Joe’s Wine Sales Dilemma
The power of the Internet has not, to-date, been utilized efficiently to address the failings of the wine distribution system. The bottle neck that is called the "Three Tier System" whereby nearly all wines are funneled through a state mandated sale to a middle man is the source of most problems that exist where access to wine is concerned, be it access to wine by restaurants, retailers or consumers. A system that was devised over 70 years ago in an age that barely accommodated cross country distribution is now hampering a wine industry that bears no resemblance to what it was in 1933.
Today, wholesalers have near total control of this system. The video below is one take on what effect this antiquated and largely ineffective wine distribution system has had on the process by which wine gets into the hands of retailers and restaurateurs who are charged with getting wine into the hands of consumers. Enjoy:
Found this vid this past weekend. Hysterical!
Nobody hates the 3-tier system more than me. Getting rid of it, however, will not in and of itself solve the problem.
The ultimate key is getting rid of it, replacing it with DTT and HAVING THE WINERIES PASS ON SUBSTANTIAL SAVINGS to the restaurants/retailers and ultimately the consumer.
Sadly, I see far, far too many California wineries who look at DTT and lick their chops in anticipation of keeping the wholesale tier’s margin all to themselves. One has to only look at the numerous Napa/Sonoma wineries selling DTT in California at the same price levels that their out of state wholesalers have.
Should they go down this path. Nothing will still be accomplished, and their wines will still be considered “crap for the price” and will back up even more without the wholesalers ability to sell based on individual relationships and product tie-ins.
While there is much to hate about the three tier system, and in particular its biggest players, Napa’s, Sonoma’s (and increasingly Oregon’s) problems do not lie in their stars but ultimately in themselves.
Interesting Take. For what it’s worth the three tiers system will not and should not be replaced. Rather, the laws that mandate a sale to distributors are what’s blocking significant advancement by the wine industry and and in true consumer access to wine.
Selling wine via a distributor middle man is an essential element of wine sales and the sales of countless other products. But to mandate by law that this must be the track no longer is necessary to accomplish most of the goals the system was originally set up to accomplish.
So how would wines be sold again without this system? Here’s the first of many mind numbing scenarios. A winery would have to make sure that any account they are selling wine to has a valid license. Not only that, but they would have to account for every transaction between that account and themselves. Also, what if they only need a few bottles a week of a product due to storage issues. That’s a lot of paperwork to suddenly handle. And how would wines from outside of the USA get into the hands of the consumers? Especially smaller wines? Just curious.
The fact that for some producers, direct to trade sales might be difficult shouldn’t be the argument to outlaw direct to trade sales by producers.
Those producers that want to deal with the intricacies of Direct to trade sales will I’m sure make the effort needed. Those restaurants and retailers who prefer, in some cases, to deal directly with a producer will also be motivated to work out a system that meets their needs.
Distributors help far more than they hamper the wine trade. Anyone who has stood in the morning line of reps at a retailer or restaurateur waiting for your one minute to present would see why direct to trade sales would never be of much consequence. Retailers don’t want to deal with every Tom, Dick, and Harry who has a story to tell and a “unique” wine to sell. They have a business to run. This is an issue only for a small minority of producers who really need to get with the program.
And yet….Wholesalers vehemently oppose legal direct to trade sales whenever it is suggested. Whether or not DTT is a realistic model (And it most certainly is and all you need to do is look to CA to see that), its utility as a sales channel should have nothing to do with whether or not it should be legally available to those who want to invest in it.
Tom, first of all I would to thank you for adding my site to your blog roll, very much appreciated. This video is pretty funny I must say. Its kinda funny to see lego/robot men cursing. I am a newb in the wine marketing and distribution sector. Perhaps somebody can steer me in the right direction for access to this type of material?
I would foresee DTT following this path. If the very sought after cult wine market comes back, those wines would ship DTT directly. If you can allocate out your 2 pallets to NYC, 1 pallet to Chicago and 1/2 pallet to Boston in one afternoon of telephone calls why would you need a distributor. This is–or at least was–a situation where the wholesalers a clearly an unnecessary parasitic layer of distribution. If demand ever comes back (I don’t think it’s ever coming back to previous levels) the cult winery keeps the distributor margin. If not, then market forces will force some realistic corrections to pricing.
