Direct-to-Consumer Growth & Rising Trucking Costs

Recently I saw two related pieces of industry news that seem to be a big sign of things to come: Direct-to-consumer (DTC) sales are soaring and freight costs are increasing quickly. Rising freight costs are hitting medium to large beer producers pretty hard. Meanwhile the emergence of DTC in the wine industry has allowed for smaller producers to survive in a time of distributor consolidation. (Btw, distributor consolidation could and will take a whole other post to talk about.)

Very different outcomes, but they are part of the some phenomenon: The ease of buying online is leading to more sales. Demand for shipped goods is going up. And on the other side the trucking industry is experiencing a driver shortage.

Brewbound.com – 18 Sep 18 1

Increased Freight Costs and a Driver Shortage Cramp Beer Profits | Brewbound.com

Surging freight costs, a shortage of long-haul truck drivers and new laws restricting the number of hours that drivers can be on the road are cutting into profits of beer companies and other major corporations throughout the United States. Although...

A few quotes:

Although increased transportation costs are affecting all consumer goods industries, Beer Institute chief economist Michael Uhrich told Brewbound that they’re disproportionately affecting the beer industry because the vast majority of beer sold domestically is shipped. Last year, beer companies shipped 2.9 billion cases of beer, according to the National Beer Wholesalers Association.

During a July earnings call, Boston Beer Company chief financial officer Frank Smalla told investors and analysts that the company’s bottom line was taking a hit in the “low double-digits” of millions of dollars, which the company will look to partially recoup through price increases.

A month later, Craft Brew Alliance CEO Andy Thomas told investors and analysts that freight costs could lead to as much as a 50 basis point hit against the company’s gross margin.

NOW contrast that with this DTC news from a recent Shanken News Daily email:

Direct shipping of wine is now mainstream in much of the United States. Last year, volume of direct-shipped wine was up 15.3% to 5.78 million cases, with consumer spending growing 15.5% to $2.69 billion, according to the 2018 Direct to Consumer Wine Shipping Report by Sovos and Wines & Vines. The channel is on pace to eclipse 6 million cases and $3 billion in sales by year-end, to reach nearly 2% of the U.S. wine market in volume and 5% in sales. And those figures include only wines shipped directly from wineries to consumers—not wines shipped from retailers to consumers, which pass through the supplier and wholesale tiers. Those sales, according to Wine.com, are estimated at a further $1 billion.

Direct-to-consumer (DTC) shipments are now clearly part of the wine-selling landscape, particularly for smaller wineries. Since the Granholm v. Heald U.S. Supreme Court decision back in 2005, the number of states where wines can legally be shipped has risen from 31 to 46.

It’s a far cry from two decades ago, when the DTC channel was all but nonexistent. At the time of the Granholm decision in 2005, DTC still totaled only 500,000 cases. Today, smaller wineries are often content to stick with DTC and leave the three-tier system to larger players. According to the Sovos report, wineries with volume of 5,000-50,000 cases accounted for 43% of all DTC shipments and 46% of sales last year.

The first time I heard of DTC sales was about ten years ago. Which was these “cult wine” mailing lists in Napa. It was only for wines that were super low production and sought after by wealthy wine enthusiasts. To the best of my knowledge DTC sales to your average consumer did not exist.

To see it grow from that to $3 billion by the end of this year is astounding. And I think what that means for our industry is that DTC is going to be very important for sales (btw, how many people are doing or want to do mailing lists?). But we also have to be very wary of rising freight costs in the future.

Rising freight costs and fewer distributors in the future may mean that if your business does not have a nearby major market to sell to, then you are better off staying small and lean.

Just a thought. And by the way, I would like to write more posts like this in the future. My hope is that we learn as much as possible from other industries, so sake can be healthy and safe for a long long time.