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?”
For over 25 years, Willamette Valley Vineyards self-distributed in Oregon under the statutory privileges of the winery law as many Oregon winemakers do today. Our sales rose to over 35,000 cases annually in Oregon direct wholesale sales to approx. 1,400 grocery, wine shop and restaurant accounts. We had 18 remarkable and dedicated representatives, seven drivers and small, regional warehouses. As we grew to meet chain store back door and administrative requirements we took on many European and U.S. brands. The new TTB requirement for contemporaneous, daily tracking of wine movements imposed a very heavy computer and logistics cost, so after 25 years, we decided to go back to focusing on growing our estate vineyards. Self distribution does work well for many, I recommend it. When we sold our brand’s distribution rights for $1 million, our remarkable Young’s Market Company and Willamette Valley Vineyards team has kept growing our brands.
Tom, I’ve read and appreciated many of your posts over the years and this one, like all the others, makes some great points. As a small producer we’re all too familiar with the challenges of taking our wines to market and you’ve highlighted a number of them. We’re fortunate to be in a state that does allow self-distribution but, with that experience, I think your post is missing one or two key points to have a more complete picture of the situation.
Perhaps the most important element missing here, in my opinion, is the customer. In this case, the customer is a busy wine buyer for a restaurant, country club, wine shop, etc. These people are incredibly busy and the big problem with self-distribution is that it makes life more complicated for them. By ordering through distributors that provide great service to their account, these buyers save a lot of time. Tracking inventory and ordering directly from individual producers comes with a decent amount of overhead and hassle for the customer( aka. the wine buyer). As a producer, we look to eliminate pain points or hurdles that would slow down or block our sales efforts. At the very least, being represented by a strong distributor who really cares about their accounts, is a great way for us to remove one big obstacle in the process. That alone may not be enough to justify the massive margin hit you reference but it is a considerable factor that I felt was missing from your post.
The second point I would make is far more daunting. The real problem with the model for small producers is simply one of scale driven by real dollars vs percentages. We know that there are accounts out there who really want to feature small producers in their shops and on their lists – they’re looking for something unique and highly authentic. The problem is, boutique wine doesn’t sell quickly. Without volume, the only way to make the real dollar revenue meaningful to anyone in the chain is to raise the prices. Which, of course, contributes to slower sales because there simply aren’t enough consumers buying wine at the price points needed to make all this work. By my math, this fundamental economic challenge applies to self-distribution and 3-tier in very similar ways, by the way. No matter what route a producer takes to market, there are real costs and real scale challenges.
The glorious nirvana that we as a small producer dream of is not necessarily the end of the 3 tier model but rather an awakening on the part of more consumers to value what small producers uniquely offer and be willing to pay the price points we realistically need to make any route to market viable and sustainable. Now, if that were to happen, can small producers really benefit from that or are we a dime-a-dozen breed who will just continue to get squeezed in the channels? That’s a fair question and one that can’t be answered in mass. As it always does, it comes down to relationships and brand. No matter what route to market we take, we are responsible for our own relationships and our own brand. We just believe that high quality distributor partners can help us on both of those fronts (as long as we can all make the math work).
Cheers to consumers that value small producers!
Just wondering if the solution to this challenge is to work with a 3PL.
It is great to see how things (in this case: wine distribution) expect to change.
It is a tremendous great proposal that small wineries would have the chance to self distribute their 5,000 -10,000 cases (3-5 tanks of wine per harvest).
They may capture their consumers directly knowing the name and preferences.
They also may have the chance to shorten distribution cost : consumers pays 2,5 times wine Ex Cellar Prices
What is essential for this model is the consumer : distribution channels are defined by them and were they want to joint the product.
Give consumers good new “way of doing” especially when they receive a better product for almost the same costs.
Change !!! There are no more winred phones
Mr. Armstrong misses the fact that these laws were put in place coming out of prohibition. Most people didn’t have a phone, let alone Alexa on their counter. I have to laugh at the idea that a busy buyer justifies the 50% discounts. It’s the buyers job and if a small producer agrees to ship them samples and then one case a quarter, why should anyone stand in their way.
Remove the ancient restraints and good ole boy family system that robs the consumer of quality and better pricing. If a restaurant wants to take a flyer on a case of my Cab, Merlot, and Chardonnay… why can’t I ship it right to them and bill them for it? or require payment (before it ships, or COD)? And if it’s too much hassle for the restaurant or retail shop, they’re big boys and girls, they can tell me no thanks.
