Lions, and Tiger, and Tariffs…OH MY!
Moving past fear and into action in a scary market environment.
Peter Baedeker, April 7, 2025
In his 1968 classic book, “The Lessons of History,” published at the height of the anti-war cultural movement in the U.S., philosopher Will Durant observed, “War is one of the constants of history, and has not diminished with civilization or democracy. In the last 3,421 years of recorded history only 268 have seen no war.” Of course, Durant wasn’t arguing that war is good, rather he was reminding his readers that as civilized as we’ve become, societies and even civilizations are most always at war with one another. Today, then, we find ourselves in yet another war, albeit one that is overtly economic.
As a pragmatist by philosophy and now a consultant by trade, my desire and my job is not to debate tariff policy, but to help people find solutions within its reality. When I was Sr. VP of Sales and then president at The Henry Wine Group during the Great Recession, my job was to mobilize a large sales team to fight hard for market share in a terrifying market. Just like now, it was difficult to get wine salespeople focused on selling instead of kvetching with their buyers about the plunge in the Dow Jones Industrial Average. In 2008, during a statewide sales team meeting, I asked the group of about a hundred wine salespeople if someone could raise their hand and define for me what the Dow Jones Industrial Average is and how it’s calculated. Not one hand went up. I quipped, “Good to know we don’t have any financial experts in this group,” and then said more forcefully, “Now let’s get back to talking about the wines in our book and how they’re better for our accounts’ business than the competition’s.”
This is not to say we’re powerless against macro forces. I think it’s crucial to exert pressure on state and federal government officials in support of causes you believe in or protest of policies that hurt your livelihood. Support organizations that lobby for change or volunteer time, but otherwise, get back to work and focus on sales.
Also, beware of believing that there are clear answers in economic philosophy; if there were, debate wouldn’t exist. I’ve heard many of my European wine importer friends speak with anger and confidence, as if it’s a plain and clear fact, about how the EU’s VAT is not tantamount to an unfair tax on American wine because it’s levied on all products sold in the EU, whether imported or domestic. This is not a fact; it’s a debatable position in a complex economic situation. Consider the other side of the argument. Italy’s 22% VAT on the total customs value of imported wine, for example, makes it very difficult for California Cabernet to be sold in Italy when it’s placed on top of the costs of unsubsidized production in California and unsubsidized marketing. By paying Italy’s VAT to sell a Napa Cab in a very cosmopolitan city such as Milan, where there would be a demand for it, the California winery is not only at a steep price disadvantage to local wines from Bolgheri but is inadvertently funding the very system that subsidizes the European wineries who compete against them on their home turf in Los Angeles and San Francisco. Meanwhile, the U.S. government charges a volume-based flat excise tax per gallon that ranges from just above a buck to three bucks and change per gallon depending on ABV and whether the wine is still or bubbly. While credits are available for smaller scale domestic wineries, the flat excise tax still pales in comparative impact vs. the VAT even when flat state excise taxes and sales taxes are added in. Moreover, the flat tax greatly benefits imported luxury goods in higher price tiers. There’s a reason you can find Super Tuscans for a great price compared to Napa or Happy Canyon Cab on fine dining lists throughout America, but you can’t find a Napa or Happy Canyon Cab on most fine dining lists in Milan or Rome. If it’s nationalism that makes the product win in its home market, fair play. In the major European cities with world class wine programs, though, the small market share of American wines is not entirely about fierce nationalism, not when the best restaurants and hotels in major European cities proudly feature global wine lists.
Americans love European things; Europeans love American things. I hope that my friends in the industry in Europe lean just as hard on their leaders to level the playing field as we need to lean on ours so that the best products win in a truly global arena.
A global arena with an even playing field is best for the fine wine business.
In the meantime, back to work. Here are three pieces of advice for winning in a tariff environment that will pay off even if the tariffs disappear tomorrow:
1. Don’t just assess you COGS; look hard at your variable sales & marketing expenses. Right now, fine wine importers and their foreign winery suppliers are sure to be arguing over who is going to “absorb” the tariff whether it’s 10%, 20% or 30%. These arguments are likely to be focused on the cost-of-goods-sold: the ex-cellar price from the winery, the shipping, the warehousing and trucking, and all the costs that by accounting rules rightfully go into the cost of the product. Unfortunately, very few of the discussions will turn to the operating expense side of each partner’s P&L. Yet therein will typically lie the quickest, if most painful, answer to dealing with a 10-30% increase in COGS.
I’ve been fortunate to have experience in all three business phases identified by experts like Peter Drucker and Jack Welch—startup, high growth, and turnaround. All viable businesses are either launching, accelerating, or re-calibrating. I’ve gained insights into variable sales and marketing expenses critical for building brands in all three scenarios. No matter what the phase, the key is always to have your house in order.
The term "economics" comes from the Greek "oikonomia," meaning "household management." Initially focused on managing household resources, the term has evolved to examine how entire societies allocate scarce resources and make production and consumption choices. Just like households, businesses can accumulate unnecessary costs without clarity about their productivity, and this is especially easy to do in the selling and marketing areas of the business. We know whether a vineyard is dying and either needs to be replanted or plowed fallow. It’s much harder to assess what we’re missing by not being involved in a marketing activity, or even what we’ll gain by being involved. If you truly assess your variable selling expenses, you’ll be sure to find headscratchers equivalent to when you assess a home budget: tell me why again that we’re subscribed to fifteen different streaming channels? Find the inefficiencies that stem from habit or bloat and stop those activities immediately.
