Wine brands need to combine demand and margin to move upmarket, says O’Neill Vintners & Distillers CEO
In the old days, when you had excess capacity, you would make extra wine and you could sell it here and there. We try to be a lot more focused on what the consumer wants and make sure there is room at every step of the way. At the end of the day, the consumer may want it, but if there is no margin for the retailer, the wholesaler, and the producer, obviously this is not a sustainable model.
One of the things we also think about is that we need to have efficient production facilities as we move forward. We built our facility to accommodate premium grapes from across the state and aggregate them in small batches around a large facility. One of our goals is to have excellent operating costs in a world where a lot of these grapes are grown, the facilities are not as efficient.
Effective in terms of being able to hyperspecialize the winemaking practices that go into each brand to make them more profitable for the brand you produce?
For example, we bring small-scale coastal winemaking techniques to the central valley. What we’re doing is if we’re going to make a barrel-fermented chardonnay or an old Paso Robles cabernet, we can do it on a large scale. We do it in increments of 5,000, 10,000, and 15,000 barrels.
If somebody on the coast tried to do the same thing and do it with 300 barrels, we have an advantage because we are doing it on a larger scale.
Our tank presses hold 60 tons of grapes, but if you go to XYZ’s large bulk cellar, they either run it through a continuous press or put it in presses that can hold 10 (trucks) loads.
We have tried to build facilities that are scalable but that provide wines in the $ 10 to $ 20 range.
You focus on what the consumer wants and target production and branding based on that demand, so does that mean brands in this modern world are short lived?
If brands are to last for a long time, you will need to continue to make significant investments, not only in the quality of the grapes and the winemaking, but also in the brand itself, whether it’s advertising or social media. The days of launching a brand and expecting it to survive are long gone.
There is also an evolution of brands. If the investment isn’t there, the consumer is bored with them and probably the retailer too. But think about the big brands that existed 30 years ago. Thirty years ago, it was the biggest brand in America, and the second was probably Paul Masson. Now they are almost nonexistent. You have to reinvest in them to keep them relevant to the consumer or create something else to replace them.
Is your margin higher in new brands than in existing brands? Is it difficult to take the prices of existing brands?
Some will not agree with this, but we find it very, very difficult to raise the prices. Ultimately, you have to create brands with higher margins to absorb the cost increases. Inflation is on the rise; it does not cost us less. Labor and transportation are big problems in California, and these are increasing by 2-4 percent each year no matter what we do.
You end up with a squeeze in margins on brands, for example, which sell for $ 9.99. You go to the retailer and say, “I’m going to increase the price by 10%. They say, “Great. I’ll take it off the planner, and it’ll be stuck on the shelf. And if it doesn’t sell on the shelves, it will be on the shelves. There is enormous resistance to price increases.
It is possible that there are five or six marks that are the Almadens of the future. They are no longer relevant, so these producers have to move production to products under the same brand halo or create new brands, which is sometimes much easier.
It’s a dilemma, because you have all this brand equity. But if you have a brand that was historically at $ 10 and now have a retailer selling it for $ 5, your margins are reduced. Where are you going? You can’t go back to the producer and say, “I need lower prices. They will say, “I can’t get manpower to pick it up, and to pick it up I have to pay more.” “
We are shown (brand acquisition) case after case, where the margin is too low, and that would make competition difficult.
Slowly everyone is repositioning their portfolios for better margins, so as long as you keep those prices in the market, they stay true. If you look at the big brands, the prices haven’t changed much. I think there are a handful that can handle price increases.
What do brands capable of raising their prices have in common?
A handful almost have cult status. They are able to increase the prices almost every year. Rombauer is one of them, on chardonnay. But they’ll tell you that they can’t increase the price of red but they can for chardonnay. The major producers of Champagne have been able to raise their prices.