The Smart Winery’s Reaction to the Grape Shortage
The U.S. wine industry is abuzz about the impending grape shortage. What should a smart winery do? Simple microeconomics says that if demand is higher than supply, price goes up. Clearly the price for bulk grapes is going up, raising cost of goods sold for wineries that don’t have captive supply – i.e. their own vineyards. But, should a winery pass on that entire increase?
Savvy wineries have spent years and significant dollars building their brands and targeting specific consumers at specific price points. The question is, if a winery simply raises their per bottle price in reaction to the grape shortage, will it stick or will they simply price themselves out of the consumer markets they have worked so hard to target?
There is a better strategy. Every good investor has a target asset allocation. Investors allocate their investments between stocks and bonds, high yield and low risk, international and domestic, etc. Similarly, any winery that sells through multiple channels should have a channel allocation strategy. Wineries can have specific target allocations of their production to traditional retail, restaurants, on premise sales, DTC, etc. To avoid alienating their end consumers, rather than raising price, wineries can shift their channel allocation towards higher margin channels. Specifically, wineries can shift share away from retail and toward DTC.
I don’t mean to over-simplify things. A shift away from traditional retail distribution to DTC is not an easy undertaking. And it doesn’t come free. DTC requires new ways of thinking, different marketing, different partners, and of course a great fulfillment partner. WARNING…shameless plug…WineDirect clearly should be your fulfillment partner. To learn more about DTC, I strongly suggest the WISE Academy. With the right education and the right partners, a move towards DTC can be very rewarding.
Done right, a winery that shifts their channel allocation towards DTC can strengthen its ties to its consumers, enhance its brands, and increase its margins. A real win, win, win.
IMHO, wineries should try to hold prices as much as they can, look for other ways to trim costs, and constantly check data to see how and where their wine and other wineries' products sell. People have so many choices from California and around the world.