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.
Other large producers in the market are watching the move with interest. There are skeptics, but if Treasury Wine can ultimately build a successful structure, others will likely follow in those states in which it is permissible and where it makes sense. It’s possible this model will put the company in an advantageous position if other states make changes to the three-tiered system’s regulatory requirements over time.
SLOW AND STEADY CHANGE
With new models emerging, producers should watch Treasury Wine Estates’s approach and distributors should look for ways to create more flexible models. To the degree that these new structures are successful and create alternative structures for producers, they will create pressure for others to adjust their models.
The examples cited here by themselves don’t signal a massive restructuring of how the current system works, but it is clear that there is increasing demand to test new models and revisit the regulations. It’s possible that states will continue to adopt laws in favor of direct-to-consumer or direct-to-retail, and wineries should be prepared. Producers will benefit from more distribution options, such as a more flexible range of services with varying fee structures, and technological innovation.