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?”

No Responses

  1. Jim Bernau - March 2, 2020

    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.

  2. Tim Armstrong - March 3, 2020

    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!

  3. KEITH BIONDO - March 4, 2020

    Just wondering if the solution to this challenge is to work with a 3PL.

  4. Luis CAPELLI - March 5, 2020

    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

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