Expert: Eric Hofer - 2/10/2010

Question
Curious about the winery to distributor aspect of the wine supply chain. I guess the main crux of my question is if wine distributors have multiple locations or one single warehouse that they do all of their shipping to/from.

For instance, when wineries ship their cases of wine to a distributor do they always ship it to the same place, or, if they're selling that wine in California they will ship it to the distributors warehouse in Ca & if selling that wine in NY will ship it to distributor warehouse in NY.

Looking at this from a cost cutting standpoint in regards to shipping. And, if the cases of wine are shipped to different warehouse locations, do you have any information on the cost savings of a NY winery vs. a California winery (assuming using same distributor) shipping its wine to NY? Or to California.

Or, since generally dealing with such large shipments the shipping cost becomes negligable? Also, any general info on how much cost shipping the wine adds to its final price would be great!

Sorry for so many Q's at once. Appreciate your time!

Answer
No problem with the questions...  This is my "hobby" and it's an area I know very well.  I'll answer them in the order they appeared...

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The points from which one distributes reflects market density, route-to-market strategy, statutes, capitalization for a start.  There's no "1" answer, let alone a single best-practice/right answer.  When one starts up a business, distribution is a huge expense, perhaps reflecting 30% of the sales price - but as density and drop sizes improve, it should go down to 8%.  One needs to craft a business plan with a set of assumptions (which one can test and re-test) to see what is best for your product(s).

From a winery perspective, they ship to where the customer (in this case a distributor) wants.   Consider, for example, CWD (Central Warehouse Delivery) operated by some of the major supermarket chains.  The major looks to keep down costs by absorbing part of the supply chain distribution costs - and might insist that their suppliers ship to their central warehouse(s) for on-shipment.  This decision is made not by the winery, but by the customer (who is a distributor).  

Next, consider a co-op based distributor situation.  Here various outlets have joined up and operate their own distribution system - and might have a couple of warehouses - possibly specializing in a territory or product base - again, the order recipient will instruct the winery as to where to ship.

Now, if the question is from your side - namely that you're looking to locate distributors for your wares, now you have a different set of questions that revolve around vetting the capability, capacity, reach, veracity and geography of a distributor.  (But as you didn't ask that, I'll hold off answering such).

I have no studies of the savings achieved by vintners.

The cost of primary transport (which is from the manufacturer to a distribution point) is, for a greater part, the same regardless of the quality of the product; (the variations relate to precautions, handling, storage, distance and reputation of the transporter).  Hence, a product with a higher price would be less affected by the same shipping than one with a lesser price.  The primary transport is a price worth considering (and shopping around for); it is not usually the make or break of a decision to trade in a particular geography (market).  

It might be easier for you to work backward from reaching your outlets.  Identify the profile of those who would be interested in your product, trace that back to distributors and their selling organizations, and then identify how the product gets to these companies.  There are several routes, some of which you are more passive - e.g. the product is collected from the vintner.  Or the product is traded as part of a coop that operates in your geography.

The biggest challenge I've found in the last 18 years in this area (of FMCG) is getting the orders.  It's partially a question of you get what you pay for; and even then, you might not get value-for-money.  With a good selling system, the distribution, even if over-priced, isn't the issue.  (In fact, if it starts out being over-priced, fear of losing a product set that sells well will force a savvy distributor to reconsider pricing to stave off competitors.)  So the question is how do you get the orders?  Do you have your own "fleet" of people?  Do you take orders passively?  Do you knock on doors?  

If you rely on the distributor for "selling", then what's the incentive for that distributor to ply your product vs. the competition that s/he also handles?  Distributor economics are different than those of the manufacturer (hence the decision making and priorities differ).  The distributor has its capital tied up in stock that isn't his/her "produce" and s/he wants to realize a profit; if that product doesn't move, s/eh will drop pricing, possibly harming the brand and possibly never reorder again.  The Vintner doesn't have the option of walking away so easily (or rebranding).

Money is: saved through efficiency and gained through effectiveness.  To achieve such, it helps to have good back office systems that integrate sales with sales promotions, incentives, etc.  Consider www.salessuite.net, a group that specialises in supporting small operators with both the "knowledge" of how to improve the business coupled with the systems that are "rented" instead of purchased and installed on-premise which will keep down costs.

Consider what I've said, and fire over the new questions that arise please!

Eric