I'll Take a Chardonnay With That Latte and No Starch on the Shirts, Please

(Originally published July 2006)

Because of Hanes's tireless efforts to popularize wine, this elixir of the gods has now become, err, popular. He has ushered in a true golden age for wine lovers throughout the world. This is nowhere more evident than here in New York City, the city of Hanes's birth. Even as Hanes types these words, 75 new wine stores have opened within the city limits to satisfy the unquenchable thirst of the Big Apple's enophiles. There can be no limits to this boundless enjoyment of the grapevine's sweet nectar.

OK, Hanes really has to try and write these articles while sober. The fact is, wine retailing in New York City may be treading on very thin ice. There is a present danger of the over-saturation of wine stores. Where once every city block had its own dry cleaners, pizza shop and Starbucks, now too does each block have its own wine store. Some canny market researcher must have proven that the average wine buying consumer would only be willing to walk 1.25 blocks to buy a bottle of Yellowtail Shiraz. What the hell is going on here?

There is no doubt that wine consumption per capita is rising in the United States, and particularly so in a sophisticated urban environment such as New York City. The city has always been known as a culinary center, and with fine dining comes fine wining. And there is no doubting that the “wine bar” scene is about as red hot as one can imagine, every neighborhood inundated with these silly places as well (a story for another day). Allowing for all this, though, Hanes suspects that there is a great deal of that old “irrational exuberance” at play within the wine retailing world and that as a result a shake out is just about around the corner.

Why the gloom and doom, chum? Well, whereas in the past selling wine and booze used to be a simple affair, more often than not a family-run business, now many new businesses seem to be run by the worst possible type of people who could run them - wine lovers. What? You back on the pipe, Hanes? No, it's just that NYC wine retailing has seen an incredible spate of wine lovers wanting to get into the business after lengthy careers in other industries. These folks are often very passionate about wine. This very passion blinds them to basic retail business principles and clouds their vision and ability to make rational, dispassionate decisions regarding business planning and strategies. This begins before the business even opens. There is a sense that sheer enthusiasm and a willingness to educate customers will translate into paid rent and savings for retirement. Were it so easy.

Back in 1999 Hanes decided he wanted to create a database of every Manhattan liquor store below 125th Street. He would rate them and collect pertinent information about the stores in this database, whether the store was a high end boutique or basically a wall of plexiglass with a slot for the money to go in and the hootch to come out. Back then there were just over 200 liquor stores in this area. Superpages.com now lists 384 liquor stores in Manhattan. Updating that database is gonna be a bitch! How did things just about double in half a dozen years?

“Back in tha day” there were the Mom and Pop stores and a few of those from that category grew into the biggest purveyors of fine wine today. One has to assume that there were neighborhood shops that stocked the regular hard alcohol people want, in addition to simple wines that ordinary folks would drink around the dinner table. The select few stores that grew in size and scale became “destinations” of sorts for the enophiliac set, if you wanted the primo juice you jumped on a subway or bus to one of the few major players. Or you sent Jeeves out to double park the Bentley as they loaded cases of claret in the trunk. New York City has more than its fair share of “destination” caliber wine stores steeped in years of tradition. On the Upper East Side there's Sherry-Lehmann and Garnet, on the Upper West Side there's Acker Merrall. In midtown there's Morrell & Company, way uptown in Inwood there's PJ's Liquor Warehouse. Hell, there's Zachy's up in Scarsdale too. Just to name a scant few.

It used to be that these were the places you went to find rare gems, idiosyncratic items and older vintage wines. And you could trust they took good care of the wine, which was (and maybe still is) pretty rare itself. These places have been around long enough to have very long client lists of the wealthiest collectors and imbibers as well as the biggest corporate accounts. Some do upwards of $40 million a year in sales. Not chump change. Hanes remembers quite well making intentional trips to these stores and their peers in search of wines not to be found on the local neighborhood retailers' shelves.

That's when new wine stores started to appear at a faster rate. Oftentimes it was a pain in the rear to get to the established places. And a pain in the back to carry all the wine home. But it was worth it because that's how you got the best wines. Over time Hanes developed his “circuit” of stores he would habituate regularly and those other stores he knew to stop into “were he in the neighborhood.” Needless to say, with each new store that opened, Hanes's credit card bill inched a little higher. Before we get too negative, let's underscore the positives here.

We've already hinted at the benefits of not having to schlep 40 blocks out of your way for a bottle of Grüner Veltliner. Another benefit is that even the biggest stores (Garnet, Astor, PJ's, etc.) can only carry so many wines. Having newcomers on the scene dramatically increased the total aggregate number of wines among which to choose. More choice is usually a good thing. Unless you are like a certain wine reviewer who would like to try every wine available and cannot afford to do so. And, also as mentioned before, the newer stores tended to have more knowledgeable and caring staff than many of the existing smaller stores (in essence liquor stores that also sold wine). Bonus. Closer proximity also means the chance to visit the store more often and develop a closer rapport with certain savvy salespeople. More bonus.

