Wine, grocery stores, and dog food

The biggest controversy in the wine business (aside from direct shipping) is probably wine sales in grocery stores in the 19 states where it's illegal. New York gets the most attention, not surprisingly, but it has also been an issue in Oklahoma, Tennessee, and Maryland.

The question seems straightforward: This is the 21st century, so why can’t consumers buy a bottle of wine at the supermarket? The answer, of course, is much more complicated, involving the competing interests among the different parts of the three-tier system; what’s often portrayed as a battle for survival between local, neighborhood wine shops and soulless, money-grubbing multi-national grocery chains; and each state’s particular politics and liquor regulations.

Hence the need for a calm, moderating approach, which is where the Wine Curmudgeon comes in. The world will not end for small retailers if wine is sold in grocery stores, and wine in grocery stores is not the panacea that the supermarkets think it is. More, after the jump:

For this, we can look at the pet business, which went through a similar shakeout some dozen years ago. That’s when Proctor & Gamble, then widely regarded by independent pet retailers as a soulless, money-grubbing multi-national out to destroy their businesses, bought a dog food brand called Iams.

Iams was the leading dog food sold by independent retailers, and was only available in pet stores. The independents were convinced that they would all go out of business the minute P&G started selling Iams in supermarkets, which happened shortly after it bought the brand.

The result? There were about 10,000 pet stores in the U.S. in 2000, when P&G bought Iams, according to the editors of Pet Age magazine, and there are about 10,000 today.

I’m not the only one who sees the parallel between dog food and wine (which occured to me because I write for Pet Age, and covered the Iams switch). Frank Frattini, who owns a very successful New Jersey pet retail operation called The Hungry Puppy, sees it, too. And he should know, because he was one of those retailers selling Iams as well as a wine drinker.

“Did we want that to happen? No,” says Frattini. “I understand exactly what the liquor stores are saying. They built up those wine brands, just like we built up Iams. And then someone wants to come and take the brands away after they did all the work to make them successful, just like what happened to us.”

Dog food is the key to profitablity for most pet retailers, accounting for as much as one-quarter of sales. Plus, consumers who come in to buy pet food often leave with other items, like toys and treats, that carry higher margins. So, in the short term, says Frattini, the Iams move to grocery stores cost him a lot of money, as his customers bought their food at the supermarket instead of his store.

In the long term, though, the Iams switch actually helped his business – really, he says.

Frattini learned how to be a better retailer. He didn’t have the Iams cushion to depend on, so he had to do a better job in other areas – marketing, inventory management and the like. That made him money he would not have made if Iams had not switched. In this, he says, he came to the realization that business will always change over time, whether he wants it to or not. So one had better learn how to adapt.

Second, retailers like Frattini discovered they had an advantage that grocers didn’t have, despite Iams. “It was convenience and knowledge,” he says. “When’s the last time anyone could answer a pet food question at a grocery store? And isn’t it easier to stop at a pet store to buy food than to go to the grocery store?”

Which should be good news for any wine retailer terrified about what will happen if his or her state allows supermarket sales. Yes, the short-term shock will be hard, but good retailers will be able to survive that. After all, when is the last time anyone could answer a wine question at a grocery store?

Comments

[Steve McIntosh]

Great parallel lesson.

As an aside: everyone likes to take cracks at the big guys. Gallo and grocery stores are great examples in the wine biz. And a lot of those cracks are well-deserved. But here's the thing: just as Gallo turns out a lot of very drinkable values, grocery stores are investing in their wine aisles in smart ways. Our local Giant Eagle grocery store has a master level sommelier candidate on staff, a 3000 bottle selection, and weekly tasting events in a convincingly welcoming environment.

Should retailers be afraid? Just the ones staffing their prime time hours with high schoolers who communicate via grunt.

[Duncan Ross, Arrowhead Spring Vineyards]

An interesting parallel, but you would need to modify it a bit. Grocery stores are great for selling national brands in a self service environment (generally). Grocery stores would be good for those national brands which are already popular (like iams). Grocery stores in NY would do little for lesser known brands even if they allocated shelf space (you would have to add a few hundred other brands of dog food to your parallel and a grocery store/big box isn't set up for this). If the grocery store replaced the wine store in the grocery store plaza, the result is reduced selection of wine. History has shown that as goods like artisan bread, meats, etc become available in grocery stores, those smaller shops fold. The same would happen in upstate NY where 1100 wine shops are located in grocery store plazas. It could work in NY if phased in over 10 years, but the sides are very black/white on the issue with little compromise. Most other areas where wine is in grocery have evolved that way since prohibition so they have evolved to their systems over a long period of time. This adjustment period is necessary to allow businesses to evolve rather than just changing the system in a day.