A Talk with Steve Kreps of Quintessential Wines

FILED AUGUST 1, 2009

Dear Client:

Imported wines have gotten a lot of national press with regards to declining sales amid the recession. Not all importers are having a tough time though. Steve Kreps of Quintessential Wines, based in Napa Valley, is experiencing a lot of growth with volumes up about 38%. We met with Steve for lunch last week and he gave us some insight on why his 8-year-old company continues to outperform the category.

30 VINTAGES IN THE INDUSTRY:

Steve entered the wine industry about “30 vintages ago,” as he likes to put it. He started at Schieffelin & Somerset as an area manager, and later joined Paterno Imports where he quickly became vp, national sales manager. Steve told us that one of the most important things he’s learned through all his experience is “that you must listen.”

“There was a period early in my career when everything went very well: brand introduction and sales success became the norm. Then came a period of ‘invincibility,’ when I stopped listening to people that made me successful -- the distributors, sales reps and consumers. I soon came to my senses and put my ear firmly back to the ground. By listening to the trade and to consumers, by evaluating data available to us, and by recognizing what the American consumer expects in flavor profiles, we have been able to structure successful marketing and sales plans for Quintessential’s deserving brands.”

The desire to become an entrepreneur led him to open a wine brokerage company covering the Midwest in 1988: Marquis Selections. He then founded Caravelle Wine Selections in 1997 as an import and marketing company with Baron Philippe de Rothschild. In 2001, Steve sold his partnership in Caravelle and teamed up his son, Dennis, to form Quintessential.

AUSTRALIA AND ARGENTINA LEAD THE PACK:

Quintessential derives its biggest volume from Argentina and Australia, but also has wines from California, Chile, Italy, New Zealand, Portugal, South Africa and Spain.

“With our rapid growth in depletions, our inventories are way down, and we have not projected as accurately as we would normally have done due to growth above expectations...all of our brands are showing growth...however, Argentina and Australia are the leaders. Shipments for the fall season of 2009 have been dramatically increased to allow for the growth.”

STAYING SMALL ON PURPOSE:

Steve noted that “we’ve been very careful about the wines we choose.” About 65% of their portfolio has scored 90 points or over, or rated as a “Best Buy” by magazines like Wine Spectator and The Wine Advocate.

“We only represent family wineries...we’re a safe haven for these wineries in a volatile wine market. More and more, smaller wineries are losing representation from major importers. Corporate policies have changed toward agency brands and they are looking for the long-term stability that we can offer,” he said. “We enjoy doing this -- it’s not just for profit.”

“We currently represent only 16 brands. We don’t believe in carrying 60-80 brands because you can’t do them justice.” Our goal is to “stay under 20 brands and carry limited SKUs from each winery ...we import only the SKU’s that the winery or regional area is famous for.”

PRICED IN THE “SWEET SPOT”:

Most of Quintessential’s wine volume comes from a $12 suggested retail price. “We give good quality for a great price...We targeted this price point for our volume products and accommodate price points higher than this for the rest of the portfolio,” said Steve. “The $10 to $14 price point gives a fair wholesale price for on- and off-premise accounts, creating fair margins for profitability and, yet, still attain volume.”

HOW ARE YOU GROWING YOUR AUSTRALIAN BRANDS?

It’s no secret that Australian imports have suffered drastically in the past year, but Steve says their Aussie brands are a major source of growth. How can that be?

“We’re an anomaly” in Australia because “we’re not in the $4-$10 price range,” which is currently taking the biggest hit. “Pillar Box is our least expensive at $12 and Wine Advocate gave it 90 points,” said Steve. “We’re not seeing a loss Australia. Instead, we are seeing double-digit growth off a strong base.”

We then asked if he thinks the low-end Australian brands are doomed, to which he responded: “I don’t think they are doomed. There will be a ‘shake out’ of all the ‘critter’ brands, copy cats and other wines in that category. A few will continue and dominate.”

UPCOMING WINE REGIONS AND TRENDS?

“The recession has thrown quite a few nuts and bolts into the process. Before the recession, the emerging regions were Argentina, South Africa, Portugal and Spain,” said Steve. “These regions will continue to grow because the wines continue to over-deliver for their price here in the US. However, some of the higher-priced wines that could have made an impact prior to the recession will be slower to come around. It’s not because the American people can’t afford higher end wines. The simple truth is, during recessions, consumers are less likely to experiment with new products at ‘ultra premium’ prices.”

