Wine Distribution Alternatives Won't Produce Tears For The Three Tier System

Posted: Mar 07, 2017

According to a Wines & Vines (W&V) article 1., in 1995 the number of alcohol distributors in the U.S. was greater than the number of wineries: 3,000 to 1,800. That kind of competitive choice must have been really good for wineries, but a lot of wine must also have been imported. 
1.Wines and Vines Article

Today, according to the article, only 675 distributors service nearly 10,000 U.S. domestic wineries , and a lot of imported wine. That is probably not so good for domestic wineries, especially the smaller ones. According to the article, sixty percent of the wine distribution market is controlled by four warehouse and distribution companies; at $16 billion, the behemoth Southern Glazer’s accounts for just over half of the top four’s distribution revenue.

“The eighteenth article of amendment to the Constitution of the United States is hereby repealed.”

With one sentence in Section I of the 21st Amendment to the U.S. Constitution, Prohibition was repealed. With Repeal came national alcohol regulations and the three-tier distribution system: producer, to warehouse/distributor, to retailer. The federal government’s primary interest was to protect an excise tax revenue stream. The states had the same interest, but many of them also created alcohol legislation to restrict, not increase consumer access.

The three-tier system does a good job in controlling foreign wine imports. The picture for domestic wineries isn’t as clear. As the number of domestic wineries grows and the number of distributors shrinks, bigness becomes more important to the latter. Large national distribution companies have to meet certain volume sales quotas, and that benefits wine companies capable of producing a tsunami of wine.

Paul Franson, author of the article says that many wineries find it difficult in this environment to gain “effective distribution.” They have turned to other ways, one of which is to use brokers: individuals or companies that seek wineries and then place their wines with distributors that fit in size and expertise.

Another way for wineries to find their market is called bridge marketing. Riffing on the fact that the present system is known as three-tier, Franson calls this new way 3½-tier distribution—companies that often started out as importers then added marketing and sales for wineries have become supplemental distributor resources that mainly serve small to medium-sized wineries in warehousing, distribution and even billing and collections. These companies often deal with multiple distributors, placing wines where they might fit best. They appeal to family-run wineries from 1,000 to 100,000 case production area. Franson names four companies: Wilson-Daniels, V2 Wine Group and Old Bridge Cellars.

There is another way: wine sales from producer direct to consumer (DtC).

Regulations and tiers act essentially as walls. But both Prohibition and Repeal illustrate how things can change, and I suppose walls can become porous over time. Just about a dozen years ago only a handful of states allowed DtC, and only a handful of domestic wineries took advantage. Today, about 80 percent of states allow DtC. In 2016, DtC wine sales reached $2.33 billion, an 18 percent increase over 2015. According to ShipCompliant, three companies produce more than 60% of all wine made in the United States, but small wineries (5,000-49,999 cases per year) dominate DtC sales. Also, DtC growth has been outpacing wine sales growth in retail stores.

It is conceivable that in the near future wine distribution in the U.S. may be split between the present distribution system and DtC. If so, certain wineries and consumers would understandably be unlikely to shed tears over a diminished three tier system.

By Thomas Pellechia | March 6, 2017

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