Abstract
South African wine producers are more successful in the American market when they partner with importers that know little about their wines. Ignorance is better than expertise, and leads to a handful of wineries being very successful in the market, while most barely make a splash.
“Why Can’t You Find That Wine?” was the rueful title of one of wine critic Eric Asimov’s February 2014 columns in the New York Times. The column was Asimov’s response to complaints that his readers were unable to find many of the wines he had reviewed. He attributed their frustration to the “irrational patchwork of laws” regulating wine distribution in the United States, and to his personal preference of reviewing the wines of small producers, whose products were “intriguing and distinctive but less available.”
Asimov’s comments refer to the notorious “three-tier system”: the regulations, introduced after the repeal of Prohibition, that have governed how wines (and other alcoholic drinks) are distributed in the United States for more than 80 years. The system requires producers or importers to sell to distributors, which then sell to retailers. Although he rightly suggests that these regulations handicap small producers, what he does not say is that some small wineries have actually flourished in this challenging system.
South African (SA) wines are a case in point. These wines are not a large category in the U.S., yet they are still a $50 million annual business. It is a particularly good business for a handful of wineries. A regular browser of the SA wine section in U.S. bottle stores will notice that the same brands show up repeatedly: Jam Jar, Goats Do Roam, Chocolate Block, Mulderbosch, and Secateurs are some of the most common. This observation prompted us to turn Asimov’s question around: why do you always find the same wines in stores? We argue that their presence is neither random nor due to wine quality or reputation but results from being lucky in their choice of an importer. Largely by accident, these wineries signed on with importers whose strength lay not in their familiarity with SA wines, but with wines from other countries. Conversely, wineries that ended up with importers with real expertise in SA wines fared poorly. Through research and observation, we will explain why importer ignorance didn’t matter.
Why Wine? Why South Africa?
Scattered in a semi-circle around Cape Town, from the Atlantic to the Indian oceans, are the nearly 600 wineries that make up the South African wine industry, the world’s eighth-largest producer. Like the other “New World” producers—the USA, Argentina, Australia, Chile, and New Zealand—South Africa makes and exports famous French varietals: cabernet sauvignon, pinot noir, merlot, and syrah/shiraz (the reds); and sauvignon blanc, chardonnay, and chenin blanc (the whites); as well as pinotage (a South African red hybrid). Although wine production in South Africa began in 1659, most of the wineries emerged after the country’s transition to democracy in the early 1990s, when international sanctions and quasi- governmental control of the industry were both removed, leading to the emergence of a new generation of winemakers. This shift was both economic and cultural; although the industry remains largely white-controlled, many of the post-1990 wineries were established by English-speakers, marking a significant change from the Apartheid era when Afrikaners dominated winemaking, which was focused almost exclusively on the domestic market.
“The U.S. is a particularly good market for a handful of wineries. A regular browser of the SA wine section in U.S. bottle stores will notice that the same brands show up repeatedly.”
Grapes ready to be gathered and processed into delicious Delheim Wine
Veronique Vi, Flickr CC
For SA wineries and other southern hemisphere producers, exports are critical because their domestic markets are small. It is the U.S., where wine sales are a $60 billion annual business, that has the world’s largest and most competitive market. To walk into an American bottle store is to see this international competition at first hand, particularly in the “sweet spot” of the $10 to $20-dollar bottle of wine. Many stores display wines by country of origin, enabling their customers to do a kind of circumnavigation of the globe as they wander from section to section. The presence of wines from all over the world is both a vivid display of globalization and the outcome of a keenly contested battle for shelf space. Our interest lies in how this battle is fought and won (or lost) by South African wineries.
“South African wineries, because they are not part of international companies, rely on American-based importers to get into the U.S. Many wineries try to enter this market, but few enjoy more than occasional success.”
A consequence of South Africa’s late arrival to world markets is that the big international companies—E&J Gallo, The Wine Group, Constellation Brands, Treasury Wine Estates, and Pernot Ricard—that dominate wine production in other New World countries have virtually no presence in South Africa. Small independent wineries are the defining feature of the post-apartheid industry, which has much lower levels of market concentration than its New World rivals. These wineries, because they are not part of international companies, rely on American-based importers to get into the U.S. South Africa’s industry, therefore, provides a revealing case study of how tiny, family-run businesses compete on a global stage and how wines are bought and sold in the U.S.
Many SA wineries try to enter the U.S. market, but few enjoy more than occasional success. Using the Wine-Searcher.com web site, we identified 864 liquor stores that in February 2017 had at least one bottle of a SA wine on their shelves; the wines came from 279 different wineries, about half the country’s total. Ten wineries were in more than 170 stores (and another five were in more than 300), whereas 70 percent of the wineries were in fewer than 20 stores and 40 percent were in fewer than five. Small wineries, such as Badenhorst Family Wines and Hamilton Russell Vineyards, whose combined annual production is less than 100,00 cases, made the top ten and were in more than twice as many stores as KWV, one of South Africa’s biggest and most iconic wineries.
