The Monolith

The ongoing, steady march toward consolidation within the distribution/wholesale tier of the wine industry continues.

News comes today that Southern Wine & Spirits has purchased Distinctive Wine & Spirits of Illinois from its parent company, Charmer Sunbelt.

There are folks that raise concerns that about consolidation within the producer/winery side of the industry every time we hear about a larger wine company buying another winery. But the pace and impact of winery consolidation doesn’t hold a candle to the impact of consolidation inside the wholesale/distribution tier. It’s the impact of this middle tier consolidation that should have folks very concerned.

We are moving toward a situation where no more that 2 or 3 distribution companies control large markets and in some cases distribution in entire states. This means that only 2 or three companies control which wines are made available in these markets. It also means that if any one of the dwindling number of distributors choose to forget to take a retailers order, that retailer can quickly find themselves without product. It’s a disturbing situation because it places the kind of enormous power and control in just a few wholesalers’ hands that that once existed in producers hands before the onset of Prohibition and that led to truly unsavory marketing schemes.

A very powerful, state supporter monolith is being created across the country.

What I found very interesting about this acquisition was in Illinois was the characterizations of the distribution business. Consider this quote from Charmer CEO Charles Merinoff, the seller:

“Over the past few years we have invested
      considerable time working to increase our market share in Illinois. Despite
      these efforts, and although we are extremely proud of the services this
      team has delivered to our Suppliers and Customers who do business in
      Illinois, the volume of business does not justify our continued presence."

So Charmers couldn’t make a go of it, eh? Take a look at the brands inside Charmer’s Distinctive Wine & Spirits portfolio. According to their website, they distributed over 220 brands. Many of them very impressive, very high profile, very high quality wines. Their selection of American Pinots, Bordeaux, Burgundy and CA cabs is good. But they can’t make a go of it?

I feel for those good producers who chose to go with Distinctive Wine & Spirits as their distributor in Illinois, but now find themselves with Southern Wine & Spirits. It’s well know that attempting to get the attention of the sales force of a mega distributor like Southern is like a mouse trying to get the attention of 18-Wheeler rushing headlong in its direction. Someone is going to get flattened.

I find it highly unlikely that back in 1934 when the states devised their mandatory 3 tier system that they also imagined a very small collection of wholesalers controlling the destiny of the wine market in entire states. Nor did they imagine the existence of over 5000 wine producers arising in America. The bottle neck that is the 2nd tier of the three tier system is becoming narrower and narrower.

At what point does the issue of control over a market of this magnitude become an issue for legislators and regulators. That point is reached when it becomes clear that these developments non only impact producers’ access to a market, but begin to severely impact the consumer.Are we not there?

As wholesalers are want to point out on every occasion possible, the state is granted the right to control the distribution and sale of alcohol inside their borders. It strikes me that if a state is going to create for wholesalers the kind of all powerful and favorable conditions for doing business and even allow them to consolidate that power in a way that makes them the arbiters of what products consumers are allowed to access, then there ought to be considerable thought given to to placing requirements on the wholesale tier.

More than anything else, it’s probably time to allow wineries to self distribute their product to retailers and restaurants, bypassing the wholesalers altogether.

Posted In: Wine Business


11 Responses

  1. Craig Camp - February 8, 2008

    If you want to see what all of this is leading to just look at Las Vegas. There Southern dominates and controls over 80% (actually probably more) of the market and dictates what goes on wine lists at all the major hotels by cutting deals on spirits and brand Champagne. The rest of the wine world has to make do with the remaining 20%.

  2. Thomas Pellechia - February 8, 2008

    Southern distributes in about 30 states now–they’re getting there.
    Re, the states re-regulating: think of it this way. You are a state liquor control bureaucrat; you’ve got 25 distributors in your state filing price lists and paying taxes to you. Imagine how much easier it would be if you had only one to control!
    As I’ve said before, Al Capone could only have dreamed of the U.S. handing him such a guaranteed market.
    The mistake many in the wine industry make is to think that state bureaucrats generally care about the industry–like all bureaucrats, they care about the 8-hour day they must force themselves to get through.
    Unfortunately, with that pesky 21st Amendment giveaway to the states, the answer is in the courts, and we’ve seen what one in Washington thinks of the issues.
    Do I seem cynical? You bet your life, I am.
    Next up: an American newspaper is fined by a court for printing an article about wine; the court will call the article promoting alcohol to minors–because minors can read, at least some can read newspapers!
    In the news item about the case, the head of CSPI states, “We’ve won this battle. Now we must move on until we repeal the 21st Amendment and bring back the 18th.”