Malbec from Argentina is another “new” trend, but Steve pointed out the varietal has been around for quite some time. “I said Malbec was great 10 years ago because it’s the perfect flavor profile for the American palate.”

“Spain has made great strides and will continue to do so. South Africa is truly a ‘diamond in the rough.’ The wines are very well made and they, along with the Portuguese, are now getting the attention of the American press.”

ITALY HERE TO STAY:

What about Italy? “Italy will not drop out of the number one spot any time soon. They will always be a dominating wine factor because Americans love Italian food,” said Steve.

We asked him why French wines are suffering in the U.S., and he echoed a common sentiment: “The French didn’t meet the flavor profile of the American palate...and their labels are hard to understand.”

NOT AFRAID OF SCREWCAPS:

“I’m not afraid at all – at least not now. My son Dennis wanted to use screwcaps on our Two Angels brand...we fought about it and I let him win. As it turned out, sales people, retailers and restaurateurs were thanking me for being brave enough to go with Stelvin enclosures.....it ended up being a very good decision.”

WHO DISTRIBUTES YOUR BRANDS?

Quintessential uses RNDC in most markets but three. They’re with SWS in New York and Colorado, and Charmer in Pennsylvania. Quintessential self-distributes in California. Most small wine companies and producers complain that they have trouble gaining distribution, especially among the larger wholesalers. We asked Steve how he did it:

“There used to be a lot of distributors and it was easier to get brands into the trade channel....but consolidation has changed that.” After spending “30 vintages in the industry” Steve’s made a lot of friends and never had too difficult of a time gaining distribution for his brands.

“I guess you could say I was ‘grandfathered’ in with some distributors. However, I believe it is because we fill a niche, even within a large portfolio. A good example would be RNDC here in Texas. We are not the center of their profit statement, but we add a ‘special stamp’ of quality to an already strong portfolio. Texas has become one of our best markets in the country, growing in excess of 150% within a large portfolio. So, it can be done if the large distributor is as professional and as organized as RNDC.”

Steve points out that his company is strongly “based on people,” and it looks like it’s paid off.
Quintessential is approaching 300,000 cases. They’re available in all fifty states along with Canada and China, which Steve noted “is coming along.”

THE IMPORTANCE OF PR:

Although Quintessential wants to keep its portfolio small, it believes a strong PR initiative and sales force are the keys to growth. “We’re unique,” he said. There are a total of 38 people in the company’s sales force. Just this week they added two new people to their sales and promotional team: Don Burke and Rebecca Benham.

NAVIGATING THE RECESSION:

There are thousands of wine brands out there and hundreds of wine companies, so we asked Steve what he does different from everybody else.

In this recession “everyone else is cutting back but we’re hiring,” he said. In the last recession in the 1980s “some importers and wineries had a two-fold approach: cutback on sales people and discount heavily to get out from under inventory. Many of them discounted so heavily that consumers wouldn’t accept the new price” once the recession ended.

“We are maintaining price credibility and have added 22 new sales people within the last 18 months, making presentations exclusively on our wines around the country. We have gone against the current trend of downsizing and it is working for us.”

Since he’s been through a recession before in the wine business, we asked him to predict how consumers will react once it’s over: “Once people come out of the recession, they’ll start buying the Rolexes, Mercedes and fine wine.” We sure hope he’s right. In his experience he’s learned that “sometimes the trends you see are a reaction to forecasts,” which he believes could have prompted consumers to spend less money this time around.

WHO IS YOUR COMPETITION?

“Everyone who has a wine in a place where I should be, whether it’s on a wine list or on a retailer’s shelf. They’re the competition.”

WHERE’S THE PINOT NOIR?

Pinot Noir is a hot category but Steve carries only one. We asked why: “We have only found one that we like and was available for us to market. We haven’t found another one that we like. Or rather, we haven’t found one that we like that someone else doesn’t already own or represent.”

WOULD YOU EVER CONSIDER ENTERING THE SPIRITS BUSINESS?

Steve didn’t entirely rule it out but it seems unlikely. “I wouldn’t know how to attack it because spirits is not my area of expertise...you have to do more than dot your “I’s” and cross your “T’s.”

Until Monday, Megan

“Live each season as it passes; breathe the air, drink the drink, taste the fruit, and resign yourself to the influences of each.”
Henry David Thoreau

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