Encounter with the Three Tier System

In my free time, I am working on my food Instagram @jzthefoodie as an influencer and yesterday, I received confirmation that I was placed on a collaboration between Kroger and Delatorri Prosecco. Because of this class, the first thing I thought about was whether the three-tier system would allow for this. Technically, this was a link between a manufacturer and retailer and reminded me a bit of the marketing techniques we debated a few weeks ago. What was more intriguing were the rules I will need to follow in order to participate in this campaign which are different than the ones I typically follow. For example:

• Hashtags: I need to include #sponsored and #corksandcheers tag Corksandcheers and Krogers
• Picture: Everyone in the picture had to be above 26 (I would have assumed 21 would have been enough) 
• Free Product: It is critical that when I post this, I have to mention that the product was free which I would never do with any other products

After more research into the rules, I found out that Corks and Cheers is a marketing pattern so I can't actually tag Delatorri Prosecco in any of my pictures which I believe is their way of avoiding issues with the three tier system. 

What are people's thoughts - is this entering into the grey area?

Aging Wine

Older wine vintages are often considered more prestigious, and I personally enjoy some of the secondary taste characteristics that emerge as a wine gets older. I wanted to do a little research about aging wine and how much a given vintage improves in value over time.

The first thing I learned is that only a small percentage of wines have "aging potential". Ninety percent of the world's wine production is meant to be drunk within one year of production, and 99% of the world's wine production is meant to be drunk within 5 years of production.

Wines that do age well are often high quality, and initially tannic. Bordeaux blends and cabernet sauvignon are examples of wine that are considered prime aging candidates.

How much does wine appreciate in value as it is aged? This article estimates that fine wine vintages have appreciated in value by about 12.5% per year over the last 50 years -- in contrast, the S&P 500 has returned around 11% over the last 30 years. Some very elite wines have appreciated even more rapidly:

I wonder if there is a business opportunity for someone to specialize in storing wines for sale when they are older and more valuable. Older vintages are uncommon in the typical liquor store, but some stores like K&L in San Francisco do carry older vintages, especially from Bordeaux. Of course, some of the return from aging is not attributable to the increase in drinking quality of older wine, but rather, that the supply of a given vintage declines over time as most of the bottles are drunk. If a large storage facility created a supply glut, I imagine that the 12.5% "return" would come down significantly.

You can see this somewhat with the Bordeaux wines at K&L. Because Bordeaux is so infrequently drunk at a young age, larger portions of it are stored and you can buy a bottle from the 1990s at K&L for $25 - $50 -- much cheaper than old vintages from other regions. While the business opportunity for storage may be limited, I am enjoying the availability of cheap older wine at K&L.

The Growing Role of Affordable Wine in the US

In “WineDirect: Supply Chain Management in the U.S. Wine Industry,” I was surprised to learn that 90% of wine sold in the United States came with an average price tag of less than $10 per bottle. I associate wine consumption to the upper echelons of society, yet US consumers' behavior towards the category are clearly shifting. A 2013 Gallup survey shows that "beer has declined as the preferred beverage of U.S. drinkers, shrinking its advantage over wine from 20 percentage points in 1992 to one point today."

According to this survey, millennials (ages 18-29) are increasingly switching to wine from beer with a 10% increase in wine consumption from 1992-1994 to 2012-2013.

A big answer to this consumer shift is women. As countries become more developed, women are entering the workforce and feel alienated by the beer industry. They also own the share of wallet and are shifting household purchase behavior to wine off-trade. In this same survey, Gallup found that "Among women, 52% say they drink wine most often, while 24% say liquor and 20% beer." Women are more likely to be aware of the ABV to calorie ratio - with wine, consumers can get drunk at a lower health cost than beer. They are also budget conscious and aware that wine is better bang for your buck. 

The Three-Tiered System: How Did We Get Here? Part I: Pre-Prohibition

Before Prohibition came into effect in 1920, wineries, distilleries and breweries often owned retail outlets in whole or in part, enjoying vertical integration and quasi-monopoly power over a small geographic area.[1]

State regulators were concerned about these “tied house” practices, and began restricting who could sell alcohol, and how.[2]  The United States Temperance Movement increased community focus on these laws, and caused increasingly strict regulation of the production, distribution and sale of alcohol.  Even before Prohibition, and far before Granholm v. Heald, the Supreme Court recognized states’ broad authority to regulate the alcoholic beverage industry, free from the strictures of the Commerce Clause of the Constitution in the License Cases.[3] 

When Leisy v. Hardin[4] undercut the reasoning behind the License Cases, Congress did not assert its power to supersede the states.  Instead it strengthened the power of the states to regulate alcohol by passing two laws.  The Wilson Act of 1890 reads in pertinent part,

All . . . intoxicating liquors or liquids transported into any State or Territory . . . shall upon arrival in such State or Territory be subject to the operation and effect of the laws of such State or Territory enacted in the exercise of its police powers, to the same extent and in the same manner as though such liquids or liquors had been produced in such State or Territory . . . .[5]

In English, this means that when alcohol produced by one state crossed over the border to a second state, the law of the second state began to regulate the product.  So if wine in California could only be sold in red bottles, and wine in Nevada could only be sold in blue bottles, California wine would have to be painted blue upon crossing the Nevada border to comply with the Wilson Act.

The Webb-Canyon Act, passed in 1913, made state-wide prohibition enforceable, prohibiting

the shipment or transportation . . . of any . . . intoxicating liquor of any kind from one State, Territory, or District . . . into any other State, Territory, or District . . . (for the purpose of being) received, possessed, sold, or in any manner used . . . in violation of any law of such State, Territory, or District . . . .[6]

Therefore, the story of alcoholic beverage prohibition in the pre-Prohibition years was one of robust state power and Congressional deference, the reverse of generally-accepted federalism principles in the United States.