  3. Morton Leslie - February 8, 2008

    Thoughts buzzing around my brain today. Costco losing its appeal. Charmers and Southern Wine and Spirits. The history of wine distribution after prohibition. You know the story; Sam Bronfman creating Seagram, Joe Kennedy becoming the exclusive wholesaler of Haig, Gordon’s and other British brands, Frank Costello founding Alliance Distributors Co, Meyer Lansky, “Lucky” Luciano (Sam Bronfman’s biggest customer) and “Bugsy” Siegel taking over Capitol Wine and Spirits. Buying politicians, buying judges, rough business tactics.
    Then my physician friend called and broke my thoughts while she ranted for ten minutes about Hillary and socialized medicine. In a brilliant epiphany, I told her that instead of fighting Hillary (or Obama or McCain) and Federal and State control over health care, the medical profession and the insurance companies should look at the model set up by alcohol wholesalers in America. She should encourage government regulation as well expand on their buying of politicians and judges.
    The way our govt. works the health care lobby should be able to put in some nice margins for themselves and set up rules and regulations, mandated by law that give us the same quality of health care as the crappy service and bullying wineries get from their wholesalers.

  4. Thomas Pellechia - February 8, 2008

    Actually, Morton, I think the pharmaceutical and health insurance industries already use the model, and quite effectively…

  5. Richard Smith - February 8, 2008

    I agree. Time to let the wineries sell direct to retailers and restaurants, AND direct to the consumer in whatever quantities the consumer feels they need. So long as tax is being paid to the relevant authorities, city, state or federal, why should wineries be restricted the way are? I know it’s better than it used to be, but my good friends at Prince Michel in Virginia can still only ship a monthly maximum of 3 bottles to a customer 2 hours away in D.C. Who comes up with these numbers? Why three?

  6. Grape from the Vine - February 8, 2008

    The trend continues! The strangulation of the second tier is of great concern related to broad consumer selection, availability and most importantly free market competition.
    I live and work in a control market. In this state it has one control market (one county market) and the rest of the state (open market). Frogs Leap wines are available most of the year in the open market, but not the control market. When the new vintage release from Frog’s Leap is shipped to this wholesaler, miraculously availability opens up to the one county controlled market (not the NEW vintage, but what is left of the prior). There’s nothing like being played second fiddle. Who is pulling all of the strings! This control market CAN NOT go direct (due to contractual obligations with open market wholesaler) to Frog’s Leap, but is at the behest of the wholesaler who controls Frog’s Leap products statewide.
    Lastly, this wholesaler is a for profit company – the end result is by having two wholesale parties involved, the consumer is paying two wholesale mark-ups incorporated into the retail pricing. Retail pricing is one thing, but DO NOT get me started how this impacts pricing on wine lists or by-the-glass on-premise.
    Grape from the Vine

  7. Lee Stipp - February 11, 2008

    Excuse me, but the first comment regarding Southern Wine and Spirits in Las Vegas is patently false. And no, our wine is not distributed by SWS in Las Vegas.
    When I first started working in the wine business, rumors about SWS in Las Vegas echoed that they controlled the city’s wine selection. This was back in the late 1980s. Today, I work in Las Vegas about every three months and I personally see the wine lists about town and there is a healthy market share amongst all of the area’s wholesalers.
    Beside this false statement, the topic of Mr. Wark’s blog is still an important one. With over 6,000 domestic wineries and a seemingly shrinking (by consolidation) number of wholesalers, small wineries have a legitimate gripe. If legislation and consolidation prevent access to markets, what other options are there? The courts?
    I am pro wholesaler, but only on the basis of adding value to the sales process and many of them do. I am pro wholesaler, but only if they don’t make unfair business and lobbying moves to block direct shipping, and many of them do. I am pro wholesaler, but only if they use competitive advantage to earn their revenue, and some of them do.

  8. CabKing - February 11, 2008

    Speaking as a distributor (albeit a very small one) in Florida. The state AB&T agency knows full well that the future of distributors will be down to 2-3 large companies (SWS, RNC & Premier) in the near term. The state knows (and advises prior to starting a distributor) how difficult the job will be to go against the larger distributors. But the reality is that the states job is much easier to manage and control with very few distributors. They also do not care how many people are in the distribution tier, just that they get paid the $2.25 per case of wine that comes into the state. The other side is that retailers and on premise accounts are also to blame for the reduction of distributors. The buyers for these accounts have no interest many times to work with the smaller distributors. It is another person to have a meeting with, another check to write and in their mind not worth the effort. SWS, RNC, Premier have all the items these accounts need in education, portfolio and pricing supports PLUS all the liquor they will need. Even as a small part of the 3 tier system in Florida I think that any winery should be able to ship their wine directly to the accounts or consumers (just like the furniture industry does). This would keep the larger distributors continuing to work to keep the wineries and supporting them rather than not really caring if they sell the wine or not. I do not see any malls closing down because customers buy clothes from mail order on line, do you?
    If wineries have a problem gaining the attention of the SWS sales force why do they stay with SWS? Go to a smaller more focused winery and help to keep the 3 tier system vibrant and strong against the larger distributors. Support the distributors with better pricing or marketing. The winery, the distributor and the accounts can all try and work together to build a brand rather than continuing to give the business to the order takers at SWS or RNC or Premier.

