Why Are Wine Wholesaler Middlemen Liars?

Wine and spirit distributors of IndianaI don’t know if it would come as a surprise to readers of FERMENTATION, but it most certainly would come as a surprise to state Alcohol Beverage Commissions as well as state law enforcement agencies to learn that it’s actually America’s middlemen wholesalers that are the state police force when it comes to making sure a licensee (wine store) is not selling to kids for example or that a bar is not just pouring a drink down someone’s throat till they get so drunk they can’t walk”.

This is according to Mr. Jim Purucker, the executive director of Wine and Spirits Distributors of Indiana.

Why is he lying?

Mr. Purucker’s insane claim came in response to a legislative proposal in the state of Indiana to allow Indiana wineries to sell directly to restaurants and retailers, rather than being required, as they are now, to sell their wine to a middleman wholesaler who then sells the wine to the restaurant or retailer down the street from the winery.

The situation that Mr. Purucker and his middlemen are defending exists in most states across this nation. Most states prohibit wineries from selling their wine directly to retailers and restaurants, but must are required to sell to a middleman wholesaler. If the economics of this bizarre but standard rule are not apparent, let me spell it out for you.

• Winery X gives its wine a retail price of $20.
• Winery X would sell this wine directly to a retailer for $15, so the retailer could mark it back up to $20 on the shelf
• Winery X however must sell its wine to a middleman, who requires the price they pay to be $10.
• Winery X could sell 200 cases of this wine to retailers and gross $36,000
• Winery X is required to sell these same 200 cases to middlemen and gross $24,000.

But here is the real kicker. The kicker that makes the way the law currently works and makes the middlemen’s position so enormously unfair, absurd, and indefensible: The middlemen wholesalers in Indiana are in no way obligated to buy and distribute the wines of Indiana wineries. Yet if a winery can’t find a middleman who will agree to distribute their wine to stores and restaurants, that winery’s product are essentially banned from being sold in stores and restaurants. It’s tempting to call this situation inherent unethical.

But let’s not forget, if this situation is changed, kids will be buying wine by the boatload in Indiana and drinks will be poured down patrons’ throats until they can’t walk.

I want to mention one other thing that Mr. Purucker, of the Indiana Middlemen Association, said about this proposal to let wineries finally sell directly to retailers and restaurants: The group also says the proposal would put distributors out of business.”

One wonders how middlemen wholesalers in California, Illinois and Washington State, where wineries are legally able to sell directly to retailers and restaurants, have stayed in business. One also wonders what possesses these Indiana middlemen wholesalers to lie. No wholesaler will go out of business if Indiana wineries and even if out-of-state wineries are allowed to sell directly to restaurants and retailers. Consider that just one wholesaler in Indiana, Southern Wine & Spirits, sold more than 1 million cases in a 12 month period ending in June 2011. Again, one wonders why Indiana middlemen are so content on lying in order to keep Indiana wineries under their thumb.

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53 Responses

  1. Rich Reader - August 22, 2013

    That’s a rhetorical question. I would rather know why the Indiana legislature is not more interested in optimizing the state revenue flows.

  2. gdfo - August 22, 2013

    I used to agree with folks who wanted direct shipment from Winery to Retail/Restaurant.

    At one time I worked for a Wholesale company. We sold a specific wine for $7.68 wholsale.
    That price would then usually end up at a $9.99 retail price at a specific deal level or number of cases bought. One day I looked up that same wine from the winery and the direct price was $10.00 Not only that but a wholsaler has to commit to buying a specific number of cases from the winery in order to carry it at all. Also that deal may include Varietals of the winery that are not as good or well known. You could buy 200 cases of their popular and tasty current vintage merlot but you had to also buy some of their off vintage chardonnay that was nowhere as good as the merlot. I have seen shipments of wine come into a warehouse that the company did not even order and the winery sent xx number of cases to fill out an order because the ORDERED wine was out of stock or sold or being held for a favored wholesaler. The scale tips both ways.

    • Kyle Schlachter - August 22, 2013

      GDFO, your case commitment suggestion is highly dependent on the size of the winery. More often than not, distributors require wineries supply them with a minimum number of cases. Profit doesn’t come from a small margin on a few cases, but a small margin on lots of cases. Maybe your example works with multimillion case wineries, but not for most wineries. The power definitely lies in the hands of the wholesalers than the wineries. Winery power isn’t mandated in legislation….

  3. Robert - August 22, 2013

    What this really boils down to is protecting the wineries’ interests and increasing their profits. Your chart specifically states that there is NO benefit to the consumer (or the shop/restaurant) whether this wine is sold direct or goes through a distributor. Only the winery benefits. And let’s also be honest what this is really about: serving the interests of California wineries because once a state allows it for in-state wineries the Constitution’s Commerce Clause mandates that the same rights be afforded out-of-state entities. What this is really all about is that many, many California wineries can’t get distribution through a combination of too many wineries in a market that is simply not receptive to more $50 a bottle California wine.

    They want to replace decent middle-class jobs with wholesalers (that often provide base salaries, expense reimbursement and health care) with pathetic independent contractor status positions that nobody could afford to live on. Ultimately the wineries want to keep as much money in California as possible.

    I’m familiar with a group of Napa wineries who attempted this in Chicago recently. It was an abysmal failure. Having spoken with the person who was hired to run it on the ground for them, he ended up doing everything from unloading trucks to making the deliveries to handling invoices, with the wineries refusing to pay him anything other than straight commission, no expenses, no benefits and even mandated that he be on an independent contractor status. Once he walked away, and with no salesperson or standing inventory in the city, the whole venture collapsed.

  4. Tom Wark - August 22, 2013

    Robert:

    Well put.

    Here’s what I’m wondering given your position: Why should middlemen determine which wines come to market?

