How Purple Wine Got This Far

FILED APRIL 6, 2012

Dear Client:

In the early 2000's Derek Benham saw a need for quality Pinot Noir in the $10 to $12 price range. At that time there were low-end and high-end offerings, but nothing in the middle. He asked himself: "What can I make that will be a very efficient proposition all the way through the supply chain?" So Derek did what he does best, and created a brand to fill a hole in the market.

You may recall that Derek did something similar when he created Blackstone Merlot back in the early 1990s, and then eventually sold it to Constellation Wines in 2001. That same year he started Purple Wine Company and two years later launched Mark West Pinot Noir. Fast forward to 2012 and Purple Wine produces over 1 million cases.

So how did the company go from creating Mark West from scratch in 2003 to becoming the nineteenth fastest growing wine brand based on SymphonyIRI? It comes down to planning, simplicity and patience. "It's all about simplicity of story and simplicity of offering. It's really important now," especially given the huge size of the major distributors, said Derek. Their "Pinot for the People" marketing strategy also helped demystify Pinot Noir. And of course the "Sideways" effect didn't hurt either.

THE STATS AT A GLANCE. It helps to set the stage so that you know what we're working with here. Mark West has grown at a 54.7% Compounded Annually Growth Rate (CAGR) since launching 7 years ago.

Dollar sales gained 33.85% and volumes climbed 38.48% in the 52 weeks ending February 19, based on SIRI food and drugstore scans. It is the top selling Pinot Noir in the 24-weeks based on dollar sales, and is now leading the Pinot Noir category in the $10-$20 segment.

FOCUSING ON SINGLE VARIETALS. Sticking to one dominant varietal per brand is a strategy Derek implemented with Blackstone Merlot, and has continued with Mark West Pinot Noir, Four Vines Zinfandel, Avalon Cabernet Sauvignon and Bex Riesling. In his early days Derek noticed that "players who were really scaling with certain price points were really focused on one SKU driver."

Traditionally in the wine business you launch one label and a host of different varieties. "It always baffled me because look at other consumer categories. Ivory Soap. Belvedere Vodka. Marlboro Cigarettes. It just makes it simple, and the wine business never really did that until the 1980s with Sutter Home White Zinfandel, and then Glen Ellen did it with Chardonnay."

It's also a tougher sell to distributors and retailers to introduce one brand with a host of SKUs. "If I come in there with a big basket of stuff that isn't really focused and isn't really clear to them," then it's not going to work, said Derek. "I think that is one of the reasons that these propriety reds [blends] have done so well. It's not six to ten SKUs. It's one brand and one thing. One SKU. Historically these large suppliers haven't really been that great with developing a brand from ground zero because that's not what they do. They're managing larger scale stuff.. But they've been able to pull it off" with the red blends.

ON- AND OFF-PREMISE APPROACH. About 35% of Mark West's sales happen at the on-premise, where by-the-glass sales are a key growth driver. Mark West sells for about $8-$9 a glass, and does particularly well in casual dining and local neighborhood restaurants. "We focus on by-the-glass-programs on all of our brands because that is where we can scale on-premise." And while Mark West is predominately a Pinot Noir brand, it has a Chardonnay as well, which "is absolutely essential at the on-premise."

As for the off-premise, "we're just scratching the surface," said Lisa Ehrlich, vp of marketing at Purple Wine. Our chain distribution has been a recent addition." Until recently they were direct-to-store-door (DSD) in just one facing. "We're still in a baby stage, so there is a lot of upside for us."

Again, the opportunity exists through its approachability. "People recognize Mark West. It's got that orange label. People can see it from across the room. People can pronounce it, they know it," Lisa continued.

WORKING WITH DISTRIBUTORS. When they first started, Purple Wine mainly worked with medium and small distributors. Now they have transitioned to the big guys as they continue to gain scale. But do they ever feel lost in the shuffle?

"Obviously some scale helps and we're quite data driven, so we have platforms in place that companies our size wouldn't even dream of. We had them in place when we were a lot smaller," said Derek. "It's our job to know our brand in their market better than they do, and help them sell it. They help as well. They're the ones out there on the street, but we're giving them the blueprints to the brand." The company also understands that distributors only have a certain amount of time to dedicate to their portfolio.

"Do we get more than our fair share of mind at the distributor level? Yes, we do, and I think that's one of the reasons we've been able to do as well as we've done."

WHERE DO THEY GO FROM HERE? "Does the trend look good? Yes, the trend looks healthy for us," said Derek, speaking on Mark West. But Purple Wine Company has other brands as well that show promise. They purchased Four Vines in September 2010. It is their first acquisition and was "a great test for our network and organizational structure" as they had to transition the brand into their own distributor network. They see a "strong opportunity" for Four Vines Zinfandel, a red wine category they weren't in before. Four Vines also has a Naked Chardonnay "but to me that's really a standalone SKU," said Derek.

Meanwhile, Avalon Cabernet's CAGR is +36%. And German Riesling Bex is at 20,000 cases "with potential to grow."

Moving forward they are focused on continuing to drive growth for Mark West, continuing to grow Avalon, and establishing Four Vines leadership in the Zinfandel category. They are also exploring opportunities in the import market, and are looking at red blends.

