an airport and sell a lot of different brands. 

In the planning stage, another mistake is made when owners believe the conversion to clubs can be as good at a downtown location as it is at the winery. And finally, owners forget the context. There are other wineries in a downtown area who are delivering their products for a tasting fee. No matter what your fee is at the winery, you have to fit in or clearly justify your tasting fee structure within the downtown.

Too Much of a Good Thing


There are two benefits of a tasting room. The first benefit is giving your guests an experience and in so doing, hopefully etching a mental marker in their mind about the wines you make. It's getting them by the trial component of the purchase decision, but the type of experience plays into that. 

The second and more important thing you are trying to do is get them into your wine club. As far as I can tell from polling wineries over time, the conversion rate of visitors into the the wine club in a downtown tasting room isn't as high when compared with the tasting room at the winery. It's a different experience.

There are economic concepts called the Cluster Theory and a related one called the Agglomeration Effect. In retail, these are the notions that explain the development and success of malls, and it helps to explain a good economic reason to have concentrated tasting rooms.

People come together in a mall or urban tourist area for an experience and convenience. Complementary and cooperating companies can do better together in a condensed location versus being spread out in the hills. That works well as long as the mix of companies is correct and price wars don't escalate among shops selling similar goods. 

But what's the right number of tasting rooms in a town? In my opinion, the regulatory choice to limit tasting rooms to one per block as was done in Healdsburg CA isn't a good solution. It's more effective to locate 3-4 tasting rooms in clusters on a block. That draws tourists and allows the winery to create clustered experiences with adjoining and cooperating tasting rooms and businesses, shuttling tourists into better defined areas within a city. But there is a limit. How many urban tasting rooms are too many? It turns out we have a good example.

The Curious Politics In Santa Barbara County


The towns of Buellton, Lompoc, and Los Olivos have ended up with too many tasting rooms, paradoxically because Santa Barbara County is trying to protect the rural character of the county by discouraging visitation at the wineries. 


The result of being unable to host visitors at the winery is that the tasting rooms had no choice but to open in the towns. It has created a less than ideal consumer experience for the wine buyer. 

The tourist traffic that otherwise would have been spread out throughout the rural countryside, has been focused down into choke points within the towns which is poor traffic planning. The situation has negatively impacted both the town and the wine business. 

Los Olivos is a prime example. It's a small unincorporated area of about 1,100 people. Above is a map of the Los Olivos overlaid with tasting rooms. I can't get the precise number today, but there are somewhere around 30 tasting rooms crammed into roughly four to five blocks. Parking on the weekends is difficult, and the visitor experience is sub-optimal.

While owners and employees do the best they can in Santa Barbara, for some visitors the experience is closer to a pub crawl versus a luxury experience. As a result, the County of Santa Barbara has some of the worst performing tasting room and club metrics versus the other major AVA's as noted in the headline slide on wine club growth.

The conclusion of a recent industry conference in the County was the visitors from Los Angeles were stopping for lunch, but driving through to Paso Robles where tourists get better experiences at the wineries. 


The Right Circumstances For Opening Urban Tasting Rooms


In Santa Barbara regulations have created a bad situation which leaves the winery owners with fewer options. An urban tasting room might be their only choice. But even then trying to better plan tasting rooms into cooperative clusters and coming up with a collaborative coherent story would improve the experience. I recognize changing what already is in place is pretty difficult.

Another good reason for a downtown tasting room is the situation in Woodinville Washington where the growing region is remote from the major population center. It's not ideal but getting customers to the hinterlands is equally difficult. Some wineries are now trying to open remote tasting rooms in Seattle to change the model, but once again the jury is still out.

My encouragement is to think hard before opening an urban or downtown tasting room and define success metrics. There are good reasons to do it but getting tasting room income from fees isn't the right one. Getting people into the wine club is the best one but downtown is a harder sell for club conversions.

Find efficient ways to collect visitor information. That has to be a key metric of your success. Each contact is an opportunity to engage visitors who have tried your wine. Another consideration is to find ways to work with adjoining businesses on the block to help improve the visitor experience. Make your business cluster the desired one in town.

I'd make sure the story was told about the winery in the remote tasting room. You have to have the connection to the site where the wine is made, and hopefully encourage visitors to make a visit there. Pictures, wine making equipment, soil samples, barrels for a barrel sample option, and videos are all good options to tell the story. 

While there are a range of design options that are suitable, and even some cross-over opportunities to consider partnering with another local business such as a cheese or chocolate shop, the facility has to be authentic and represent the winery. If its looking more like a themed restaurant or sports bar with antiques and memorabilia on the walls, you're selling the wrong thing.



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Saturday, September 2, 2017

Premium Wine Sales Decelerating






      The Big Short



It's easy to tell people what they want to hear. It's harder to tell them what they don't want to hear.

