Virtual Marketing and the Wine Industry: The solution to an age-old problem

The Wine industry: specifically, the Direct to Consumer side of the business, has had a problem for a few years….The Tasting Room is dying, (some industry pundits say it is already dead).

The model of the tasting room is as old as the wine business itself in California.

Charles Krug began the first “cellar door” tasting in 1862, shortly after he opened his Napa Valley Winery. This was a novel idea and one that was not necessarily taken from the old world.

“Over the years, wineries have tried to reach “out of market” and bring their product to the consumers home”

In 1991, the tasting room was elevated to a new level when Opus One opened its winery and Tasting Room. With its vanguard design, sleek lines and modern materials, it ushered in a new era of tasting rooms design. As new money flowed into the wine industry, tasting rooms become more glamorous, sleek and modern—but the concept was still the same:

 Guests come to a bar or private room and either pay for or receive gratis, tastes of wine.

The original purpose was to promote a trial to drive sales to traditional retail channels. Tasting Rooms were often a part of the PR and Marketing department expenses. Their success or failure each year was measured as a “debit or credit” to the department that managed them.

And this worked pretty well…until lately. Tasting rooms are dependent upon foot traffic and more and more that means tourists. If your region is doing well and hotel occupancies are high, then your corresponding wine country benefits from the influx of visitors. But if the tourism market is hampered by say a Great recession or a natural disaster; such as what happened with the wildfires of 2007, 2017 and 2018,– tasting rooms suffer.

And with this loss of traffic there is yet another unintended consequence. Since Tasting rooms are the primary source of new club members, loyalty and subscription program models are affected adversely as well.

Over the years, wineries have tried strategies to reach “out of market” and bring their product to the consumer’s home.  These include Wine dinners at restaurants, AVA tasting events,  “Wine Club on the Road”, and even “Tupperware style wine parties”. Some are effective, some not; but they all require an investment in time, talent and money.

Meet Virtual Marketing.

 This is not a new idea in the wine industry. Years ago, video companies were selling services to wineries to create ‘content” and broadcast it live over the internet. It too was expensive, the feed was often compromised, and the return was difficult to measure.

With the advent of the pandemic and the shut-down of tasting rooms, wineries have had to be more creative to find ways to continue to sell. This has been made easier by the advent of “media technology platforms”  These new “media tools” include  Facebook Live,  Instagram Live and Zoom. They have fueled the explosion of virtual tastings, which is a tactic of Virtual Marketing.

The virtual tasting offerings run the gamut; most common, are weekly tasting events, social events and happy hours. Some wineries are allowing you to make an appointment with a staff member after you have purchased the product to have a personal guided experience with the wines. (Think private room at the winery). Many, with commercial kitchens, are doing cooking demonstrations.

More creative Virtual Marketing Tactics:

 Iron Horse is hosting Sunday Brunch with owner Joy Sterling. QVC style shopping events JCB Collections has tried multiple concepts including Facebook live tastings with owner John Charles Boissett and a QVC style shopping event through its Salon. Ceja Vineyards is hosting Tuesday Taco night. Rams Gate Winery is delivering the meal kit to your door for the cooking demo that you will tune in to watch.

It shows a great deal of creativity on the part of the industry, and with analysis may prove to be a profitable low-cost way for a winery to sell DTC.

From a brand standpoint, it could be an effective way to solve that age-old problem of reaching wine consumers in their homes who do not visit wine country-providing them a sample of the product and the story behind it.

But it begs the question: What will happen after the Viral Curtain is lifted and business re-opens?

Who will continue to utilize “Virtual Marketing” as the fifth strategy in their DTC program?

The Urban Tasting Room and the Challenges They will Face after We Get the “All-Clear”

When Governor Newsom issued the order to shut down bars, pubs, and wineries in California, he set in motion a chain of events that may force winery owners to take a hard look at their Urban Tasting rooms.

By effectively shuttering winery tasting rooms, he forced winery DTC managers to pivot quickly to their e-commerce programs—(the smart ones also cranked up or began telesales efforts.) This also began the internal reviews of DTC programs, their cost structures and their gross margin contribution to the bottom line.

