It’s Child’s Play

I sometimes run by my kids issues I am dealing with at work. I probably shouldn’t mention this as clients of Wark Communications are supposed to think that what we do here is a bit more than child’s play.

Anyway, this morning over "Eggs in Frame" we were discussing how wineries sell wine. I explained the state-mandated three-tier distribution system to the kids (which, oddly, they seemed to comprehend easily). One of them piped up and said, "I think the middle guys (that’s the wholesalers) should have to sell all wines!"

…Duh!  I’ve thought about this before but when you suggest it to folk in the wine industry they look at you like they’ve just had a stroke and can’t quite comprehend what you are saying. But the fact is, the kid is absolutely correct!

Any wine distribution system must satisfy three demands that are placed upon it:

1. The distribution system must allow access to the wines available in the United States. If it cannot or does not meet this primary goal, then the system is broken and inefficient.

2. It must provide a means for the state to regulate the distribution of alcohol. This means ways by which states can assure its rules and regulations are being followed.

3. It must provide a means by which the state can collect taxes on the sale of alcohol.

Clearly, where ever the state mandated three-tier system is in place, you have a broken system because the first, and primary, goal is unmet. In every state where there is a mandate that wine sales go through a distributor, only a fraction of the wines available in the U.S. are actually distributed by the wholesalers. Hence, broken.

There is a simple way to fix this problem if the states insist on continuing to subsidize the wholesaler tier through a state-mandated three-tier system that demands distributors get a cut of all wine sales.


No picking and choosing. No denying wineries and importers distributor representation. No claims that there is no market for the wine when brands are denied representation. If states want to continue to subsidize the existence of wholesalers and to guarantee them profits, then wholesalers should also be forced to represent any brand that wants it, just as all brands are forced to use a wholesaler.

Now there is no guarantee that the wholesaler would actually sell the wines to retailers and restaurants in the state, let alone sample the products, just because they were forced to represent these brands. But that’s OK. By guaranteeing all brands access to the state, the brands themselves can do the real heavy lifting and market their wines themselves, using the wholesalers as mere paper shufflers and logistics companies. This way the state and its political representatives are still able to give wholesalers something (a guaranteed profit) in exchange for their campaign contributions, yet also provide something of a functioning distribution system that serves the producers as well as the retailers and restaurants and, ultimately, the consumer.

This is not a perfect system. But it does remove most of the unethical qualities of the current state mandated distribution systems that provide wholesalers with subsidized profits through law, while not actually guaranteeing a rational or fair system of distribution.

Now, this proposal would not allow consumers to necessarily access the tens of thousands of wines currently available in the United States. In order to make the state-mandated three tier system truly rational, a true tax collecting vehicle, truly consumer-friendly and economically efficient, you’d need to provide an exception that allows consumers to purchase and have shipped to them wines from any retailer or winery in the nation.

I’ve got the kids working on this problem, too.

Posted In: Wine Business


7 Responses

  1. Randy - April 28, 2008

    Excellent insight, as usual. You’re not anti-distributor, you’re anti-stupidity.

  2. Jack at Fork & Bottle - April 28, 2008

    “3. It must provide a means by which the state can collect taxes on the sale of alcohol.”
    Yeah, Heaven Forbid that wine was treated like a Food and not taxed (like other foods in some states and countries). Heaven Forbid!
    (In the scheme of things, shouldn’t Amazon customers pay taxes for what they buy, in comparison to buying wine from a winery?)

  3. Thomas Pellechia - April 28, 2008

    Two different taxes, Jack. Alcohol excise is the one that the state extracts directly from wineries and distributors. Sales tax is on top of that, and is the responsibility of retailers to collect.

  4. zinman - April 28, 2008

    The result would be the establishment of a 4th tier (look at Oklahoma), comprised of sales reps who are there to do what a distributor is supposed to do.
    In Oklahoma it’s a broker network that represents wineries, replacing the sales efforts of the distributor. Distributors there work on very short margins, because every distributor can sell every item.
    The drawback is additional costs that must be recovered through higher retail prices, reducing sales volume, particularly in states where distributors are working on 18 to 21 %.
    Like labor unions, brokers could provide strength in numbers that individual wineries just can’t create on there own.

  5. Thomas Pellechia - April 29, 2008

    Yep, zinman. The only solution is to abolish the 3 – tear, er, tier system.

  6. Nancy - April 29, 2008

    Thanks, Tom for your two recent extensive articles on the distribution problem. I work in a retail wine shop and although I knew about the laws preventing people from having wine shipped to them from wineries, I was puzzled by the inclusion of retailers in the category of the hamstrung you might say. We ship wine to people all over the country — except Indiana, I think, which is right next door and which simply won’t allow the pollution of wine inside its borders. I’m still a bit confused by the whole mess, but I think I agree with the idea to “abolish” the three-tiered system. However … remember the old fable of the mice who decide to put a bell on the cat?

  7. Kevin Rupy - April 30, 2008

    Tom: Great entry. One other model to consider is the one just adopted in Virginia. It essentially creates a ‘virtual’ wholesaler. In essence, the small winery does all the heavy lifting you mention, and is free to deliver its goods directly to the retailer. The virtual wholesaler is essentially papered on the process. That way, everyone is happy: the winery is in the retail market; the state gets its money; and the wholesaler is kept in the loop.

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