Consumer experimentation, upscaling changes retailer approach to wine, beer, spirits

JEFF QUACKENBUSH,

Oren Lewin is senior vice president of marketing and strategy for Novato-based WX, until recently called Winery Exchange.

WX was founded in 1999 as a business-to-business portal but quickly morphed into a creator of private-label wine and, later, beer brands. Now the business focuses on exclusive wine, beer and spirits brands, which WX owns but exclusively sells to a given retailer.

Annual sales are now well over $100 million, and the company employs more than 100. The company produces 80-plus brands for dozens of clients, mostly retailers such as Kroger’s, Whole Foods Market, Rite Aid, CVS, Trader Joe’s, Total Wine & More, Cost Plus World Market, Safeway/Albertsons and and United Kingdom-based Tesco, WX’s third-largest client globally.

The company in recent years started creating and acquiring national brands, chiefly Chronic Cellars and Our Daily Red.

Case volume is more than 6 million a year, distributed to almost all the U.S. and to 12 countries. WX sources from suppliers in 17 countries.

Lewin is set to be on the diversification panel at the Business Journal’s Wine Industry Conference on April 28. He talked with the Journal about three major trends driving big growth in beverage alcohol at the retail level.

What growth are you noticing in wine, beer and spirits?

OREN LEWIN: Clearly, wine and spirits have been outpacing beer for the last 10 years. Wine and spirits growing in the 2 percent to 3 percent annual rate by volume, while beer is flat to down.

Wine and spirits are also seeing a lot of tradeup. You’re seeing dollar growth outpacing volume growth. It’s not wineries or spirits companies’ raising prices. It’s consumers trading up to more expensive wines and spirits.

In beer, all the growth is being driven by craft and by imports, especially Mexican beer. There’s also the emergence of ciders and certain flavored malt beverages, such as the hard root beers. All of those segments are higher-priced.

The segments that are declining are mainstream domestic light and premium beers. The Budweisers, Bud Lites, Coors, Keystone Lights of the world are all declining. There is this transformation of the category to being more premium-driven, craft-driven, import-driven.

Still the lion’s share of the category is domestic mainstream beer, but that’s not where the growth is coming from.

For retailers where we’re active, our [beverage alcohol] growth is up 20 percent to 30 percent. We’ve been growing at 20 percent-plus in Kroger’s for several years.

It’s not all tradeup-driven. Consumers are experience-seekers. They have a set of brands in their regular consideration set, but they’re not loyal. In our partnerships with major retailers, we’re having conversations over where are there gaps in their portfolio for a particular consumer or a particular price point or a particular origin. You’re bringing something new to their category for consumers to discover, that drives growth and benefits us.

In light of this experimentation, do your exclusive-brand contracts run for a few years then retailers move on to other offerings?

LEWIN: Anything that doesn’t perform, they are going to move on from. Things that do perform, they can have long lifespans. We’ve had exclusive brands we’ve launched and have failed and been discontinued in a year or two. That’s true for any brand. We’ve had other brands that have been around for a dozen years in a Kroger’s. Some keep growing, and others grow for several years then start to decline.

Our brands are no different from other brands in that regard. The key is that the quality in that product has to be sustained over time, or the consumers try something else. And you have to update the packaging and marketing behind the brands, to make sure there is buzz about the brands.

Do you take the seasonal-brew approach to exclusive brands?

LEWIN: The core of our business is ongoing brands, but we are doing more seasonals than ever. This past year for Kroger’s in one of our existing brands we introduced an Oktoberfest and a pumpkin seasonal for the fall. We’re going to be doing a summer beer for them. For another retailer, we’re going to do four seasonals in one brand.

For a given brand, we’ll source from different breweries, because brewery B may do a better job with pumpkin than brewery A. The consumer doesn’t care, as long as you’re delivering the quality they expect.

What mix do retailers want in beverage alcohol?

LEWIN: There are three things that are putting WX in the sweet spot for a lot of retailers. First, consumers are experimenting more and more. They’re looking for new things in flavors, styles, pack sizes, package forms, across all beverage categories. A lot of that is driven by millennials set of preferences for experimentation and less traditional ways of doing things. Look at all the experimentation that’s happening in wine with countries of origin or varietals or in craft beers.

That fragmentation is causing retailers to need products that span many more categories than they have in the past.

Second, retailers generally are under pressure to simplify. They are trying to reduce the number of suppliers that call on them. If you have one supplier that can offer that diversity to them, it is a plus. We’re one of the few suppliers that plays in wine, beer and spirits from a number of origins. That makes us a preferred partner.

Third, retailers want more exclusive brands. In the U.K., the majority of the market is private label and not national brands. Here it is still 90 percent or more national brands. The trend is going in the direction of private label for fast growth.

How can North Coast vintners adapt to these retail market changes?

LEWIN: There is a return to authenticity. There have been concept brands, and there still are a lot of those out there, but many of the concept brands that have been most successful have a sense of authenticity in their story or their package that are helping them resonate with consumers.

As wine supply in the North Coast continues to tighten, prices continue to go up. Wineries have to be able to justify the premium price. The North Coast is becoming less competitive with other appellations. A lot of North Coast wineries should be looking at their packaging. When was the last time they refreshed it? For wineries with the quality there and good reputation, are they looking a bit dated compared with other wineries that are investing in high-end packaging? The whole proposition has to justify the price point.

A lot of wineries have been fairly traditional in their presentation, but a lot of the growth is coming from the unconventional brands. The Prisoner is as unconventional of a Napa Valley brand as you can get, and it is commanding $40. Traditional wineries should be open to presenting themselves in a different way or creating different brands to reach a different consumer.