What the Hell is a Wine Club AnyWay. Part 2.

In my previous post I tried to explain the definition of a wine club, and the difference between a retail wine club and a winery wine club. In this post I will try to explain the evolution of the wine club and why they exist in the first place. The fact of the matter is wine clubs are now basically loyalty programs, but that’s not how they started.

A (Very) Brief History of Alcohol in America

It’s 1933 and America’s great experiment, Prohibition, is failing miserably. Americans now disapprove of the 19th Amendment by an overwhelming majority. Organized crime has become more brazen and incredibly wealthy distributing illegal hooch from Canada, Europe, and the Caribbean. Moonshiners are showing off their get-away cars in a new sport called “stock car” racing. Citizens are poisoning themselves and “bath tub” gin and wineries are selling unusually high amounts of “sacramental” wine. The federal government had had enough. However, Prohibition was a part of the Constitution and as we currently know with the ACA, turning it back won’t be easy. It will require another Amendment and many states are still quite satisfied with the status quo. Compromise will be necessary.

Reticent states insisted they should be able to control the flow of alcohol across their borders. Legally, interstate trade is protected under the Constitution–but these were desperate times. The solution came to be known as the 3 Tier system. It declared that alcohol production, distribution, and retail were to be separate entities giving state and their distributors full inventory control such that a retailer would not be allowed to purchase alcohol directly from a producer. It was a strange compromise that was hastily drafted for ratification and wrought with loopholes and constitutional hypocrisy. Some states like Utah and Ohio chose to handle distribution as a government function. Other states like Alabama and Oklahoma restricted distributor licenses to just a handful for the whole state. Subsequently, 80 years later the system looks nothing like what was intended and is straining in the face of corporate deregulation and the internet.

A (Very) Brief History of Wine Since Prohibition

After the end of Prohibition wine was largely made in bulk by brands like Gallo, Inglenook, and Italian Swiss Colony. With so few producers making relatively large volume labels, it was easy for distributors to carry virtually every wine made. However, by the mid 1960’s small quality producers in California like Robert Mondavi, Louis Martini, Beaulieu Vineyards, and others were producing small batch wines. Most of the country didn’t take notice until the famous Paris Tasting of 1976 when California Cabernet and Chardonnay suddenly achieved world acclaim. Small wine producers started popping up everywhere–particularly in California, Oregon, and Washington where climate and soils were most suitable for vine growing. On the other hand, while the number of wine producers was exploding, the number of state distributors was doing the exact opposite. One of the loopholes of the 3 Tier system permitted distributors to operate in multiple states, thus enabling mergers and acquisitions. A once small Florida distributor called Southern Wine & Spirits now controls the flow of alcohol in over 40 states. The result is 10,000 wineries trying to get a relative handful of distributors to carry their products.

Starting in the 1990’s the wine industry reaction was if you can’t beat them, join them. Winery conglomerations began forming until today over 1000 brands are owned by just 5 corporations (including the 3 aforementioned pioneers). This still leaves the vast majority of producers with production too small to be bought or picked up by a distributor. Their solution, sell direct. Wineries choosing this option across state lines were, at first, operating illegally. However, states like CA, WA, OR, and NY starting making “reciprocal” agreements allowing direct sales of restricted quantities across state lines. Eventually, provisions of the 21st Amendment were challenged and today over 40 states now have some form of direct sales allowances. Another loophole that distributors have turned a blind eye to as long as the quantities do not challenge their domain.

Wine Economics 101

For years, direct shipping was a necessity by the smallest producers who couldn’t distribute. However, most larger wineries had tasting rooms and some of them were taking notice of how their Direct-To-Consumer sales were affecting their bottom line. Let’s do a little wine producer math on a bottle of wine that sells for $25 retail sold via distribution.

Production Cost: $5 Distributor Share: $5 Retailer Share: $7 Taxes: $3 Profit: $5

Now, let’s try that as a tasting room sale.

Production Cost: $5 Taxes: $3 Profit: $17

Admittedly, this is over-simplified and results may vary. Running a tasting room costs money, but so does marketing and promotion to catch attention from distributors and retailers. Regardless, the bottom line is you have to sell 3x as much wine to match profit from a tasting room. Prior to the winery explosion/distributor consolidation period all wineries had to have enough capacity to achieve reasonable profit. Many of these wineries were caught in a vicious cycle when their distribution declined and either sold or went out of business. The survivors either drastically reduced production to sell to local markets only, or put more emphasis on mixing DTC sales to augment challenges in distribution.

Wine Clubs!

As I mentioned in Part 1, wine clubs started as just that–a club for enthusiasts to sample new releases. However, economics quickly drove them into a loyalty program that would eliminate