Wine on tap: an idea whose time has (finally) come

In 2010, I wrote a blog post with the title "the appeal of wine in keg, and an appeal to the restaurants who want it".  In it, I lamented that despite keg wine's appeal in terms of freshness, cost savings and environmental responsibility, there hadn't been enough adoption around a single standard to allow a producer like us to even know what sort of keg to buy, let alone to put the infrastructure in place to economically get empty kegs back to us after a restaurant has finished with the wine.

Fast forward three years.  This year, we'll sell over 500 cases of wine in keg, split between our three Patelin wines.  Next year, we're projecting that we'll increase that to 1200 cases.  It's still a small portion of our overall production but between the explosive growth, the fact that every ounce of this wine is being poured by the glass, and the fact that it's the coolest new restaurants and wine bars that are choosing to install keg systems, it's one of the most exciting developments in our business in recent years.  All that on top of the benefits that I identified three years ago:

• Freshness: The wine that is poured out of a keg is replaced by an inert gas, which means that it doesn't oxidize.  If the number of by-the-glass wines I order that are oxidized is indicative, there are an awful lot of wines out there not showing to the winery's (or to the restaurant's) advantage.
• Waste: Restaurants expect to dump out the unused ends of most opened bottles at the end of each night, and the rest of any bottle that's been open multiple days.  This adds up; restaurants I've spoken to estimate they may waste 25% or more of their glass pours this way.  Keg wines are good down to their last pour.
• Sustainability: The bottles, capsules, corks and labels that help preserve, identify and market a wine between barrel and glass are temporary enclosures, that will be discarded when the bottle is consumed.  That's a lot of resources tied up in something whose only purpose is to be used and thrown away (or recycled).  Kegs eliminate it all, and when empty are returned to be washed and reused.
• Cost: All that packaging doesn't come free.  We pay on average $22 per case to package our Patelin de Tablas wines.  Sure, you have to buy (or rent) kegs, but the cost is less than the cost of the equivalent packaging, assuming you have a reliable way of getting the kegs back.

The industry has standardized around 18.9 liter (essentially 5 gallon) stainless steel kegs, hooked up to tap systems that replace the wine that's poured out of the keg with a mix of Nitrogen and Carbon Dioxide.  This inert gas protects the remaining wine from oxygenation, but is different from a beer kegging system in that the contents are not under pressure.  Each keg contains the equivalent volume to 26 bottles of wine, which means that for the 240 kegs we've sold so far this year we've avoided having to produce, ship and discard some 6240 bottles, labels and capsules, as well as the cardboard for 520 case boxes and inserts.  That's good both for the environment and for our bottom line.

It hasn't been an easy road here.  In 2011 and 2012, when we began to keg our Patelin wines for California accounts, we did it all in house.  We set aside a volume of each wine at bottling time, stored in stainless steel barrels, bought a supply of kegs, filled them here and shipped the first batch off to Regal WIne Company, who distributes our wines in California.  So far, easy.  But it turned out that even  with Regal's enthusiastic support it was difficult to get the supply chain to work in reverse, and impossible to get ahead of the growth curve economically.

First, the supply chain issues.  All the shipping infrastructure for California wine is designed to take product away from a winery and bring it first to a distributor warehouse and then to restaurant and retail accounts.  Regal had to install a tracking system, charge a keg deposit to accounts that ordered the kegs, and train their delivery team (and their restaurant buyers) to return empty kegs after their contents had been poured out.  Then we needed to wait until a critical mass of empty kegs had been returned to Regal and schedule a truck to go pick them up.  The kegs, by this time, had accumulated various delivery and return stickers on them and needed more than a simple washing to get them in shape for the next filling and delivery: old labels and delivery instructions needed to be scraped off with razors, the kegs needed to be disassembled and sterilized, and then reassembled and filled by hand.  The process took the two members of the cellar team the better part of a day for 25 kegs, which not only eliminated our cost savings from the foregone packaging, but was also difficult or impossible in busy stretches of harvest.

Second, the growth curve.  We found that for every new account that started pouring Tablas Creek by the glass, we needed to buy about 6 more kegs: one currently on tap, two empty but either not yet returned to the distributor or accumulating at the distributor and not yet returned to us, one full and in the wings at the restaurant for when the tapped keg is empty, and then two in inventory waiting for the reorder, since if Regal couldn't guarantee some continuity in inventory, the accounts mostly couldn't justify changing their menus.  Each empty, new keg cost us around $120.  We passed along about $20 of the roughly $40 in savings from eliminated packaging, lowering the price by $20 and using the other $20 to cover costs of purchasing, cleaning, filling and shipping kegs.  The problem was that kegs weren't being sold, poured, and returned to us fast enough to amortize their purchase cost before we needed to purchase more kegs to meet the new demand.  We had counted on the average time between fillings for a keg being around 90 days, which meant that we'd make back the cost of each new keg in a year and a half.  In reality, it averaged around 180 days, doubling the amortization period.  And our shipping costs, to pay for trucks to bring empty kegs back here and (once refilled) back up to the distributor, ended up higher than expected.

Finally, the system that we'd developed was never going to work outside of California.  If it was tough getting kegs back to us in a timely and economical manner in-state, from our largest distributor with whom we have a wonderful working relationship, it was clear that it was never going to work out-of-state, where the volumes of wine we sell are an order of magnitude less than in California and where the shipping distances are longer.

Enter Free Flow Wines.  This company is the brainchild of Jordan Kivelstadt and Dan Donahoe, and is the first serious attempt to apply economies of scale to the logistical challenges of selling wine in keg.  They work with about 100 wineries, who send Free Flow their wine in bulk, rent kegs from Free Flow's large inventory, and then outsource the keg filling to the experts there.  Free Flow has a working relationship with over 100 distributors, and will sign out ordered kegs to these distributors, track them until their return, and automatically charge and credit keg deposits.  Between the 100 wineries there is critical mass of that makes it economically viable to send a truck to retrieve empty kegs from these often far-flung distributor warehouses.  We started working with Free Flow earlier this year, and kegs have gone from being one of our constant headaches (albeit one that we were willing to deal with for the other benefits we saw) to a channel whose contribution might be as positive for our bottom line as it is for the wine we sell through that channel.

And that wine quality?  Impressive.  How impressive was driven home to us earlier this year when a return shipment of empty kegs included a keg of our 2010 Patelin de Tablas that was only half-empty.  We hadn't sold this wine in at least 9 months at the time, and the keg could have been out as long a 18 months.  Evidently some account took the keg off tap and stashed it somewhere, eventually finding it and returning it to Regal to recoup their keg deposit.  It was with some trepidation that we tapped the keg to see how the wine was tasting, but we needn't have worried.  It tasted like it had come out of a fresh bottle, even most of a year later, not temperature controlled, half-full.  If we'd needed a demonstration of the quality of this storage and service system, that did it.

Now, to the advantages in wine quality, economics, and resource conservation, we can add another: scalability.  It's about time.