Influential Costco executive discusses wine business in Q&A

Annette Alvarez-Peters is one of the most powerful people in the wine industry.

She supervises the wine buyers for Costco Wholesale Corp., which sold $3.7 billion in alcohol around the world last year. The sway Costco carries in the industry from the vineyard to retail shelf is tremendous because many wineries want a shot at floor space inside the big-box discount retailer, based in Issaquah, Wash.

Alvarez-Peters has held various positions within the company from an entry-level accounting job to merchandising receptionist. She was a beverage alcohol buyer in the company’s Los Angeles Division from 1995 to 2005, when she was promoted to her current position, assistant general merchandise manager of beverage alcohol.

Alvarez-Peters is definitely not a wine snob. Some wine connoisseurs got bent out of shape when she told a CNBC interviewer in 2012 that selling wine is no different than selling toilet paper. “But at the end of the day, it’s just a beverage,” she said in the CNBC interview. She is studying for her Masters of Wine.

To get a sense of the current wine (and beer) retailing environment, Press Democrat wine business reporter Bill Swindell conducted a question-and-answer session with Alvarez-Peters via email. The following is an edited transcript:

Q: How tough is it to get a wine sold at a Costco store?

A: By design, we have a very limited number of wines in our system. We tend to have a constant rotation of wines which we like to refer to as our “treasure hunt.” Each buyer is very selective in choosing items for their respective regions. We look for quality wines at a value.

Q: How big is your team? How do you settle on a mix of international versus domestic wine?

A: We have 11 buyers on the alcohol beverage team. Each is responsible for wine, beer and spirits for their region. Each region consists of two to 13 states with up to 60 stores. Each buyer deals with the necessary paperwork, PowerPoints and supplier/distributor meetings to run their business, in addition to getting into Wine Country and wine shows or tastings when time permits.

Our domestic wine business is approximately 65 to 70 percent. More import wines are sold in the Midwest and East Coast. We try to tailor the wine mix to the region and their demographics. Each buyer has the autonomy to purchase all categories for their region. In addition, they all do an excellent job supporting local wineries. For example, Washington state will have a larger selection of Washington wines, and Oregon will have various pinot noir and pinot gris from the area, whereas, our stores near the California Central Coast will have items from Santa Barbara and Paso Robles.

Q: What factors go into setting a price for a bottle of wine?

A: As with all items sold at Costco, (profit) margins do not exceed 14 percent. I think the wine industry varies in regards to making wines affordable, depending on the segment (premium versus luxury). There is a lot of competition at most premium and super-premium price segments, which can drive very affordable prices in the market.

Q: Has Trader Joe’s had any effect on your bottle price?

A: Trader Joe’s is a good operation. As a competitor, we watch their prices, as we do with any retailer carrying the same item. We adjust accordingly.

Q: What regions do you tend to purchase from?

A: California is the largest region. From California, Sonoma leads the way with Costco’s Kirkland Signature Sonoma Country Chardonnay and La Crema Chardonnay. Napa follows.

Q: What is resonating with consumers?

A: Rosé wines performed very well during spring and summer months. Domestic pinot noir continues with double-digit growth. The import wines continue to do well - Rhone Valley, Argentina, Bordeaux and Spain - showing double-digit growth.

Q: How big is craft beer sales at Costco?

A: This is a pretty exciting category for us. We continue to experiment with various breweries and try to support the local craft breweries in each market. The craft beer segment represents approximately one-third of beer sales.

Q: Is the India Pale Ale share growing in the beer market?

A: Yes.

Q: Can you discuss more about Sonoma County wine? You mention chardonnay is big. Any other varieties?

A: Domestic wines represent 65 to 70 percent of our business, which California is the largest segment. In addition to chardonnay, cabernet and pinot noir are doing great as well. It is difficult in our system to pull the percentage of Sonoma versus Napa.

Q: After many years of selling producer wine, Costco decided to sell a private-label wine. Why did it take so long to make that decision, and has it been a good one?

A: Kirkland Signature was developed in 1995. Our first Kirkland Signature wine was developed in 2003. Kirkland Signature represents approximately 20 percent of the business. Developing wine, spirits and beer has been a great decision for us. Kirkland Signature is a strong brand with our members, as the members are able to try various appellations and regions which they may not have otherwise considered.

Q: And those profit margins on Costco private label are set at 15 percent, right?

A: Yes, are margin cap is at 15 percent on Kirkland Signature. We don’t necessarily sell every Kirkland Signature item at 15 percent.

Q: Can you discuss the changes to the wine laws toward more privatization that Costco helped pass in Washington state? Did that have the desired result, and is that a model for the rest of Costco’s stores?

A: At this time, Costco is not leading the charge with any changes to wine laws. The Washington state liquor laws allow our members to shop Costco for all of their beverage alcohol needs.

Q: Wines sold at Costco can be cheaper, sometimes significantly, than those sold through a winery’s tasting room. Does that cause brand damage to a winery’s price? Should that make a winery not want to have their wines sold at Costco? Or is any cost outweighed by the exposure that Costco can give them?

A: Costco demographics skew toward the higher end. Costco has approximately 2,500 to 3,000 members shopping at each Costco every day. We are vital partners with many of the wineries. We depend on them for quality items and they depend on us to deliver their product to the end-user. We often create brand awareness for wineries, as we have more than 75 million members, and many note they saw “Brand X” at Costco. Also, wineries will produce “winery only” varietals or limited releases available for sale at their tasting room only. Many times this can offset their mainstream varietals that are sold to Costco or any of their other retail partners.

Q: Is a tasting room a competitor because they sell wine, or a support because they allow consumers to sample wine, which is the important element in a wine purchase?

A: Any retail establishment that carries the same item is important and we need to ensure we show a value, as our members pay a membership to shop Costco. We are able to offer additional exposure to every winery to promote their wines within our stores. … I would suspect that most of our members have had very few opportunities to visit wineries or tasting rooms in California. I believe our reach to the consumer can create more availability to a wider range of wine lovers.

Q: Some executives in the wine industry are concerned that the popularity of craft beer, cider and craft spirits could erode wine sales. Do you agree?

A: We haven’t seen the erosion in wine sales related to craft beer and spirits. Our wine category continues to grow at a steady pace, along with beer and spirits. If anything, craft beer is pulling sales from other segments of the beer category. Sales of import and domestic beers are soft, while conversely, craft beer, ciders and large bottle format beers are very strong.

Q: You mention that you like to source locally, but are there some specific craft beers that do well nationwide in all your stores?

A: At this time, we do not have a craft beer that is listed nationwide. Many of the breweries cannot supply our needs, therefore, by design each region’s buyer will seek out breweries within their region.

Q: Has there been one alcohol product that has surprised you and your team in its popularity among customers?

A: Dry rosé wines came on strong this past spring and summer. It has been a slow build for the past couple of years.

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.