Amazingly in New York, a restaurant can’t even buy more wine, if they are in arrears to a wholesaler?! Who decides what risk buyers and sellers want to take? This is nanny state legally mandated extortion. The market needs to be free. The buyer can decide from whom and how and where he’ll buy his alcohol. And the seller can decide whether to extend credit or not.
Your second argument “there simply aren’t enough consumers buying wine at the price points needed to make all this work,” is a specious at best. In the state of California, producers find ways to get all sorts of wine and price points into retailers and restaurants. Why would it be any different anywhere else? The only reason it doesn’t work is because price and volume (read supply and demand) are artificially controlled.
A small producer can’t sell her wine to a WHOLESALER for $30 to have them turnaround and sell it to the restaurant for $42, to have the restaurant put the (normally $60 retail) wine on the menu for $84. Instead, the restaurant is left hawking crappy wines for $60, that we can all buy in the grocery store for $22. Again, who is left out if we free up the market? The middle men and people that aren’t needed anymore in 2020 or 2021.
In today’s age, we’re all grown adults… it’s time the legislatures produce and the consumers demand adult laws that allow the artisan producers to sell directly to whomever they wish.
Finally, your flippant point about nirvana has nothing to do with consumer willingness to pay for good wine… it’s the multiple channels, decades of graft, and markups that prevent good wines at good prices… again, California is a great example of the possibilities. Imagine a world where the restaurant can still offer a beautiful Cab or Chard for $84, and they still get $42 a bottle profit and the producer now gets $42 versus $30 (or less) under the tiered system.
Stop the nonsense immediately and allow hard working small business owners the profits and money they deserve… If the wholesalers add value, let them convince the producer and end users, don’t create laws that protect them from the free market.
And yes, we agree… cheers to the small producer and the consumer that buys directly from them. The sooner we free the channels from protection and taxes, the easier it will be for everyone to get what the 2 parties agree to give and take.
Davide,
You have absolutely no idea what you are talking about.
Please tell me how the wine director who wears many hats can possibly see all of the 3000 case producers who would like to sell to them direct. There are 8,700 wineries in the United States alone plus another 27,000 in France and lets say another 150,000 in the world.
How many hours in their 60 hour week could they possibly taste with all of the people who want to present them wines.
Many restaurants do not have the budget or storage space to sit on two or three cases of a single wine, let alone all of the cases from all of the wineries that would like to sell to them! As an FYI to you many of the best wine restaurants place an order with two or three bottles of several wines and repeat that with several other of their preferred suppliers on a weekly basis.
Here are all the reasons why a small producer would want to sell my company their wines!
1. We have a team with relationships with many customers.
2. We buy the wines and carry inventory.
3. We pay the bill in the desired payment window.
4. We have all of the relative licenses.
5. We pay the state and local taxes.
6. We chase the customers down for payment!
7. Their wines are part of a diverse portfolio that customers want to work with.
8. When a salesperson is taking out their wines on they are likely seeing numerous customers, do you want to ship a set of 3 to 6 wines to 75 relevant customers in a market and then wait for those 1 case orders that you then have to ship?
All of that being said in the State of Illinois you can do exactly what you are talking about but the vast majority of producers choose to work with one of the many quality wholesalers in the Chicago market and many other markets!
Your flippant comment about how a restaurant who has not paid a wholesaler their bill on time can’t buy more wines shows your ignorance on the subject. If you had any idea what it takes to chase down money from some customers you would not be saying that!
The problem out there is there are too many wineries trying to sell average wines at high prices. The best wineries are represented in most markets that they want to be in and are happy to have a local company with relationships in the market promoting their wines.
Get rid of the mandated 3 tier system and 99.9% of the wineries would keep their current distribution system just like it is.
Mr. Jensen,
I do know what I’m talking about, as I’ve been around the business since 1976 when I first drank with Joe Heitz on his hay bales in his barn in Napa.
Your last line says it all. Yes, let’s get rid of the mandated 3 tier system and see what happens. But it will never happen. And so why not let it happen and if what you say is true, that 99.9% of wineries would keep their current distribution, then it shouldn’t matter at all to you, right?
Why are people buying average wines at high prices? That’s the problem!? Huh? That shows ignorance on what happens when markets are controlled by government regulations.
