This is Why Alcohol Self-Distribution is the Next Big Thing
You are a small producer of wine. Say, 5,000 cases. What can you expect from working with a distributor?
This is an important question that will be addressed at the upcoming 3-Tier Symposium being produced by Wine Industry Network in May.
As a reminder, here is the basic conditions under which a wine producer must work in order to see their products end up on the shelves of a retailer or the list of a restaurant in another state via a distributor:
1-Most states require a producer to sell their products to a distributor, who then sells those wines to retailers and restaurants.
2-Most states prohibit out of state producers from selling their products directly to retailers and restaurants in the state.
3. Despite the legal mandate that out-of-state producers must work with a distributor in the state, distributors are under no mandate to represent out-of-state producers.
4. Most distributors will require those out-of-state producers they choose to represent sell them their products at a 50% discount off the suggested retail price.
So, the question becomes, what does the wine producer expect to receive for the right to sell their products to a distributor in another state that will represent them? That is the question that 3-Tier Symposium moderator Laura Webb, a marketing consultant with OKOS Partners and former brand manager at Brown Forman, answers in a recent Wine Industry Network article:
“As a small supplier, getting in bed with any distributor does not mean you can forgo selling your product. You’re the best salesman for your brand.” Often, small wineries expect a distributor to get them in front of people and markets they wouldn’t otherwise be able to penetrate. But distributors are fundamentally focused on the logistics of moving product—they’re doing inventory management, warehousing, transportation and fulfillment. “To expect that they will do more than that for a small brand is unrealistic. The most successful brands have brand reps out there doing events and serving as the face of the brand in the market.”
Let’s boil this down to its essence: Nothing more than moving boxes. That’s what a small, out-of-state producer gets for signing up with a distributor in another state and selling that distributor their products at a 50% discount off their suggested retail price. No marketing. No Branding. Just order taking and delivery. Isn’t this just a slightly augmented version of FedEx and UPS?
But did you catch that last statement from Ms. Webb? This: “The most successful brands have brand reps out there doing events and serving as the face of the brand in the market.”
Of course, she’s absolutely right. The small producer isn’t just cutting their price by 50% to get their product into another state via a distributor. They are also going to have to give a cut of every sale to a local sales representative who is employed by the producer, rather than the distributor.
The standard 50% price reduction off suggested retail that the distributor demands of a producer in order to distribute their products in the market could only exist where state law requires out-of-state producers to sell only through in-state distributors and where there is no co-existing law that requires a state’s wholesalers to represent brands that want to enter the market.
There must be a term that describes this kind of business relationship in which one party has zero bargaining power and the other party has all the bargaining power. I just can’t think of the term for this kind of one-sided bargaining other than “Three-tier system”.
I don’t think I’ll be able to attend the Wine Industry Network’s 3-Tier Symposium. But I’d like to. WIN always works hard to put on compelling events. Plus, those involved in the 3-Tier Symposium are doing yeoman’s work to promote its value, no matter what it takes. For example, here again is Webb explaining why her particular panel is so valuable:
“She [Webb] has found that small wineries and distributors often regard each other with disdain and frustration. I feel like the relationship has broken down over the years,” she says and wants both sides to realize they need to work together to reach common terms on how to operate. “They’re all in this for the same thing—to sell wine.”
Disdain? Broken down over the years? Yeah!! How could the relationship between small producers and distributors not break down when the structure of the alcohol market place has so fundamentally changed over the past 30 years, while the regulations (read: state-manded use of wholesalers) have not changed?
What is the solution? It’s simple. Allow small producers to self distribute. Take the wholesaler out of the middle. Make the wholesaler actually work for a living rather than being given a living by legislative fiat.
This change is coming. It will come primarily as a result of judicial fiat since so many states discriminate against out-of-state producers by allowing their own producers to self distribute certain amounts of wine, beer, and spirits while denying out-of-state wineries, brewers, and distillers the same privilege.
The 3-Tier Symposium, while unquestionably useful, is unlikely to have the impact of both sides realizing “they need to work together to reach common terms.” I think it’s more likely that the small producers will walk away shaking their heads and wondering, “why would I want to even try to work with a wholesaler?”