In 2007 I saw the above chart that tracked US home prices versus median family income. With other indicators in the market, I was convinced there was a real estate bubble already in the process of bursting and I started talking about it in speeches. The result of my prescience? I stopped getting speaking invitations and in one speech had the organizer ask if I could be a little more cheery. 

People don't want to consider the downside risk in business when things are going well. 

If I told you today what you wanted to hear, I would say that wine consumption is growing in both volume and dollars and consumers are continuing to trade up above $9.00. I would tell you that grape prices are at an all-time high and trending higher right along with land prices. 

That's true and might get me more important speaking engagements, but I'd rather you know about an underlying trend I'm seeing that's more than a little concerning. If I'm right, it's going to change the way you are thinking about business right now.

Sunday, June 18, 2017

Podcast: An Industry View Through Rob McMillan's Wine Glass

 
I had the opportunity to visit Christian Oggenfuss and Geralyn Brostrom at the Napa Valley Wine Academy just after the release of the State of the Industry Report. We sat down to an open mic over a glass of wine and explored several of my perspectives on the business as well as the story of how the Wine Division of SVB was created, and why we started producing the State of the Industry Report.

After you get though the early part of the podcast which sounds a little like a This is Your Life show on your's truly, at about the 15:00 mark we start to get into some of the concepts discussed in the report. The questions I cover are:

Monday, May 29, 2017

Restaurant Wine Sales Collapsing for Small Wineries


      I will Always Love You


Every credible measure that I see regarding restaurant wine sales is trending negative for the small family run wineries. Why? What's behind the declining trend? Economics? Changing consumer attitudes? Conspiracies from wholesalers? Big wineries displacing the small ones? It's not due to a lack of desire from restaurant owners.

Restaurateurs love the wine business. The business is worthy of their love because it enhances the enjoyment of the food served to their customers. It's practical for the restaurant trade to love wine because restaurants themselves make better margins on bar sales compared to food sales. Wine for the restaurant trade is still an important part of success, but sales opportunities to restaurants are collapsing for small wineries.

Saturday, May 20, 2017

Replay: SVB Direct to Consumer Survey


We had a good time on set delivering several perspectives on the SVB/WBM annual Direct to Consumer survey. For those aficionados of our surveys and telecasts, you might note a shift in the title but it's just reflective of how we've evolved the survey questions.

We used to call this survey the Tasting Room Survey but over time we started to realize tasting rooms were only part of the formula for success, so we started asking more questions about wine club metrics. Now we have several years of benchmarks from which we can determine trends in clubs and in tasting rooms.

Sunday, May 7, 2017

SVB Annual DtC Benchmarks




Direct to Consumer sales now represent 60% of the average winery's revenue, but the real growth in direct sales has only taken place over the past decade, dramatically accelerating in the past 5 years. While it might seem like wineries have been doing this for a long time, it's difficult for me to say direct sales have been a professional discipline.

In 2013 I published one of my more popular posts addressing the problem the industry faced in finding good Direct to Consumer Managers. Since it was a new discipline, it wasn't possible to find experienced managers. That is starting to evolve with time, but we are still scratching and clawing our way to direct sales success, learning from each other as we go and playing a little bit of follow the leader. Some of that is good and some not so good which underscores the importance of data.



Wednesday, March 15, 2017

The Tough Questions Wine Clubs Face

 
After many years of flailing away looking for the right strategy, we are seeing DtC sales homogenize around a common theme. Wineries build a tasting room with a design statement. That's 'the experience.' Customers come to the winery, pay a fee and receive a curated tasting of wine. At the end of the tasting, the customer is invited to join the wine club and somewhere around 7% accept. It's working, and if you believe the stats that came out yesterday, DtC sales in February 2017 were 37% higher than February 2016.

Wednesday, March 1, 2017

Annual DtC Survey is Open!



Today, the eleven largest wineries are moving 80% of the wine sold in America, while distributors continue to march toward complete consolidation. The other 9,000 wineries in the U.S. are left to compete with each other for the remaining 20% of case sales.

Not their Fault


I don't blame wholesalers. They have no financial incentive to take on that mass of small customers. Add to that the decline in restaurant sales, which historically have been a large part of family wine sales, and it's hardly an exaggeration to say that Direct to Consumer sales are required for the survival of small family wineries now. It's really their only viable path to market, and yet the industry itself is still barely novices in selling wine direct.

Monday, January 16, 2017

Will Boomers Keep Buying Wine?


The title of this piece is the question all wine companies should be asking today, because boomers are the dominant cohort across all price points above $14. Can they continue to buy your wine? 

I've been saying for nearly a decade the anticipated ascendance of millennials as the top cohort was greatly exaggerated as to both timing and impact, but their coronation is coming and the day when boomers no longer dominate consumption is also fast approaching.

Tuesday, January 3, 2017

2017 State of the Industry Report


Most of the wine business has already developed their strategic plans for 2017 and is starting to execute. The plans had to be put together using history as a guide, laced with a hint of a best guess. That's just the way this family owned industry has to roll.