A client began our consulting session with the news that he’d made his first sale. I had not spoken to him in several months, having helped mainly with label approvals and pre-import advice, so I was glad to know he had made progress and looked forward to helping him further with his new questions.
This client’s company is licensed as both a US importer and a California distributor. He and his partner had decided to start small, as many importers do, and concentrate on their home state, establishing a foundation that could be used to demonstrate to distributors in other states that their portfolio had traction. So far so good.
The wine had just arrived in the U.S. and the sale was five cases to a discerning buyer at a high profile Los Angeles store. Therefore, most importantly for today’s subject, he had made the sale as a California distributor. Secondly, it was to a discerning buyer at a high profile store. Thirdly, the sale was five cases. All of this would indicate the wine was very good and the pricing was excellent.
It sounded like a promising start for a new importer’s unknown brands and as a result of this news, I asked about his pricing structure and what discounts he was giving for volume. He revealed that he had not considered discounts, nor had the retailer asked for a one. This really surprised me. As a rule of thumb, in California there is a “front line” price for one case and then varying reductions are given at, e.g., three and five cases or five and ten. Further discounts are usually available with even greater volume. Variations on this would generally be the norm in all states. I would have expected the retailer to at least ask about discounts unless the wine price had been expressly indicated as “net” (no discount).
Through further examination of his pricing I discovered that they were only taking one margin. In other words, they had marked up the wine only at the importer level, instead of taking it further to the wholesaler pricing needed to sell to retailers. Their rationale was that they were both importer and wholesaler and okay with the profit at that price. After all, they had made a good sale, hadn’t they? No, this was catastrophic! I had to break the news to him that no wonder the buyer was so happy with the pricing, didn’t question it and bought five cases. The only good news in all of this was actually that the wine must be good quality for the buyer to have made the purchase at all. After all, he wasn’t going to buy bad wine at any price. Unfortunately, with that pricing strategy they would not have a long-term profitability model, or would eke out very limited distribution in their immediate area, and only if they were delivering the wines themselves and continue to make all the sales. They would never be able to:
- sell to a distributor in California, should they choose down the road; after all it’s a big state and they can’t cover it all on their own
- hire or pay for salespeople or brokers to provide more sales
- sell to a distributor in any other state; with the transparency of the internet, any distributor could see that the retail price for the wines made by the importer in California would be much lower than they would have to charge to sustain the business model in their respective states
- build their California distributor infrastructure, because there was no room in this limited margin
An importer margin is generally 30-35% and designed to cover marketing, travel to the various markets, samples, incentives, warehousing, licenses, brand registrations, out-of-state brokers (if necessary) and other expenses accruing to an importer selling to and supporting distribution in a few states or nationally.
A wholesaler/distributor margin, when licensed to sell within your home state, is generally 45-50% and must fund warehousing and delivery, state excise taxes, local taxes (if applicable), salespeople or independent brokers, state licenses, lots of samples, discounts on pricing, promotion and in-state travel.
It is evident that the new importers who take this one margin approach are doing so in a well-intentioned effort to be competitive and with the assumption that they will still have a profitable business without gouging and being greedy. This is commendable but misguided. As an importer, the incentive to distribute within your own state is that sales can often be made faster and more directly to a retail account than to a distributor outside the state. For a new importer that has spent months working through licensing, compliance and logistics, immediate gratification feels very good. But by taking on the responsibility and jeopardy of two different levels of the business, those two margins will allow you to cover all the expenses of two businesses, both built-in and unforeseen. With one margin expected to do double duty there’s no way this will be profitable. As an importer and distributor:
You are entitled to both margins. You need both margins.
But further, and perhaps most importantly of all for the future of the portfolio, you are preserving a retail price that enables any distributor to buy from you at FOB and sell at Wholesale to their customer, maintaining a retail price within their state that comes close to the retail figure in your state. With only one margin, a retail store in California could be charging $9.99 for a wine that will sell for $15.99 elsewhere. This is untenable and no distributor will carry wines with that disparity.
It’s not the first time that someone has come to me and told me that they were starting out their wholesale business on one margin, but I hope it will be the last. Not all new importers will succeed, mostly through insufficient groundwork or lack of sustained effort. I would hate to see anyone, my client or not, to fail on the basis of something so rudimentary and fixable.