    Also, do you agree that if this law passes, wholesalers will go out of business in Indiana as the Indiana Wine & Spirit Distributors say?

    Finally, what’s wrong with Indiana wineries keeping more of the profit is they can competently distribute their own wine and have no need of the middlemen?

    Inquiring minds….

    • Robert - August 22, 2013

      I’m actually in favor of allowing in-state wineries to self-distribute and understand that by extension the Constitutional provisions will extend it to out of state wineries. And while I may support the principal on legal grounds, I certainly don’t have any sympathy for the California wineries. I’ve seen how they are going to go about this relying on the cheapest and most exploitative employer-employee relationships through brokers and independent contractors. I watched a California distributor switch to that model because of pressure from his domestic suppliers. Within a year all the best sales reps were gone, and those that remained were looking. Napa in particular gets so wrapped up in their self-image that they lose sight of the fact that being associated with their wines is no substitute for a decent salary and some health insurance.

      In any event, I don’t think it can succeed. If it couldn’t work in Chicago (massive and highly condensed market) how is it going to play in markets like Texas or Ohio which are highly fragmented among multiple cities. Restaurants and retailers are not going to buy these wines without a regular salesperson and prompt delivery (which means standing inventory in the state). Small wineries need to get it through their head that they are not all that and the masses out in ‘Murica are not craving to get access to their wines. They need to build a sales and logistics infrastructure (i.e. the role that distributors play in the market)–and that demands capital investment that I think few if any of them are willing to undertake.

      The only people who could truly make this work are the giants. They already have existing sales forces–independent of their distributors–in most important markets, have the support and office staffs to manage it and would most likely give up some small time placements for the ability to truck pallets of wine directly into grocery stores and chain restaurants. If that were the case, certainly a lot of decent jobs would be lost and there would be some consolidation among large wholesalers.

      Secondly, I don’t think the middlemen are determining what wines come to market. California loves to bemoan the tyranny of the distributor shutting them out of markets, but they’re looking at the wrong problem. I’ve worked with distributors around the country, and every one shares one trait: they’re freaking lazy and will always follow the path of least resistance. If that path meant loading up on more Napa Valley wineries, every single one of them would be doing so as we speak. That they’re not speaks not to some plot to keep a California brother down but is rather a very telling analysis of the market. Distributor decisions rarely drive the market; they almost invariably reflect it.

      Again, look at Chicago for an example. There are over 100 licensed distributors working the market currently from the giants to small importers who only wholesale what they bring into the country. If a California winery can’t find a wholesaler in Chicago, it’s not some plot to limit market access. It’s that hundreds of people are independently coming to the conclusion that their customers will have no interest in your product.

      As to your question about keeping as much profit as possible, it’s their legal right as corporations to maximize profit. I don’t dispute it. I just don’t have to condone their greed and selfishness.

      • Tom Wark - August 22, 2013

        Again Robert, If an Indiana winery can’t get distribution, why couldn’t they easily hire a person to service a local region, maybe even around them, or in Indianapolis or another metro region.

        Of course this can work for small wineries. That why THEY, and not California wineries, are pushing this.

        • Robert - August 22, 2013

          Tom, it can work for small in-state wineries (and no I don’t think some Indiana wine being sold direct to trade will shutter the doors of even the smallest wholesaler much less SWS), which is why I’m glad to see them increasingly being given this opportunity. One of the main reasons that it can conceivably work for them is that they already have full time employees in place handle the sales work.

          To date, I’ve seen nothing that leads me to believe that it can work for small California wineries, and I know an industry colleague quite well who was on the inside of an attempt. A bunch of them tried it in Chicago and fell flat on their faces, not the least underlying reason being a complete unwillingness to make the long term capital investments necessary. All they thought was necessary was to get out from under the tyranny of the three tier system and restaurants and retailers would flock to buy their wine. It didn’t turn out that way. Their salesperson couldn’t run away fast enough, and now they are back to selling no wine in Chicago.

  5. Kim Johannsen - August 22, 2013

    Robert

    The price of wine will be as high as the market can bear, but without a middleman to take a cut, it is possible for the price to be lower without the winery losing money. But even in the unlikely event that prices aren’t affected, the consumer still benefits by a having a larger selection.

  6. Tom Wark - August 22, 2013

    Ding, Ding, Ding, Ding! Winner, Winner, Chicken Dinner!

    Kim Johannsen gets the prize for submitting the most succinct, most pertinent comment!

  7. Robert - August 22, 2013

    So will this be a driving issue for the “wine consumers organization?” If so, I find it highly ironic (and telling of where the organization’s true allegiances lie) that a consumer organization would go to the mattresses over an issue that by your own admission will have little or no benefit to them.

  8. Free the Wine - August 22, 2013

    You think this is bad? Where states take out the middleman and retain complete control of the system is far worse. We have States next door with the evil Wholesalers who offer Retail Prices lower than our state’s “wholesale” price which is Gov’t run. – the fact is we’ve let the industry run with the Post Prohibition rules and fear mongering far too long since ’33 without competition – Yes, even the Gov’t ran our airlines and phone companies one time, and let them go – distributors and state controls need to face competition and open markets. Let’s reform all these stupid laws and let the free market work for once. And let’s all remember to boo all those Prohibitionists who created the mess in the first place.

  9. Scott - August 22, 2013

    Robert has hit the nail on the head with his analysis of the imagined problems of small California or Northwest wineries getting to the market. They blame the lack of entry to markets on lazy or downright corrupt distributors when the real issue is a lack of demand for their wines. I have commented on numerous occasions regarding this on this blog, and it’s still true. Why would all the distributors in a market ignore a wine producer if there are customers in their town who want those wines? Not to sound too Gordon Gecko, but they would want to sell these wines, no? Carp and groan all you like about distributors and their motives, but surely you aren’t suggesting (yet again) they don’t want to represent wines that customers want and that they can profit from.

