Imagine a Get-Out-of-Jail-Free Card For Wineries and Retailers

Get-out-of-jail-freeIn a recent article at Wine Searcher, Writer Liza Zimmerman attempts to answer the question, what would the American wine marketplace look like if wholesalers (the middle tier of the three-tier system) were eliminated. It’s a tantalizing question and Zimmerman does a good job of sussing out answers with the help of some pretty smart people.

However, in the end it’s a silly question. It’s like asking, what would the American wine marketplace look like without retailers?

Zimmerman sets the stage:

“Despite a great diversity in the US wine market, dozens of wine producers – of all sizes – have continued to complain about what they perceive to be limited market access, which they blame on the distribution tier. Many continue to share a belief that they would be able to sell more wines direct to consumer (DTC) and penetrate more markets if the middle tier no longer existed.”

As far as I know, not a single person inside or outside the American wine trade has ever suggested that wholesalers disappear. I might be one of the most virulent opponents of the three-tier system and I’ve never suggested it. What I and others, however, have long insisted is that the LEGAL MANDATE in most states that require producers to sell to wholesalers and retailers to buy their inventory from wholesalers most certainly should disappear.

While the requirement that producers and retailers be kept at arm’s length by the mandated use of a ACmiddle tier wholesaler might have made sense in 1933 in the wake of prohibition and organized crime’s deep reach into the alcohol distribution system, it makes zero sense 80 years later. Ironically, the only reason a state mandated use of the wholesaler remains in place 80+ years since repeal of Prohibition is that this state-mandate has given the wholesale tier such complete control over alcohol distribution that they are able to control the apparatus of regulation and lawmaking surrounding it. In other words, the state-mandated use of a wholesaler in any given state has evolved into nothing more than state-mandated profits for a class of business protected from having to compete.

I’m sort of surprised that Zimmerman was able to get such impressive people to speculate on what a world without wholesalers would look like. No one wants a world without wholesalers. No one could do business in a world without wholesalers. No one ever speculates about a world without wholesalers. However, Many producers imagine a world where they are not legally required to use a wholesaler to distribute their wine in a state and many retailers imagine a world where they could contact a producer of wine, beer or spirits and buy directly a few cases.

So the real question is this: What would the American wine marketplace look like without a state mandating use of a middle tier? The answers are pretty straightforward:

1. Most large and medium-sized producers, as well as a number of small producers, would contract with wholesalers to distribute their product to restaurants and retailers

2. Some large and medium-sized producers would create their own distribution system and sales force and sell directly to retailers and restaurants in some markets, bypassing the wholesaler

3. A good number of small producers would choose a limited number of markets to sell directly to retailers and restaurants, either dedicating an employee to service accounts in that market or using a locally-based independent sales team to visit accounts.

4. Direct-to-consumer sales and shipping would remain a robust and important option for producers of all size, but particularly for smaller producers.

5. Retailer to consumer shipping from out-of-state retailers would even more robust than it is today, providing consumers with access to the entirety of product inventory across the country.

6. Retailer-created wine clubs of every possible type would be available to consumers in every state

7. The balance of political power within the alcohol industry would be more evenly distributed among the three tiers.

It turns out that each and every one of these impacts of a de-mandated wholesaler tier is a positive impact as it results in more competition, better product selection, better consumer access to wine, more market opportunity for producers, more choices for retailers and less political corruption.


3 Responses

  1. Steve - May 12, 2016

    Agree with everything you say. Facts still remain: As long as there is corruption (i.e. money, political contributions) in the legislative system (state and federal) there will NEVER be a lessening of the 3 Tier distributors gold mine which funds career politicians. It is like public sector unions; they exist legally for politicians and “oh, by-the-way least we forget-employees”. If wineries/vineyard owners organized and had a slush fund to pay politicians campaigns then they might have a chance of change. But, finding wineries willing to stick out their necks will be impossible. Imagine what would happen if a mid-size winery went on record to kill off 3 Tier wine distribution. Would they ever be able to find a distributor to handle their brand? Yes, there will always be a place for a distribution/manufacturers rep. arrangement, nonetheless the impact to distributors would be felt. Once a winery delivers a bottle of wine to a distributor that distributor owns the rights to that winery for life (in most states). In NV, once a winery produces about 2,500 cases of wine the arrangement is in perpetuity. No where else in business in America is such an arrangement held legal.

  2. Tom Natan - May 18, 2016

    I’m in DC, which operates exactly that way. If a particular alcohol product isn’t available from a distributor within DC, retailers can act as their own importers and bring it in from outside DC (from anyone who can sell it to them). It has worked out well and you’ll find more than you’d otherwise expect at DC wine shops and restaurants.

  3. tom merle - May 20, 2016

    Tom, as the foremost expert on issues dealing with online retail wine sales, could you explain how the new drynk/eBay arrangement that permits their retailer members–producers aren’t involved– to ship into 45 not 14 states is legal. Do individual vendors actually hold to the 14 state restriction or is it all being ignored.

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