Thanks to Robert McIntosh at The Wine Conversation for pointing me to this story.
Orbital collapses into administration.
The worst news to come out of this is that the folks with the company (10 of them) have all been laid off. The somewhat better news is that there is still a chance that the business might still be sold and the brand will live on. That’s still not very good news, but at least the ownership group may be able to pay off their creditors and meet their near term financial commitments.
As Robert writes, this is a sad day for wine marketers, particularly people like me with winery blogs interested in social media. Stormhoek has long been the poster child for online and social media marketing success in the wine industry. They’ve won awards, gotten national media attention, more than doubled production and landed large accounts, and I’ve personally held them out as a case study in my talks on wine marketing.
So what went wrong?
I have an email in to Hugh, who I’m sure has had better days, so I wouldn’t be surprised if I don’t hear back from him. Anyone else associated with Stormhoek is welcome to email or call me if they feel like talking about how things unfolded. All I know from the article is that an unnamed source mentioned that “mistakes were made,” and that a major retailer delisted Stormhoek recently because of “a lower retail price available to a competitor.”
Does Social Media Work For Wine?
At this point I think a fair question to ask is: Does this mean that social media, blogs and other internet-centric marketing are a poor fit for the wine industry?
No, I don’t think so. There is more doubt than there was yesterday, certainly, but a number of factors specific to Stormhoek still lead me to believe that there is great potential for (at the very least) small wineries online. Here they are, off the top of my head.
1. Stormhoek is exclusively a retail brand. They offer consumers no way to buy direct. Simply put, direct sales are really the only way to make the economics of wine production work. In most cases, producers that rely on distributors to get their products to market - and then further rely on large retailers to move that product - will have to deal with constant pressure on their margins. There really isn’t a huge amount of money to be made in the wine industry in the first place, and when you can’t supplement your income with at least some high margin sales, business can be get ridiculously difficult.
2. Stormhoek’s price point put it in a class wine marketers refer to as the “fighting varietal” category (around 10 bucks a bottle). In this market segment price is a huge issue for consumers who are looking first and foremost for value. You’re competing directly with a market that is dominated by Yellow Tail types and that is often undercut during periods of high grape supply, ala 2 Buck Chuck. It’s challenging, and creative marketing and branding pays the least dividends in this segment since consumers are not very brand loyal, and you need a lot of them.
3. Stormhoek doesn’t have famous “terroir.” They knew this going in, and Hugh put a brave face on things very early on. In fact it was the only point in the Stormhoek guide to blogging that I disagreed with when Hugh first published it.
Take us for instance. We share a property line with one of Kistler’s vineyards, and across the street is one of the first vineyards planted in the Russian River. Dehlinger is located just down the road, Rochioli just across the river. These things are easy to understand, help place us in the world of wine, and become part of the story people tell about us. I think this quote from Principals and Practices of Winemaking is still pretty relevant:
“It is usually easier to succeed as winery number 50 in a famed district than number one in an unknown area.”
Terroir may be old world marketing, but it is extremely effective marketing nonetheless. Importantly though, terroir is also mutable, and a few 90+ point scores can create interest where there once was none (see Isreal for instance). Terroir won’t sell your wine for you, but it helps immensely if you have it.
So there you go; my attempt at putting lipstick on this pig.
I’m still optimistic that blogs and new media hold great promise for wineries focused on developing relationships directly with customers and selling their wines direct. In fact, I think that small wineries have a huge advantage over large ones in this area, which is a nice change of pace.
I also think that efforts by people like Tom Wark and Free the Grapes to liberalize interstate commerce laws for wine shipping are crucial to the success of direct. And since the future is direct, then small producers absolutely must have unfettered access to markets.
I’m convinced it’s the only way most of us will survive.
UPDATE: A comment on Tim’s post on Winecast from a Stormhoek employee caught my eye.
Hi Tim,
Hope all is well, just to let you know the problem wasnt with the stormhoek profit margins or much at all to do with Stormhoek, the problem was that they had several other wine brands in the stable that were not making money and Stormhoek alone couldnt make up for the losses occured from the these other brands.
Chris
Sounds much much better than what the article linked to above was saying. If indeed the problems were with their distributor only, then Stormhoek should be fine when they find a suitable partner. I just wonder how the article could have gotten the part about them selling off the Stormhoek brand so wrong.
Glad you picked up on this as I too think it is an important milestone, but I hadn’t had the time to fully consider the implications.
I do think that the UK issues are a little different to the US, and therefore maybe some of the implications you mention might not apply equally in the UK, but maybe I had better elaborate on my own site. I do think that, at least in the UK, a brand needs to be in the retail channels (supermarkets) and thus will need wines in the “fighting” price points, and therefore will not need a terroir style message.
