The innovative marketing and brand experiences offered by the online technology of third-party providers (TPPs) can be an effective way for wineries and wine retailers to connect their product with their customers, expand markets and facilitate the sales of wine.
Many TPPs are online marketing services that allow consumers to connect with a product by tapping an app on their phone. The customer simply clicks on the app, selects the product and enters the credit-card information.
The TPP sends the information to the retailer who processes the payment and arranges for the delivery. Consumers get their products, retailers expand their markets, and the TPPs make money without having to produce, inventory or sell anything. What’s wrong with that?
The concern of the regulators is that while wineries and retailers that sell alcohol are required to be licensed, TPPs are not.
When TPPs started proliferating, the California Department of Alcohol Beverage Control (ABC) issued an advisory in 2011 setting out clear guidelines for licensees. The guidelines concluded that the licensed seller (the winery or retailer) is ultimately responsible for the actions of the TPP and that it is, therefore, in the best interests of the licensee to make sure the service provider understands the rules before entering into a contract.
The consequences of not paying attention can be serious, including in some cases the filing of an accusation by the ABC against the licensee.
COUPONS, REBATES AND DELIVERY APPS
There are now many ways in which new technologies are making sales and marketing very efficient. For example, the instant redeemable coupon (IRC) is the equivalent of cash given by the retailer to the consumer at the point of purchase, which is then processed through the retail account and ultimately paid by the supplier.
In effect, you could potentially walk into a store with just a handful of coupons and walk out with a bottle of wine Of course, the conditions on most coupons prohibit multiple coupon redemption on one particular product.
In California, it is still lawful for suppliers to provide consumer IRCs through retailers for spirits, but as of Jan. 1, 2017, it is unlawful for suppliers to provide them at the point of retail sale for beer and wine.
“Where there’s a law that prohibits what has become normal supplier marketing activity, there’s often a workaround,” says John Hinman, alcohol regulation law specialist and founder of Hinman and Carmichael LLP.
In comes the manufacturer’s rebate, called a mail-in rebate (MIR). The consumer may mail a coupon in to the manufacturer and receive a check for a particular amount by return mail. The MIR is still legal, but the IRC isn’t.
Now a technical service provider comes in and develops an app to instantly process the manufacturer’s mail-in rebate.
“This may or may not be legal,” says Hinman. “The developers making the apps may not necessarily understand the rules, nor care about them because they don’t have licenses at stake. But that fact that technology is being used to work around the system, and satisfy the spirit of the law because the money doesn’t go through the retailer, is an elegant solution to a vexing marketing problem.”
WATCH HOW THE MONEY FLOWS
TPPs are connectors. They can’t sell alcohol. They can’t make decisions about pricing. What they can do is charge fees. They can, and do, often string together a set of fees that equate to full compensation for their services.
Katherine Philippakis is a partner with Farella Braun + Martel LLP and chairs the firm’s Wine Industry Practice Group. Farella is a law firm with offices in San Francisco and St. Helena that has a long history representing those involved in the California wine industry. She works frequently with the firm of Hinman & Carmichael, of which John Hinman is a founding partner. Hinman & Carmichael is a boutique San Francisco firm that specializes in regulations related to the production, distribution and sale of alcoholic beverages.
Vine Notes is a periodic column on wine industry topics such as finance, law, accounting and marketing.