America Without Tiers: Changing Wine Distribution? 

The distribution arm is often attacked by both consumers and producers.

 

Source: Wine-Searcher

May 12th

 

America’s three-tier system can be frustrating but, asks Liza B. Zimmerman, what would life be like without it?

 

Since the repeal of Prohibition in 1933 the US alcoholic beverage market has been governed by a multi-level sales system. It was put in place, primarily, to control any one party having undue control over the sale of alcohol.

 

While the system can be hard to understand and pose hurdles for lesser-known wine labels – particularly imported ones – it has, in all likelihood, opened up the American wine market to a greater number of wine brands.

 

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.

 

If distributors were to disappear, which is not legally or financially likely any time soon, few wine producers seem to have a viable solution as to how they would get their wines to market. If this ever happened, many experts bet that the US market might come to resemble the United Kingdom, or Australia, in terms of how a handful of big-name retailers dominate the market.

 

The data and challenges

 

Most wines in the US are sold through a distribution tier in which consolidation continues unabated. According to Barbara Insel, president and CEO of the Napa-based Stonebridge Research Group, there are about 500 major wholesalers currently in the US market, down from 7000 or more at the turn of the century.

 

Most markets are now dominated by two large players with many states – like the super-competitive markets of New York and Las Vegas – being home to many small distributors. Insel added that, according to Shanken’s Impact Newsletter, the top three wholesalers – Southern Glazer’s, Republic National Distributing Company and Breakthu Beverage Group, a Charmer Sunbelt-Wirtz merger – control approximately more than 50 percent of the market. And of dollar value sales, according to Insel, 90 percent or more wine ultimately goes through wholesale channels.

 

The bulk of sources I spoke to support the existence of a three-tier system in the US, as they believe it gives consumers greater access to wine.

 

“The mandated distribution tier in the US creates a platform for brands to enter the market and plays a positive role,” said Stephen Rannekleiv, executive director at the Food and Agribusiness Research and Advisory at Rabobank International’s New York office.

 

“The wholesale tier also plays some role in balancing the power of suppliers and retailers.”

 

If the tier ceased to exist there would be a lot less access to wine distribution, added Bennett Glazer, the Texas-based executive vice chairman of the new merger Southern Glazers, the largest wholesaler in the US, which is present in more than 40 states.

 

“The UK doesn’t have a distribution network [and as a result] they don’t have the access to brands that the US market provides,” he added.

 

Many brands that can’t be found on the shelf are often picking up that slack with their direct-to-consumer (DTC) business. As a result, said Rannekleiv, DTC sales have been healthy in recent years. Insel estimated that DTC sales average between 3 to 8 percent of total sales. So the sheer logistics of servicing the remaining 90-plus percent share makes distribution essential, she concluded.

 

Other marketing alternatives are also in play. Many larger retailers in the US market already import a number of wine brands directly, either using import agencies or taking on their own licenses. This mirrors what larger operators have been doing in the UK and Australia for some time.

 

A potential negative factor of these larger-label programs, according to Rannekleiv, is that they can limit choice “and put a lot of pressure on supplier margins”. Alternative solutions are generally worse than the traditional model and usually don’t work out in the long term said David Bowler, owner of the New York-based David Bowler Wine. He is both an importer and distributor. Without the middle tier, “you would not have 80 percent of the fine wines that are currently available to the consumer”, he concluded.

 

The sales alternatives that are compatible with the three-tier system aren’t limited to chain operators. According to Christian Miller, principal of Full Glass consulting, a Berkeley, California-based wine-industry data analyst, smaller wineries “could develop a potentially more extensive direct-to-specialty retailer system wherein distribution from small domestic wineries would resemble that for small-production direct imports”.

 

While the total number of wine stores may be shrinking, the wine business at large seems to be healthier than ever. “There’s considerable evidence that the independent fine wine shop sector is growing and, in many cases, financially healthy,” Miller said.

 

“There are surely some economies of scale to warehousing, full trucks with a variety of products, etc, for a large and diverse portfolio of products,” said Miller. “The entity filling these roles may not have to be a legally mandated wholesale tier, but if not something has to fill that role.”

 

While the wholesale tier many benefits to producers, it also has its limitations. While most retailers and wholesalers are reluctant to discuss it, many big wholesalers remain focused on moving top brands. A variety of incentives, from trips abroad to additional pay, are often at stake for moving the right wine at the right time. Few distributors want to openly discuss the return on investment of their business, but Insel puts it at between 30 to 35 percent. Retailers come in at 50 and importers at 20 percent, she added.

 

It is also harder for smaller wineries and distributors to compete with the level of service provided by larger distributors. When I worked for Vinum Importing in Seattle a decade ago, one small retail chain wouldn’t pick up our brands in all its eight locations as we didn’t have enough staff to replace the wines on the shelf or work the floor.  Rannekleiv agrees that the importance of the wholesale tier can create barriers for enter for smaller wine brands. “It limits the ability of suppliers to communicate directly with their customers and consumers.”

 

The alternatives and the future

 

While innovative producers have been seeking out alternatives to the three-tier system for decades, there’s a cap to the number of brands that any retailer can carry. Larger chains, be they giant supermarkets such as Safeway or hundred-unit restaurant chains such as Ruby Tuesday, are even further limited by having to carry well-distributed national brands to make their selection consistent. There is always going to be a need for wholesalers, concluded Rannekleiv.

 

“A small winery can’t effectively service a market from hundreds or thousands of miles away. But large suppliers will own their own distribution.” This is true in the case of E&J Gallo, whenever possible, and many distributors have long been dedicating new divisions to specific wine suppliers.

 

With or without the wholesale tier in place, larger wine producers are likely to continue to dominate the market, both by virtue of their sales force and ability to buy into or influence distributors.

 

With no middle-tier restrictions more brands might be available on an ad-hoc basis in more markets and the “consumer would probably see a little improvement in prices. Larger suppliers with the critical mass to justify owning their own distribution [facilities] would see improved efficiency,” said Rannekleiv.

 

It’s also questionable if there would be more brands on the US market without the wholesale tier. “That depends on whether an effective direct-to-trade delivery or broker/delivery system springs up to take the wholesalers’ place,” said Miller. If that were the case then “small wineries that currently have retreated to mainly or all DTC might be lured back into broader distribution”.

 

Should the distribution tier ever be eliminated, “many small and medium-sized wine companies, as well as many independent retailers, would feel a notable decline in their competitive positioning,” Rannekleiv added.

 

Most big-ticket producers who have been able to sell DTC or deal directly with retailers have been doing so for decades. They seem to be among the only ones who are likely to benefit if the wholesale tier was ever eliminated.