middlemen

The Disintermediation of the Wine Business

Disintermediation refers to the process of “cutting out the middle man” — reducing the number of links in the supply chain by eliminating certain functions. There are all sorts of ways to shorten the supply chain, both when it is a good idea and when it is not.

Mike Veseth, editor of The Wine Economist, give us examples of disintermediation in the wine distribution. There are a lot of big and little examples of disintermediation at work in the wine industry.

On the big end of the scale we have giant firms like Tesco who now often source bulk wines directly from around the world and bottle them under their own labels (sometimes in their own plants) and sell them under house brand labels. The streamlined process shortens the chain and cuts cost.

Disintermediation was part of the story for one of American wine’s biggest success stories of recent years – Two Buck Chuck (a.k.a. the Charles Shaw wine sold at Trader Joe’s stores). Most wine in America goes through the three-tier distribution system with its built-in middleman structure. But Bronco Wine, which makes 5 million cases of Two Buck Chuck a year, and Trader Joe’s took advantage of a provision in California regulations that allowed companies like Bronco to deliver directly to the retailer, cutting out a link and making it possible to profitably sell a two dollar wine. A lot of factors contributed to Two Buck Chuck’s success and this disintermediation was one of them.

Disintermediation works for medium sized firms, too, such as Naked Wines, which uses an interesting crowd-funding and direct sales model — their “angel” investors finance wine production and become a built-in direct-to-consumer market for the final product — that’s double disintermediation in a way.
Fass Selections, a direct wine retailer, aims to cut out two links in the supply chain for their wines: importer and distributor.

Another example of wine disintermediation was a discovery that Mike Veseth and his wife made while walking through the big Queen Victoria public market in Melbourne during their visit to Australia. Mike saw the big stack of wine barrels at the ReWine market stall.
The ReWine folks offer a carefully curated selection of wines that they have purchased in bulk from Australian producers. They sell them directly to consumers in the Queen Victoria and Preston markets – the bottles are filled from the barrel containers. Bring your bottle back to be refilled (like the wine “growlers” that are gaining popularity here in the U.S. where local law permits them) and you get a discount.

The wines range from basic dry red and dry white wines sold at a low price to some very interesting products on up the line including dry, sweet and fortified wines.

You get what you pay for in the basic range, we were told, as these wines are blends made for a particular price point like basic wines everywhere in the world, with more distinctive products at the higher price points.

These examples just scratch the surface of disintermediation in the wine industry. Mike Veseth visited with a 2500 case winery recently that seemed to build its entire distribution model around the concept of cutting out the middleman. Easy to see the incentive to do this and also to appreciate the risks.

Once you start to think about disintermediation you will begin to see it at work everyone. Keep your eyes open – it might not change everything, but it’s bound to have a big effect.