Disintermediation was a hot topic in financial economics a few years ago — I built an entire economics class around it — and it remains a powerful idea even if it may be an unfamiliar word. I think we don’t use the term so much these days because the concept is now woven into the fabric of our daily lives! Time to untangle it and see how it works, especially in the wine business.
Disinter … what?
Disintermediation refers to the process of “cutting out the middle man” — reducing the number of links in the supply chain by eliminating certain functions. If you’ve ever tried to sell a home yourself rather than using a real estate agent “intermediary” or bought or sold anything on eBay or Craig’s List then you’ve been part of the disintermediation movement to a certain extent. As the video above suggests, the quotidian activity of buying an airline ticket was once upon a time a middleman business. Not so much any more!
Commercial banks were the main focus of financial disintermediation back in the day. Banks and other financial intermediaries provided valuable services (that’s how middlemen earn their pay), but the incentive to borrow or lend directly through “securitized” products was strong and that’s why financial disintermediation started to occur. Disintermediation increased the apparent efficiency of the financial markets but also probably increased risk and volatility because some of the functions of the intermediaries were lost and the bank-based regulatory structure found it difficult to cope with the “non-bank banks” and other institutions that evolved. Or at least that’s my take on how the process unfolded.
Disintermediation still goes on today, but it has become so commonplace that we don’t give it much attention — until we are the links cut out of the chain! The advent of “crowd-sourcing” or “crowd-funding” websites is a good example of disintermediation. There are all sorts of ways to shorten the supply chain, both when it is a good idea and when it is not (sometimes it turns out the missing link was really important).
How Does This Relate to Wine?
Which brings us (finally) to wine. A Wine Economist reader writes to suggest disintermediation as a topic for a column and I think it is a great idea. There are a lot of big and little examples of disintermediation at work in the wine industry.
On the big end of the scale we have giant firms like Tesco who now often source bulk wines directly from around the world and bottle them under their own labels (sometimes in their own plants) and sell them under house brand labels. The streamlined process shortens the chain and cuts cost.
Disintermediation was part of the story for one of American wine’s biggest success stories of recent years — Two Buck Chuck (a.k.a. the Charles Shaw wine sold at Trader Joe’s stores). Most wine in America goes through the three-tier distribution system with its built-in middleman structure. But Bronco Wine, which makes 5 million cases of Two Buck Chuck a year, and Trader Joe’s took advantage of a provision in California regulations that allowed companies like Bronco to deliver directly to the retailer, cutting out a link and making it possible to profitably sell a two dollar wine. A lot of factors contributed to Two Buck Chuck’s success and this disintermediation was one of them.
Disintermediation works for medium sized firms, too, such as Naked Wines, which uses an interesting crowd-funding and direct sales model — their “angel” investors finance wine production and become a built-in direct-to-consumer market for the final product — that’s double disintermediation in a way. My helpful reader drew my attention to a direct wine retailer called Fass Selections. which aims to cut out two links in the supply chain for their wines: importer and distributor. That’s disintermediation, all right! Disintermediation isn’t everywhere, but there’s a lot of it around (tasting rooms and cellar door sales?), even in places you wouldn’t think to look.
Down Under Disintermediation
My favorite example of wine disintermediation was a discovery that Sue and I made while walking through the big Queen Victoria public market in Melbourne during our visit to Australia in September. I couldn’t believe my eyes when I saw the big stack of wine barrels at the ReWine market stall.
The ReWine folks offer a carefully curated selection of wines that they have purchased in bulk from Australian producers. They sell them directly to consumers in the Queen Victoria and Preston markets — the bottles are filled from the barrel containers you see in the photos. Bring your bottle back to be refilled (like the wine “growlers” that are gaining popularity here in the U.S. where local law permits them) and you get a discount.
The wines range from basic dry red and dry white wines sold at a low price to some very interesting products on up the line including dry, sweet and fortified wines. There was a nice Pinot Noir from the Adelaide Hills on offer when we stopped by.
You get what you pay for in the basic range, we were told, as these wines are blends made for a particular price point like basic wines everywhere in the world, with more distinctive products at the higher price points. Something for everyone, I think especially for a wine economist like me!
These examples just scratch the surface of disintermediation in the wine industry. I visited with a 2500 case winery recently that seemed to build its entire distribution model around the concept of cutting out the middleman. Easy to see the incentive to do this and also to appreciate the risks.
Once you start to think about disintermediation you will begin to see it at work everyone, even in the world of wine. Keep your eyes open — it might not change everything, but it’s bound to have a big effect.
Thanks to my economics-savvy reader for suggesting this topic. Thanks to Sue for the Melbourne photos.
Here is an example of intermediation in the wine industry that should happen: I live in MA where I have a wine tasting club. We have our tasting dinners at a local restaurant. All wines from that dinner have to be bought via distributors. I can’t bring wine to the tasting and the restaurant cannot order a shipment of wine directly from California nor can it buy from a local supermarket. All wines sold in the restaurant must be purchased via wholesalers/distributors. This law applies to individuals as well as restaurants. So I cannot order wine directly – I must buy in liquor stores. And liquor stores are supplied by distributorsA Federal court 5 years back said this violated the US Constitution but the distributors to date have paid off the right state politicians to keep it on the books.
For anyone interested in this matter, see http://www.morssglobalfinance.com/massachusetts-wine-laws-violate-the-us-constitution/.
Mass and PA are the 2 states it’s virtually impossible to ship into. Find a friend in a nearby more freedom loving state and fight the man.