Have you talked to your Wholesaler about Interstate Shipping?
Posted on | February 12, 2010
Written by | Ian Griffith
Have you talked to your Wholesaler about Interstate Shipping? We have a unique view of the wine industry at Beverage Media in that we work with retailers, wholesalers, importers and wineries to support their businesses. Of these industry players the mostly maligned tends to be the wholesaler who is hidden from public view and appears to operate in mysterious ways.
Wholesalers or distributors (interchangeable terms in this article) fill an important role in the sale of wine and spirits in the US. They not only manage the movement of cases through the supply chain, they have salespeople on the street selling product, and they register brands and pay excise taxes. This is the middle-tier of the 3-tier system, created by the 21st Amendment to give states control of the sale of alcohol.
Internet sales of wine have been redefining the limits of state control by enabling direct shipment to consumers that by-pass the wholesale tier. Wineries and retailers want access to a national market, but wholesaler through their national association WSWA have been arguing against this liberalization of trade. Wholesalers see direct shipping as the narrow end of the wedge and are aggressively defending their special position as the state’s gatekeeper. If wineries and retailers are permitted to ship direct to consumers, then they expect the next battle to be over whether wineries and other drinks suppliers can sell direct to retail. This is the real threat for wholesalers and would undermine their control of product in the state.
The legal campaign to increase direct shipping access for retailers has been coordinated from California where retailers can already buy direct from wineries, and where the large wholesalers aren’t as important to a store’s business. At times the rhetoric on both sides of the argument can seem extreme, but there is a growing anti-wholesaler, anti-3-tier narrative that suggests wholesalers add little value to the industry.
From an East Coast retailers perspective a different view prevails of the wholesalers’ role; store owners often see the success of their business depending on their relationship with their wholesalers. Even beyond the day-to-day interactions of buying product, retailer associations call on wholesalers as an ally when they need help with political campaigns. In recent years wholesalers have been generous contributors to campaigns that blocked wine sales in grocery stores, both in NY and MA. These are family owned operations, some very large, that have been active in their communities for decades. Understandably, retailers in these states are less willing to challenge their wholesalers head-on.
In the past month, Massachusetts became the latest state to lose an appeal that would have blocked direct shipping from wineries. In this state, retailers face a ban from “exporting” wine and many have been warned by the ABCC to stop shipping orders to other states. Faced with the prospect of wineries shipping into the state, there has been a shift in attitude that may lead to a reversal on the export ban for retailers. A change would likely allow MA retailers to ship out legally for the first time, but without opening access for out-of-state retailers.
Does this discriminate against out-of-state retailers? It probably does, but the courts are undecided over whether that is unconstitutional. For instance, in reversing a decision that allowed retailers to ship to Texas, the Fifth Circuit Court of Appeals recently ruled that national markets in the lower tiers (retail and wholesale) make it impossible for a state to protect the traditional three-tier system”.
When retailers ship wine across state lines, that wine was likely purchased from a distributor. Would wholesalers really be that worse off with a national market for retail wine sales? It could happen that trade imbalances develop between states, but having strong retailers in a market would be the best insurance against lost sales. As retailers grow stronger and more competitive with online sales, their wholesalers stand to benefit from this business.
While the legal battles are a necessary part of the campaign to open states to retailer shipments, there are relationships on the ground where retailers can make their case to wholesalers. Rather than demonizing the wholesaler, retailers would do better to make the case that both are better served by allowing interstate shipping.
Comments
11 Responses to “Have you talked to your Wholesaler about Interstate Shipping?”
February 12th, 2010 @ 8:28 pm
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February 13th, 2010 @ 12:55 pm
While I would not argue that distributors provide no value, I do think that most of the arguments for maintaining the three tier system still seem to stem from an anti-consumer and protectionist position. It basically boils down to limiting the ability of the free market to operate like it does in other arenas.
February 13th, 2010 @ 3:17 pm
Thanks for the comment Ben. I should have realized that I might find myself defending the wholesalers even though that was not my intention. I don’t think there is any question about whether the 3-tier system will be maintained for the foreseeable future; the Supremes were pretty clear in the Granholm decision that the states have control of the sale of alcohol on their turf. It is up to each state whether they allow winery or retailer direct shipments, or require that wine moving through the state at least bump the dock of a state-licensed wholesaler.
I see SWRA has filed for a review of the 5th Circuit decision, it seems like a long shot but it may produce a new decision for Texas.
