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.