It might be the most successful 19-year experiment in the history of wine retailing in the U.S. And in retrospect, it is easy to see how it would have worked.
But in the setting up of Ron Loutherback’s three Wine Club stores in California, the story is one of near failure, toe-stubbing, financial hardship, business pressure, intimidation, outrage and bit of teeth-gnashing frustration.
Through it all, the tall, bright-eyed, gray-haired Loutherback has maintained a persona hard to capture: part bemused and good-natured, and part cynical, hard-bitten, tough-as-rawhide businessman with a knack for knowing what to do when.
When people meet Loutherback for the first time, they sometimes don’t know what to think. He often has a wide if not wild grin, and he displays an innocence and mild-mannered demeanor that belies his business savvy. But then when he begins to talk numbers, about the fact that his three stores will gross about $50 million in 2004, you realize he is quite serious about this wine game.
Especially since the Wine Club sells nothing else. Just wine.
Indeed, though he is hated by some members of the retail wine community, it is merely because of his success, with few realizing that what Wine Club did for the entire California wine market was to energize the game with a competitive spirit that has helped everybody who was able to remain in the business.
In The Beginning
“That first day was a real wake-up call,” he said. “I thought I had a customer base that would do more than $268 that first day.” Undaunted, he went home that evening still sure what he was doing was the right thing.
“Price Club was just going strong at that time, and people could understand warehouses and warehouse locations. They knew that was the reason their goods were less money, because their locations were cheaper.
“Instead of concentrating on just my local clientele, I was going to draw from a larger region. We were freeway accessible (between the I-5 and the CA-55 freeways) and volume was the key.”
And how did he expect to draw that larger crowd? With a radical plan that no one had yet tried: every wine in the shop was offered for 10% over Loutherback’s cost.
“And we added advertising,” he said. Even Price Club wasn’t doing that. And he also had a newsletter that was growing popular.
He hired Ken Rowell as his wine buyer, but Ron worked the floor six days a week, and for the first three years things were lean.
One key moment came early in 1988 when he attended a seminar on newsletters. “I had always had one, and this seminar gave me the idea about how to sell wine with it. I took an ad out in the L.A. Times that said, ‘Dial this toll-free number and get a free wine newsletter.’ And when people called I told them, ‘I don’t care where you live, if you give me your address, I’ll ship wine to you.'”
That got the ball rolling. By the beginning of 1989, Wine Club was sailing along.
And to make his selection top-drawer, he convinced wholesalers to provide larger allocations of anything he knew he could sell because of his lower prices.
Discounting Expensive Wines
The key was expensive wines.
It’s one thing to save $2 on a wine that sells for $12, it’s quite another to save $10 on a more expensive wine.
Though Ron Loutherback has Wine Club stores in San Francisco and Santa Clara, this one is the original, located in Santa Ana.
A case in point: When Antinori’s famed Tignanello was selling at full retail for $60 some years ago, and other shops’ discounted price was $50, Loutherback had the wine for $40, a saving of $120 on a case, more than covering shipping fees. At the time, wholesalers would tell some clients that certain wines were on allocation, yet Loutherback always seemed to have more of these wines than others.
A key reason for this was that he paid wholesalers on time. He could do this because he had an average inventory turn 12 times per year. This means that he was essentially buying wine and selling it before he had to pay for it (based on a 30-day billing cycle).
Today, Wine Club turns its inventory some 16 to 17 times a year, or roughly every 20 days.
Moreover, to keep things fresh, Ron personally would drive to wine country to buy wine at retail, including tax, and then drive it back to Santa Ana and put the wines on the tables (none of his stores has expensive racks), marked up that same 10%.
When I visited the Santa Ana store years ago, I was shocked to see Williams Selyem Pinot Noir that the winery was selling for $40 a bottle and which could only be bought at the winery. The wine was $45.50 at Wine Club.
“We pretty much still do that with wines that are difficult to get. I still get an allocation of Duckhorn, Spottswoode and a number of others,” he said. “It comes to me at full retail, I keep a small amount of it, and mark up the rest with a normal markup including sales tax.”
Low prices aren’t enough, Loutherback says. He succeeds by offering the right products at the right price.
For the first few years, the margin was right at 10%, but when Loutherback realized he needed to take credit cards, he increased that margin to 12%.
Today, the margin seems to float a bit, with some items marked up slightly more when the demand seems to be greater. For instance, the suggested retail price for Tignanello is $75; Wine Club’s price is $57.99, or 16% over wholesale.