Among DTC strategies, rural tasting rooms (those at the winery) have one of the lowest gross profit margins; labor, incentives, maintenance, and commissions are some of the major contributors to the expense line. Conversely, a winery website–enabled for e-commerce–offers one of the highest gross margins; you can call it: “the salesperson that never sleeps”.

Further, urban tasting rooms have even lower gross margins than rural tasting rooms because they have rent expenses and utility costs. (I call out utility costs, as urban wineries cannot offset that expense with solar installations as many rural rooms do.)

Urban Tasting Rooms (UTR) is dependent on foot traffic–like their rural counterparts–but because of their location, they do not benefit from being a “destination, nor having a vineyard in proximity. About 50% of their traffic comes from tourists, and the balance from trade, industry, and locals.

Urban TR’s have the advantage of attracting more industry traffic—due to their convenience and proximity. And Industry guests spend money. It is an accepted practice that after a complimentary tasting, Industry guests will buy wine.  In contrast, rural wineries have the added advantage of attracting more club members and more seasoned wine tasters, since they offer production facilities, vineyards, and beautiful natural settings. Hence, the payback (club membership, sales) on operations is generally higher in a rural winery than a downtown location.

When times are good, Urban Tasting Rooms have a unique advantage– they allow visitors to try wines without having to drive–thereby reducing risk (and in the case of those who might hire drivers, cost). Hotels have begun to promote them to their guests as a safe and easy way to experience wine country in “downtown settings”.

They are a source of new club members as well as a reward for existing club members. They also serve as wine bars and sometimes retailers.

Many are the primary tasting rooms for their winery, others are secondary licenses known as a  “Dupe 02”. In California’s major wine country cities, there are more than 200 Urban Tasting Rooms as of March 2020.

Depending on the market, they generally have small staffs, usually 3-6 people. Their coverage is not always seven days a week; many close on Mondays, Tuesdays and or Wednesdays. Their hours vary but most stay open until 6 PM—later than their rural counterparts. Some —like in downtown Napa— have extended hours on the weekend, remaining open until 11 PM.

Their advantage in this current crisis is that they can serve as pick-up points for club shipments and in some cases, bottle sales. Many are taking that path. Others are sending pleas to their club members and asking them to order and use the downtown room for pick-up.

The challenge ahead for all Tastings Rooms—UTR’s in particular–lies in the ability of the winery to retain all staff during the crisis. Layoffs have already begun. The further challenge is that Urban Tasting room models are not like their rural counterparts. They serve multiple purposes; as places for wine education, a wine bar and sometimes– informal retail store. But much of their traffic is different from the rural destination wineries. While it can include club members– who enjoy having “their place” downtown to call their own, it also includes a mix to tourists and business travelers looking for a place to sit down and enjoy a glass of wine or a place to stop off between meetings and meals to enjoy a glass of wine. Visitors are not always interested in hearing the brand story and or being educated in a tasting. Some use the Urban tasting room, as they would a bar; to socialize with friends and simply enjoy a glass of wine.

Additionally, most Urban TR’s offer table service, which differs from the private tastings of the rural rooms, as they are generally in line-of-site with other customers. Hence, the Urban TR  seated experience offers less privacy and is profoundly different from the experience in a rural room.

the conundrum is that the staff that operates these rooms have very specialized skills. They are part restaurant hospitality pro, part bartender, part winery educator, and part security guard. They must also have the skill to work well on their own. Often, UTR shifts have only one staff member working at a time.

If wineries lay-off their UTR staff now, they may not be able to quickly rehire that staff when the crisis ends and the world re-opens for business. Re-training will be time-consuming as the learning curve is higher for UTR staff than that of a traditional rural tasting room. In addition, some staff may simply leave the market in search of other opportunities. Remember, it was only a few months ago that the industry was in a “seller’s market” for labor. There simply weren’t enough people to fill the jobs.

