Private label wines step out into the open

Business ideas come from all types of life experiences. For Tom Scott, it was his daughter’s wedding about six years ago.

Scott, vice president and general manager for Oliver’s Markets, noted his daughter wanted a personalized label on the wines served at her wedding. After brief moment of exasperation, Scott turned to his wine and spirits buyer, Richard Williams, and asked: “Richard, can I get this done - and what the hell is this going to cost me?”

The skeptical, yet dutiful father prevailed, and was able to source some wine with help from Vintage Wine Estates in Santa Rosa. The result: Susy and Ryan’s Zinfandel and Susy and Ryan’s Sauvignon Blanc was served at the wedding of the Tammingas.

“It was quite the hit. It was delicious wine,” Scott said. “And after that I was going, ‘If we can do this on that scale .?.?.’”

Fast forward to beginning of April, and the Santa Rosa-based grocery chain has introduced its Oliver’s Own wines at its three stores. They are sourced with grapes from Sonoma County appellations and will be offered at three different price ranges from around $10.99 to $15.99 per bottle, though they are currently being discounted during a three-month product launch.

The sales have been better than expected, with Williams calling the first nine days “astronomical.”

The introduction of Oliver’s Own offers a window into a hidden but significant part of Sonoma County’s wine industry. While they aren’t imbued with the grand romance of the county’s elite wineries, whose names are recognized around the world, private labels and their related subsets are an integral business for local growers and wineries.

Private label wines are wines made exclusively for a single retailer and are sold under the retailer’s brand, not the winery’s brand. They represent anywhere from 5 to 10 percent of the U.S. wine retail marketplace, according to wine executives and analysts, though it is not readily tracked. But all interviewed agree it will continue to increase.

“It’s real interesting,” said Phil Hurst of Oliver’s Markets’ decision. Hurst co-founded Novato-based Winery Exchange Inc., which was one of the first companies to do a U.S. private label wine business in the early 2000s, and now is chief executive officer of Truett-Hurst Inc. “It’s a sign that the private label market is growing,” he said.

The concept is not new. After all, wine negociants go back to the 1600s as Dutch shipping firms helped expand exports of the Bordeaux region. It remained popular in Europe, and in some countries the estimated private label wine market can reach as much as 50 percent penetration, with big retailers such as U.K.-headquartered Tesco and German-based Aldi controlling much of the market.

Economics of wine

The economics of the private label business make sense on a number of levels. For the supplier it offers a willing buyer, an important incentive in an industry where it is widely acknowledged that it is harder to sell wine than it is to make it. It can also yield bigger profit margins for suppliers, who can bypass many of the costs that wholesalers tack on when selling branded wine.

At times, it also has been born out of necessity. For example, after the Internet stock bubble burst in the early 2000s, vintners found themselves with a lot of quality wine and a shortage of buyers, said David Francke, executive vice president for Purple Wine Co. in Graton, which makes around 200 different wines from small customers to those that need 10,000 cases.

“The dot-com bust created surplus high-value wine that needed to go somewhere,” Francke said. “It opened the gates up to buy finished wines.”

For retailers, they get a wine without much of the wholesaler markup - resulting in close to a 50 percent discount in some cases - and the ability to offer customers an exclusive product they can’t get anywhere else.

Good deal all around

The practice offers grocery stores that operate on a profit margin from 1 to 2 percent a chance to make a greater profit. For instance, a grocery store isn’t going to do well competing against a Costco with its economies of scale as the largest wine U.S. retailer, said Brian Rosen, a Chicago-based alcohol beverage consultant. “It’s a matter of survival,” Rosen said.

The customers also benefit as they can get a comparable bottle of wine at a reduced cost, especially as stores typically place the private label on the shelf right next to a winery’s brand to make it easier to see the savings. For Oliver’s Market, the cost savings on its private label can be as much as half, Williams said.

In addition to a retailer’s private label, there is also the control label, where a wine supplier owns and controls the brand but dedicates it to a specific retail account. There are also celebrity brands. The most notable example is the Charles Shaw brand of wines sold at Trader Joe’s, the ubiquitous “Two-Buck Chuck.” While derided in much of the wine world, the wines have become one of the chain’s best-selling brands, although they now sell for $2.49 before taxes at its Santa Rosa location.

It fact, Trader Joe’s was a pivotal player in building acceptance in the U.S. market for the private label wine market, which started gaining ground domestically about 20 years ago, analysts said.

“Trader Joe’s used to be where the wineries would unload stuff that wasn’t moving,” said Rob McMillan, executive vice president of Silicon Valley Bank’s wine division, noting that the Monrovia-based retail chain could buy wine at rates near $1 or 50 cents per bottle.

The market has grown across the board with most retailers developing their own programs. Estimates of private and custom labels in the U.S. wine industry can be a much as 40 percent in volume. Total Wine likely has the largest percentage of such mix, but others such as Whole Foods, Safeway and Kroger participate. For Costco, its Kirkland Signature wine label is approximately 20 percent of its wine business.

“Our Kirkland Signature business will grow as we find the right items to develop,” said Annette Alvarez-Peters, Costco’s assistant general merchandise manager, in an email.

Find the winemaker

The one part that the industry doesn’t like to talk about is who actually is making the private label wine, especially as they are less costly than their own labels. A recent check of various wines sold under the Trader Joe’s brand shows they were made by ABJ Wines in Geyserville, JBA Cellars in Rutherford and DNA Vineyards in Ukiah. Those “companies” keep the true winemaker hidden, though a parlor game exists among some wine aficionados on who really made it, especially if they discover a real keeper at a low price. Trader Joe’s even teases, noting its 2011 Reserve Cabernet Sauvignon Napa Valley Lot #115 comes from “a premium winery in the heart of Napa Valley” and was surplus wine “that became a burden on the heels of large back-to-back-to-back harvests.”

While serious wine fans may sneer at Trader Joe’s, the reputation of private label wines has grabbed greater acceptance in the marketplace. “Over time, they have turned into real brands,” said Peter Byck, CEO at Winery Exchange, which notes it has helped make wines that have garnered 35 platinum, 41 best of class and 305 gold medals in various wine competitions.

“I think this validates the question surrounding the quality of the private label wine we make,” he added. The company counts Kroger, Costco and Whole Foods among its retail partners and does more than $100 million annually in business, which also includes private labels in beer and spirits.

The outlook also is bright over at Rack and Riddle in Healdsburg, where general manager Mark Garaventa notes that its private label production is expected to grow from 35,000 cases last year to 50,000 cases in the coming years. The company specializes in sparkling wines, but has decided to go into the still-wine sector with its private label.

Rack and Riddle products go to wineries, retailers and even distributors that are looking to bulk up their portfolio. But Garaventa is eyeing other possibilities as well, including the burgeoning hotel and resort sector, cruise ships, restaurants and even Fortune 500 companies that want to offer personalized wines to their employees as a perk. “There is so much potential in this market,” he said.

Over at Oliver’s Markets, executives concede they were late to enter the private label market, but that was a result of the economic downturn and its efforts to ensure it could find a quality local winemaker and good sourcing of the grapes in areas such as the Alexander Valley and Sonoma Valley.

But company executives knew the private label business was a smart play, especially because a key niche at Oliver’s Markets is serving locally made Sonoma County products. Local products account for 28 cents of every dollar spent by its customers.

While the wine served at his daughter’s wedding was good, Scott said he knew that it would have to be even better for his customers.

“The quality we needed for that was different than the quality we needed for the Oliver’s brand,” Scott said. “There’s really a very high bar we are looking at for these wines.”

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