    • Tom Wark - August 22, 2013

      Scott:

      Ah, yes. The famous and mysterious powers of wholesaler divination….able to know a wine will not sell without ever trying to sell it. Indeed!

      And it’s a power the wholesalers desperately need as it turns out. Since wholesalers are the only tier in the system that have nothing to do with consumers, don’t sell to consumers and clearly haven’t the interest of consumers at heart, they do need these magic powers.

      Being able to determine demand is quite the skill. Interestingly, thought, we see winery after winery cultivating direct to consumer marketplaces in market after market, even after wholesalers turn them down. Miraculous!

      Still, one wonders why wholesalers are so vehemently opposed to producer direct distribution if they are convinced they know so well what will sell.

      But more importantly, I’m still waiting for someone to make the principled case as to why producers ought not be allowed to distribute their own wine, rather than give away money to a middleman they feel they don’t need. Perhaps one day one of those middlemen or one of their apologists will take a stab at that, Scott.

      • Robert - August 22, 2013

        Being able to determine market demand–or at the very least react to it when it’s slapping you in the face–is a freakin’ necessity of staying in business! If Distributor X has seen his California sales plummet, and he’s already dropped several California producers in response, why on earth would he pick up new ones. If Distributor Y looks at market tend data and sees that imports have doubled their market share over the last decade and are expected to by half the US wine market by the end of the decade, why on earth would he increase his domestic portfolio. It’s his money because last time I heard none of these California wineries are offering any distributors the opportunity to sell their wines on consignment!

        Then again, if you’ve been reading closely, I say let them try. I’ve already seen it go down in flames once. And by the way, a really interesting tidbit to my friend’s experience was that after coming on board with this operation, he later found out on his own that half of the wineries previously had Chicago distribution but had been dropped in the prior year or two–including a couple of Parker darlings that had received 95+ scores for a dozen years. As he put it, “I’ve never been so frustrated in my life as trying to sell wine as I was taking around an all Napa Valley book.”

    • GregP - August 26, 2013

      Are you kidding? I had accounts in a number of states calling us and begging for wine while our distributors were not willing to bring the wine in giving us all sorts of “reasons”, most of which boiled down to other wines in their portfolios not moving and in need of a “push” to sell them (minimums and all that). One distributor, while being inundated with calls from accounts for our wines, openly told me on the phone they want to create “artificial demand” for wines and accounts “begging”. Another had sales force not even aware we’re in the book when I personally poured cases of samples for the entire sales force 3 weeks prior. Don’t get me started on distributors, the losers here are consumers and wineries. I rarely walked out from an account without an order in hand, but for some reason distributors’ sales people had “difficulty” selling to same accounts. 3 tier system is nothing but a scam.

      • Joe Jensen - August 27, 2013

        GregP,

        If I had a nickle for every time a winery owner told me that they had all of these people interested in their wine I would be retired by now, guess what I am not retired.

        My challenge to you is below:
        1: Are you represented in Illinois.
        2: If not, are you willing to send me your FOB list and samples?

        We are pretty picky and end up rejecting most of the wines we taste for various
        reasons but the main one is we have to like and believe in what we add to
        our portfolio and when the prices get over $25 or $30 retail it better be good.

        We are a small team creating a focused portfolio who is building a reputation
        for having a smart and well thought out selection!

        Cheers,

        Joe

        • Robert - August 27, 2013

          Joe, in my experience dealing with them (and Napa in particular) none of them are honest with each other. It’s a whole “Emperor Has No Clothes” mentality, and they are all Emperors.

          I once listened to a guy whose winery produced about 3,000 cases a year, most of which was $50/bottle zinfandel (you’d have a better chance of getting rid of herpes). This guy held court at a restaurant in St. Helena telling his colleagues how great things were going. That he was sold out on every vintage and that 85% of his sales were direct to consumer. The reality–and I knew this intimately–was that he had 3 vintages on current release with a fourth staring him in the face. He had been dropped by multiple distributors and was down to only five states of distribution. He was cutting deals in California to dump wine at $10/bottle. Yet the facade he would put on was one for the record books.

          My friend who headed up the self-distribution group in Chicago told me stories of wineries lying to each other about how well they were doing, which would of course lead to a phone call from winery B as to why he was not doing as well. The underlying reality was that Winery A’s wines weren’t moving at all because he had been dropped by Heritage and their was still wine in the system that they had closed out at a loss.

          The amount of self-delsuion, grandstanding and utter posturing that floats around that valley is incredible. It’s surreal.

          • GregP - August 27, 2013

            First off, I am not in Napa precisely because of “Napa mentality”. Secondly, when Whole Foods buyer wants your wines in all of his IL stores, when a couple of IL somms visit NYC and then call me to ask how to get the wines because D. Bouley personally introduced them to wines as some of his favorites, I know the wines are at least “competitive”. When a distributor then pushes some other wines and ignores calls from accounts asking for our wines I know there is a problem not related to my wines’. When said distributor says none are in stock while there are, in fact, I know there is a problem. Lying to accounts seems to be OK these days.

            When you paint with a wide brush stroke at least know the subject. I am a realist, not a dreamer. When I hear “artificial demand” I know there is a huge problem. When I pour our wines at a distributor tasting and Morrell wine buyer places an order for 10 cases of wine A in front of me, to only not receive even one bottle because said distributor is pushing other wines he must sell a contractual minimum of (and then ignores another order for 5 cases from another account placed in front of me 10 minutes earlier), I know there is a problem. When I hear from an account moving 3+ cases per month asking why he is not receiving more wine from “artificial demand” distributor it is seriously disconcerting on all levels, not just for us but accounts as well (and consumers ultimately).