These facts are very important and provide a solid foundation for the success enjoyed by many of the newer wine retailers who have opened up shop during the past ten years or so. But why waste time on the positives when we can lunge forward into the negatives? Sweet!

Rarely do the smaller stores compete well on price. You pay for (a) that higher service level and (b) the fact that the store is small and cannot buy in bulk wholesale discounts. Eight years ago Garnet and PJ's had the best overall prices in town and they still do. This is because they have bigger buying clout and higher volume of sales. Additionally, the way the game is played, smaller production or highly desired wines are “allocated” by wholesalers to retailers. The biggest (i.e., best) customers get to pick the “cherries” and rarely do the smaller shops get them. So, if you as the end customer are in the game to acquire and drink these wines it may still be best to try and work your way up the pecking order of customers at Acker or Sherry-Lehmann. And you gain this access by spending money there. Not at your local store. But this is just quibbling, as we have already said there's plenty of wine out there, and more wines anointed as desirable “cherries” each year. So, there's likely something for everyone at any store. At least Hanes has a hard time walking out of a wine store empty-handed.

What Hanes wants to focus on is the Big Picture. It's not a complete zero sum game by any stretch but the question is, how many new stores can come onboard before either the older stores lose meaningful market share or the newer stores find there is not the depth of clientele they expected? Capitalism 101, people. Says the socialist sympathizer.

When you make $40 million a year, it takes awhile for the newbies to chip away at you. But chips break off, as they must. Hanes knows that personally he does not visit the major wine stores as much as he used to, not nearly as much. It's just easier to slip into some local store for a few bottles. Maybe these wines will not be the first thing you wanted but they will prove interesting and maybe even tasty. In aggregate, losing these nickel and dime type sales might be hurting the well-established “destination” stores. Not enough to truly threaten financial viability but enough to feel a couple of solid shots to the ribs. Anecdotally speaking, the last few times Hanes has visited these stores he has seen substantially less turnover in the product displayed than in previous years. This, in turn, is a disincentive: going to a store and seeing no new wines for sale will translate into fewer visits to this store.

It would be curious to see a select basket of “destination” stores' total yearly revenues as well as increase in percentage of year-to-year net profit over the past decade. Hanes would hazard the guess that while the raw number (the $40 million) has risen a lot, the actual percentage that counts as net profit has not kept up. The costs of the wine itself, labor, rent, marketing, etc. have all risen as well, arguably at a faster pace than total revenues.

The hegemony of the “destination” store is effected not only by the proliferation of new neighborhood stores but by these stores' ambitions. Many stores really just want to be high quality local stores. There's neighborhood marketing, minimal internet presence, a smaller selection of wines for sale (but by no means necessarily worse). The business is scaled to be a small business, in keeping with the dreams of a wine loving proprietor wanting to immerse her or himself in spreading the gospel of the vine. Being profitable is always a priority but becoming the next Microsoft is not.

But there's different strokes for different folks, 'natch. Many of the new entrants do want to be the next $40 million wine store gorilla. And it's these outfits that perhaps represent the biggest wild cards in the current landscape. In Lotto, it's “a dollar and a dream” but in NYC wine retailing it's “$3 million and a dream” because you probably need at least that much to start up a new store that wants to make the playoffs. Many of the newer stores have targeted almost exclusively “high net worth” clients, those clients most likely to belong to the “destination” stores already. Unless these clients are cloning themselves at a rapid rate, something has to give. The chase for the HNW clientele persists as the closest zero sum situation, with a loser for every winner. Stores like Tribeca Wine Merchants, Italian Wine Merchants, Crush, Union Square Wines, Le Dû's Wines, Grande Harvest, Vino, Cellar 72, among others, pretty much have the Morrell's and Sherry-Lehmann type clientele in their crosshairs. Selling a $10 bottle of Kendall-Jackson just ain't gonna cut it. Especially as these places have some serious rent to pay.