A mentor of mine in distribution once told suppliers who were raising their prices due to production cost increases that "the consumer doesn’t care how much it costs you to make your wine; they just care how much it costs them to buy it." I’d extend that thought: consumers don’t care about your costs to make or market your wine; they only care if your product is compelling for its price on the shelf or menu. Sometimes, you might even be priced too low—imagine that!
Pricing should never depend on either COGS or sales and marketing expenses; instead, costs and expenses should be managed based on the product’s retail pricing target and competitive set.
During profit triage planning, don’t take the easy way out and go straight to slashing payroll either. Sure, some on the sales and marketing team are part of the inefficiency themselves, and they have nobody to blame but themselves if they’re not constantly getting leaner and better. But start with the activities and you will find waste no matter what your size. If you have a small team, there may be nowhere to cut and don’t fall into the accountant trap of trying to save your way to success. This is about activity and its results as much as it is about headcount. In fact, start with your people and make them work ground up: demand that your sales and marketing team cut 30% of their variable selling and marketing budget and deliver a plan to still hit this year’s goals. You’ll find out quickly who is capable of a "war time” mentality.
How you break out of the gate can often determine success or failure.
2. New market entrants may hold an advantage over established brands bogged down by bloated expenses. Many wine companies who are well established in the U.S. market are spending lots of money to move their products, and their management knows that they’re wasting 50% of their sales and marketing budget. They just don’t know which 50%.
Bigger businesses in our industry tend towards the household that is over extended and is suddenly faced with a big household expense increase: they hesitate before making decisive changes. They just can’t imagine life without that service or thing, even though it’s not essential for happiness let alone survival. They have become so accustomed to a lifestyle that they don’t know how to change behaviors and live more efficiently.
Some brands and businesses are so big they don’t even know who the right customer is anymore; they’ve grown market share to the point where they forget that the customer is not always right, rather the right customer is always right (Peter Fader). The longtime but low value wine club member who says, “I love your wines but they’ve gotten too expensive,” or the trade customer who says, “I love this wine and will pour it by the glass if you sell it to me for half the price” are the wrong customers no matter how big you are. For new entrants, not getting involved with them in the first place is much easier than breaking up with them.
What’s more, this very traditional industry has had a tough time adopting sales techniques that go beyond pure shoe leather, meaning variable selling expenses as a ratio to gross profit are still way higher than they should be. Some of your bigger competitors still don’t have a coherent digital sales strategy, for example, which means you can implement one now and take their market share on a lower cost basis.
If you’re a “new homebuyer” in the U.S. fine wine market, so to speak, now is your opportunity to strategically plan your sales and marketing expenses, set up a plan that eliminates the waste and doubles down on the efficient activities that truly produce real case sales. If you’re in acceleration mode in the U.S., you can do the same. Take market share from the bloated and obtuse. This is your chance to snatch a beautiful home under foreclosure because the owner spent beyond their means.
A great marketing campaign by the Santa Barbara Vintner's Association reminds us of our uniqueness as well as our roots.
3.Stay humble, American wineries. I will never stop drinking Rioja. There’s nothing like it in the world. I’ll never stop drinking Piedmont Nebbiolo for the same reason. In fact, some wines from both areas that I purchase, especially the premium offerings, could go up 50% in shelf price and I’d still buy them and cut back on other purchases.
When it comes to wines that I have emotional connections with, I’ll cut out other guilt free spending before I’d stop enjoying them as well. Every time I put my nose into a great glass of red Rhône wine, I have a Marcel Proust moment that brings me back to my first visits to France as a young wine salesman. That’s what I’m spending my money on, and it’s worth it every time.
The idea that tariffs on foreign wines will automatically turn Burgundy consumers into California Pinot Noir drinkers is misguided and counters the core values of those of us who truly love wine and food. No American in the fine wine business—even an American winery owner—would say they want to live in that kind of a world. Our European wine industry friends don’t want to live in that world any more than they want to try and shove all of their lost U.S business back into their home markets or even other export markets (a mathematical impossibility, by the way). The beauty of fine wine and fine food is that it’s about place and people and experience. Fine wine and food are exportable precisely because of that. Without getting back into a policy discussion, there is an economic argument that having a trade deficit is a sign of a wealthy society with a strong currency that can afford luxury goods from all over the world. I was lucky to enter the wine business at a point in American history that allowed me to be exposed to lovely imported and domestic wines. I still love and consume them both. I live on the western edge of one of California's great wine regions and love tasting red Marsannay next to Sta. Rita Hills Pinot Noir. At the end of the day, I spend most of my money on those wines that I have created an emotional connection with. This goes all the way down to the brand level.
Many American wine brands still have a long way to go in terms of connecting with customers in this manner, and this is done through creating brand experiences that speak to the right customers. It’s not done by selling on price alone or temporarily filling shelf space. What will turn that Burgundy consumer into a U.S. Pinot Noir consumer, at least for some of her purchase choices, is a product in both flavor and experience that hits her soul like an iron fist while comforting her pocketbook like a velvet glove.