The Meaning of Wine Distributor Consolidation: Pain
When a mere four distributors control more than 60% of all wine distribution in the United States, isn’t it time to reconsider the privileged place and government protection from competition that these distributors receive via the state-mandated three-tier system?
With the merger of Wirtz Beverage and Charmer-Sunbelt and the reported merger of Southern Wine & Spirits and Glazers, you now have four companies that control 61% of wine distribution in America: 1) Southern/Glazers, 2) Wirtz/Charmer, 3) Republic and 4) Young Market.
The primary reason states, in the wake of Prohibition’s Repeal, mandated that producers sell only to wholesalers who would then sell to retailers was to assure that producers could not dominate and control a market’s retailers and restaurants through pressure tactics common prior to Prohibition.
With well over 8,000 wineries in the United states now and a drinking public that is hell-bent on promiscuous buying habits, someone has to explain to me exactly how the threat of a single producer could possibly pressure retailers. If a producer of $15 Merlot tried to pressure a retailer to buy gobs of their wine, the retailer could easily procure an equally well-known and equally sweet Merlot from another producer.
The rationale for a state mandated use of a wholesaler by producer makes zero sense. And that’s why you’ve never heard and will never hear any wholesaler defend the three-tier system on the grounds that it was originally created.
The fact is, one could easily do away with the state mandate that a wholesaler be used and still prevent pressure by producers by keeping any number of tied house laws in effect.
And of course, even without the state mandate that the middle tier be used, producers would still largely choose to use wholesalers to distribute their wine. The difference would be they wouldn’t be forced to by state law and wholesalers would have to work a little bit harder. Given that wholesalers are notorious for not working very hard at all on behalf of most wineries, a little extra work surely couldn’t hurt them.
Wholesalers like to brag that it is the three-tier system that is the gold standard and that this government imposed system of protecting wholesaler profits is what has given American’s the broadest selection of wines anywhere in the world. But this is a lie. And because wholesalers know this is a lie that makes them liars. What made America the source of the best selection of wine in the world was a combination of American wine drinkers and the entrepreneurial spirit of winemakers. Wholesalers just happened to be in the right protected placed at the right time.
But if you really want to see the American wine market take off there is a very simple plan to accommodate a surge in the American wine market:
1. De-Mandate use of wholesalers by producers so that entrepreneurship combined with technology and logistics efficiencies can bring products to markets faster.
2. Rescind all “Franchise Laws” in every state so that wholesalers are actually forced to perform to keep a brand.
3. Remove all restrictions on direct shipment of wine by both wineries and retailers in every state so that consumers can immediately and easily obtain every wine in the American marketplace.
Ask any mid-sized producer of wine in America how they feel about the three-tier system. Ask them how often they have been held hostage by their wholesalers who demand market visits to sell their wine. Ask them how often wholesalers demand a “great review” to even try to sell the wine. You’ll get horror stories from 90% of these wineries for the simple reason that wholesalers have them by the you-know-whats.
The bitter fact today is that wholesalers are able to coerce producers, retailers and restaurants due to the enormous power they have been granted by state laws they protect with sacks of money. And now, with a mere four companies controlling over 60% of the wine marketplace (and that will be 70% in a couple of years after a new round of consolidation) it will be even more difficult for wineries to get a fair shake.
If you are looking for a more dispassionate understanding of the increased pain wineries face due to wholesaler consolidation, Paul Franson has penned this fine article for Wines & Vines.
Spot on, Tom
There are a lot of holes in your arguments. Do you think a major retailer is going to want to set up a winery with 5 sku’s to sell in their system as a vendor so they can carry just their wines -vs- being able to get them from large wholesaler? Yes I work for a large distributor, and you know what I have multiple wineries and importers lean on me to help them with the placement and general promotion of their wines so I am not “lazy.” Our distributorship offers curb to curb coverage to delivery and merchandise wine to any account with a liquor license within the entire state, how many trucks and people would a winery have to procure to accomplish that? How is a moderate to small winery going to be able to handle the logistics of getting wine to the shelves of off premise retailers, and to the dining room tables of restaurants on a national basis? There are many smaller distributors out there so no one is pigeon holed into having to be with one of the large companies. In addition there are also delivery services that for a fee will pick up and deliver wines to retailers if the winery is willing to take care of the sale of the product. There are many options available for a winery or importer to use to get their wine into the retailers hands, and for many a large distributor network is the best solution.
Jim:
Thanks for commenting.
I wonder if you would be willing to try to justify state laws that require producers use wholesalers, state franchise laws and state laws that prohibit direct shipping from out of state retailers.
Unless you can do that then you find yourself working for a company who’s profits are a direct result of sucking off the government tit.