            When I hear “We are building a great portfolio” and then a price limit, product unseen and untasted, I know the poster is incapable of selling nor evaluating. So, yeah, thanks for confirming my points.

            3 tier is outdated and very corrupt. On all levels. Anyone defending it is either clueless or is corrupt as well. If our wines, as you make it sound, are so bad, why not let us freely distribute ourselves? I, for one, KNOW that we could sell tons more on our own, just on wines’ merits. And we can manage the accounts much better to boot. Wine business is personal, having some middle man who only cares about bottom line and sales people who are way more interested in generating easy money over the phone via beer and alcohol orders is doubly worse for wineries. And consumers.

            But, hey, you said you know the guy in Napa…

          • Robert - August 27, 2013

            I’ve heard it all before. Mr. $50/bottle Zinfandel was supposedly a Chicago insider, yet his insider contacts amounted to about 4 people–one of whom was a bartender with no buying authority. Sure he threw a lot more names around because he had been taken in their four years prior by a salesman and sold them a case of wine. Unfortunately, he was too obtuse to realize that relationship was between the restaurant and the salesperson/wholesaler, not him.

            Oh and BTW,. you have a legal right to self-distribute in Illinois and no franchise law obligations to your current distributor. You’re free to leave and start immediately. Give it a try! If that doesn’t work out, there are around a hundred small distributors in Chicago who don’t sell beer or liquor or have contractual obligations to large wineries. If you truly are ready to drop this free cash in their laps, I find it hard to imagine that none would take you on.

  10. Thomas Pellechia - August 22, 2013

    Having spent quite a few years in a wine region that distributors have historically ignored I can also tell you that when small wineries start to self-distribute to the retail and restaurant trade, they usually come to realize that it is not much of a money-saving process. They have to add sales and delivery staff, and they have to develop a logistics and delivery system.

    Often, the small wineries decide to band together and then soon enough they support a small distributor who comes along just to service the small wineries. Within a short period of time, that small distributor realizes that logistics and sales eat up profits because small wineries don’t sell in large volumes. Not long after that, many of the wineries are being distributed by Southern, and the others try to go it alone…and the cycle begins anew.

  11. Thomas Pellechia - August 22, 2013

    To be clear, I don’t mean to support the mandated distribution system. On the contrary. I hate it that government created a lazy monopoly, Just pointing out the inherent pitfalls to small wineries who wish for their freedom.

    What I would love to see are large distributors without government protection that are forced to fight for territory on the strength of the service that they provide to their customers AND to suppliers.

  12. John Dorminey - August 23, 2013

    Thomas nailed it. The distributors are wrong and if they will get out of their own way, they will end up representing the strong local wineries. All these new craft breweries are experiencing the same thing in other states. They start off self-distributing because they think it makes them more profitable. They grow distribution then hit that wall where significant investment is required to grow to the next level. Getting there is usually a period of loss. The amount of money they can make getting large distribution through a distributor, far exceeds what they can make on their own. Gross dollars vs net dollars. Fat margins at lower sales vs lower margins at volume.
    Nonetheless, in the end the market should decide, not lobbies.

  13. Joel Goldberg - August 23, 2013

    All the good folks of Indiana have to do is look across the state line to Michigan, where in-state wineries have the option to self-distribute, thanks to post-Granholm legislation.

    The results aren’t at all surprising: larger wineries with efficiencies of scale and the need to move significant case quantities around the state take advantage of wholesale distributors. Smaller wineries that don’t interest the wholesalers primarily self-distribute to their local regions, and sometimes to a few restaurants / retail outlets elsewhere.

    While no one’s 100% happy with this system, it works well enough for everyone concerned — and it’s way better for the wineries than mandating the use of wholesalers.

  14. Carl - August 23, 2013

    I would like to know when the wholesalers in Indiana took over in-state distribution. To the best of my knowledge it did not exit in the mid-eighties. At SAC Hq MWR we had an initiative to get our bases to stock their clubs and package stores with locally produced wines. The reason was to demonstrate to our customers (service people and their spouses) that there was more wine to be enjoyed than that produced by Gallo.

    On a staff visit to the old Grissom AFB, we set up a meeting with the Indiana Wine Producers and their leader at the time, a retired military guy, met with us and base officials and made arrangement to get the Indiana wines into the base clubs and package store. As far a I now this happened without the involvement of any wholesalers. We worked with wholesalers all the time, and would have been happy to work for them in Indiana if necessary.

  15. Direct Shipping - August 23, 2013

    Open the state and let wineries ship to the retailers or restaurants. Problem solved. I’d rather pay UPS or FedEX the same money as the wholesaler would make (perhaps even more) to not have to deal with them if I so chose, especially if they bring zero value to the table which is the case most of the time.

    I think people are missing the broader issue here. It’s called free markets and capitalism guys. The most liberal state in the union even gets these tenets and free markets for wine rule in CA and they work. Laws implemented to protect specific businesses from competition will be abolished by those who believe in these basic ideas for our country. It will just take time and people who care.

  16. Stephen George - August 23, 2013

    Thanks for this post, Tom, and to all of you for the well-informed, thoughtful exchange.

    Let’s consider this from the consumer perspective for a moment:

    I work with a very small California winery, and Jane Doe of Indianapolis hears about our wines from an Illinois friend, or maybe she reads a favorable review in The Wine Advocate.

    Let’s say she decides she wants to buy three bottles. She cannot place an order with us directly, because Indiana law requires a consumer to visit an out-of-state winery in-person before getting any wine shipped to them.

    Ok, so Jane then decides to swing by her favorite local retailer to ask them if they can bring it in for her. The retailer calls me and asks if we have Indiana distribution. We’re so small that we don’t, so he places an order for three bottles directly with me. We sell the three-pack to the retailer for $90 and ship to them via FedEx, and the retailer sells it to Jane for $120. We make $90, the retailer makes $30, Jane gets her wine, and Indiana wholesalers come out the same.