INDUSTRY ISSUES: PURPLE WINE TALKS SUPPLY, PRICING AND RED BLENDS

A big issue right now is pricing in the wine industry. As you know, the past two grape harvests were short, and available bulk wine supply is at the lowest it has been in ten years. The result is dramatically higher grape prices, which puts California wineries in a tough spot. Bulk wine pricing in the Central Valley costs about twice as much per gallon as it did in the past. "That's the base of the pyramid of the supply in California. It comes out of the Central Valley and pretty much determines and drives everything else. People don't like to admit it, but it does," said Derek. And just think about Moscato, which is on fire. Per gallon prices have increased about three and a half times. "People who are out there trying to bid in this kind of environment, their businesses are going to be dramatically impacted," Lisa pointed out.

As a winery, do you swallow raw materials costs? Or do you increase prices to consumers who are still price sensitive after the recession? "We're waiting to see what's going to happen," said Derek. "It's an odd time to even consider a price increase coming off an economic shellacking.but here we are faced with this situation where the main component in your raw materials, winegrapes, have increased dramatically in the last twelve months."

"You start to shallow your programming as a first step," said Derek, speaking theoretically on wineries' options. In other words, suppliers may start cutting back their marketing dollars and incentive programs to distributors and retailers.

OTHER SUPPLY SOURCES. But there are also other sources of supply. Major wine companies send "millions of gallons of bulk wine overseas" every year to price sensitive markets in Northern Europe and the UK. Those companies can now get much better prices at home, so it's likely those materials will stay in the United States. "It will be interesting to see how that affects supply. It's not an immaterial amount that goes overseas," Derek noted. Meanwhile, those European markets - dominated by private labels - will source their wine elsewhere from places like Chile and South Africa. "They don't care where they get the wine as long as it's the cheapest wine possible."

Keeping supply at home, however, probably won't be enough, especially since the industry continues to grow at impressive rates. Another option is for domestic wineries to source from overseas. "The vineyard development side of this equation is going to have to get aggressive to keep up, or" wineries will be forced to go overseas.

That's why large wine companies are offering long-term growing contracts on bare lands in the South Valley that haven't yet been developed. "It's a deep commitment. It's ahistoric."

But then again the industry is facing a major shortage. There have been periods in the past where supply in a certain category, say Chardonnay or Merlot, is short because that particular category is hot. But "this is the first time in 30 years that I've been in the business that you're seeing prices leaping up across the spectrum."

THE PRICING CONSENSUS: "I think prices are going to drift up. Dramatically? Probably not. But if you look at prices on the spot market doubling essentially inside a year, you're thinking 'gosh, that's going to put a lot of pressure on margins through the supply chain.' Growers are happy. They're getting what they want. But you have to be careful in this environment to raise prices because you've trained your retailer and you've trained your restaurants at certain price points.. It's going to be tough. It's going to be a reorientation of the existing mind set. We'll see."

Right now, all the companies are watching one another to see who is going to raise prices first. It's a Mexican standoff if you will.

ON SWEET BLENDS: The growing popularity of sweet red wines are putting even more pressure on supply, particularly Zinfandel. "All of a sudden Zinfandel has found a home, a place in these sweet proprietary reds at a higher price," said Derek. "It has put a huge strain on Zinfandel [supply], especially in the Valley."

Of course, the nice thing about red blends is it gives winemakers a little bit more freedom on the production side. But "there's a certain taste profile there that our customers become accustomed to. You have to be sensitive to that as a supplier not to dramatically change it." So if Zinfandel supply is tight, winemakers have to go out and find something else to blend that replaces it.

$10 THE NEW FIGHTING VARIETAL. Derek noted that the large suppliers who used to dominate the "fighting varietal," or under $5 category, are "moving up market" to the $8-$10 price range. "That $10 price point is the new fighting varietal. I'm convinced," he said. Brands including Apothic, Cupcake, 14 Hands, and yes, Mark West, are good examples.

RETAILERS' RESPONSE. Retailers maintain that the majority of consumers continue to buy on price point, and so the dwindling supply makes them especially nervous.

"For the last three years we've been trying to prepare large retailers that there is going to be a shift in supply. They haven't believed it. Now there is definitely a shift for them. They're worried about getting wine. The deals aren't there the way they were. So I think the retailers are going to shift strategies a little bit. They are much more worried about their competition now. They're also switching out for wines abroad. They're perfectly happy if you don't have a $10 Cabernet to shift to a $10 Malbec," said Lisa. And now we wait to see how the industry will respond.

WSD BRIEFS:

RUBY TUESDAY ACQUIRES LIME FRESH. Ruby Tuesday has purchased Lime Fresh for $24 million, reports NRN. Execs said this positions them for growth, particularly in Florida "where the brand has realized much success to date," said Ruby Tuesday founder Sandy Beall during their Q3 report. Lime Fresh has 15 locations across the country with another 50 openings planned through 2014. Nevertheless, Ruby Tuesday plans to close 27 of its underperforming locations in the coming months. It also struggled against a tough competitive environment, so Ruby Tuesday has expanded its TV advertising that will focus on its "value proposition."

WALGREENS EXPANDS IN MARYLAND. In the next 12 months a dozen stores are scheduled to open in Maryland. Walgreens has the least penetration in the state despite the fact that they already operate 60 units there. In the meantime, Walgreens has slowed its nationwide expansion, reports CSNews.


Until Monday, Megan

"'Whom are you?' he asked, for he had attended business college."
George Ade

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