Wine profitability, premiumisation and getting into the on-trade

Chris Indelicato, Delicato Family Vineyards
Chris Indelicato, Delicato Family Vineyards

Chris Indelicato is President and CEO of Delicato Family Vineyards. A member of the third generation, Indelicato presides over one of California’s fastest growing wineries, a family-owned business that’s made wine in California for nearly a century. Born and raised in Manteca, California, where his grandfather Gaspare Indelicato planted the family’s first vineyard in 1924, Indelicato was immersed in the work of wine from early on. After he graduated from the University of Southern California in Los Angeles, Indelicato went on to become a licensed Certified Public Accountant and then assumed the roles of President and CEO of Delicato Family Vineyards in 2004. The company is now one of the top ten US wine companies by volume, selling more than 11 million cases a year. He explains his financial approach. 

Could you outline the scale of Delicato?
Let’s start with the vineyards. We have 7,000 acres that we farm today and a handful of appellations. We have four wineries; one in Napa, one in the Lodi area, one in Monterey County and one in San Benito County as well. Today we ship about 11m cases of wine and we produce in total about 13m cases. 

What’s the split, domestic versus export?
We sell about half a million cases to export and the rest of it is domestic. 

Do you also import brands?
We do. We just picked up imports and we’re starting with Santa Rita in the US. We have Torbreck out of Australia and we have some others coming on.

So, you choose a brand where you don’t have something?
Yes. We want to import wines that don’t overlap with an offering that we have. Obviously we only have one Chilean brand. We like to have suppliers that are top three within a category. Santa Rita is number two out of Chile so that works for us. They have really nice wine quality. I think we’re going to be very patient about who we choose to import as agency brands. 

What trends are you seeing in the US?
Obviously rosé is hot. Sparkling is hot. There’s a lot of discussion and action around cans in the US market. Most of the volume in the US market in cans is at low prices so there’s not a lot of margin in there. The higher priced canned wines which are a better quality, their volumes aren’t as high. We continue to have some offerings in the organic wine area and it continues to slowly build. I think 500 millilitre Tetra Paks are doing extremely well. I think the packages are really convenient to use because the size of the Tetra Pak is extremely small. It’s two thirds of a bottle; not a full bottle but two thirds, and you can put the cap back on, so that’s a real benefit.

Where does Tetra Pak do well?
In the US. In all markets in the US. Grocery and large national retailers. It’s not an on-premise package. It’s an off-premise package and Broad market.

What sort of wine do you put into them?
The same quality of wine you would put, for example, in Bota Box you’d put in a Bota Mini. Same blends. 

One of the strengths of Delicato Family Vineyards is the way it’s built an effective on-premise team. How does your team go about building on-premise partnerships?
What we do is either work with our importers or our distributor partners to develop a list of key on-premise accounts by geographic area and then dissect the information by variety and price point. We then look at our brands and we align our strengths with what the customers are looking for. Our goal is not to be everything to everybody but focus on what we’re best at and what the data says is important in terms of selling.

How does that translate specifically to working with the on-premise?
You create a list of customers you’re going to go after and then you develop maybe three priorities within that customer. Then you go and make the call. You might go to Portland and find the top 20 restaurants and then within those top 20 restaurants you’d find the largest performers by price point there. 

How do you know which ones are the largest performers?
Your distributor and importers have depletion data by account. 

So, you’re looking at the depletion data for your own wines?
No. The distributor would develop a list of accounts by volumes sold and they could dissect those for you and tell you that account A sells a lot of Pinot at $9.00 a glass. Then you would align that with what you would want to pitch. Generally, your sales team would go in with the distributor and you’d taste through the wines. You’d have a one page sheet that would provide a cost per ounce, accolades, reasons for buying the wine and a bottle cost.

When you’re working internationally with the on-trade, what approach do you take? 
It’s very similar. You work with your importer to go to key areas within the country. You target key accounts. 

What’s different about working with the on-trade versus the off-trade? 
I think, first of all, many on-trade don’t always want brands that can be found in off-trade. The second point in on-trade is that a lot of folks are looking to match the wine style to the food that they sell and serve. Off-trade is basically a shelf set that people come in and purchase; they have the opportunity to pick and choose whatever they want. For on-trade the chefs are very particular about the style as well as the quality of wines that are served. 

What are your most important markets outside the US?
Canada, Sweden, Japan, China, UK, Germany.

The New World category in general is in decline at the moment in the US. How do you keep people, especially sommeliers, interested in what you’re doing?
I’m not sure that the entire category is in decline. I think the volume categories are in decline because the (US) dollar had weakened and a lot of those volume categories are all price driven. So, if the dollar strengthens dramatically the US market share will pick right up. There is always a time element to these scenarios.  For the more expensive wines, obviously the US is very important market. People are interested in California wines, appellated wines; Napa, Monterey, Sonoma. 

You’ve got a background in finance. Tell me about that and talk about profitability in the short term versus the long term, and how you forecast.
We can start with my background in finance. I went to USC in Southern California. I got a degree in accounting and worked in public accounting for eight years after I graduated, so I’m a licensed CPA. When I came back to the winery I worked in the finance area. Generally, there are two areas in the winery. You have historic accounting and then you have forecasting and future looking accounting. I worked in both areas with that before I became the CFO [Chief Financial Officer] which looks over the finance, the accounting and a lot of other functions within the business as well. 

