Judging from early customer response, Vincor International Inc. may cheerfully toast its new partnership with Wal-Mart.

Last April Canada's largest winery quietly set up shop in several stores operated by the world's biggest retailer in the province of Ontario. Called Wine Racks, the wine boutiques operate within 300 to 400 square feet of space Wal-Mart leases to Vincor at its stores in Barrie, St. Catharines, Oshawa, Windsor, Mississauga and Richmond Hill.

Vincor International's president, Donald Triggs, said the move into Wal-Mart involved opportunity and common sense. Simply put, Vincor wants to be where shoppers go. "When you look at other markets in the United States, the United Kingdom and Australia, you'll see retailers increasingly expanding the scope of their portfolio and carrying all price points," he said. "This is not a trend that's exclusive to Canada by any means."

Kevin Groh, manager of corporate communications for Wal-Mart Canada, describes the partnership as a good fit with the chain's retail model. "It's one more step towards providing our customers with everything they need, and permitting them within the confines of a general merchandising store the opportunity to buy a product that might otherwise cost them more or take more time to seek out elsewhere."

The Wine Rack boutiques feature only well-known Canadian wine produced by Vincor, ranging from CAN$7 to $30 a bottle. "When we considered adding wine to our available products, we again wanted to support Canadian brands at our stores within this country," explained Groh. "Vincor had leading Canadian brands such as Jackson Triggs and Inniskillin that we knew to be popular with customers, as well as the quality afforded by an award-winning company." Wal-Mart is also confident Vincor's large supply network would keep up with demand, he added.

Once the media reported on the first Wine Racks going into operation, shoppers gathered to check out the shelves of the other wine boutiques on the very morning they opened. "We thought it would take two, three or four visits before our customers started to use the wine service," said Groh. "It's still too early to tell for sure, but we're actually seeing a quicker uptake."

Vincor is the first winery to offer its products in a Canadian department store. Linda Franklin, president of the Wine Council of Ontario, admits it is a little unusual, but said no one within the Ontario wine industry is surprised or particularly concerned by the new locations. "We've had winery retail outlets within grocery stores for years, so this is a natural extension of that," said Franklin. "The upside is the big Ontario wine banner displayed in the Wal-Mart stores, which is encouraging a greater number of people to think of buying Ontario wine."

Ontario is the only Canadian province where Vincor or any other winery is currently able to form a partnership with a department store. When the Canada-US free-trade agreement came into effect in 1989, Ontario wineries retained the right to maintain off-site stores already in operation. The same right became grandparented under the World Trade Organization's regulations implemented in 1995. Six Ontario wineries have 290 off-site authorizations, which are regulated by the Alcohol and Gaming Commission of Ontario.

Vincor has the authorizations to operate 164 off-site locations. To open up a wine boutique within a Wal-Mart store, Vincor had to shut down one of its other premises. "Because there are a fixed number of stores we can operate, we're continually developing new sites and pruning the poor performers," said Triggs. With the Wal-Mart chain operating 80 stores in Ontario, the question is how many of them Vincor might end up occupying. Each time Vincor wants to change an off-site location, it must apply to the Alcohol and Gaming Commission for permission.

"If the Wal-Mart experiment goes really well, and the parties are happy with it, I think it would be reasonable to assume this would be something Wal-Mart and Vincor would pursue more vigorously," speculated Franklin.

Both Vincor and Wal-Mart are taking a wait-and-see attitude based on how the initial Wine Racks do over the next six months or so. Vincor is not requesting additional licenses from the Ontario government. Neither is Vincor or Wal-Mart lobbying to open up Wine Racks in other provinces. Wal-Mart currently has 231 stores in Canada.

"In the short term, it makes good sense to start in one province," Groh said. "If all goes well, we'll have to focus elsewhere, which could include a more thorough entry in the Ontario market and possibly other provinces. We are researching possibilities, but we are not at the point of approaching other regulators."

The Liquor Control Board of Ontario (LCBO) will not permit any merchant to sell wine at lower prices than elsewhere. The one exception is wine offered exclusively at one location, which can then be sold at a different price from similar wine at another retailer. Even so, the price cannot drop below CAN$5.50 for a 750ml bottle--the minimum set by the LCBO. Wine Racks boutiques are not currently featuring any exclusive Vincor wines.

Triggs said he's not worried the public will deem Vincor's wine of a less value as a result of the winery's partnership with a retailer championing itself as a low-price destination. "You can find Les Domaines Barons de Rothchild in very select retailers, and you can buy it at Costco or Sam's," he pointed out. "The retailer does its own thing, and so does the brand, which is as it should be."

Vincor's leasing arrangement with Wal-Mart differs from the setup south of the border. Wal-Mart does lease space to specific merchants within its stores in the United States, but wineries are not among them. Nearly 1,000 American Wal-Mart locations sell domestic and imported wines. Wal-Mart buyers choose among US, Australian, Italian and South American vintages ranging from US$3 to $14 based on customer preferences within a community.

The Canadian leasing agreement created a significant media stir as Wal-Mart took another innovative step to compete with grocery chains in Canada. Franklin said the ripples it originally sent through the wine industry might have been an overreaction. "Originally, people thought Wal-Mart was getting into the wine business directly and made it a much bigger deal than what the reality is." wbm