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Wine Industry Arguments – beyond natural dissension?

I’ve been holding off on commenting about HR5034* for some time. I’ve always been of the opinion that it is a big issue for drinkers, wineries, online retailers and distributors, but not so much for small wine retailers (this blog’s readership).

(* bill in Congress, Comprehensive Alcohol Regulatory Effectiveness, that further restricts distribution of alcohol).

However last weekend I read one of the best discussions I’ve seen for some time in the Wine and Spirits Group forum in LinkedIn (restricted to members of the group, but accepts all join requests).

A great forum discussion is like a great dinner party discussion

Cooking with Geeks

Where people with conflicting points of view argue back and forth, sometimes in a friendly way with an agreement being reached (my preference), sometimes with people agreeing to disagree (a second best), and unfortunately sometimes with violent disagreement (something I like to avoid).

This discussion showed all these things. My feeling though is that HR5034 is a “lightning rod” for lots of other wine industry issues. I’m not to saying that HR 5034 is a trivial issue, it’s not, it’s important, but I think there are a lot of issues swirling around in the background.

This post is all about those Issues

Here’s how it started…Linkedin photo

The discussion was created by Richard McMongale who asked, the seemingly simple question,

Who supports the current three tier system?

Richard use to work for Southern Wines and Spirits in South Carolina, but seems disillusioned with Three-Tier.

He goes on to say,
For those of you who are not aware of the three tier system, the general idea is that the producer must sell to a distributor who must then sell to the retailer and retailer may sell to the end consumer. A large number of states operate this way. This system sometimes enables distributors to have exclusive rights to market their product within a geographical area, so that there are not two distributors of Jameson competing against each other for example. Personally, I strongly believe the system is complete flawed and no longer works in our current times. However, I was curious to know what others thought.

The resulting comments were from some wine personalities I greatly admire such as Tom Wark (top wine blogger, PR man and lobbyist), Paul Mabray (DTC and wine technology commentator at vintank), and Debra Meiburg (MW). Some other great LinkedIn contributors such as Mark Norman (seems to run most of the wine groups on LinkedIn), Armin Pfleiderer (retailer), Tim Jacob (wholesaler), Barry Downing (broker), Tom Schaad (retailer), and Lauren Ackerman (winery). As well as some others that I’ve not seen before but will be paying more attention to such as Steven Schattman (distributor), Terry Murphy (retailer), Bob Rohden (consultant) and Christian Lane (vintner).

For the sake of readability I won’t source each comment individually but attribute them all generally now. There were some other great comments as well, my apologies if I haven’t mentioned you.

The discussion mainly covers the evils of Big Co

Large retail chains, distributors and wine companies. From discounting to service to anti-competitive behavior. Distributor effectiveness in general is questioned by some, which leads to some smaller distributors giving as good as they get.

And of course no one likes the lobbyist power of big distribution (despite some preferring Three-Tier).

The interesting yet saddening thing to me is the “artificial” tension in the wine industry

There’s a natural tension in business

Financially it’s like any business i.e. profit = volume times margin while minimizing fixed costs. Natural tension is mainly in negotiating prices. You want higher prices and lower COGS, while your customers and suppliers want lower or higher prices respectively.

So there is always going to be reasonable disagreement with customers and suppliers.

Arguments Yard

However the wine industry seems to have lots of “artificial” tension

Here are the key ones that I observe (and are not necessarily my opinion).

Wineries (and retailers) believe that distributors are an unwelcome and inefficient part of the value chain protected by legislation because they:

  • have a state gatekeeper role by regulation not because they offer value-for-money service (or any service)
  • refuse to represent wine brands thereby effectively blocking them from entering a state market
  • demand geographical exclusivity by law or by agreement but do not service it well

In particular big distributors:Old Potato Distributor Building

  • have unethical influence through lobbying and political donations
  • provide a poor distribution service – no time for small brands as they focus on the volume brands
  • keep growing in power through consolidation

Distributors on the other hand believe:

  • they provide great value through logistics, marketing, sales, credit, accounting and administration assistance.
  • provide expertise and efficient category support vs a retailer doing it all themselves.
  • reduce the number of reps a retailer sees

Small wine retailers in particular are concerned about large wine companies and large retail chains selling “bland, bad and cheap wine” – and that this destroys profitability in the wine industry.

In particular their is a strong concern about large retail chains receiving large discounts (and free product) through volume deals. This destroys the price points that are arguably at the heart of small wine retailer sustainability – high volume spirits, beers and mainstream wine – leaving small retailers with low turnover and costly stock.

Indeed there are accusations of anti-competitive practices by the big Distributors, Wineries and Retailers. It has been suggested in the LinkedIn discussion, that big companies will purposely take on or buy up wine brands to reduce competition in a wine category, rather than to increase the brand or category sales. Which is fighting talk!

It’s not just the big guys though

Small wineries are accused of seeing small distributors as a stepping stone to big distributors. As soon as the small distributor has built up enough volume through “sweat and tears” then the supply contract is moved to one of the big distributors. The small winery, it is said with a fair amount of schadenfreude, then faces the issue of being a small fish in a very large pond in the big distributor’s book.

Small wine distributors say that they provide better and more personal service to retailers. And that they need more support from wineries in terms of simple things like shelf talkers, wine glasses and regular in-market visits which they don’t get.

However some wineries are having great success with Direct to Trade (and Consumer) where that is legally allowed. They are using technology and a personal approach with the trade to make this a success. The implicit suggestion being that distributors are not needed if a winery is prepared to do the work itself.

Consumer Demand

Wineries point out that there is unsatisfied consumer demand, Americans want access to all the wine brands available in America, not just a distributor selected few.

But there is also some speculation as to whether consumers care about brands at all. A feeling is that they want a particular varietal and are happy with whatever brands the retailer stocks (at their price point). In contrast one story is given of a wine retailer that was determined not to sell wine from the big wine companies. In the end it found it did need the wine brands, I’m presuming because of consumer demand.

Actually there is market research (I can’t help myself but jump in with an opinion even if I’m trying to keep to only other’s opinions 😉 ) that suggests that brand loyalty depends on the consumer segment and price point. But what matters for this post is not wine consumer behavior facts, but the fact of differing industry opinion and perception, and resulting tensions.

Logistics

One commenter gives an opinion that 3 tier is best for large volume wineries and Direct to Consumer (DTC) is best for low volume wineries. He says big distributors are set up for high volume logistics so they should take care of the big wineries and the small wineries should be able to use their “natural” logistics channel – DTC.

The Legal and Moral

Dishonest coffeeOn top of all this there are Legal and Moral issues that also come into play covering:

  • Temperance and moral alcohol issues behind regulation
  • Free market principles of trade
  • Job losses from restructuring Three Tier distribution
  • Tax collection issues
  • Legal points on constitutional interstate commerce vs state alcohol regulation
  • Legal points on state vs federal law

Which I’m not going to cover here (as I don’t think I have anything to add to this part of the debate).

The Distrust

There is a lot of distrust out there, in particular with larger companies. Not just ordinary tension you would expect in any industry, not just re HR 5034, but a montage of conflict in all parts of the wine value chain.

Is this the sign of healthy debate or an industry in distress?

Do you agree, or what have I missed?

Photos courtesy of Cooking for Geeks, LinkedIn- Photo, Arguments Yard, Potato Distributors, I hate dishonest coffee

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