February 13th, 2010 @ 4:31 pm
Sorry, didn’t mean to enter attack mode or anything. Guess I’m still stinging from the Texas decision.
I do think that your post does a great job of encouraging deeper thought on the issue, and you are right about the 3-tier system being here to stay, at least in the short term.
Very informative and interesting post.
February 15th, 2010 @ 10:46 pm
I’ll agree that in all states the distributors that actually do the hard work of promoting brands, selling and delivering wine, and working hard to maintain relationships with retailers and restaurants will always have a place in an open wine market. It is the same for any product – those who have cracked the distribution game will be compensated for being competent marketing partners.
This is not usually the case however in states that block the sale of wine directly to retailers or restaurants. Most distributors rely on their monopoly to maximize profits compared to work. It is much more profitable for them to sell 1,000,000 cases of a certain wine and block the sale of other wines. The result is little consumer choice and a lack of access for most wine producers in a particular market.
So, I think the question is not whether or not the opening up of markets for direct sales will actually provide a benefit to wholesalers in general, but whether or not most of the protectionist dinosaur wholesalers that are currently emptying their coffers to fight market-opening legislation would actually be competitive in an open market?
February 16th, 2010 @ 3:51 pm
Thanks for the comment Tim. I’m sure there are distributors who act to protect their market share at the expense of small wineries and consumer choice. However, they also need to support the growth of their key accounts and could be more open to a strategy that supports local growth through interstate shipping. I’m hopeful changes in MA will demonstrate this.
February 24th, 2010 @ 9:15 am
Great breakdown of an industry and supply chain that is so incredibly convoluted. It will be interesting to see the potential changes that could develop in coming years – though like you mentioned, the 3-tier system is here to stay for the foreseeable future!
February 26th, 2010 @ 6:31 pm
Ian:
This is an interesting and thoughtful article. But I am not surprised others felt you were defending wholesalers. So did I. I work for a California Retailer, and we have active and effective partnerships with our wholesale suppliers, both large and small. In fact, many California wineries work through them, even though they are not required to do so.
It is not a zero-sum game. But wholesalers who feel they have the right be gatekeppers and restrict consumer choice are fighting against the tide of change, IMHO. If I were Glazers and Republic, and controled 90%+ of the Texas market, I would be trying to prolong my Duopoly rents as long as possible. But that does not make it fair to the consumer who can see wines they want to buy, but not get them becuse their local wholesaler chooses not to carry them.
We are in a state where each grocery store sells wine, beer and spirits. Yet there is a vibrant panoply of family-owned businesses selling wine. I work for one such, with three stores and a website. I get very tired of hearing the parade of horribles used to keep wine from grocery stores in other states such as NY. Living in a state who made that choice did not in any way spell doom for us independent family-owned retailers.
The great thing about facing competition is that it makes you better!
February 28th, 2010 @ 12:50 am
Keith, I was having difficulty reconciling the demonization of wholesalers that we see online with the day-to-day practice of the trade on the East Coast. Instead of defending them I was trying to describe a more complex relationship between retailers and wholesalers.
There is anxiety at many levels in this industry when it comes to structural change. We need to balance being entrepreneurial while minimizing the risks to our business. The regulatory environment of a state largely defines the playing field for retailers and wholesalers, and can promote risk aversion. It is a tough argument to make that a business needs to invite more competition to grow stronger. I suspect we are watching an industry resist that argument until the last possible moment.
March 1st, 2010 @ 3:15 pm
Ian
What complex relationship do you refer to between retailers and wholesalers?
The one where wholesalers support retailers in fighting against the will of the people and keep wines out of supermarkets?
I am not sure I follow that angle.
I have great respect for wholesalers. I have built many great personal relationships from my business relationships. Nevertheless, the three tiered system as we know it, is a dinosaur and is begging for improvement. Supporting a model of business that is nearly 100 years old, in this day and age, is not sensible, to me.
March 1st, 2010 @ 6:11 pm
Daniel, thanks for joining us.
The grocery store issue is an example where retailer associations have received support from wholesalers on tackling a political threat. It seems to me, more often than not, the retailer and wholesaler act as allies rather than adversaries. They work to preserve productive relationships rather than threaten them.
People’s argument with the 3-tiers is mostly about the state mandated role of wholesalers, not with wholesalers per se. As you yourself describe the relationships on the ground are often strong. I’m proposing that retailers work those relationships to help open more markets for interstate shipping.