Badenhorst and Hamilton Russell are the exceptions, however, because the vast majority of SA wineries, whether large or small, are on very few shelves. Winery shelf presence is another illustration of the winner-takes-all marketplace found in taste-driven industries, such as film and music-making, book publishing, and modeling, in which a few hits garner most of the rewards and attention, leaving everyone else with the scraps. However, this outcome in the wine trade is not random or due to good marketing and favorable reviews. Connections to the right importers—what we call organizational capital—enable some wineries to squeeze through the distribution bottleneck.
The Three-Tier System and the Rise Of The Big Distributors
The three-tier system makes the U.S. alcohol marketplace different in two fundamental ways from any other. First, it has encouraged the rise of powerful distributors that now dominate the market. All alcohol retailers in the U.S., whether restaurants, bottle stores, or grocery stores, are required to buy wine from distributors rather than directly from a producer or importer. This model was established after Prohibition to diminish the influence of producers on alcohol sales. Distributors—small, family-owned businesses at the time—were seen as the key to preventing big brewers and distillers from controlling the market.
In the so-called “franchise” states (21 in total), distributors acquired additional leverage because of laws preventing producers and importers from terminating distribution contracts unless there was “good” or “just” cause; distributors typically have to be given written notification of termination and offered the opportunity to correct their shortcomings. Franchise states have effectively locked producers and importers into a kind of permanent marriage with distributors, with limited opportunities for divorce. As one importer of SA wines stated: “They [the distributors] own you… so god help you if your relationship goes bad with your distributor.”
The protections afforded distributors by the three-tier system, although ostensibly intended to safeguard local mom-and-pop enterprises, have in fact enabled a handful of distributors to dominate alcohol distribution across the country. A wave of mergers and acquisitions over the last ten years has resulted in just three of them—Southern Glazer’s Wine and Spirits, Republic National Distributing Co., and Breakthru Beverage Group—selling half of all the wine in the U.S.
The second difference is that unlike in other countries where big retail chains dictate what wines are found in stores, in the U.S., small, independent retail stores have flourished, resulting in a highly decentralized market. Tesco has about 25 percent of the wine market in the United Kingdom, for example, whereas Costco, the largest U.S. wine retailer, has a market share of less than four percent. American consumers are accustomed to buying their wines at stand-alone liquor stores.
“The protections afforded distributors by the American three-tier alcohol distribution system, although ostensibly intended to safeguard local mom-and-pop enterprises, have in fact enabled a handful of firms to dominate alcohol distribution across the country.”
The combination of large distributors and much smaller retailers has given the U.S. wine market an hourglass shape. Thousands of producers and retailers are at either end; between the two, in the narrowest part of the hourglass, are the distributors. The biggest of these may own distribution rights to hundreds of wines, but the wines still need to be hand-sold. Every week, distributors’ sales consultants or representatives (the “reps”), toting their company’s “book” (its list of producers and brands), call on their retail clients to promote their wines. Store visits are an opportunity for the reps to find out which wines are selling well and need restocking, which are doing poorly and need to be displayed more prominently or even pulled, and to highlight any new products. It is the thousands of individual meetings between reps and retail buyers that have produced the outcome we have noted: a few SA wineries have ended up in many stores, but most have little presence.
Our explanation of organizational success differs from that of organizations scholars Glenn Carroll and Anand Swaminathan who attribute the success of American microbreweries and “farm” wineries to production-side factors such as market concentration and organizational identity. We focus on distribution and on the retail market, where wines are bought and sold. Our study of the wine marketplace confirms Jens Beckert’s observation that markets are political arenas as much as economic ones; the battle for shelf space turns on how much leverage producers and importers have over distributors.
Reps, Retailers, and the Distribution Bottleneck: Why SA Wines Don’t Reach the Shelves
Importers often make the mistake of assuming that a distribution agreement with a major distributor will ensure that their wines reach a broad array of retailers. As one unsuccessful importer noted, these ties can be the “kiss of death” for SA wines, because there is little incentive for reps to push them. Distributors may be willing to add a South African wine or two to their portfolio because there is no downside to including another brand in their book. However, reps will rarely promote little-known SA brands in their visits to retailers. The reps for the big companies make a living by selling in volume, which means that they focus on supplying established brands to retailers that are regular customers.
“Wineries were more likely to be successful when they signed on with importers that did not specialize in SA wines rather than with those that were focused on South Africa. It turns out that expertise and knowledge are far less important than organizational capital.”
The owner of a distributorship explained the logic that drove the reps’ selling strategies. Reps, he said, “tend to like things that are annuities.” What he meant was that they saw little value in trying to persuade a retail buyer to take a chance on an unknown wine, which might sit unsold on the shelf. A rep wants a regular order and a guaranteed sale. A veteran importer noted: “A distributor wants you to bring stuff that’s going to sell and doesn’t really care where it comes from. He wants a product that’s going to sell. I mean, that’s the name of his game. He moves a product from here to there, that’s how he makes money.”