  9. Jo Diaz - February 11, 2008

    In a word… Oligopoly…
    It rules all industries, it’s just taken the wine & spirits wholesalers a lot longer to get their ducks in a row. In every major industry, 80 percent of the market is dominated by three major players (hence, oligopoly versus monopoly). The 20 percent left over is where every other company falls. It’s the 80/20 rule applied to all sales in a free society. Airlines, food vendors, warehouse sales, beer, name the industry… It’s how capitalism works. No shocks, just realizations that the wine and spirits wholesale industry’s catching up.

  10. Jason - February 12, 2008

    Its not how capitalism works. Its how America works. Capitalism is not predicated on the ability to buy/manipulate the government into altering the playing field in your favor. Capitalism functions without government interference and regulation. What you see in America today is closer to socialism. Instead of the government owning the businesses, however, you have the businesses owning the government.
    Im only bitter though because I live in Michigan and half the wines I want I cant get because a distributor here doesnt carry them. That burns me even more than the prices, the fact that some third party can control my demand and have it tailored to their supply.

  11. Guy Azera - July 6, 2008

    Someone sent me to your blog and I could help to voice my opinion as I read the comment Posted by: Grape from the Vine | February 08, 2008 at 07:06 PM
    “Excuse me, but the first comment regarding Southern Wine and Spirits in Las Vegas is patently false. And no, our wine is not distributed by SWS in Las Vegas.”
    With all due respect, either you are blind or you are not involved in wine distribution of wines in Vegas. The approach may not be delicate but this is a gross misrepresentation of state of distribution in Las Vegas.
    I based this statement on two facts:
    1) All you have to do is look at the posting of volume of gallons of wines declared through the Department of Taxation and you can compare the amounts of wine importation by SWS and all the other importers. By the way this just what SWS declares . SWS is doing business in New Mexico and Arizona and interwarehouse transfers are done (in other words not being accounted as importation )
    2) There are evidence that SWS have at least 75% to 80% of wine list of restaurants and hotels market share . SWS maintains a tight control on those as it is the jam that goes on the bread and butter.(I am not even talking about some of the products that you have to buy to get other).
    Anybody that has anything to do with the wine distribution would know that SWS has a very tight grip or a monopoly situation in Nevada but this is not to say that a few importers/distributors are trying to bring to Nevada a choice of small Estates from all over the world in the hope that their wine discoveries would be shared by wine directors in search of excellence or mostly fullfill the needs of all these high end restaurants who are striving for excellence in food and would like to create a wine list that suits their concept instead of trying to fit in the wine list template created by SWS.
    In Nevada, SWS has a very strong voice with the legislation and do not hesitate to lobby in order to gain complete control .They have sent their lobbyists to enact laws in 2003 that changed the definition of supplier for imported wines to include their agent . As the Department of Taxation has decided that they are not concerned with claim of exclusivity but collecting excise tax due upon importation ; SWS has taken upon itself to police the State by going back to the legislation in 05 to give them the right to sue to enforce the law eventhought the Department of taxation is the exclusive authority to regulate and enforce NRS 369 chapter.
    Thus the topic of Mr. Wark’s blog is still a very important one.
    But you are right on one point the only way to fight this out is in the Court system and for that one needs to have millions of dollars in order to prevail and even dream of a free market economy where businesses compete for the good and benefit of the “n” consumer.
    Quote :
    “If wineries have a problem gaining the attention of the SWS sales force why do they stay with SWS? Go to a smaller more focused winery and help to keep the 3 tier system vibrant and strong against the larger distributors”
    This is not a valid option for a small producer doing business in Nevada with SWS .
    SWS is now in litigation with a small californian winery who was unsatisfied of the job done by them and tried to designate a smaller importer/distributor. SWS took them to Court and vowed to take them to the cleaner under the pretense of Franchise Law , SWS is claiming that they have sold in excess of 2000 cases of this winery in a year and therefore this winery is no longer free to go anywhere else.
    Little problem: SWS interpretation of a case is not as we all understand it to be 12 bottles of 750ml or 9 liters no no no but any unit of measure as long as it satisfy their claim.Guess what: They even won in State Court.
    You do not have to beleive me but just check the case in State Court in Las Vegas and then you understand the extent of what needs to be done in order to just get Justice! It is just incredible but this is Vegas.
    I do beleive in the Justice system but our industry is complex . The laws that are being enacted do not represent the needs of the industry but merely the need of some giant wholesaler(s) who effectively control our industry by creating Laws that only suit their schemes.Our industry is in dire needs of new regulations that would take in consideration all the parties involved but most importantly would ensure the protection of the “n” consumer as well as preventing the creation of monopoly .

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