Get rid of the regulations and those same average wines would then sell at average prices, but the wholesaler (the middlemen) would be out of business. Yet, the average winery and the average restaurant would now have perfectly matched wines and prices. The current regulations don’t allow that. And in fact perpetuate the very thing you say is THE PROBLEM.
It’s funny that all the points you make for your business (I suspected you were in the middle) are exactly the things that a small winery can do themselves, from the start… and then once they’re big enough they could hire you to do all those things if it made sense to THEM.
But today, in 2020 or next year, why can’t a small winery take a bottle of their wine to their favorite Michelin starred restaurant in NYC and share it with the Somm and have the somm say, “damn D, I love this, can I buy a case or two for the restaurant?!” And me say “sure, that’s great”… cut me the check, or go to my web site and use the code Restaurant and I’ll sell you it at 50% of what I sell to the public.” And then I ship it to them. Done and dusted.
The answers are simple. They might be in arrears with a big group, so they can’t buy mine. My winery isn’t interested in “POSTING MY PRICES” for any and all in the state of NY to see. My winery might NOT be interested in being FORCED to be represented by just one “sales organization” in NY.
I also might want to go to another Italian restaurant the next night and do the same thing… sell a case or two. But I can’t. I can’t even ship it to them. I can’t even carry it over there myself.
Again, let me be clear… I agree that your last idea is possible, but then what are you afraid of? That I’m right? And that the majority of wineries would leave you?!
So if you think you really do add value, let’s get rid of the requirement to force me to do business with you as a wholesaler. And wouldn’t you feel better at night knowing that I was doing business with you because you actually DID add value, as opposed to pretending when I have no choice?
Let’s free the marketplace, free the wineries from these handcuffs and chains. Then we’ll see what a free market feels and tastes like.
I love people like you who come out here and squak about the 3 Tier System yet are afraid to identify themselves.
You are delusional and self congratulatory and just because you drank wine with Joe Heitz on hay bales doesn’t make you an expert in getting wine sold.
The problem is that there are a lot of people who make mediocre wines that most people are not interested in!
You miss the fact that the somms and wine buyers don’t have enough time in the day to see and taste with every person who wants to sell them their goods!
I think I understand the free market quite well since I started in distribution as a second career and have managed to put together an excellent company when everyone in the industry expected me to fail.
The dozen plus people who work for me and the many wineries my company represents are thrilled to have a company with a team that adds great value to them.
Most wineries realize that there is a happy medium between tasting room sales, direct to consumer sales and sales through through distribution and balance their pricing across all areas.
The ones who are really good at it make it work across the board.
The most successful wineries I deal with wouldn’t think of giving up their distribution network and prefer to concentrate on what they do good.
Mr. Armstrong,
You claimed I didn’t know what I was talking about. So, I pointed out that I’ve been connected with the wine business for 46 years. I have good friends with multi-million dollar sales at their wineries who have used the 3 tier system. I pointed out that my first exposure to Napa was with Joe Heitz. I’m friends with owners of top shelf Bordeaux and Tuscan wineries.
And yet somehow I’m ignorant, delusional, and self-congratulatory.
Hmmmm.
I think your arguments are circular and you’re afraid of an open market. You and others who own the middle of the 3Tier system are simply afraid that the only reason you have jobs is because the laws protect you.
All I’m saying is, you may or may not add value. And you may or may not be in business when it opens up, as it will.
And let me be clear, I believe you think you add value, but a small 300 to 500 case winery is a rounding error to your business and everyone else in the middle. The laws hamstring these folk and prevent them from making a living, by selling their wine to whomever they want.
Moreover, It’s not for you to tell the Somms and restaurant owners how much time the do or don’t have to follow or not follow small producers. In fact, they have the same amount of time as everyone else, and should have the choice. If it’s easier for them to use you and pay the value to you for that, so be it. But please don’t hide behind the law and claim you absolutely add value (that’s circular logic).
It’s criminal and unconstitutional, forget the ethics and morality, that you should make as much as a small producer makes on their product because the laws says they have to use you.
And your argument that you know the free market because you started into it as a second career is lost on me. There’s no logic in that.
Again, let me be clear. I understand you firmly believe you add value and you have created a business. I’d propose to you that if it WAS OPEN AND A FREE MARKET, guys like you that add tons of value, could wipe up the rest of those that hide behind the laws.
That’s all. What’s the name of your distributor?
Happy Holidays!
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