Wineries that cut out middleman show strongest growth

As the recession begins to ease its icy grip on the North Coast wine industry, it has become easier to identify the winners and losers of the past few years.

One notable standout, which has become the lifeblood of many small and mid-size wineries, is the direct-to-consumer wine market.

Across the region, small and mid-size wineries with strong direct-sales programs such as wine clubs largely outperformed the rest of the industry during the downturn, according to industry analysts.

"Now there is so much emphasis placed on direct sales," said Jon Fredrikson, president of Gomberg, Fredrikson & Associates in Woodside. "It has let wineries better control their destiny."

Kosta Browne Winery in Sebastopol, which was sold in 2009, is a great example of a small company that thrived because of a robust wine club.

While nearly every winery sale in the last few years was the result of economic hardship to some degree, Kosta Browne was not. The 15,000-case winery sold for an impressive $40 million — a price several times higher than deals involving substantially larger high-end wineries.

The reason: Kosta Browne Winery had one of the strongest wine club programs on the North Coast.

"As a result, they were able to do very well in that transaction," said Matt Franklin, a merger and acquisitions advisor in Santa Rosa. "Everyone on the high-end is now aiming to increase their direct-to-consumer sales."

Direct wine shipments provide wineries two key advantages.

The first is better profit margins. Wineries keep a larger percentage of direct sales, rather than sharing a cut with distributors, retailers and restaurants.

"They get full margin on the sale of their products," Franklin said. "If they are selling it through the traditional three-tiered system they are getting half that."

Secondly, it has become more difficult for many wineries to distribute their bottles through traditional channels, often referred to in the industry as the "three-tiered system." In part, that is a result of a consolidation of wine distributors, who increasingly want to deal only with wineries that have large annual production volumes.

"We went from thousands of distributors a few decades ago to about 700 now," Fredrikson said. "The majority of wine sales are really only handled by a handful of distributors."

Distributors are now less willing to deal with all the boutique wineries scattered across the North Coast than before the recession, which weakened demand for high-end wines.

"These smaller wineries don't represent much in the way of profits for the distributors," Fredrikson said. "Unless it is a door-opener brand, a highly-touted cult brand for instance, distributors are not interested."

As a result, many small and mid-size wineries have in recent years turned to direct sales out of necessity.

Daily wine shipments at wineshipping.com, a Sonoma business that helps wineries fulfill orders, increased during the recession, said Jennifer Goodrich, director of sales at the company.

"The daily orders immediately went up," she said. "We are seeing it continue to increase."

Direct sales still represent only a small fraction of the market — about 3 percent overall — but that is growing, according to industry analysts.

For some wineries, direct sales have long been part of the business model. The wine club program at Gundlach Bundschu Winery in Sonoma dates back to the early 1990s, said Susan Sueiro, its marketing director.

"It's a significant portion of our sales," she said. "And it has been for a long time."

During the recession, its wine club sales proved far more resilient than its sales into the three-tiered system, Sueiro said.

"We took much more of a hit on the three-tiered system, because of a slowdown in restaurant sales," she said. "Our club sales, on the whole, just went sideways for awhile."

Wineries such as Gundlach Bundschu have seen another promising trend in recent years. It used to be that the majority of shipments stayed in state, but now more people outside California are placing orders.

Six years ago, the U.S. Supreme Court issued a landmark ruling vastly expanding the legal rights of wineries to ship bottles directly to consumers in other states. Now 38 states allow California wineries to ship directly inside their borders.

The result has been an ever-growing market as wineries add new customers outside California.

In 2005, Californians purchased 54 percent of the wine shipped directly to consumers, according to MKF Research in St. Helena. By 2007, it had fallen to 45 percent.

Now shipments to Californians only amount to 32 percent of direct shipments as more wine is sent to homes in other states, according to a recent study by Wines & Vines magazine and Shipcompliant.

"Direct sales is the best of all markets for wineries," Fredrikson said. "They are all hustling like crazy now to develop their direct-to-consumer programs."

You can reach Staff Writer Nathan Halverson at 703-1577 or nathan.halverson@pressdemocrat.com.