    Or maybe the retailer reads about my winery somewhere and knows he can hand-sell a couple of cases to clients who are looking for new Napa wineries to explore. So he contacts me to order 24 bottles, we make $720, he makes $240, and six Indiana consumers get to taste wine that’s otherwise unavailable to them.

    Can someone make a principled argument as to why this shouldn’t be legal?

    What about Constitutional constraints? Unlike with federal legislation and jurisprudence, 21st Amendment considerations don’t apply here, because a sovereign state is free to make its system as open as it likes.

    What about public safety? That’s how Tom began this blog post, with the Indiana wholesaler trade association making the highly dubious and wholly unsupported claim that wholesalers make it their business to ensure retailers are not inebriating customers or selling to the under-aged. Really? I’ve never known a sales rep to make this task a priority (especially since they’re not legally required to do so) – have you?

    What about keeping our wholesalers in business? As others have ably pointed out, the truth is that wholesalers DO add value – for those suppliers and retailers for whom they add value. Logistics, infrastructure, in-state inventory warehousing, sales reps pounding the pavement – large wineries that need to move large quantities will still pay for those services (just as they still do in other self-distribution states). And anyway, this is less a principled argument than a protectionist one. Most liberals and conservatives will agree that the government shouldn’t be in the business of making laws designed only to keep a category of companies in business unless those companies are performing a crucial public service.

    So why should we not permit a level-playing field? Is it not just and beneficial to permit wholesalers to continue working with those wineries they want to; to allow wineries without representation either to fulfill orders initiated by retailers or to try their hand at developing their own distribution system; and to enable consumers to get wines they can’t otherwise?

    We may argue about how much value wholesalers bring to the table, and for whom, and whether that matters when making laws. We may disagree about whether small wineries can successfully develop their own distribution system. But I have yet to hear a compelling, principled argument about why Indiana (or any other state) should not open the market to let this play out equitably.

    • Robert - August 23, 2013

      I agree with much of what you say, and the IN wholesalers claim that they are some kind of guardian against underage drinking is absolutely absurd. As I’ve noted above, I agree that this should be legal for West Coast wineries. Where I differ from some is that I’ve seen it in action. It failed, and I’ve yet to see or hear how it could truly succeed in a business sense other than for a winery sending a few sporadic cases here and there–and only because he usually lost or can’t get distribution in said market.

      I’ve worked with a lot of distributors around the country, and have felt the frustration. With few exceptions, they are lazy, take the path of least resistance, have no interest in long term brand building and generally don’t add value proportionate to their margins. That’s not to say that they add NO value. It’s also not to say that direct shipping is the answer to it. At best, it could possibly serve as some form of market pressure to get them to act and perform better.

      What I’m most interested in is the true feasibility of the issue.

      You said you would sell that case of wine for $360. What does it cost to fedex a 12 bottle styropack from California to Indiana these days? $75-$90+ the cost of the styro? That is coming right off your top line on that case. Has it pushed you below your standard fob? Extra paperwork, compliance, invoicing, having to write off bad debt now and then. I’d be surprised if you’re really not selling that case for $260. Wineries charge DTC customers for the shipping. You can’t do that direct-to-trade. Try and nobody will do business with you when wine coming through a distributor is delivered next day for free. Suppose that retailer or restaurant is having money problems. Who is going to go into the store and ask for a check when he’s 15 days late? Oh, you’re going to make him pay up front? Yeah, that’ll work when everyone else is giving him 30 days. Who is going to pop a cork and take that wine into 8 restaurants next Tuesday.

      Like I said above, your model is great for selling a case here and there but not truly building a brand for the long term.

      • Stephen George - August 23, 2013

        Robert, it sounds like we’re on the same page regarding whether self-distribution should be legal, which, like Tom, is my main concern.

        Regarding feasibility, I agree that what I described is not a realistic model for sustained brand-building, at least for most wineries. That’s why most small wineries are focusing more and more on direct-to-consumer sales.

        But again, that’s not my point. I’m looking at this mainly from the consumer’s perspective. — i.e., why should an Indiana consumer care about this bill and advocate for its passage?

        A few comments about the economics from a small winery’s perspective. It costs roughly $22 to send 12 bottles of wine to Indiana in a temperature-controlled truck, so that doesn’t muck up the margins as much as one might expect.

        And even though we’d have to eat $22 shipping cost on a $360 order from a retailer, that sure beats selling the same case to a wholesaler for $240.

        And even though we’d have to give the retailer terms of 30 days, that sure beats the 60 days most wholesalers insist on. And in my experience, ensuring a timely payment from an out-of-state wholesaler is no picnic either.

        Point being, for a consumer (or retailer) who wants to order wine that’s otherwise not in the market, and for a small winery that wants to be able to fulfill these periodic orders, a market open to self-distribution is the best, most efficient solution state of affairs.

    • Robert - August 23, 2013

      [["Anyone care to guess why? How about that their wines are not very good and their prices are way to high.

      In Illinois any winery can get a license and self distribute and some people make it work but it is going to be way to much work and too much hassle for most people.

      California needs to realize that the next generation of wine drinkers is going to be different, they are not stuck on Cabernet, Pinot Noir and Chardonnay and they have found out that they can buy great wine from France, Spain, Italy, Chile, South Africa, Argentina and a few other places for about $15, try to find that from California."]]

