Over the past decade, distributor consolidation has jarred the producer-to-wholesaler ratio, and this evolution is testing the long-standing three-tier system. With many more wineries to a shrinking number of distributors, it is becoming increasingly difficult for small producers, in particular, to get their wines to market.
Producers and many smaller retailers are pushing for a change with the three-tier system. Developed after Prohibition, it legally mandates separate roles for producers, wholesalers and retailers of alcoholic beverages in the U.S. market. Wine producers are feeling trapped with limited options, because you can’t get around the fact that regulatory requirements necessitate a distributor.
In a recent article by the senior global beverage strategist at RaboResearch, it is noted that wholesaler margins are higher in the U.S. than in other markets, in part because U.S. wholesalers typically include sales and marketing services that go beyond the basic delivery service. But small producers — if they can find a wholesaler — often feel they don’t get the marketing support for which they pay.
Large suppliers — and retailers, as well — believe they could create a more efficient system if they were not forced to go through a wholesaler, or if they were at least able to negotiate variable levels of services with different corresponding fees.
These frustrations are permeating the industry; however, strategic moves are being made by players along the value chain that may help the three-tier system adapt to the needs of the market in the coming years.
TESTING NEW DISTRIBUTION
In the RaboResearch article “Wholesale Change,” Stephen Rannekleiv points out how adaptations are taking place in the traditional distributor channel. On trend with other product industries, innovative technologies and direct-to-consumer retailing is shaping an evolutionary exploration of new models and potentially an eventual adjustment with the regulatory framework of the three-tier system.
Some of the change happening in the market is being driven from within the wholesale tier itself. New models, such as Liberation Distribution (LibDib), create opportunities for small brands that were previously kept out of the market by their lack of access to distribution.
LibDib is essentially a technology platform that connects small brands with retailers and on-premise operators that are looking for something unique. The LibDib model has some clear limitations in its ability to service brands that achieve scale, but it is an innovative model that satisfies a tangible demand in the marketplace, and, as such, expect it to continue to evolve and expand.
In addition, this and other technology-based solutions should emerge for producers and retailers to get around the fact that there are fewer wholesalers. This model opens doors for many small-scale producers to have more control over their sales and marketing.
Other changes are being driven by producers. Treasury Wine Estates recently announced that it was making profound changes to its route to market in the U.S., using direct distribution to key accounts in some markets where regulations allow, creating a hybrid distribution model in Florida, and changing wholesalers in a number of others in order to gain more direct access to clients and assure strong support for its brands.
While the motivations and potential upside of Treasury Wine’s latest move are clear, the risks of this move should not be underestimated. The company is trying to develop a completely new distribution system, even as the wholesaler it terminated will be actively trying to reposition new brands in the market in order to fill the void.
Vine Notes (nbbj.news/vinenotes) is a monthly column by Rabobank, Farella Braun + Martel and Heffernan Insurance Brokers.
Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, N.A., member FDIC. The content, views and opinions in this article are based, in part, upon research produced by RaboResearch Food & Agribusiness, a unit of Rabobank Group. The information contained herein is intended for general educational purposes only and is not to be construed as legal, tax or financial advice. Please consult with your own legal, tax or financial adviser for guidance with your own particular circumstances.