The good news is that there is some relief for small businesses contained in the recently passed CARES act. The $2 trillion bill provides loans for small businesses with 500 or fewer employees; which could allow wineries to prevent layoffs and continue paying employees. It also has a provision for payroll tax deferment. According to Business Insider, employers could delay paying payroll taxes for 2020, then pay 50% in 2021 and 50% in 2022.

We found out today that the administration is extending “shelter-in-place” until April 30. ” Dr. Anthony Fauci, director of NIAID has said it may even be longer– months before it is lifted. During that time, the current Urban Tasting Room will be operating at one-quarter speed. It will be plowing new ground; what will it’s purpose be in a month…two months? It remains to be seen what its next evolution may be.

Because, the final danger to urban Tasting Rooms, may be that wineries whose UTR was operating as a duplicate 02 may look at the utility of this strategy, find it no longer necessary and simply choose not re-open.

Cultivar Marketing

Tipping in Tasting Rooms

A Spirited Debate Ensues

I remember the first time I heard about tipping in the wine industry. My wife was working part-time as a tasting room associate at Freemark Abbey. She came home and told me that after she finished ringing up an order for a couple she’d hosted from Houston, they gave her $5 tip. You’d have thought from her exuberance it was $20 bill.  I’d only been in the wine business for a few years, but I thought to myself…that seems odd. Tipping in a tasting room environment where a sale was made “over the counter”.

Fast forward to 2020 and the issue of tipping is a very hot topic. Not just restaurants re-thinking the model– like Danny Meyer’s decision to create a no-tipping policy throughout his Union Square Hospitality Group, but there’s a new backlash gaining traction against tipping at service counters. Think of your local coffee barista. Where once a pair of decorated coffee cans might have posed a whimsical challenge to encourage a tip for a vote; “Is Die Hard a Christmas movie yes or no”, now modern POS systems force the tipping decision to be front and center to customers.

According to an article in the Chicago Times, “some consumers say they feel an implicit pressure….as cashiers hover nearby”. Tipping at a service counter is driving a higher share of wages to employees and in some places, the employers are using this as a cudgel–adding tacit notes to menus that “tipping helps create a living wage for our employees”. It will be interesting to see how this will resolve itself, but it has several parallels to tipping in winery tasting rooms.

Despite my late awareness of tipping in tasting rooms, it’s been a part of our business for many decades. There are numerous resources online from Trip Advisor forums to Tourist guides which offer advice on how much to tip for each type of experience from “belly up to the bar” to group tastings to seated private events.

And just to be clear: When we speak of tipping in tasting rooms, we are really talking about whether a tip line is present on the receipt generated from the POS system. Cash tipping happens regardless but is less frequent due to people carrying less and less cash. (there are numerous stories of guests– without cash–not only running out of an urban tasting room to find the nearest ATM but even mailing cash back to an associate weeks later.)  

I can understand the spread of electronic tipping in counter service. One major difference between the local coffee shop and a tasting room is the base wage. Depending on the state, counter service staff minimum wage may range from $7.25 (Federal) to $15.00. Tasting room wages, in general, are higher, ranging from $19-25 an hour in Napa and Sonoma counties. In addition, tasting room staff are further compensated with incentives for wine club and email sign-ups and in some cases bottle sales. In short, they make a lot more than your local barista, bakery or sandwich shop worker.

But there is a distinct difference between a barista making a latte which may take five minutes and a tasting room associate who may spend an hour educating a customer about a brand, its story, the wines, and their production.

Further, as Urban Tasting Rooms have proliferated, the incidence of table service has increased. Guests are conditioned to offer a tip under these circumstances, subconsciously associating a seated wine tasting with a restaurant experience.

An additional challenge to tipping in tasting rooms is ownership. Some owners are opposed to tipping simply on principle. They perceive it as a negative impression on their brand to the guest experience, so they don’t allow the practice by not allowing it on the receipt. But that does not prevent a cash tip, which still happens.

Other owners have taken tipping to an extreme. In a recent blog post “SVB on Wine”, Rob McMillan posted “The Email You Don’t Want to Get”(Feb 8, 2020) which detailed the travails of a father/daughter wine trip to Napa that included this: “She was also, in her own words, “royally pissed off” when we were presented with our invoices at several locations only to see hundreds of dollars listed as our “suggested tip” based on our case purchases.

