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Single-Unit The Wine House Competes Against The Big Chains In Los Angeles

January 13, 2012

The Wine House opened its doors 35 years ago in Los Angeles and has been a destination for savvy wine buyers ever since. Despite a difficult economy in recent years and a 12% unemployment rate in California, owner Bill Knight says revenues hit $20 million in 2011—returning to their levels of 2007, before the recession hit California hard. Knight competes against all the major U.S. retail chains in his market by focusing on service, and he eschews selling private labels or direct imports. Knight believes those who do that will find it harder to source good California wine in the coming year. Shanken News Daily recently spoke with Knight about these issues and trends in his market.

SND: How have you responded to the difficult economy of the last few years?

Knight: We’re just trying to keep our head above water. We’ve always been promotional, but we’ve become even more so, in trying to win back customers. We’ve picked up our Internet business, but that hasn’t completely offset what we lost in store traffic.

SND: Did you have to change your product assortment?

Knight: People are looking for discounts at every price level. If it was a $150 bottle of wine, we sold it for $100. If it was a $20 bottle, we sold it for $13. The upper and lower ends have been stable. What died was the middle market—between $35-$100. People traded down, but some continued to add to their cellars and continue consumption patterns on wines over $100.

SND: What share of your wine business is accounted for by California?

Knight: Around 45%.

SND: And after California?

Knight: Imports. My youngest son Jim is the import buyer and my oldest son Glen is the domestic buyer.

SND: What are the trends in your California wine business?

Knight: The California wine business has been very promotionalized. Wineries have gone out of business, there have been a lot of closeouts and people have created second labels and promoted those goods. There hasn’t been much change in our mix, however, because trends are similar in the import market.

SND: So is your business up or down in 2011?

Knight: We were flat with 2007, and I think we dropped about 12%-13% in the 2008-2009 business.

SND: Then you came back in 2010?

Knight: We started coming back in 2010, and this year we’ll have revenues of $20 million, equal to what we did in 2007. We’ve had a few other people come around and beat us up. BevMo moved two stores near me and syphoned off some business. And Total Wine has been nipping at my outer reaches in the Southern California market.

SND: Are they your two biggest competitors?

Knight: Well, let me put it this way—my list of non-competitors is shorter than my competitors. I’ve got 7-Eleven selling wine, all the supermarkets selling wine, I’ve got department stores like Walmart selling wine, and of course I’ve got Costco. We’ve got more competitors for wine, I think, than any other part of the country.

SND: How do you compete with the likes of BevMo, Total Wine or Costco?

Knight: I think we provide better service. Of course, some people might disagree with that, but I think the service here is better. People who shop here are looking for something more than national brands. I think we’re selling fewer national brands and more small, unique producers, which often provide better value at the same price point.

SND: A lot of those chains also do big private label business. Do you?

Knight: We don’t. You need to buy 500 cases or more to do that. And we think the private label business will have a lot of problems in the future.

SND: In terms of sourcing?

Knight: Yes, because the crops in California have been cut substantially both in 2010 and 2011. So I think a lot of that private label business will disappear and prices will rise. Therefore I’d rather buy the first label than the second label or stuff that’s sold off in bulk. I think there will be less wine available in the bulk market. So for those in the business, I think it will be tough to get good juice.

SND: Which varietals or which regions are performing best for you?

Knight: Just looking at my inventory, California Cabs are still doing well, as are the Bordeaux blends and Chardonnays. Pinot Noir I think has sort of flattened out for us, and Merlot has died. Syrah is getting weak too.

SND: What about sparkling wine?

Knight: California sparkling is okay, but for some odd reason, our customers haven’t gravitated strongly toward that and have stuck with the imports. Champagne sales, except during the holidays, aren’t as strong as they were in 2007. It has an expensive image, and with people being more frugal, Champagne drops off the list. But instead of going to California sparkling wine, they’ve gravitated to Prosecco.

SND: Tell me about your restaurant, Upstairs 2. What’s the concept?

Knight: It’s basically small plates and 50 wines by the glass or bottle. It’s in a 3,500-square-foot space on our second floor above our 25,000-square-foot retail space. We’ve been doing it for five years now.

SND: How do you like being in the restaurant business?

Knight: It’s tougher than retail. The consumer is more fickle. We were holding wine classes there and started doing a lot of food and wine pairing classes, so I needed a kitchen. We also do a lot of winemaker dinners, so we hired a chef, kitchen crew and wait staff and opened a restaurant.

SND: Is it profitable?

Knight: It’s breaking even.

SND: What do you see coming in the next year or two?

Knight: I’m still very nervous about the economy. We need the economy to grow, and I’m not optimistic about that. I just don’t see a typical economic recovery coming. I’m not optimistic, I’m cautious. I think we’ll do more of the same, we’re going to inch ahead maybe a little bit, but I’ll be surprised if this economy became dynamic like it was in 2006 and 2007.

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