Business > The Wine Business

The Wine Business

By GREG MAFFETT
Published: January 17, 2012

This is a short case study on business, specifically the use of email in business. It started with an email that I read. The email began…

Recently many of you expressed a desire for your allocation process to be more convenient while ensuring your wine quantities are guaranteed throughout the year.

The email went on to explain that the club was changing from a "order what you want up to the limit" format to "we are going to ship you what we want when we want" format.

Welllllllll....

I was not one of the many. In fact, I dashed off a note promptly in reply.

Interesting, can you quantify "many"? Curious what percentage of the client base was enough to change your business model.

Cheers,
Greg

It’s a day later and I’ve not heard anything back on that email. I’m not surprised as I expect the original email has met with a chilly response across the customer base.

I was, by my standards, quite reserved in my reply. But I did have that academic curiosity as a guy who teaches about business and contracts. The opening line indicated that the consumer demand was driving this policy change. So I wanted to quantify the volume of the demand. Would 20% of the members be enough to drive change? Did "many" mean over 50%? Where was the cut line?

My immediate compare/contrast on this approach was with the folks at Disney. When you are a member at Disneyland, you are constantly being surveyed about possible changes in the membership structure. They don't suddenly make a unilateral change in the arrangement and send you a note saying "Look here, we are changing your deal because some other people asked!"

Now granted, Disney is often despised by certain Americans as being too corporate and fake, but it is what it is. You pay about the same for a day at the park as you pay for a good bottle of wine. And Disney makes a lot of money. But in doing so you get the sense that there are seriously committed to not annoying their customers.

It is the ripple effect. There are legions of stories of people who were treated well at Disney and who later brought dozen of people back. In my case I was at Disney because my youngest daughter liked the place. When she got tired of it, I no longer renewed. But, I now have a grandchild coming along soon. I'm still a potential customer and guess what, they left me with a good taste in my mouth. It's just good business to not alienate those who have used your product. So back to this winery.

As I thought more about this email, I started to apply some math concepts and business concepts to the idea. Are businesses there to serve the customer or to make a profit? Ok, you can argue "both" but in the end if they don't make a profit, they are no longer a business. So any policy change has to be viewed in the "Will this increase our profits?" light.

So I used the math approach called hypothesis testing. The two hypothesis were

1. This was a response to customer demand.

2. This was an effort to increase profits.

These two are not strict tests, they are not mutually exclusive, instead I was simply trying to figure which was the “driver” and which was the “passenger” if you will. Hence my email. If they came back and said, why yes, 66% of our club members indicated they preferred this approach, I'd salute and pat them on the back.

If it was the other, then they are trying to sell me a bill of goods.

Ok, so I thought some more. Would they respond favorably to the following ideas from customers?

a. Cut your profits in half? no.

b. Send us free wine on our birthday? no.

c. Deliver our wine for free? Maybe on big orders.

So when they made the choice they made, it didn’t feel like customer demand.

Take away autonomy and charge us for shipping seemed to support hypothesis 2 vice 1. This was a money grab. But it was worse than that, because they were "selling" it as "this is what you asked for." And I know I didn’t ask for this.

Hrmm.

I tend to look for causal relationships in events. On my end, I can clearly lay out the causal events that have lead me to buy a little wine from them, but not a lot of wine. I look in my wine closet and see a number of Pinot’s. All are good. Most are in the $40-50 dollar range. The ones from this winery are in the $70-80 range I think. So I look at two bottles and see that the 45 dollar one is say 90% as good as the 75 dollar one from this winery. The quality to price ratio is better on the lower priced bottle, so looking at this as an economist, my wine closet is a “market that clears on price.” My long term holds are my highest priced bottles. Hence, I hardly replace them. If there are many customers like me, the winery has a sales problem. And that is what this feels like. But as a seller, that is not a signal you want to send the market.

Granted, this is the wine business. All wineries are selling grape juice at highly marked up prices. So they are selling an image. And if they come right out and say sales are lagging, they hit the people who are buying the image in the chops. I get that, it's a fine line.

