How de Négoce Eliminates Tiers in Wine Distribution For Better (Cheaper) Wine
What is the Three-Tier System?
In theory, the three-tier system was created in 1933 after the repeal of Prohibition to regulate and control the safe manufacturing, distribution and sale of alcohol, while also streamlining the process of collecting taxes on alcohol for the government.
In the three-tier model, the producer is at the top of the pyramid, wholesalers are in the middle (this is where tainted products get tracked and weeded out and alcohol tax collection happens) and retailers are at the bottom (they are the ones who sell alcohol). The tiers are kept separate in a bid to prevent any one category from having financial interest in another—leading, it was thought, to excessive sales and consumption of alcohol pre-Prohibition.
In practice, the three-tier system has led to increased costs: because bottles have to pass through so many hands before they get to a consumer—and all of those hands need to be paid—a single bottle will cost much more for the buyer than it cost to produce.
Cameron Hughes In Russian River Valley photo credit Rocco Ceselin.jpg
Circumventing the Three-Tier System
Cameron Hughes cut his teeth selling uber premium wines to the masses, until he realized there was a better way to move the kind of terroir-driven small-batch wines that inspired him, at a price that more people could afford. While—and this is key to his philosophy—still allowing producers to see the kind of profit they need to stay afloat. It also circumvents the traditional tiered system.
We’ve been following the growth of Hughes’ brand de Négoce since it launched in 2020, intrigued—but skeptical—about the perma-sale model it deploys. A négoce also known as négociant is a French term for a wine merchant who purchases grapes, juice, or wine and vinifies and/or bottles them to sell. We spoke with Hughes to learn more.
How did you come up with the model for de Négoce without breaking any of the entrenched rules of the three-tier system?
I started in the wine business as a cellar-rat back in 1994 at Corbett Canyon winery, thinking maybe I wanted to be a winemaker. I was much better suited for marketing and selling, however, and I quickly rose through the ranks of the parent company, The Wine Group, whose lean-and-mean production methodology and flat management strategy of empowering a small number of employees to manage huge swaths of business allowed them fend off, through superior product quality and far more efficient path-to-market, a full frontal assault from both Gallo and Constellation (back then Canandaigua) on both the Franzia box wine and Corbett Canyon businesses. In both my state and regional management positions I got to see first had the actual costs of production and all the markups and associated programming costs of getting a case of wine into the consumers hands. Since then, lean-and-mean, efficient paths to consumer have always been my passion.
In 1999, I left my regional sales manager position at TWG to work as first employee and GM for a start-up French wine importer and negociant (in the sense that they were putting their own blend together at various Domaine and Chateau), and I saw first-hand the ex-cellars and landed costs of a case of wine from Europe and realized that a wine landed for $3 ended up being sold for $15+ due the “three-tier” system (which is actually 4- or 5-tier when you factor in importer, wholesaler, retailer and then the layers of sales people and administration needed to navigate those layers). As a team we decided to invest in the licensing and broker network to efficiently sell to retailers.
After a year working there, the ownership (tech execs convinced the three-tier system was broken) felt that their import portfolio needed some domestic wines and asked me to explore buying and bottling our own California wines. I researched and found bulk wine brokers and a bottler, tasted some excellent bulk wines, and showed them all the costs to produce high quality “bulk” wine. A light bulb went off in my head that, with our direct model, we could really provide exceptional value in the marketplace. However, various health events led ownership to decide to wind down the business, but I had learned enough to be dangerous. I liquidated my wine collection I had amassed over years of collecting and my father matched my funds. Into business I went, bottling up 500 cases of wine and starting to sell it out of the back of my car. Two years later, after working the bulk market for high-quality small lots, I approached Costco with a deal – I would interface them with these little needle-in-a-hay-stack gems, allowing them to taste the bulk samples prior to bottling and commit to the inventories based off the bulk sample. They bit and the company exploded, expanding to all Costco regions, then broad distribution in 40+ states to a variety of Chain and Independent retailers all the while adding a robust Top 3 Direct-to-Consumer (DTC) businesses. I sold the company to Vintage Wine Estates in 2017.
How did you initially assess out how to cut costs?
My experience working at The Wine Group showed the inefficiencies and trust costs of wine production, even for luxury wines.
Many negociants or other businesses buy wine from wineries that they can’t sell at a lower price for branding purposes – and that model seems to be in play here as well – is it different and why?
The models are quite similar from a production standpoint but it’s worth noting that many of them were inspired initially by my success with Cameron Hughes Wine as a Negociant brand in Costco. However, in our current incarnation as de Négoce, we built the model backwards (as it should be, I might add) by starting with the direct-to-consumer offering and putting the consumer in the position of Costco where they could commit to and purchase the wines prior to bottling and directly from us for incredible prices. They can also shop for samplers or individual bottles at steep discounts.
Who is buying your wine?
It is pretty even split with Millennials as our top buyers, then Gen X and Boomers are about even after that. It splits 63% male and 37% female which I think is likely typical of broad-selection internet wine retailers but perhaps we over-index on the female front.
What regions are consumers most enamored with right now in your lineup? Any theories on why?
Napa Cabernet is king for us as we are able to most powerfully disintermediate and offer the biggest discounts there versus the typical market price.
Any plans to go beyond the online Bottle Shop and sell to stores?
We are working on that now. Stay tuned.
How many cases do you move annually? How much has it grown since launching in 2020?
It’s over 100,000 cases yearly run rate, purely direct-to-consumer. But it’s been flat as we pivoted to buying a lot more imports due to the 2020 fires smoking much of the Bordelaise varietal wines we see on the bulk market. I cannot speak for the 2020 North coast reds that are bottled and in the marketplace, but I have yet to see a non-smoke-tainted 2020 BDX red on the bulk market. Tragic, as the underlying material was bound to be fantastic if not for the fires.
Any regions you’d love to represent but don’t?
Cameron Hughes Samples Wines photo credit Rocco Ceselin
The world is my oyster when it comes to wine sourcing, and I am thrilled to continue to explore the wines world. Right now, I would love to see more wines coming from New Zealand and Tasmania as well as South Africa. We are working on a number of purchases now from Australia where there is a massive oversupply of luxury quality red wines due to their epic trade spat with China and I expect to be able to purchase quite a bit of 2021 and 2022 German/Austrian white wines (along with the rest of Europe) that have been tight due to the short ’21 vintage. We will also see a re-emergence of Napa Cabernet starting later this year and into next Spring of fantastic 2021 Napa Cabernets. Very excited for that!
What is the average discount? Any particularly deep ones we should know about?
At minimum, prices are 33% off. That’s usually for a Bordeaux red where the marketplace is super competitive with many online retailers working quite lean. In Napa Valley, however, we can offer incredible value; for instance, we’ve sold (prior to bottling in what we call Tranche One) a $140+ Diamond Mountain Cabernet for $25/bottle as well as a $250+ Stags Leap Cabernet for $30/bottle.
With the Consumer Price Index up 8.2% so far this year, a $250+ Stags Leap for $30 sounds … almost too good to be true. (But we’ll take it. Actually, make it a case).