The issue here is that despite the success with an online audience, the brand has not yet achieved broad-based consumer awareness, and thus was still at the mercy of the supermarkets’ buyers. If consumers won’t miss the wine, then retailers are in a strong position to threaten to remove it. But consumer awareness is expensive, and terribly difficult to achieve.
Bloggers do have influence, but with a specific audience. The question is whether that is enough for a winery’s business plan
Hi Robert, and thanks again for the pointer to the story.
You’re absolutely right, I was really talking about the US market, so your insights into the UK will be appreciated.
I suppose my overall point is: if you are going to one-at-a-time consumers with blogs and micro media, then you’d better have nice margins and not have to sell to a huge amount of people. I think that’s the real lesson from the demise of Stormhoek.
Seth Godin makes a similar point about rock bands here ( http://sethgodin.typepad.com/seths_blog/2008/01/music-lessons.html ). He argues a band only needs 10,000 loyal fins to make a nice living. I think the same is true for small wineries. Retail wine brands aren’t built for 10,000 consumers though, they’re built for 100,000 or more. And there’s the rub.
excellent point. It would be interesting to try and put an actual figure (as far as possible) on that number for a retail brand. I would have thought it would vary greatly from country to country, but this makes you think.
This seems like a classic case of a young company unable to control its growth, thus paying the cash flow penalty for it. Take a look at this article, it provides some detail about the company’s financial position and goals:
http://www.baselinemag.com/print_article2/0,1217,a=208805,00.asp
Here are a few nuggets:
* Establish retail presence in seven major grocery chains in the United Kingdom.
* Increase number of Stormhoek wine units in U.K. grocers from four in 2005 to 24 in 2007.
* Boost revenue from $3 million 2005 to $10 million in 2007.
In 2006 the company was at a $6M revenue run-rate, up 100% from 2005. That is some serious growth and exacerbated the cash-flow crunch that likely occured when Tecso and others played hardball. I think the wine marketing and social networking angle is clear enough–it works to well!
While 100% speculation on my part, you can probably point, as an added bonus, to the margin pressure they were feeling, the devalued American dollar versus the Euro, the british pound, etc.
So, in addition to probably being thin on margins in the U.K., they were getting their lunch eaten if trying to convert that to American ducats. They were going the supermarket route with Tesco and somebody else, one of the other gets bent out of shape because of slightly better volume breaks and all of a sudden the wheels are falling off the cart, very unintentionally.
I think one could speculate that while they have tremendous micro-mindshare in the US, they didn’t have good distribution of Stormhoek. And, mindshare without distribution when you don’t have a direct strategy is not a great recipe for success. Two weeks ago I saw the Stormhoek Pinotage in my market for the first time. I know earlier in 2007 they had hardly any distribution. I might go pick up the Pinotage for posterity. Hopefully that is not necessary, however.
It’s unfortunate. I’m sure they’ll re-group, though. If they add in some focus on direct sales to capitalize on domestic increases on wine shipping to really capture the buzz they can create, I’m sure they come out of this just fine.
Jeff
[...] at Pinotblogger rightly asks “Does Social Media Work For Wine”? “Marketing experts” will be [...]
[...] fair question posed by Josh at Pinotblogger today reacting to yesterday’s news that Stormhoek’s UK partner, Orbital, has closed. How [...]
[...] fair question posed by Josh at Pinotblogger today reacting to yesterday’s news that Stormhoek’s UK partner, Orbital, has [...]
I rather post here than create a wider echo chamber in the wine-blog-o-sphere…but I do have to say after reading everything on all the blogs that are talking about this, no one points out how blogging didn’t work? In my view blogging was the most successful aspect of Stormhoeks rise to fame. If anything bloggers should look at this as to the power of blogging. What Hugh and Stormhoek did was raise awareness of a brand so high and so fast through a new marketing medium that it couldn’t handle it’s own growth. Is this in someways just a result of not being prepared?
Just my 2 cents
[...] a good start with some fun things happening around the Wine-Blog-o-Sphere: A Book club, Backlash, Lament, more WBW and so much more. Anything I forgot to mention? Any memes that need to be discussed? [...]
Yes, they raised awareness quickly… but correct me if I am wrong - they didn’t sustain the interaction. Indeed, it was their effectiveness with the blogging community that initially put them on the map (and inspired my activities) - but I haven’t seen anything about them for the last year or so. It’s like they dropped off the radar.