In terms of how do you forecast profitability, the biggest challenge in the wine industry is that it’s a fixed cost industry with low margins, and you have to be able to understand what the cost of doing something is. That can be challenging. For example, an inexpensive $5.00 wine can run down the same bottling line as a $20.00 bottle of wine, so how you spread cost can have an impact on your understanding of the profitability of the business that you want to be in.

How do you work that out?
I think it just takes a lot of experience. A lot of people look at things differently. One of the big things that I push is continuity of understanding of cost. 

As long as you’re tracking something consistently over time it’s important to understand how those costs are changing. You can have a lot of opinion based on how you spread costs. To me there’s no right or wrong answer. It’s about being able to spread your costs well enough to understand your entire business, but then keeping a consistency in your system so you’re watching when the variants change.

When something happens like the strengthening of the US dollar, how does that change your accounting system?
We track currency separately, so we don’t give people credit when currency improves profitability and we don’t hold ourselves or people accountable for when the currency takes profitability out.  We keep that as a separate issue. If you’re going to launch a product internationally you have to have enough margin in there so you understand what your profitability is at the peak and at the valley of a currency cycle. We’ve all been in the business long enough to know what those look like; what the Euro could be, what it couldn’t be. If you can’t make money when the Euro is $1.10 or $1.05 then you probably shouldn’t do the project.

I have a theory that what looks like consumer demand might actually be the result of currency movements. I remember when Australia was doing really well in the late 90s, when the Australian dollar was two to one. Everybody couldn’t get enough Aussie wine. Then big crash came when the dollar strengthened.
It took all the margin out of it.

Yes. So, it looked like consumers were falling out of love with it but I think what happened was in order to reach the same price point they had to reduce the quality in the bottle. I don’t know but I think the currency has much more to do with consumer behaviour.
Currency does and also crop levels. If you enter a period of long over-supply and the costs go way down then retailers can lower their prices and people will buy more wine. So, I think currency is a big piece of it. I think the wine industry is still a very supply driven industry. Even though all of us spend all of our time talking about marketing and sales techniques and data and things like that, the supply has a lot of inertia in the market as well. Australia went through a long period of over-supply. The US went through a long period of over-supply and it lowered the prices in the market and it’s an opportunity for people to buy wine at a cheaper price. 

Everybody’s talking premiumising. What are you doing?
We’re all premiumising. We’re continuing to focus more resources on growing brands at higher price points. I think there’s a shift in the customers. People are drinking a bit less. Beer is down. Wine is flat. Spirits are up. The volume is roughly flat but I think if you look at the dollars, the dollars are up. So, people are drinking a little bit less wine and a little higher quality wine. A lot of folks are saying that’s driven by being more health conscious but I’m not sure. I don’t know how to measure that. 

How do you convince a distributor or a retailer to accept a price rise in your wines?
I don’t think anybody’s really taking price below, say, $20.00 retail. People are launching new brands at higher price points.

Are you launching new wines at a higher price point?
We are. We have 3 Finger Jack; it’s a $20.00 old vine zin from Lodi, and things like that. We launched the Z. Alexander Brown and it was the number one brand in 2016 in the US in Nielsen data. We’ve just about doubled the volume in 2017 and we think maybe in the fourth year it can be a top 100 brand in the US. We have three of those. We have Gnarly Head, Noble Vines and Bota Box.

How do you build a brand from the ground up? 
You have to start with a really, really high quality wine that over-delivers at the price point. Nobody wants to tie the champ, so if you’re going to go into a category you have to be better than them in terms of quality. Then you invest heavily in promotions. Non-price promotion investment. Tastings, social media, training, education and a lot of shoe leather. You’ve got to get out in the market and push the wine. 

How much do you think the legalisation of marijuana is going to impact the wine business?
So far there’s been limited data on that. Anecdotally I think it is going to have an impact. It remains to be seen which of the alcohol categories will be impacted more; whether it’s beer, wine or spirits. I think it’s going to have an impact more on beer than wine. 

Wine is more of food based occasion so I think it will have a larger impact on craft beer than wine. I think within that too you’re going to see certain age demographics will probably use marijuana more than others, so if you look at those age demographics and what they drink that would probably lead us to what may end up being impacted the most.

Finally, what’s the thing that you’re most excited about in the industry and what’s the thing that you see as the most troubling or threatening?
I think the most exciting thing at this point is the millennial generation are very interested in wine and they’re interested in drinking a more premiumised wine from a broader spectrum of offerings, varietals, price points, origins, countries and things like that. So, I think the industry will continue to flourish over the long term because nobody knew what the youngest generation was going to drink and they are basically going to replace the baby boomers at some point. I think the thing that’s the most difficult right now in the wine industry is we’re going to continue to face the regulation on a lot of fronts; labour, environmental, water, and political as politics play out on trade and things like that. That’s one difficulty. Two, continuing consolidation.

We’ve had a lot of consolidation and we have to be conscious of that and continue to evolve how we run our sales and marketing to meet the needs of the consolidating retailer and the consolidating distributor. 
Interview by Felicity Carter

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