One of the biggest mysteries during the pandemic is whether the boost in off-premise wine sales has made up for the ravaging of on-premise sales. Christian Miller of Full Glass Research thinks he has found a way to reconcile the numbers.
“People were breathlessly reporting huge declines in wine revenues or consumer spending on wine,” says Miller, whose Bay Area consultancy has worked for a variety of companies in the wine, beer, and spirits business. “So, I wanted to figure out if and how off-premise gains could offset on-premise losses when you trace it back to the winery.”
Miller’s calculation revolves around the substantially higher markups for restaurant wine, which tend to be four to five times as much as retail markups in the US To simplify his model, he made two assumptions: First, that the FOB price at the winery is roughly the same whether the wine ends up off-premise or on-premise; second, that on-premise accounts for about 20 percent of US wine volume.
The result? At typical wholesale and retail tier margins, a 20% increase in off-premise sales will offset a 75% decrease in on-premise sales. In other words, an $18 retail wine that sold for $60 on-premise would only have to increase off-premise sales by one-fifth to make up for its loss in restaurant sales.
“People may quibble about that ‘same FOB price’ assumption,” says Miller. “But that cuts both ways. Yes, wineries often offer incentives and discounts or depletion allowances for on-premise by-the-glass placements. But the same occurs off-premise, whether it’s truckload deals to the chains or margin fortification for the distributors or retailers.”
He notes that though it seems one size would not fit all, as a snapshot of the overall US, market, he says, “I think I’m on pretty solid ground.” The formula is just as accurate for producers whose sales focus on restaurants or for those who have few on-premise sales.
Math Problem Here
If 20% of sales decrease by 75%, that is 15% of the 100% that has been lost.
To grow it back the off-premise sales (80% of the total) must grow by 100/85 -1 = 17.6%.
The key insight is that in both off- and on- markets competition forces rates of return down to the normal return level. Thus, a bottle sold off- has the same profitability as a bottle sold on-.