Hi there
As Chris says it’s certainly not the fault of Stormhoek as we were up nearly 40% in growth year on year, but it’s equally not that other brands in the stable were not making money either… the business was split into three sep parts and the problem at the end of the day was cash flow issues for a number of reasons. In an era where the UK has a negative credit situation, the bank just decided that they would rather put the agency into administration rather than sort it out…sad as the situation should never have happened. anyway… Stormhoek i’m sure will carry on… it needs a fresh breath of driving sales support and focus and together with its fantastic marketing support, i’m sure we’ll see it do very well in the near future…Catherine
Hi all;
We need to be clear on a few things:
1) Stormhoek has not collapsed our distributor - Orbital Wines (who unfortunately also hold the brands right in the UK) has.
2) Tesco are most certainly not our only outlet in the UK, they were in fact the last chain to take product last year. Oddbins, Threshers, Waitrose, Sainsburg and Asda are some of the others to name a few.
3) Direct selling of wine like dogfood is a problem. The shipping often exceeds the price of the wine. Good “focussed” distribution will always do better than online sales because there is someone in your face (with a smile) saying buy Stormhoek.
But more to the point. On the points you made in your post.
1) Re direct sales - besides my point above regarding online sales, there is also the fact that accessability online can and often does dampen the enthusiasm of potential retailers and to move 200k cases you need more than an online presence. And what do you charge on your site - the same as retail or less but still more than you charge a restaurant or the retailer. It is tricky enough to get the price right for retail.
2) I would contend that the price point is just right to elevate the wine above the masses where price is considerably more important than brand. This price point - in the UK for instance - is a UK Pound above the average mish mash and fits quite well into the low end of the premier range. Our Pinotage showed that in 2006 when we cleaned up against wines 3 to 4 times our price of GBP4.99 / USD9.99.
3) Terroir is an invention in my opinion. To create exlusivity. The New World has none and yet we have managed to produce fantastic wines. Terroir is romantism at its best and makes you think of valleys lined with vines, hills and rocks with horses pulling ploughs to turn in the weeds between the rows of vines etc. etc. Which IMHO is exactly what Stormhoek is. Take a look at Grahams post today and tell me we don’t have a picture perfect farm…
A marketing strategy based on the most cutting edge 2.0 internet BS without a great product to back it is no marketing strategy that I would support. We are not the Milli Vanilli of the wine industry. I expect that you guys knew that otherwise the end of Orbital would have not have raised a single post here.
Shane
Shane,
Thanks for the comments and for clarifying some important things about your situation. What’s confusing to me from the outside is that Orbital’s ownership and Stormhoek’s seem to overlap to a large degree (or I may just be confused in general), and the brand ownership issues don’t help either, as you pointed out.
As to your point comparing wine to dog food - I totally agree that shipping wine all the way from South Africa would be silly, especially at your price point. There are fulfillment houses in the US that pick, pack and ship though, so it isn’t impossible. Also when I talk about direct, I’m also talking about tasting room sales, wine club sales, email blasts and every other transaction that takes place at high margins without having to go through a wholesaler (who are evil).
1. I can empathize. Honestly, I have no advice to offer on selling 200K cases because I feel it’s almost a non-viable business model for most wine producers at this point. You need to be either really, really big, or really small. How do you get to be really really big? Lots and lots of money. Which most of us don’t have.
But I think there are ways to work in at least some direct sales without alienating your retail customers. 10% might be a realistic goal, especially if those sales are occurring in the US when your major retail clients are in the UK.
2. Good points, and well taken. My comments on price point weren’t specifically aimed at Stormhoek though. It’s the whole range of wines in that category I feel may not be best suited to social media marketing.
3. Terroir is more than pretty hills, but I agree that it is an invention in some respects. Still, that doesn’t make it any less powerful as a marketing tool. Many consumers believe in terroir, even if it’s defined simply as “this guy is located near this other guy who makes wines that get high scores, so it might be good.” And in the end it’s the perception, not the reality that matters because re-educating consumers is costly.
It may not be fair, but Stormhoek is the poster child for web 2.0 marketing. It’s what allowed you to rise above the din and get noticed. The end of Orbital is notable because it calls into question the efficacy of just such a marketing strategy. It’s about Stormhoek, and its about something bigger than Stormhoek. It about the future of wine marketing.
Thanks again Shane, and all my best to you and everyone at Stormhoek.
[...] Pinotblogger takes a long hard look at the collapse of Stormhoek which grew fast with pioneering promotion by sketching blogger Hugh Mcleod. Pinotblogger says that one of the biggest problems was that Stormhoek did not come from a cluster or, as they say in the wine trade, a Terroir. You have got to make sure that you are on the right slopes facing the right way or it is an up hill battle to start up. Get in the right cluster and you will soon be producing a business of the best vintage! [...]