Whatever side of the debate you fall on, know that this issue has as many adherents as opponents in the Napa Valley and around the country.

Among the Napa downtown tasting rooms, (there are approx. 40) it is equally divided among those who offer a tip line and those who don’t.

At a recent meeting, representing nearly 50 Napa Valley wineries, a spirited debate was waged on tipping; afterward the room was equally divided.

At the 2020 Direct to Consumer Wine Symposium, I asked my town hall group “do you allow tipping yes or no. The response from the audience of 100+—which included representatives from multiple AVA and states? 51% yes, 49% no.

Questions you should be asking yourself:

  1. Does tipping help with staff retention—especially in a tight labor market?
  2. Does tipping really damage my brand?
  3. Should I be pooling tips collected electronically and sharing equally with tasting room staff and back-bar?
  4. If I allow tipping should I adjust the other commissions, incentives, and bonuses we pay our tasting room team?
  5. Does not having a tip line put the customer in a quandary which may affect their experience?

Editors note: Yes Virginia, “Die Hard” is indeed a Christmas movie.

2020: The Challenges That Lie Ahead for the Wine Industry

 

In a recent edition of the SF Chronicle I read an interesting article about non-alcoholic cannabis Rose. And I thought, it wasn’t bad enough that something like “white claw” could gather so much attention now another competitor for wine was entering the “Octagon” battling for share of stomach.

I have watched wine– currently holding a 15% “share of stomach” among alcoholic beverage –grow steadily over the last 20 years, but recently, it has begun to plateau. Long-time Industry expert and prognosticator Rob McMillan of Silicon Valley Bank, stated in his 2019 State of the Wine Industry report that:

“The US wine industry is at the tail end of its largest growth period in history.”

There are many reasons for this; not the least of which is increased competition from other alcoholic beverages for share of stomach– such as the Cannabis Rose. Other reasons include the decline of the baby boomer generation–due to retirement. Boomers have been the main drivers of growth in wine sales for the last 23 years.

Direct to Consumer (DTC) Sales, as a channel has come into its own. It is still showing growth–fueled by the number of states that have changed their laws to allow direct shipments to wineries. (46 at last count, thank you “Free the Grapes”) Another reason for DTC growth has been a quantum shift in thinking by vintners that tasting rooms are not just “PR” tools to drive sales to traditional retail outlets. And for those of you who don’t remember, for a long-time tasting room were simply considered PR tools–ways to expose the brands to new customers–particularly tourists. It was hoped that visit to the tasting room would leave a lasting impression that the guest would remember when they purchased wines back home.

But headwinds are blowing on the traditional tasting room model, as well as two of the other prongs of DTC; the traditional wine club and the “mailing list”.

Tasting rooms began an arms war creating bigger and better longer more expensive “experiences” to attract customers. Several downtown’s in wine country feature more than a dozen choices for tourists–choices which Hotels happily recommend to allow their guests to taste wine and avoid driving. Wine clubs– which offer discounts–will find themselves in an endless cycle of battling their internal wholesale teams on pricing because of aggressive front-line prices at big box wine stores and the utter transparency of the internet.

(On a separate note, on-premise outlets are having their share of difficult conversations as millennials now check their phones as they read the wine lists and challenge the sommelier to defend markups of 3X and 4X.)

The highly allocated “mailing list” tool to sell Ultra-premium wine had its “Emperor has no clothes” moment after the last recession. Wineries that had “waiting lists” of 2-3 years or more, suddenly reached out their mailing list members who had been on “hold” to let them know their wait was over– “we have wine for you.” (I will not name the brand, but it had three levels of product that suddenly reached out to me in 2009 and said you’ve been elevated to the top of our list Mr. Baker.)

And so it goes. Changing demographics, more competition two new generations to attract to the category (yes two–don’t forget “Z-Gen”–coming of age next year) and an arsenal of tactics in DTC that need innovation.

What’s a vintner to do? Test. Innovate. Change.