      Joe absolutely nails the issue on the head here because this is the issue that it really comes down to but the one that must never be spoken of in Napa’s restaurants verandas and pool parties where image is everything and everybody tells everybody else that they’re constantly sold out.. Drying up distribution is not some evil plot to keep you out of Chicago. Rather, it’s the market at work. Nobody is distributing your wines because their customers are, with each passing year, buying fewer and fewer of the ones already here. Show up with a well priced Bierzo or Muscadet and Chicago will find a place for your wine. Show up with another $75 bottle of Cabernet, and nobody gives a #$$%.

      A quote I read elsewhere comes to mind: “Having a wine list full of cult Napa wines is like having a closet full of leisure suits.”

  17. Joe Jensen - August 23, 2013

    First off, the people who run the various wholesale lobbying groups are shills for large corporate wholesalers like SWS, Wirtz, RNDC and the other big boys around the country.

    There is no issue with underage drinking due to direct sales or other methods except for the rare occasion when something slips through the cracks.

    No teenager is ordering wine direct, it is way to expensive to get their buzz on!

    As an Illinois wholesaler who has been growing a company for just over two years now along with the other 90 or so small wholesalers in Illinois who represent various brands out there I will tell you there is a reason a lot of wineries do not get representation.

    Anyone care to guess why? How about that their wines are not very good and their prices are way to high.

    In Illinois any winery can get a license and self distribute and some people make it work but it is going to be way to much work and too much hassle for most people.

    California needs to realize that the next generation of wine drinkers is going to be different, they are not stuck on Cabernet, Pinot Noir and Chardonnay and they have found out that they can buy great wine from France, Spain, Italy, Chile, South Africa, Argentina and a few other places for about $15, try to find that from California.

    Grape growers want more because of a few bad growing seasons but now they have a big crop going so on goes the cycle.

    Stop whining and blaming the wholesalers who can be a valuable extension of a wineries marketing team.

    By the way, try to get a call back from some of your wineries when you are expressing interest in representing there wines in a market.

    Their brand new brand is supposed to be attractive to the established quality distributors who have full portfolios of recognized successful wines that they barely move quantity of in some cases, why would they want your brand.

    On the other hand, good new small companies are looking for brands and we know we have to be brand builders but we constantly see wines choosing to go with the big guys where they disappear into their portfolio’s!

    It is not a simple as having a clear path for direct sales because there is one in Illinois and it doesn’t really work except for a few winery owners who dig deep and make it happen and it is usually because they have a reason to be in a market often.

    I look forward to the responses that will come!

    Cheers,

    Joe

    • Tom Wark - August 23, 2013

      Joe,
      Where the issue of winery direct distribution is concerned it makes all the sense in the world to blame the distributors/wholesalers. They will and are doing everything they can to stop a change in the law to allow winery self distribution.

      The issue has nothing to do with whether distributors provide value, if wineries can successfully self distribute or if Napa is full of itself. Rather, the issue is whether or not wineries OUGHT to be allowed to self distribute their wines rather than have to engage an wholesaler

      I don’t know where you stand on this issue, as a wholesaler. What I do know is that no wholesalers in Indiana, large or small, have spoken up IN FAVOR of self distribution. Have you? If not, why? Further, would you? If so, will you?

      • Robert - August 23, 2013

        You’re right. All tangential arguments aside, they should have the right to try. We just differ on how it will all pan out for them. Some small California wineries tilting at the self-distribution windmill in Chicago will not mean a bit of difference to me or my business.

        If you want the real game changer though, you need to argue for ALL California wineries to have that right, not just the little guys—i.e. no size limits to the laws. Because the ones for whom this would really work are the Gallos, Constellations and K-Js of the world. They have the support, sales and logistics staff AND marketing dollars AND customers to direct drop full pallets into grocery stores, chain retailers and chain restaurants. You want to strike a real blow for freedom and against the Southerns, Nationals and Wirtzes of the world, you’re going to need to crawl into bed with some equally unsavory characters to do it.

        After all, this is “all about the consumers,” and there are a lot more consumers of those wines than the producers usually mentioned in blogs such as this. Or do they not count? Is this really about cozying up to and carrying water for the people who invite you to their parties on the veranda?

      • Joe Jensen - August 24, 2013

        Tom,

        I personally have no issues with wineries self distributing but the smart ones know that a good wholesaler is a partner in their business.

        How many wineries want to send 3 bottles at a time of their $3o bottle to some of the best restaurants in Chicago? You would be surprised how many customers order split cases of wines that move slower.

        What happens when a top restaurant is almost out of your wine and the need a case right away because they forgot or got busy with something else going on in their business?
        With a good wholesale like us, we have been know to run out to the warehouse and get what they need. Kind of hard to get that via FedEx and very very expensive!
        My point is that we offer a lot of services to our winery partners and so do many of the wholesalers out their that we compete with every day.

        The battle you should be fighting is with the corporate behemoths that suck the life out of the industry through their liquor supported deals. Close out dumping, which is only viable through massive liquor budgets, etc!

        Self distribution is no threat to my business and may be more of a threat to the wineries business if the are not focusing on what they might be good at, which is making great wine.

        Cheers,

        Joe

  18. Marc Carmichael - August 23, 2013

    I sat through the entire wine shipment hearing at the Indiana Statehouse. Mr. Purucker did not suggest or even allude to the fact that Indiana wine and spirit wholesalers might go out of business if Indiana’s wineries were allowed to reneg on the 2006 agreement and direct ship again. So who’s lying now?

    • Tom Wark - August 23, 2013

      Marc:

      How about this quote from the wholesalers in Indiana?

      “”It’s okay for the wineries to talk about what’s good for their economics, it’s okay for me to talk about what’s good for my economics,” said Purucker. ”

      This quote has the value of at least offering a nugget of truth. Wholesalers would like to stop self distribution for their own profits. It’s simple as that and its always as simple as that.

      So, let’s put this in perspective: Indiana wholesalers are working to keep Indiana wineries under their thumb for their own economic benefit, whether it hurts Indiana wineries or not. It’s a simple matter of them using their power to game the system so they can avoid competition.

