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A novel problem for a vintage technique: using mixed-integer programming to match wineries and distributors.

Article Excerpt
Wineries must find distributors to represent their wines, and distributors seek interesting wines to sell to clients. Wineries and distributors often form partnerships at trade shows. I created a system to qualify potential partnerships for one such trade show, the World Wine Market, by formulating a mixed-integer program that is an embellished transportation model. I based its parameters on answers to a questionnaire I obtained from a subset of trade-show attendees who were seeking partners. Of 675 possible matches between wineries and distributors, the program recommended 31 as the optimal set of matches. This resulted in an allocation of just over 50,000 cases of wine. Participants provided positive feedback. In addition, the program introduced at least one winery and a corresponding distributor who have formed a profitable, long-term partnership.

Key words: programming, integer: applications; transportation: network; marketing: channels of distribution; industries: agriculture, food.

History: This paper was refereed.

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Wine is California's most valuable agricultural product, contributing $45 billion to the state's economy through direct sales and secondary revenues, such as from wine tourism (MKF Research 2004). The state has more than 1,500 wineries and a 90 percent share of American wine production (Wine Institute 2003). However, the vast majority of these wineries are small, family businesses that face increasingly difficult barriers in getting their wines to market.

As the repeal of prohibition has mandated, alcohol sold in the United States must pass through a three-tiered distribution system. Each state has its own special regulations, with distribution a necessary middle tier. After an era of consolidation, 20 distributors now control over 70 percent of the national wine market (National Wine and Spirits, Inc. 2004). Most of these seek to represent high-volume brands, such as Kendall-Jackson or Turning Leaf. A Wine Institute (2003) survey shows that 75 percent of the wineries polled felt that distributor consolidation has adversely affected their ability to find representation.

Some wineries seek to bypass the perceived distribution bottleneck by relying on direct consumer sales. While many states allow direct consumer shipments, which are increasing, this channel accounts for only 10 percent of total US wine sales (Cholette 2004). Despite the recent Supreme Court ruling prohibiting discriminatory interstate shipping restrictions, this channel will remain of limited potential. Therefore, the many small vintners who wish to continue to exist as independent entities may have to partner with specialty distributors who seek lesser-known brands for wine shops, restaurants, and other clients looking for more variety. Such distributors are usually small businesses with limited geographic presence. To find such potential partners, wineries often must visit the distributors' offices or attend trade shows, at great expense in time and money.

A partnership between a winery and a distributor involves many considerations. One is that wines are highly differentiated products. They range in price from $2 to hundreds of dollars per bottle and include blended wines and many different varietals (wines made from a single grape variety, such as merlot). As Cutler (2005) documents, distributors expanding their portfolio of wine brands often have very specific needs. For instance, they may seek new zinfandels, but only within the $14 to $24 price range.

Geography is another factor for both wineries and distributors. Wines from prestigious California regions such as Napa and Sonoma tend to be more desirable than those from California's Central Valley. However, some distributors seek wines from less established regions, such as the Santa Barbara area, which the recent movie Sideways made popular. Likewise, specialty distributors often have a limited domain--the states where they are licensed by the local government to transport and sell alcoholic beverages. Rather than attempt to distribute its wines across a nationwide client base, a winery may prefer to strategically target smaller regions, such as Florida or the New York Tri-State area. Lastly, transaction volumes must be a consideration. A distributor who requests a 100-case allocation of a winery's 1,000 cases of Paso Robles zinfandel leaves that winery in need of a market for the remaining 900 cases.

The 2004 World Wine Market

The World Wine Market is an example of a trade show that wineries attend to find representation. Gerry Parker and Clarke Smith organized the show and private investors have produced it annually for four years. In May 2004, I worked with them to create and execute a matching program for the trade-show attendees. The program goal was not to mandate definitive matches between wineries and distributors, but rather to prequalify potential pairings, allowing them to arrange meetings in advance.

We employed Web-based questionnaires for both wineries and distributors to collect data on participants' attributes and preferences, as Table 1 shows. We contacted all preregistered attendees before the show and provided them with a set of questions. A subset of those contacted completed the forms. These included 45 wineries from California and Oregon and 15 distributors seeking wines to purchase or represent. Wineries entered over 200 distinct wines for consideration...

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