Thanks to the efforts of Paul, fellow blogger Jeff and the whole team at Inertia, small wineries like ours will soon be able to take advantage of pull demand and on a very small scale let restaurants and wine shops in New York buy wine direct from the winery - but not really.. Overall this is very good news. As an example, if I’m able to cultivate a relationship with a couple restaurateurs in NYC and they want to buy my wine, I won’t have to also spend my time and efforts trying to convince a wholesaler to “pick me up.” All the buyer will need to do is visit a state sponsored web page and place an order. From there the wine will be processed through a wholesaler’s account, taxes and their commission will be taken out, and the buyer will be billed and the wine shipped.
The bummer for me is that a middle man will still get a cut for doing (I’ll go ahead and spoil the punch line of this post) basically nothing. Jeff at Good Grape wrote a post about this last night. Here’s the gist:
The upside to this program is you might think that this would be a threat to the three-tier distribution system, but in fact it’s a benefit. In many states, Inertia is partnering with a distributor to aid in the administration of the program and the response from distributors has been strong because they see the value in allowing small brands access to the market so they can grow, without the risk of them having to take on inventory.
In our model, the winery fulfills all sales direct and we call this the “virtual inventory model.� The distributor participates, ecommerce facilitates the transaction, the winery gets a sale and sends the product.
…
Eventually the winery might grow to the extent where they will need traditional distribution services and, oh, yeah, they would be in a position to have access to a distributor that has been a part of the ecosystem fostering a friendly introduction and, potentially, allowing those winery brands to take their sales to the next level with more “on the streetâ€? sales horsepower. We call this “brand incubation.â€? Wineries are developing and growing their brands.It’s a win-win-win for everybody…
I hesitate to call it a real win-win. In fact, the contortions that Inertia had to go through to be able to even offer this service to their customers highlights exactly what is wrong with the state mandated three-tier system. What, exactly, are the wholesalers doing to deserve a cut of the sale of my wine under this scheme? I repeat: nothing. Nada. They are acting as a state sponsored clearing house that never even takes possession of the wine! How then are they fulfilling their mandate to “protect the children” ect. ect.
What this reinforces to me is that the wholesalers are happily in bed with state governments and that without the prodding of the judiciary they would be quite content to see the system remain in place in perpetuity. The government trusts the wholesalers to get them their taxes and, in turn, they protect the wholesaler’s backside by making Inertia and others come up with incredibly inefficient schemes such as this “virtual inventory model.”
Now, I want to be clear here. Inertia has done a great thing in opening up a market that was otherwise effectively closed to small wineries. I just think that Jeff, and soon I suspect Paul, will be putting the best face on this scheme so as not to scare off distributors. They are shoehorning “direct” into a place where few thought it would ever happen: New York. But we shouldn’t be disingenuous. The consumer is still paying more for a bottle of wine in New York via this system than they should have to. Wineries are still making less per bottle than they should have to. And for all this, neither the consumer nor the winery are receiving any benefit.
This, my friends, is the three tier system.
Ahh Josh, yes it is in states that require 3-tier (self distribution states do not require the wholesaler). We are not being disingenuous - we are just making incremental steps in opening a BRAND NEW CHANNEL. However, please note that in the markets that require 3-tier, the wholesalers are providing some service to you in those markets (price posting, label registration, etc). I hear your thoughts but this is a major win on four fronts:
1. You have access to markets never before available and now retailers/restaurateurs and consumers have selection like never before. Market economics on price will play out as well.
2. Due to our back breaking work, e-commerce is now an ACCEPTED methodology for Direct to Trade transactions - GROUNDBREAKING AND REVOLUTIONARY. This includes self distribution states.
3. If you do have a wholesaler in your SHORT TAIL states, there is a chance that they do not cover the entire state so now you can use a tool that gives you FULL market access without dis intermediating your partner wholesaler.
4. You now build and own customer relationships like never before.
I’ll let Jeff add more but this is one step in many to help wineries succeed in a difficult environment but moreover, create a win-win situation for all parties where appropriate.
Inertia - Powering the Wine Revolution
—Paul Mabray - CEO (and fighting the good fight - remember, we believe in wineries and direct)
By the way, great blog entry and understanding of how to leverage our system to the max.
P
Josh,
Kudos to you for getting this, getting it immediately and then breaking it down. A lot of people are still trying to wrap their arms around the concept–which is really quite simple, as you demonstrate.
And, I have the distinct pleasure of commenting on my post from my personal site, with professional candor–such is the joy of marrying business and pleasure.
Speaking of business and pleasure and working both sides of the fence, I fundamentally understand your argument, but, really, the distributors are adding value by taking care of administration that is necessary. Inertia is fostering an ecosystem in which small brands can develop, profitably. And in order for any ecosystem to be in balance, all living creatures have to be represented.
It’s a bad analogy, but you get the point. Distributors have to have a seat at the table, where appropriate, or we wouldn’t be doing the channel justice by leading a revolution in change, with almost every constituent.
In all of the conversations I have had with distributors they truly see this as development mechanism and are agreeing to take very modest fee’s–fee’s that inhibit neither the winery or the consumer in price. If anything this is a tool to keep more money in the pockets of small wineries so they can continue to invest in their business.
With our system–you set the price of the wine. The distributor does the price posting. So, in this regard, cost is relative to your margin structure. And, on top of that bonus, you get to build direct relationships with the trade accounts. No ride-alongs on market visits … you get to deal with them directly.
All of my best, and thanks for heeding my previous post on Good Grape about not enough opinions in the wine blogosphere.
Paul and Jeff,
Hopefully you didn’t feel my rant was directed at you. I tried to take pains to make sure to commend Inertia for trailblazing direct to trade in New York.
Still, it really is an issue of choice and fairness for me. In the ecosystem small producers inhabit distributors are a barnacle on the ass of the industry. I understand that there has been compromise on all sides, but I don’t have the choice to do the simple compliance work that the wholesalers provide - which I’ll be overpaying for no matter how small their margins - on my own. I’m forced to pay them for something absolutely trivial like filling out a price posting form (http://www.abc.state.ny.us/JSP/wholesale/WholesalePage.jsp).
All my bitching aside I’ll DEFINITELY be using the direct to trade module and I agree that what Inertia has done is a huge step in the right direction. Still someone needs to be out there pushing for more, because that’s what is fair - for both the consumers and the small producers alike.
Thanks for the comments guys.
Fight the good fight! And great job, Paul and Co if you’re still reading this.
We are and thanks to both Jason and Josh for the kind words of encouragement as we strive to find solutions to the tough problems.