      Any desire to defend that?

      • Marc Carmichael - August 24, 2013

        Through their own greed the wineries (including Indiana’s) brought the Granholm decision down on their own heads by suing the various states for the in-state preferences they were giving their in-state wineries (including Indiana) to help them grow and thrive. Indiana started helping its wineries in 1971 and again in 1989 with the Wine Grape Market Development Fund which to date has given over $10 Million wine excise tax dollars to the Indiana wineries. The wholesalers have always supported Indiana’s wineries (why not since they want to distribute their product one day?) and had no problem with their self distribution until the 2005 Granholm decision mandated that out-of-state wineries had to be given the same rights as in-state wineries. This would have allowed high-end CA, WA, and OR wines to be direct shipped via FedEx and UPS to the high end Indiana restaurants depriving the wholesalers of income from brands they helped build (or couldn’t get), plus the regulators (and the state) would not be able to keep track of all the direct shipments and taxes involved. In the post-Granholm 2006 legislature the wholesalers asked that Indiana wineries give up self distribution in return for the creation of micro-wine wholesalers to help get their product to retail, and for direct to consumer. THE WINERIES AGREED and since then their numbers have grown from 30 to 70. That is hardly keeping the wineries under the wholesalers’ thumb.

        In short, Indiana’s wholesalers have always supported Indiana’s wineries and still do today. The debate is not about the effect of direct shipping for Indiana’s wineries, it is about the effect of direct shipping by out-of-state wineries into Indiana. It is also about the Indiana wineries not wanting to use the micro-wholesaler system created in 2006.

        To try to invent a “nugget of truth” so you can call Jim Purucker a liar is to show your ignorance of the history of wine in Indiana and of the continued support of Indiana wineries by Indiana wholesalers.

        • Thomas Pellechia - August 24, 2013

          Marc:

          It was my understanding that the Granholm decision was limited to allowing wineries to ship direct to consumers, no to restaurants. Have I been wrong about that?

          • Marc Carmichael - August 24, 2013

            You are wrong about that. Granholm simply said you have to treat in-state and out of state wineries exactly the same. So if Indiana reinstates direct to retail for Indiana wineries it must do the same for out of state wineries. That’s why the micro-wholesalers permit was created in 2006. We all want to help them get to market, but without allowing the high end wines to go around our wholesalers and direct ship to the high end restaurants. It is a balancing act to comply with Granholm and protect the three tier system, which I assure you will be protected in Indiana because it works as intended, plus Indiana is not controlled by any one segment of the industry as in CA, WA, and OR.

        • Robert - August 24, 2013

          Mark, I think you hit the nail on the head with how the small California wineries will act when given this freedom. If you’ve read above, I know because I had a close industry friend head up a Chicago effort on behalf of a dozen or so of them.

          One of the most shocking things of how they acted was that several of them actually started shipping him wine to begin selling and delivering WITHOUT HAVING THEIR PERMITS! When a couple of the applications came back as rejected (because they were pure custom crush producers and therefore viewed as a wholesaler by the State of California), he had to scramble and use HIS industry contacts to find a small importer who would clear the wines for him………..
          …..and remember, all of this was worth nothing than pure commission, no benefits, no expenses, independent contractor status in the eyes of the wineries.

          When the end came, one of the biggest factors is that these wineries now were demanding that he falsify and sign state of Illinois inventory reports. That was the final straw where he told them to go ##$% themselves and walked away.

          I may not love the Wirtzes and Southerns of the world, but I know the people who work for them make a decent middle class living, get vacation time and some health insurance. Kiss that all goodbye if the Gods of Napa Valley get their way.

          Mark, I’m sure you have but if not, you might also want to look at Virginia’s experience. They allowed it for awhile, but the abuses by California were so egregious that I believe they repealed the law and set up a private-public wholesaler to handle the needs of in-state wineries.

  19. Dave Woods - August 23, 2013

    To complete the financial equation, you must also consider the selling and delivery cost involved.

    Put a salesman on the road, and then arrange to deliver one case of product. Unless large quantities of product are sold and delivered in one drop, the potential extra profit for the winery is negated and then some. Let’s not forget the Friday afternoon emergency call, “I forgot to order and I need a case NOW or I will be out of product”.

    You also need to look at it from the retailer/restaurant perspective. They prefer to minimize their number of vendors.

    • Robert - August 23, 2013

      An excellent point. Even if wineries band together to try and get some efficiency of scale with keeping a warehouse and salesperson on the ground, if 3 cases from 3 wineries come in the door. That’s 3 invoices that will be delivered with them. 3 sets of accounts payable that will need to be set up, and 3 checks that will eventually need to be cut.

      It really is the height of Napatude that they truly believe that restaurants and retail will jump through such hoops just for the privilege of getting ahold of some wine that had most likely been rejected by half a dozen distributors already.

  20. gdfo - August 23, 2013

    Kyle, The wine that I cited as 7.68 was from a small Winery. Yes, big distributors want a case number commitment. UMMM.. So do small distributors and boutque distributors.
    The story is NOT that the Distributors are evil nor are the wineries, they each have challenges. Lots of Distributors sell more than wine and they are not wine lovers, but they are good sales companies. They want to know that if they take on a product that they can get that product. There are small boutique distributors that want case commitments. And, they too have to take on a varietal they don’t want to get the one they do.

    So, Sally wants a wine. She can buy it online for 10.00 a bottle plus shipping or she can go the the retailer and get it for 9.99.