Demand for a SA wine is unlikely to come from the retailer either because they deal with anywhere from 15 to 30 reps and lack the time necessary to question them on what new wines they might be carrying. As one retailer explained, “that’s not my job. I’m too busy running a shop… My job is taking care of my customers.” If a rep wanted her to consider a new wine, she said, he or she would have to talk her into it. In busy stores, a rep might have as little as five or ten minutes to convince the buyer of the merits of an unfamiliar wine. Wines that are not pushed will seldom be tasted or bought and will exist merely as a shadowy presence in the pages of the rep’s book.
The SA producers whose wines have vanished in their distributors’ portfolios find the experience frustrating. They believe they have made good quality wines for sale at competitive prices and cannot understand why they are unable to get any retail traction. One winemaker described how much he and other producers had struggled in the U.S. market and added, with a mixture of exaggeration and exasperation: “And this is a known fact—the Californian wines are four times more expensive for the same sort of quality as a South African wine!” Hyperbole aside, the winemaker had a point: quality has no effect on how SA wineries do in the U.S. We know this from our quantitative examination of wine-store placements. A regression analysis found that winery quality—which we defined as the number of 5-star wine ratings wineries received from the Platter’s South African Wine Guide between 2012 and 2016—did not have a statistically significant effect on how many stores wineries were in.
We found that wineries were more likely to be successful when they signed on with importers that did not specialize in SA wines rather than with those that were focused on South Africa. It turns out that expertise and knowledge are far less important than organizational capital.
Why Ignorant Importers do Better: Organizational Capital Aka “A Very Big Stick”
Given the importers’ importance, one might expect SA winemakers to invest time and effort in selecting them, but the process of choosing an importer has been largely hit-or-miss. The wineries themselves seldom initiated the partnerships. What usually happened was that the first importer to visit generally secured an agreement from the winery to buy a certain number of cases, handle their shipping to the U.S., and sell them to distributors. One winemaker used a typically South African turn of phrase to describe how he had “found” his importer: “He just phoned and rocked up and liked the wines.”
The visiting importers fell into two categories. First were those that specialized in SA wines—they were knowledgeable about SA winemaking and targeted the best wineries and wines to build their portfolios. Second, there were the importers with international portfolios that had decided to add SA wines because they seemed a promising new category—these importers acknowledged knowing very little about SA wines. One of the importers in the second category recalled his ignorance when he made his first trip to South Africa: “I remember the flight down to South Africa, thinking to myself, what am I doing, you know… I know nothing about South Africa, why am I doing this?” However, his company ended up being one of the most successful importers of SA wines, as have been other importers with an international focus.
The SA-focused importers have been mostly unsuccessful, despite their expertise, because they assumed that quality and price would count in the wine marketplace. One such importer explained: “I made the assumption that my passion and my ability to select the best wines at reasonable prices—that the very committed, very talented wine buyers out there would perceive these gems the same way that I did, and be all over them. But I couldn’t have been more wrong.” What he had overlooked was that wines do not sell themselves on quality or price, especially those made by small producers; they have to be “pulled through” the system, to use a wine trade term. Pulling a wine through requires an importer to have leverage over the distributors and a sales staff to monitor them.
The most successful importer of SA wines is an Alabama-based company, Vineyard Brands. It was the importer for nine of the wineries on our list, including four of the top ten. Vineyard Brands is best known for its prestigious French brands, including Château de Beaucastel and Domaine Weinbach, and it has deployed its large staff and strong portfolio of famous wines to pull its SA brands through the market. As an importer who had previously worked for the company said, distributors “value Château de Beaucastel, they value all the other great wines that Vineyard Brands brings to the table, so they’ll take it [South Africa] on, knowing that Vineyard Brands also has a really competent sales team that’s going to help pull it through.” Another importer provided a more colorful description of Vineyard Brands’ leverage: “Because of that big portfolio and some of the great brands that they carry, they have a very big stick to beat the distributors and the retailers into picking up and coercing into picking up some of these brands.”
Over time winemakers have become aware that some importers have been more effective than have their own importers. Many have switched importers, although their options are limited. Every winemaker would like to be represented by a successful importer, such as Vineyard Brands, but the importers that do well tend to have small South African portfolios and are hesitant to add new wineries because of opposition from the producers they already have, who regard any additions as unwelcome competition. Moreover, signing on with a new importer does not necessarily mean that the winery will have access to all of that importer’s distributors because, in the franchise states, the distributors with the previous importer will still own the brand. In these states the winery may disappear from the market, unless the importer is able to arrange with the old distributor to release the wine.
The winner-takes-all outcome for SA wineries is likely to continue as long as the three-tier system remains. Changing the system is difficult because wealthy distributors are large donors with considerable influence over state politics. Another option for wineries is to sell themselves to outside investors; in the last five years, three American investment firms and a French wine conglomerate have purchased four of South Africa’s iconic wine estates. These ties may improve their access to the U.S. market, but raise concerns about the “colonization” of the South African industry.