For the smaller but growing winery, eliminating the middleman by self-distribution, where legal, offers several advantages over traditional three-tier distribution, including better margins, direct and immediate feedback from retailers and their consumers, and greater control of its brand.
Limitations of the Three-Tier System for the Smaller Winery
The smaller winery faces numerous challenges getting its wine to market. Some challenges are legal in nature. Others are the result of the market itself.
Legal limitations.
In most states not including California, three-tier distribution is required by law. A winery must sell its wine to a distributor, who in turn sells it to retailers and restaurants, as a matter of law. (California law is discussed below.)
Additionally, most states prohibit out-of-state wineries from selling their products directly to retailers and restaurants in the state. Despite this requirement, distributors are under no legal obligation to represent out-of-state wineries. Most distributors will require those out-of-state wineries they choose to represent sell them their products at a 50% discount off suggested retail price.
Market Limitations.
Several market factors are also in play:
According to winery and distributor sources, in 1995 the United States had about
1,800 wineries and 3,000 distributors. Today, there are more than 9,200 wineries and nearly 1,200 distributors. Distributor consolidation is often cited as a major challenge to the industry. The Challenge of Distributor Consolidation, www.winevineanalytics.com. Supply and demand have created a situation where the route to market is handled by a smaller number of large distributors, holding huge leverage over which wineries they choose to represent and at what terms. Very often, smaller wineries do not have the volume or reputation to attract a professional distributor.
Further, sales are trending lower the winery tasting room, resulting in reduced revenues from DTC sales. “Cracks in the Tasting Room Model” from Silicon Valley Bank’s 2020 State of the Wine Industry Report. DTC sales make up 60 percent of the average small or family winery’s revenue today, and nearly all that revenue is dependent on a consumer first visiting the winery’s tasting room. After many years of growing revenues, wineries are having difficulty growing their wine clubs, club cancellations are increasing, and tasting room visits are down.
Additionally, COVID-19 has had a devasting impact on DTC sales. According to a survey reported in Wine Business.com sales in March-April 2020 sales lost in the tasting room averaged 74.5%, despite creative new strategies to sell wine (e.g., curbside wine pickup; reduced shipping costs; special DTC promotions; etc.)
The Solution: Self-Distribution
Self-distributing, as the name implies, eliminates the middleman distributor. The winery sells directly to the retailer.
Self-distribution in California does not require a Type 17 distributor license from ABC. As long as the winery distributes only its own brands, the Type 2 Winegrower license is sufficient for self-distribution. By statute, a Type 2 license authorizes the sale of the winery’s products to any person holding a license authorizing the sale of wine and brandy, including retailers, and to consumers for consumption off the premises where sold. A Type 17 license would be required if the winery intended to sell products other than its own.
Advantages of Self-Distribution
- Improved Margins
Most wine distributors work on a 28-30% profit margin (2018 survey home.binwise.com). Self- distribution eliminates the middleman, meaning, the winery which distributes its wines through its own salesforce retains more profit compared to working with a distributor.
- Direct and Immediate Feedback from Customers
Distributors typically handle multiple brands, sometime hundreds of brands or more. Getting a distributor to give priority to a small winery’s brand can be exceptionally difficult when the brand is new or not one of the distributor’s larger sellers. With self-distribution, the winery’s own salesforce visits its customers face-to-face on a recurring basis, getting immediate feedback directly from retailers and their consumers. For the winery which self-distributes, there is zero risk of its wines being ignored or lost in the shuffle.
- Have Complete Control of the Brand and Message
A winery which self-distributes has virtually complete control over where and how its wine is sold. By comparison, once a winery sells to a distributor, where and how the wine is sold is the
distributor’s choice. The winery wanting to control its brand and message can better do so if it self-distributes.
Limitations of Self-Distributing
- High Start-up Costs.
The winery wanting to self-distribute will have significant labor expenses at the outset as it builds a sales team and pays for labor associated with shipment and delivery of its wines. The smaller winery can control these expenses and maintain it margin by distributing in local markets at the beginning (note Mixed Model example below).
- Not Legal in Every State.
- Not Legal in Every State.
The best distributors know their market and have important connections earned over years of operating in that market. They have a ready contact list and their calls to retailers are not “cold- calls.” They may be able to secure favorable shelf space more quickly than a salesperson for a small winery beginning to self-distribute. These limitations, of course, assume that a
professional distributor would be willing to represent the small winery’s brand and give it sufficient attention.
Mixed Model: A California Winery Can Have It Both Ways.
Self-distributing is not just for the smaller, growing winery. There are several examples of large, well-known high-end California wineries with mature markets, which self- distribute.
Some California wineries have it both ways, employing a “mixed model” of distribution. One such winery the author interviewed self-distributes (two-tier) in Northern California through regional sales reps employed by the winery and reporting to top winery management. These regional sales representatives have divided the Northern California region into four territories, with each rep selling into all retailer locations, both on-premises and off premises. Meanwhile, in Southern California, it distributes through a wholesaler/distributor in traditional three-tier fashion.
Winery management identified the same advantages of self-distribution for the winery as those identified in this post for the smaller winery not having a mature market: better margins, direct and immediate feedback from retailers and their consumers; and greater control of the brand and message.
The smaller but growing winery should consider eliminating the middleman and self-distributing.
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