He says that his newsletter carries his prices to 97,000 persons, some of whom are competitors who know that he is a huge shipper of wines all over the country. And they know that to compete with Loutherback, they have to be “a buck below me.”
Power of the Newsletter
That same newsletter is also a powerful advertising tool. People on the list tell those who aren’t of the special prices Wine Club offers on hundreds of wines, including lower-priced California offerings.
Loutherback also prides himself on his exceptional staff, at each of the three locations (the other two are in San Francsico, at the junction of the 101 and 80 freeways, and in Santa Clara at the junction of the 101 and 880 freeways).
Four members from each store in the Wine Club team select a wine to highlight each month in the newsletter. It has evolved into a 32-page newsprint publication with loads of information and prices, store by store. (Some wines are available in all stores.)
Loutherback has become so successful that he’s almost embarrassed (but not quite!) to note that he sells probably more classified growth Bordeaux than any other store in the U.S.
“That’s what the distributors tell us,” he said, revealing that for the 2000 vintage, he sold about $14 million in Bordeaux futures.
Revenues More Than Doubled Since 1995
Overall, revenues have more than doubled since 1995, so I asked him what specific element pleased him most: price, selection or service.
“I could have the best price and not have the right product and it wouldn’t sell very well,” he said. “And there are times when I have gone to a different location and paid a higher price because I was dealing with someone who was nice.
“So we pride ourselves on our enjoyable atmosphere. Where can you find people who love wine? Where? If you don’t respect the product, you leave the product on the loading dock in the summer. I’ve been to places where they don’t love wine and I see it being mistreated.
“That shows up in the way we deal with shipments. We won’t ship something if we think there’s a chance that something can happen to it on the way.”
In sum, he said, “It’s my staff. They make Wine Club what it is.”
Curiously, not one of the Wine Club locations is actually large enough. The Santa Ana store, the original, is only 6,000 square feet. Santa Clara is 7,000 square feet, and San Francisco is a tiny 4,000 square feet.
The San Francisco store is so small that when a particular wine is extremely popular, it may have to be delivered three times a week.
“But each is as individual as the customer base demands,” he said. In the San Francisco store, for example, the average customer is greatly interested in trying different things — wine from Provence, Chile, South Africa, Spain. They are more receptive to trying something new,” he said.
“In Santa Clara, they are really true to California, but are eager to learn about the new things, new wineries.”
I asked about the lack of beautiful wood racks that some stores take pride in. “Well, I’d have to hire people to fill those racks. And what’s the point…as fast as we sell wine?”
Special Display Tables
The tables that he uses to display wines were “built specifically for us, to do a specific job.”
But what is amazing is that once in the store, the lure of low pricing is so great that the average in-store buyer acquires two cases of wine.
Loutherback doesn’t mind using numerical scores in his newsletter for those wines that are scored, even if he and his staff do not agree with the ratings. “All the better that [the consumer] gets upset with [Robert] Parker than with me.” But far more important, he points out, is wine education that comes from articles in the newsletter or stories his wine sales people can tell.
The three Wine Club outlets will generate about $50 million in sales this year; the inventory turns 16 to 17 times annually.
“I learned a long time ago that people want to read stories with a little controversy, and being a little bit of a publicity hound, I speak my mind.
“One of the things that has bothered me the most is the importance wineries put on having their wines at restaurants. They get special deals, allocations of certain wines, and they kowtow to restaurants and ignore the retail shops.
“They tell us, ‘We want to stay on the wine list,’ or, ‘Our label has such prestige we need to be with good food,’ and, ‘Restaurants educate the customer.’ The one I really like is, ‘You build brands in restaurants.’
“Well, there are damn few restaurants that educate the customer. Usually, restaurants are too busy to give the customer any information about wine. Even the best master sommelier in the world can’t take the time to educate.
“And most of them [restaurants] treat wine as if it was a cash cow, and that’s about it. I pride myself on the fact that our wine people know wine and are willing to educate anyone on any wine we have in stock — and some we don’t carry.”
It’s widely known that Loutherback was one of the first major shippers of wine to consumers in other states, and he is adamant that consumers in any state should have the right to buy from retailers in any other state.
“Sure, we’ve been shipping across state lines to reciprocal trade states,” he said, but even there the system doesn’t often work properly.
“I’ve shipped to legal states and still had wines confiscated, and I have spent hundreds of thousands of dollars in legal fees.”