Not a lot I can disagree with here, Tom. I do want to raise a couple of points. First, the part about “demanding” market visits. As someone who does more market visits a year than I would wish, my distributors aren’t demanding them–a crowded marketplace and my own evaluation of what is required to build small wine brands. I know that I need to spend time in markets and at sales meetings or else I will be left behind by those who do commit the resources to assisting their distributor build their brands. If I’m not at that sales meeting and in that salespersons car a couple of times a year, there will be someone else there. If the Lords and Ladies of Napashire truly believe that they can sit home and their wines will “sell themselves” they are more delusional than even I have considered.
Also, you tend to put these arguments rigidly and dogmatically as winery vs. wholesaler. Has it ever occurred to you that, despite what frictions and frustrations are in the relationship, that small wineries interests are in many cases much more aligned with small distributors than they are with the large mega-wineries. And conversely, the interests of Southern and Wirtz are much more in tune with KJ, Constellation and Veuve than they are with the small boutique distributors that they would like to stamp out of existence.
My third point is that you always seem to be in favor of an across the board libertarianism when it comes to any and all regulation. Are there any state laws that you actually think level the playing field and help small wineries gain access to markets and compete in them? Off the top of my head, I can think of state minimum pricing in Ohio and the ban on chain stores in New York that do a great deal in leveling the playing field for both the small distributors and small retailers that are the lifeblood of small wineries.
Tom’s position might be stridently stated, but “Jim I work for a large distributor” doesn’t just have holes in his position, he has no position. Tom’s point is not that there is no place for distributors or that they cannot add any value, but rather that distributors have been granted a government monopoly reminiscent of Soviet-style control that provides them with profit levels and power that would not exist in a normal free enterprise market. In any other business, the logistics side is highly competitive with thin margins (amazing the results that competition provides). There is no rational reason that the distributors should make anywhere close to what the producer makes, but they do and it is shameful (plus they get to demand legally mandated cash-on delivery payment terms). No wine producer likes even their “best” distributor and even the big liquor brands hate them – a necessary evil is the nicest thing anyone will say (I know that officially the distributors are called “strategic partners, but what choice to they have…). I would also take issue with Bill Haydon’s comments about “helpful” government regulation in this space. Do you really think that Ohio and New York have better wine options for consumers in states without such regulations? I will acknowledge that there are some boutique distributors with great portfolios who really care about their wineries, etc., but neither they nor government regulations are the lifeblood of small wineries. The lifeblood of small wineries (up to 5000 cases, probably up to 10,000 cases) is direct-to-consumer for the simple reason that the winery that actually made the wine gets to keep the money.
Bill, Your vision from the grandstands is blurry at best. Monopoly? You can open a distributorship tomorrow if you like, or self distribute your wine. No Value added? I guess the fact we warehouse, deliver, set pricing, negotiate monthly features, promote, and merchandise the product is worthless. Thin margins? Working for a large distributor we struggle with profit margins. Things like: taxes, transportation costs, packaging, health benefits for employees all chip away at any gross profit margins. With an established winery with little of no debt service the cost of making a bottle of wine is -vs- what they sell it to the distributor for is a much larger markup than what the distributor takes when selling it to the retailer. Ironically I was interrupted while writing this by an importer wanting to discuss an in store pouring of his wines I arranged with a retailer, he is new to the market and I have been mentoring him with regard to the buyers of the area. He is very happy that the store and I came up with a plan to promote his sparkling wines during the holidays. Jim best stick to subject matter you are more knowledgeable about.
Jim,
I wonder, given you are such a supporter of the distributors if you can find a way to defend the following:
1. state laws that require wineries to sell through distributors
2. State Franchise Laws
3. Laws the prohibit direct shipment from out of state retailers and wineries
I could name others I’d like to see a defense of, but these will do. And here’s the thing, if you cant bother to try to offer up a defense of these three gifts to wholesalers then don’t bother trying to right off other peoples comments since you clearly have not nearly enough perspective, experience or appreciation of the business to even attempt a defense of those things that help guarantee wholesalers their state supported protection from competition.
I look forward to your defense of these things.
Tom
I don’t know what backward state you live in but in my state there is no requirement that wines be sold through a distributor any winery can sell directly to retailers or consumers, there are no wine franchise laws, and D.T.C and shipments from retailers to consumers are legal and encouraged by the state. In fact some airline even allow a free case of wine checked in when you are leaving our airport. Guess you might want to consider moving.
Jim,
Your state is the exception.
Jim –
Sorry to burst your bubble but mine is not a view from the grandstands, nor is it a minority view. I am the buyer for an on-premises establishment and have been involved in running wine trade-only events for years. I deal with wineries and distributors all the time. Some of the distributors I deal with are very knowledgeable and care about their wineries and some are pathetic (the pathetic ones have huge beer and liquor brands so wine is an afterthought, but the three tier system laws don’t allow the underserved wineries to leave without the distributor’s permission – I know first hand that it is a very painful and expensive process).