On the topic of serious rent to pay, let's focus on that for a bit since this will probably be Reason #1 for why some of these places eventually fail. The aforementioned Union Square Wines just moved from a totally sweet location mere yards from the very popular Union Square Park greengrocers location to a, frankly, much lower trafficked location at 13th Street and Fourth Avenue (yes, there is a Fourth Avenue in Manhattan). The word is that they got a nice shot of Benjamins to vacate. Nevertheless, moving to this new space is a huge gamble. In a similar situation is Astor Wines & Spirits, which just moved from an equally sweet location on Astor Place between two major subway lines, the #6 and R lines. They now reside in a building at the corner of Fourth Street and Lafayette Street, about 3-4 blocks south of where they were. Astor's owner owns the building they moved into so they will definitely realize some savings on rent. But, especially given that they are a very large store for Manhattan, can they continue to draw customers from around the city? Hell, can they lure their regular customers who got off the R train, stopped in for a bottle and then headed home northwards, above Astor Place? We shall see. But it would be interesting to see how their main local competitor, Warehouse Wines on Broadway, has been doing financially in the same monthly periods since Astor moved as benchmarked against past years. One would guess they have taken a big chunk of Astor's laziest customers. Throw in some smaller moves like the boutique store IS Wine moving from Fifth Street to Eighth Street and you see things are changing.

And Hanes has yet to mention the new entrants who are already established players outside the city borders. In New York State an entity can only hold one retail liquor license. So, these new entrants have tried to carefully position their one shot at gaining a NYC foothold. The well-known Whole Foods shot themselves in the foot by opening their wine store in their Columbus Circle store illegally, without its own entrance separate from the food store. Ouch. The word continues to be that they will redeploy their liquor license at their new food store location on Houston Street - blocks from where Astor just moved. Californian high end food discounter Trader Joe's just opened its first branch in NYC, very close to Union Square: the park and the wine store. Their lines are long, their wines are cheap and their corporate pockets deep. Beware the new junkyard dog. And a fairly well-known outfit in New Jersey and Delaware named Moore Brothers just opened their fine wine emporium in Manhattan's Gramercy Park area. Near a whole bunch of other wine stores.

Other large wine retailers have had their eyes on muscling into the NYC territory for years. Hanes hears the rumors. The Voices always make sure he knows. Chicago's fabled Sam's Wines & Spirits has been rumored in the past to be interested. Others closer to NYC too. Have they not finally broken through the citadel walls because they can't find the right spot to open? Or because maybe the landscape has mutated so quickly of late that, even with their existing clout, there's not much fruit left to pick off the trees? These folks didn't get rich by being stupid. Umm, Hanes may have to retract that statement one day.

All this is not to mention the ever-growing wine retailing component of the internet. Are the PJs and Garnets of NYC gaining more via e-commerce than they are losing? Are New York's wine geeks spending more of their money outside the city boundaries than within? It's a black box. Until the “For Rent” sign is in the window. Profits get squeezed more efficiently out of a captive audience and the audience is no longer captive. Note also that New York State recently has allowed for wineries around the country (California, Washington, Oregon, etc.) to ship directly to customers in-state once the winery registers with New York authorities. Maybe less business for the retail stores here?

A corollary question to the inquiry regarding the survival of this horde of wine retail stores is the effect they have on NYC's wholesalers and distributors. Do they benefit from all these new retail stores or not? The answer is not an obvious “yes.” At the heart of the matter are questions such as, does it make no difference if a distributor sells 100 cases of Mount Ego Napa Valley Cabernet to one store or ten cases to ten different stores or one case each to an 100 stores? Depends, depends, depends. There are issues of margins at various size case purchases, is it more profitable to move sizeable chunks at lower margins or lesser amounts for a higher margin. Any answers have to factor in things like manpower - you need more sales reps (and delivery drivers) if there are more total accounts and this is a cost factor. Fewer reps mean less salary and benefits paid. Unless they are really beating the pants off the competition, which is hard to do across the board.

Then, are the wines “allocated”? If so, everyone will want them. If you, as distributor, have 50 cases and whereas once there were 50 accounts who wanted them, now there are 150 accounts who want the same 50 cases. Trouble. As successful wine retailing is about relationships with the clients, so too is wine wholesaling. If the plethora of stores creates problems in meeting needs and satisfying customers that will hurt the relationship. If the distributor just looks at this as a chance to jack up prices (supply and demand) then maybe the end customer will just go online and buy the wine cheaper from Seattle or San Francisco than in New York and then the retailer gets stuck with a lot of overpriced wine on the shelves and no customers for it.

At 3,000 words and counting, there is no doubt this is a topic dear to Hanes's icy cold heart. And there's a lot more to say. The true “bread and butter” of any wine store is really the wines sold for $15 and under. If a store can maintain volume there, chances are it will stay in the black. If not, dark clouds loom. To pay NYC's stoopid rents a lot of sub-$15 wine has to be moved. The rent is only going to go up. And, once more, that's to survive, not necessarily become highly profitable. Will the average New Yorker (as opposed to the wine geek) support the volume of purchases required to keep almost 400 liquor stores in Manhattan afloat? It's a big question but if the answer is going to be “yes” you better start loudly proclaiming “I'll drink to that!” Otherwise, there's going to be a lot of dusty bottles of wine left on the shelves.