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[1] Alcoholic Beverage Industry Three-Tier System, Park Street (last visited Feb. 1, 2018), http://www.parkstreet.com/wine-spirits-industry-background/.

[2] See Thurlow v. Com. of Mass., 46 U.S. 504 (1847), overruled in part by Leisy v. Hardin, 135 U.S. 100 (1890) (discussing a Massachusetts law restricting liquor retail licenses and a Rhode Island law intriguingly forbidding the sale of “rum, gin and brandy, etc. in a quantity less than ten gallons”).

[3] Id.

[4]135 U.S. 100 (1890).

[5] The Wilson Act, 27 U.S.C. § 121 (1890).

[6] The Webb-Canyon Act,  27 U.S.C. § 122 (1913).

Impact of Marijuana Sales on Alcohol Sales

Partnership Potential in BYOB Cities

I went to college in Philadelphia where restaurants struggle to acquire liquor licenses, both because of the prohibitive cost of the licenses and strenuous regulation. As a result, these restaurants miss out on the hefty margins associated with alcohol sales (they generally charge guests a corking fee- but that is small relative to the potential margins of alcohol sales).

Most Philly BYOBs are restaurants in the lower end of the market, although the growing acceptability (from a branding perspective) in the market has meant that several mid-tier and casual gastro restaurants have gone the BYO route.

Under the current system, guests bring any wine, beer, or liquor of their choice, and the restaurant charges a corking fee which includes chilling (if needed) and serving. For the consumer, the benefit of this system is controlling/limiting the cost of the dinner, choosing their preferred beverage (rather than being limited by a wine/cocktail list), and reducing their meal decisions to just food (for some people having to choose from an extensive wine/cocktail menu is not appealing, and can even be stressful). The downside is that the consumer does not necessarily know how best to match the drink with the meal, and the servers aren't able to help make recommendations. This can hamper the flavor potential of the meal. While this is likely not a concern for the lower end restaurants and consumers who elect to go there, the mid-range gastro restaurants might want to consider the effect of this on the consumer experience, and the opportunity to partner with local liquor stores and/or specific wine/liquor brands as a remedy and (perhaps more impactfully) a potential revenue opportunity.

The basic idea would be for a BYOB restaurant to partner with (a) local liquor store(s) and encourage guests to procure wine/alcoholic beverages for their meal from that store. Customers could be incentivized through deals/discounts, option to deliver/receive bottle at the restaurant (e.g. guest can order online via OpenTable or another app at the time of booking) pairing recommendations, recommended new wines, etc. From the perspective of the liquor store this is an opportunity to increase sales, improve the consistency of cash flows, and/or move inventory (e.g. restaurant recommends inventory that they are trying to move). For the restaurant, this could improve perceived quality, help them to control the guest experience to the fullest extent, and also get a commission off of the liquor store sale. The Philly food scene has a loyal customer culture where establishments have regulars and can confidently anticipate return customers, so it is reasonable to assume that restaurants could have marketing around this at their establishments.

The same could be accomplished through partnerships or *tasteful* endorsements of vineyards/producers (e.g. there could be a vineyard of the month in the same way that restaurants feature the farms that they source produce and meats from).

Would be interested to hear what people think about the merits/limits of this idea!

Personal Observation of the Chinese Wine Market

Since we are discussing the Chinese wine market this week, I thought it would be interesting to share my personal observation of the Chinese wine market from a consumer's perspective.

Wine has always been a symbol of elegance and wealth in China since the economy opened up to the Western world in late 1970s. Today, wine is still very much a refined taste and a foreign concept. Considered as a luxury product among alcoholic beverages, wine is priced at a premium to beers and distilled Chinese liquors, especially French wines. It is quite common for a $10 bottle of regular Bordeaux wine, or even a sub-$5, non-AOC French wine (Vin de France),  to retail at ~200-300 yuan ($30-50) in China, if not more.

Given the lack of wine knowledge of the general public, less savvy wine drinkers in China usually use a couple of (not so accurate) rules of thumb to guide their selection of wine. Consumers are most focused on region (France is best, then Italy/Spain/California), year (older is better), and design of the bottle (people love chateaux or extravagant looking coat of arms). Counterfeit is also a problem, although less severe in the non-ultra-premium market. However, given the general lack of trust of both the quality and the price of wines sold by local retailers, Chinese consumers love bringing back bottles of wine from duty-free shops when they travel abroad.

Buying wine (especially a good bottle at a fair price) has not been easy in China. In the off-line market, wine is mostly sold through local specialty retailers (alcohol & tobacco shops) and supermarkets. The specialty retailers' target clients are more often gift-givers (premium alcohol and tobacco are common gifts in China) than everyday wine drinkers; therefore, the price mark-up is quite significant. In supermarkets, there is usually a wide selection of wine, but the ones at affordable price points (~$10/bottle) are usually from low-quality local producers.

Recently, with the rise of online retail, wine shopping has become a lot easier and the markups significantly squeezed online. Government regulation is much friendlier in China than in the US (ID law is not enforced and no issue shipping across provincial lines), and many of the top retail websites (T-Mall by Alibaba, JD.com, etc.) offer a great selection of wines. Going forward, the online retail prowess of leading Chinese tech companies will make it tougher and tougher for off-line retailers to compete. It would be interesting to see how the market shakes out in the next couple of years.