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.

 Weigh in with Your Observations and Opinions!!

  • Please join the site in the upper right hand of the page.
  • Offer your own observations and opinions for the benefit of the wine community. 
  • Promote this discussion on your favorite social media platform now.

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.