Not everyone responds in the same way. There is the problem with the mass email. What will be bought hook, line and sinker by some, is rejected by others.

They make some very good wine. There are only two I don't like. The "flagship" wine, the Arcus Estate and the Cuvee. The former has never tasted well in the tasting room for me, maybe it needs a 10 year aging process. The latter is probably juice that didn’t make the single vineyard cut, but was too good to sell to other producers as bulk juice.

The idea behind the new allocation club is if you select a high volume plan, you get the Arcus Estate. Well that paired it down to the small shipments in a hurry. But I suspect the small shipments will get the Cuvee. Hrmm.

I should mention that when I joined the club, the cheerful law student who signed me up was kind enough to explain to me that the reason to join was not that I got free tasting, but that I got first shot at the rare wines. I’m generally pretty good at figuring out my own value system, but I often get a chuckle out of people half my age who feel a need to recalibrate my value system.

So back to me, the premise for joining the club is now gone. The new scheme is no longer "first shot" but instead whatever we decide you should drink. And as I buyer I now have concerns that they will use the club to “dump” wine that they don’t see selling. Not a bad deal for them, but a bill of goods for me if it goes that way.

I was puzzling over this while I was on my daily bike ride. I was still in hypothesis land. Maybe it was customer demand, but if I had to bet money, I'd have bet that sales were down and there was a senior level meeting where they said "we need more sales from the club and here is how we are doing it. Craft an email that makes it sound like it was customer demand..."

So then I dug into the end of the email...

Once you have selected and confirmed your membership level, your current A-List benefits will continue, including invitations to special events and complimentary tours and tastings. If we don't hear from you by February 3rd, we will reach out via phone to confirm your interest in receiving Archery Summit wines. If we are unable to connect, we will move you to our mailing list. * Please note that mailing list members do not receive first access on the release wines.

So there you have it. The boot to the mailing list. Pony up or get downgraded.

Ah, hypothesis 2 confirmed. Sales are lagging and they feel a need to bully people into this allocation scheme.

They market themselves as the Rolls Royce of Oregon Pinot Noir. Clearly they are among the best. So they can't come out and say that they can't sell their wine and need to bully existing customers into buying it. But that is the feel. In 2009 they could still offer the "glamour" of limited availability. Now they are, i suspect, awash in wine and need to twist your arm to make the numbers to stay in business.

Yes I get it. And yes, I expect most of the other members will get it and pony up.

For me, I'm on the on the fence. I'm trying to figure out why I would want to do business with people who think twisting my arm and selling me a bill of goods is something I want.

I mean it is good wine, but really, there is lots of good wine out there.

So the next day I did get a similar email from their sister winery. That winery already had a shipment program, so it was not near as big a change. Likewise, the email had a much more customer friendly tone.

“A few month ago we conducted a survey…”

Ah there, now there is something concrete to link this to. I remembered the survey. It was something I was part of, like the Disney experience. It went on to tic off off the upgrades. But no arm twisting and no bill of goods.

To me it was now even more clear that the parent company that owned both these wineries was driving this, that is to say, “It was coming from corporate.” And I suspect that the people in Oregon may have pushed back, but were told to salute and move out smartly. Which they did. Badly. Not intentionally bad, more petulantly bad.

The economics book that I’m reading now could possibly use this as a case study. The book is Adapt by Tim Harford. He argues that decentralized control and local autonomy leads to more robust decision making in complex situations. The guys at HQ always want to squeeze more money out of the business. The local operating units rarely want to drive off customers. That sets up a dynamic that can work if they are decentralized.

But it doesn't appear they are.

Any Comments?


More...

» Haditha in Pennsylvania

USPS vs UPS

By GREG MAFFETT
Published: April 7, 2012

how to make getting stuff from here to there harder than it needs to be

Public House

By GREG MAFFETT
Published: April 5, 2012

A few words on the decline and fall of local food purveyors.