When asked point blank if he shipped to any customers in non-reciprocal trade states, Loutherback merely said, “If we get a call from a consumer in a state where I’m not permitted to ship, I advise him, ‘Go to work on your state legislature and become a full-fledged citizen instead of a second-class citizen.'”
As for the interstate shipping issue, Loutherback said, “I was gung-ho against restricting Americans’ ability to buy what they want to buy, but now the wineries are seeking the customer themselves by wanting to ship across state lines direct to consumers.
“So, in effect, they want to be my competitor, and they can govern the supply. They can sell the high-end stuff [directly] and sell me the lower-end wines. Is it any wonder that Oregon has such lousy distribution in California? We can’t get the good wines; all they’re willing to sell us is the stuff they can’t sell at home.”
Taking a Stand in San Francisco
Loutherback’s most courageous decision, he admits, was his willingness to open a second store in San Francisco, a town in which a handful of powerful retailers opposed him and wielded power with the major wholesalers.
For weeks before the opening, Loutherback said, he heard from many people that he was unwelcome, and rumors abounded that some were threatening violence. “Every distributor was threatened not to sell to me.”
But Ron is nobody’s poltroon and in the weeks leading up to the June 14, 1992, opening, he slept on a cot in the San Francisco store, “with a loaded 12-guage shotgun in my sleeping bag.” The tension remained for more than three years, perhaps longer, he noted.
Through all his trials and tribulations, Loutherback remains one of the most outspoken of retailers. Though his wine operation is not publicly traded, he is willing to publish annual sales figures each year, and admits that some of his best buyers are in places like Hong Kong and El Salvador.
And no, he has no plans to expand the empire any further. Much to the relief of other retailers.
Discovering Wine Discounting
It all started for Loutherback back in 1984. He had been running a small gourmet deli, the Delicacy Shop in Fullerton, CA, in upscale Orange County. Knowing the vital importance of location, he was used to paying high rent for good visibility, and making ends meet (barely) based on high margins for everything he sold, including wine.
It was just six years later when a small liquor store, Bob’s on Larkin Street in San Francisco, had successfully beaten back a challenge of its wine discounting by the state’s Alcohol Beverage Control (ABC) board, when discounting of wine was still in its infancy.
Years ago, under the old fair trade laws, the greatest discount a store could offer on alcoholic beverages was 10% (usually for a case purchase), and prices rigidly followed a price posting done with the ABC.
But as with most new marketing ideas, wine discounting was still being done by the seat of the pants. Some items that were slow movers would be offered on deeper discounts, and other items of a more prestigious nature were offered with only a few percentage points off.
Early in 1985, Loutherback began to see what discounting could do. He was aware of the rise of Price Club (now called Costco, begun in San Diego in 1976). By 1982, with only two stores, the Price Club warehouse operation was selling a few Classified Growth Bordeaux for bargain-basement prices, and people from Orange County were driving an hour south to the first Price Club in Rose Canyon to buy wine.
So Loutherback analyzed the phenomenon and realized a few truths:
- Location was still important, but not in the way it once was. Price Club was located in inexpensive places that were mainly industrial, where land was cheap and near freeways. By doing this, the stores were accessible to a wider audience.
- The way to encourage people to drive long distances to buy merchandise was to offer prices that were so low consumers wouldn’t mind traveling the extra few minutes.
- He also knew that if he charged a fee to belong to a “club,” people would feel as if they were on the inside of a good deal.
So he closed the Delicacy Shop, sub-leasing the space, and on Oct. 31, 1985, he opened the Santa Ana Wine Club.
Membership was $2 per year.
Wine Club Santa Ana
- 2110 East McFadden, Suite E
- Santa Ana, CA 92795
- 714-835-0163; 800-966-5432
- 19 employees including two fluent in other languages (Spanish, Japanese); accounting, web-master, newsletter coordinator
Wine Club San Francisco
- 953 Harrison Street
- San Francisco, CA 94107
- 415-512-9086; 800-966-7835
- 11 employees including one fluent in Arabic and French
Wine Club Santa Clara
- 1200 Coleman Avenue
- Santa Clara, CA 95050
- 408-567-0900; 800-678-5044
- 7 employees including two fluent in Spanish, one fluent in Japanese and one fluent in French and German.
All stores open 9 a.m. to 7 p.m. six days a week; 11 a.m. to 6 p.m. on Sundays.