My statements regarding how wineries and spirits companies view distributors is based on actual first person conversations with the people that own and run such companies.
While you are technically correct that anyone can start a distributorship, there are artificial barriers to entry caused by the three tier system that should not exist in any rational economic system. Moreover that fact has nothing to do with massive shift in the balance of power to distributors that the three tier system imposes on the actual producers of the product. If you are really arguing that distributors would have the same margins without the three tier system then I have an email buddy whose husband, cousin uncle, etc. used to be a high ranking official in the Nigerian government who wants to send you some money – I’ll hook you up.
Great for you that you are helping an importer do tastings – that is a value add and the market should reward you for that effort. You would be doing that with or without the three tier system.
My perspective is certainly different than yours, and we disagree on the underlying issues, but that isn’t the same as not being knowledgeable on the topic. You can sell the “grandstands” comment walking.
Jim
I’m not an in-the-know guy like many of you in this comment section. I’m just a guy who likes to drink wine. Why is it that my state restricts shipping in such a way? I live in Texas…you know the one – the one that runs its mouth about free markets, pro business, etc.?
Why can an individual in the United States not have the freedom to buy a case of wine from a different state?
Please explain. Thanks in advance.
Working for a small (5,000 case) winery, I know very well that the U.S. distributor system is broken and outdated. When prohibition was repealed, the federal government gave the states the authority to make their own rules. It should be obvious to anyone that distributors in many states were taken care of by their state legislators, with gifts such as franchise laws, and no credit terms allowed for their accounts.
Now, with so much distributor consolidation, it is very difficult for a small distributor to gain attention from their large distributor. it is difficult to get market work and sales meetings with large distributors. And the reason is that these large distributors are pressured from their large suppliers (Diageo, Constellation, Treasury, etc) for sales and placements. The sales reps have management-mandated quotas to achieve, which are all brands from the larger suppliers. With the burden of these quotas, the sales reps of large distributors don’t actually sell. They are order takers for their customers.
For small wineries, the best avenue for sales is to make their direct-to-consumer sales a priority, and thus, making sales to distributors a smaller priority.
Change the consumer’s palate. As simple as that. I used to sell in Las Vegas and the average consumer wants what they want. Wine consumers are no longer adventurous. Beer consumers are looking for the newest item and the most high quality item….sadly wine consumers not so much. Craft beer guys are significantly more discriminating than the average wine buyer.
I’m new at wine wholesale and distribution (3 years). My focus is select premium pinot noir wines which I purchase directly from wineries for sale in Europe. I’m concerned about the quality of wine and small wine producers survival if the avarice of conglomerate wine houses and distributors continue to merge and control the industry and purchase premium wineries only lend name recognition to their money making machine. It’s not good for winemakers nor consumers. .
Your argument is tired and boring. In a country where the NRA controls gun sales. That is to say that nobody needs a license to buy a firearm of any kind, and you are suggesting that essentially there be wide open wine sales without restrictions, taxes is frankly insane. I am not an apologist for the wholesalers, but nobody put an NRA authjorized gun to anyones head to go into the wine business. This kind of bullshit, that I chose to open a wine business, I should have no barriers to entry and somehow be promised some form of success. It is infantile, immature and frankly pathetic. I am a winemaker, i.e I am a victim. Get over yourselves
Mr. Heller,
Until you can show where anyone is suggesting there ought not be any restrictions, as you suggest has been said, you won’t be taken seriously.
All you do since I started following your blog is rail against wholesalers, their apparent monopolistic business practices, that are in a cabal with state and local governments to prevent competition. Having been in the wine business since 1972 starting with Ridge Vineyards and then owning a brokerage company that was the first to represent Caymus, Burgess Cellars and both Stags Leap, amongst others, then working for Southern Wines and Spirits for three years, then working for what became Wine.com I can tell you with metaphysical authority that all suppliers believe that all sales forces, whether brokers or wholesalers believe are doing their best to make the winery fail. Shipping six bottles to a restaurant in wherever is not going to cure this. Shutting Southern, et al down will not cure this. There are way to many brands who feel that because they exist they should be successful. It just isn’t so. They need to be responisble for their own business and stop pointing fingers at others and saying it is your fault I am failing or your existence prevents me from being successful. If a brand is going to sell its wine at wholesale they are going to need to pay someone or someones to get in front of the customer. It is just life. People should just stop whining about it
Mr. Heller,
There you go again, asserting that someone is suggesting that wholesalers be shut down when no one suggested such a thing. As I mentioned before, if you are going to be taken seriously you need to stop making outrageous claims.