    The restaurant down the street from the winery is still an anomoly

  21. Joe Jensen - August 27, 2013

    Dear Anonymous GregP who doesn’t seem to tell us which winery he represents that is so in demand here in Chicago and seems to have lost it judging by vitriol he is spewing out here and the deep hatred for those he should be developing relationships with.
    Nice comment on D Bouley by the way since their list is dominated by European producers and a small amount of California, I call on you to disclose what wine you have that is on the Bouley lists and in such demand.
    Also if you must know the New York market is very different than the Chicago market so something that is hot in NYC may be a dud here.
    Please tell me all of the Chicago somms that want your wines because I have heard this song and dance before and when the wine is available the all seem to forget about it or have gone with another one of the many wines available that compete with your wines and many others.
    Those of us who you despise so much are the people in the trenches every day of the week working with the various buyers here in Chicago and other markets.
    We work hard to develop our relationships and that is what this business is about, most of us have good wines to sell and most often a decision is made on the relationship basis and not always on the wine.
    GregP please go to the ILCC website and apply for your Illinois distributor license, it only costs $295, get some warehouse space with Veterans and make your magic happen because I and my competitors in Chicago aren’t sweating it as we see new distributors come and go every month or two because it is such an easy and fun business to be in!
    To Kim Johannsen, GregP, Tom Wark, etc you all have your own agendas just as the wholesale groups do so lets not play so innocent here.
    Robert, I think I know who you may be or not but email me at joe@compasswinesandspirits.com, I would love to talk!
    GregP since your wines are so fantastic please send me your FOB list and samples we would love to taste your wines! Heck, if they are so good forget the samples, I will order them sight unseen, do my paperwork, hold them in inventory, go out and sell them at 20pts GP and reduce my sales teams compensation since they are so good we won’t have to sample them out or do any other work to get them moving here in Chicago!
    To all of you who despise the system so much, just remember that except in CA and maybe a few other producing states your distributor is technically part of a faulty system but even without it you will need a competent team in any market to get your wine sold over and over again. We find new placements when lists change and we work hard to build unknown brands into wines that people ask for with no guarantee that after we build it you won’t get seduced by SWS or Wirtz telling you fairy tales about how much more wine they will sell for you!

    Cheers,

    Joe

    • GregP - August 27, 2013

      You, once again, have shown your ignorance of CA wine market if you are asking me what GregP stands for when it is more than sufficient for anyone who knows Cal Pinot. Had you recognized the nickname you would also know that I am nothing but a straight shooter who simply states facts, as harsh as they may be. And no, I won’t mention Nobu, Sparks, BLT and some others since I really, REALLY do not need to justify myself to some upstart “wanting to build a portfolio”. Good luck with that, have no idea why any winery would be looking to sign up with you when you go out of your way to show ignorance on so many levels.

      And yes, I am looking at direct routes into both NY area and IL now, having dealt with the 3 tier corruption and stupidity, not to mention some outright criminal behavior at times. Time to get rid of the 3 tier system, one distributor at a time. Consumers will only benefit.

      Carry on. You guys are nothing but honest and knowledgeable, always looking out for accounts and consumers… /s <=== in case you didn't get it

      Don't bother replying, as the old Soviet Union joke went, "Please do not write us letters, we do know your opinions."

      • Joe Jensen - August 27, 2013

        GregP, Get Over Yourself, you and Cali Pinot Noir are synonymous I say Good For You!
        I don’t think you can back up the claims of all of the restaurants that you say want you wines as I have not seen your Alcina Cellars listed on any wine list. If it is Alcina Cellars then you have a defunct website and many old vintages listed.
        I suppose next you will tell me that you are on the list at Naha here in Chicago.
        My guess is that you drive the growers and serious wine makers crazy being that you are a wanna be who has nothing to offer the industry, ask around in Chicago and people know we are a solid, new and small company that is coming along slowly and thoughtfully and will be a strong presence here in the long term.
        Delete my email address or black it out because your hostility is frightening.
        To all others, I only have taken the gloves off after being maligned and insulted by GregP.

        Cheers,

        Joe

        • Robert - August 27, 2013

          14.5% Russian River Pinot Noir for 35 clams a bottle. Yep, I can totally see the Craig Permans and Rootstocks of Chicago crawling all over themselves to get at this stuff.

          You’re passing on free money, Joe. Loads and loads of freakin’ free MONEY.

      • Robert - August 27, 2013

        Laughing my ass off. When I put “Pinot Noir Greg” into google the only autofill options I’m given are for Greg Norman Pinot Noir. Even Greg P…brings up…..Greg Norman Pinot Noir. Same if I add California to the mix. A legend in your own mind.

        You may not be in Napa Valley, but you sure as heck are of it.

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  25. Winery Owner - January 28, 2014

    Allow me to offer my $.02 as an Indiana winery owner. As Tom states in the article, we are legislated out of the market. Local restaurants and groceries want to carry local products but the state sanctioned monopoly (3-tier system) keeps us from the shelf because wholesalers have no incentive to carry our product. They can’t make money on the small volumes we would supply but we would, if we didn’t have to pay them an unnecessary margin. Jim Purucker actually established his own micro-wholesale permit and offered to distribute Indiana wine to make this all go away. The problem is, we would take the wine to the restaurant down the street and send him a check for representing us. The 3-tier system was legislated in by gangsters after prohibition and completely undermines the free market that makes this country great. Forcing a supplier to go through a wholesaler to sell to a retailer is “bully-commerce.”
    Let me also mention we are not looking to self distribute beyond our market reach. At a certain point, wholesalers offer a value added service that makes sense for suppliers. If we are able to build our brand through a limited self-distribution privilege, it takes that burden off wholesalers who would otherwise lose money carrying a small brand. Very few wineries in the state are over 10k gallons and would likely only use this as an opportunity to put their wine on the list at local restaurants. HB 1387 will create jobs, strengthen local economy and offer a wider selection of wines rather than seeing the same 20 wines on every shelf and wine list across the state.

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