The mega-brands, might go so far as to set up their own warehouses in major markets. They already have the sales/marketing infrastructure in place, so why not take that extra step. I would foresee the wineries and the chain accounts dividing up the wholesalers’ margin between themselves.
In the critical mass markets (NYC, Chicago, Boston, DC, Atlanta, Miami and a few others) I would see a system of independent brokers coming into existence to service accounts o behalf of the mid size–the 10K-75K–wineries and small boutique importers. Here, you could pay an independent contracter broker his commision, keep some distributor margin for yourself and still pass on some savings down the line.
Tom is ultimately right that wholesalers will never go completely away. The key is to take away their legal monopoly, which results in their adding cost to the product that in no way correlates to the value they add to the distribution process.
This is very simple problem assuming you can get past the politics involved in the individual states and the campaign contributions from distributors.
Once this issue is resolved and the requirement that a distributor be involved the marketplace will adjust to the changes and where distributors add value, have the relationships wineries don’t want to take the time and effort to establish, they will get business otherwise they won’t.
Very funny and sad video. As a point of reference I think wholesalers are necessary for high velocity SKU’s and Brands. However, the bottleneck in the current distribution paradigm restricts access to many quality products and brands for the trade and consumers. However for DTT outside of CA to really take legs, wineries need to adopt this model from one of the key service providers (Inertia or the Wine Tasting Network)and hopefully other healthy models that enter the space. The only way change will be instituted is through a significant amount of adoption from producers and the trade. B2B online sales (and/or self distribution) and marketing agent are key for the health of the wine industry IMHO.
Tom .. thanks again for another thought provoking blog. There is no doubt that there is a place for both DTT and for a three-tiered system, both having great benefits, but also substantial drawbacks if one were to choose only one or the other. What we don’t need are mandates that ensure a continued monopoly in an age when it is not only no longer necessary, but worse, it actually hinders business from many quarters. Oh, but the way, that video could have been made to represent many other industries where companies are more interested in moving product (short term profits) in place of properly serving the customers that ultimately keep them in business.
Is no one going to bring up the point that the numbers that the salesforce is trying to hit do not come from the wholesaler itself? They are assigned to the wholesaler by the supplier, whether it be Diageo, Constellation or Brown Forman, or a small family winery that wants to show their bank good depletion numbers for the quarter.
While the video (minus the sarcasm) is accurate, the blame for the numbers game should not fall entirely on the wholesaler.
For those wineries that really want to take a run at DTT, simply hire a clearing wholesaler at a greatly reduced fee, put a person on the street and see what happens. It’s legal, and it’s an option available right now in almost every state.
Having been on the supply side for almost a decade, one thing that hasn’t been mentioned is that the three tier system has made distributors freakin’ lazy. In essence, they long ago abandoned any semblance of what a distributor should do to justify their margin: i.e. build, develop and maintain brands.
Large distributors want their work already done for them through regional and national chain account contracts. In effect, they want to pass the wine through and take a substantial margin based upon the work that the supplier’s sales and marketing infrastructure have set up.
And don’t put the “boutique” guys on a pedastel either. They are just as lazy and just as parasitic. Only, they want Robert Parker to do their work for them. If they can’t flash a Parker score to do their work, they’re not interested.
What DTT would accomplish is taking the pre-sold wine (either the mega brands or the sought after boutique wines) out of the distributors’ hands. If they wanted to continue selling wine, they would have to earn their keep by going back to building and maintaining brands–what wholesalers in other industries have to do every day to stay in business.
The contention that “Distributors help far more than they hamper the wine trade….(and that the) small minority of producers…really need to get with the program” really sounds like the view of a distributor and seems to miss the whole point of encouraging free and open competition in this country. What competition is there when, as this blog has frequently noticed–(1) there are effectively only two wholesalers in the largest state markets, like TX, NY & CA; (2) less than 10 players nationally; and (3) one that can veto the say of those 10 nationally.