Now having been on so many sides of the wine industry, please, give me a good rationale for 1) requiring by law that producers sell to wholesalers, 2) the existence of Franchise laws protecting wholesalers and 3) restrictions on direct shipments from retailers and producers. Unless you can at least make that effort without putting words in someone’s mouth I don’t see you having any credibility in this discussion.
I never suggested that the shuttering of Southern was your idea. What I am positing is that your 3 issues are not ultimately germane. Whether I am credible or not is not germane. Wholesalers are going to protect their positions. Taxing agencies are going to protect their positions, and ok franchise laws are probably a bad idea. But There are way too many wineries in the world, way too many wine brands in the world. If a winery or wine brand want to have their products distributed, get shelf space, or on a wine list or a by the glass program they are going to have to put a body or bodies in front of the customer. That costs money. A lot of money. Probably too much money. But like I said, nobody put a gun to anyone’s head to get in the wine business. Complaing about the unfainess of it all doesn’t matter. One of the reasons my old business ultimately failed was because I did not become a wholesaler
Tom,
Am I reading you right? Are you suggesting that where inequity, rent seeking and regulatory protection exists that in no way serves but harms all but wholesalers those circumstances ought to be ignored and not discussed? That’s what it sounds like.
Winemakers do all the things you suggest. But they do it under handicap and when change is sought they are told that Franchise laws are necessary, that the three tier system is crucial and that direct shipping is dangerous and they find themselves in political battles with wholesalers who have the advantage of being in a position of unfair advantage.
Finally, the market should determine if there are too many wineries. Won’t it?
I think what I am failing to effectively communicate is that the commercial issues trump the fairness issues. As examples: Gallo in many markets own or control their own wholesale operations. twenty odd years ago Kendall Jackson fired Southern in California to go it alone. Most recently Bill Foley bought Epic wines in Santa Cruz and put all of his brands I believe in this house. These were all done to have as much control of their respective sales forces as possible. These are commercial decisions, not fairness issues. I am sure Southern did their best to remove KJ’s and Foley’s wines from wine lists. Now you may not like or respect the Gallos or Bill Foley or Kendall Jackson. But these are smart people who have figured out what it takes to be successful in the wine business. Those are commercial decisions. If winery x wants to have its wines sold in the New York market, they will need a sales force. The will need a wholesaler. Now they could make a deal with a Martin Scott or Southern or whoever and pay whatever that cost is. They could use a clearing house and pay whatever that cost is. My guess is the actual dollars out of pocket and points of distribution are better with the three tier. Or they could with a winery direct approach Fed Ex cases at almost $200/case after having Fed Ex’d samples at lets say $75.00 a box and pay someone at the winery to follow up a lousy commercial strategy. Or they could hire someone in the market pay all of their expenses and get mediocre results and a ton of UBER bills and high priced expensed meals. These are ultimately commercial decisions, not a matter of fairness. The top 50 restaurants in every market have wine buyers who are snobs, know more about wine than anyone else and being the flavor of the month only lasts 30 days. It is a crummy business
Tom,
You wrote:
“I think what I am failing to effectively communicate is that the commercial issues trump the fairness issues”
Of course they don’t. It’s actually possible for two issues to be addressed in tandem, at the same time. Winemakers and retailers across the country understand perfectly that the system is rigged in favor of wholesalers. But they don’t stop making or selling wine.
Your “shut up, get over it and do what must be done” position equates to a zero sum game. Well, it’s possible to play the game while also trying to change the rules. And that’s what’s being talked about here.
Franchise laws that protect wholesalers from competing. Mandated use of wholesalers that protect them from competition. Bans on direct shipping from retailers and wineries that protect wholesalers. These are illegitimate rules of the game that serve no purpose but to protect wholesalers and their paid for influence. Yet you seem a little put out that they are challenged.
Nobody in their right mind would get into a new business without fulling understanding the barriers to entry a various distribution points as well as the costs associated. But, I forgot, this is the wine business. Eliminating franchise laws will cure very little. You also fail to mention Gallo Wholesale which is a huge operation. Perhaps the consolidation that is going on in the wholesale sector, is not just a matter of increasing the ability to muscle suppliers, but is a necessity to increase efficiency of the logistical side of the business, which is very expensive.
Lastly, there has been little discussion regarding the proliferation of wine clubs…Wall Street Journal etc. The New York Times has full page ads touting their club. Someone has penciled that it can make money with a limited number of markets… Im not sure…
As I mentioned, I am new to the biz.
I have a small shipment of handcrafted vodka sitting at Customs in France, because they want me to pay Excise tax of 13 Euros per 750ml bottle of 40% alcohol.
Can anyone direct me to a Customs agent who can help me dispute the matter.
Thx……J
This Tom fellow doesn’t have a clue. Just another pathetic individual trying to impress people. He was a failure when he has his own business! Go figure!!