Chain Store Sales – “Back Door” Distribution Still Relies on the 3-Tier System

08 Friday Sep 2017

Posted by in Wine law regulations

≈ Leave a comment

Tags

, , , , ,

chain store photo

The 3-Tier system has been explained at length in my books and online by others so I won’t spend more time here with the same thing. But it remains a hard concept to grasp, especially when you’re new to the US alcohol business and perhaps think there are exceptions, such as when an importer is selling to chains.

Take this example. The importer has contacted a national buyer for Sprouts, Lidl, Whole Foods or one of any number of large chains. Even though an importer is headquartered in Ohio, e.g., and the chain is a retail operation with the buying office in Atlanta, your presentation can be made to the chain buyer, who can then decide to place the wines in stores across 40 states. However, most importantly, the importer is not directly selling to the buyer, because the importer is not allowed to break the 3-Tier barrier of (1st tier) importer selling directly to (3rd tier) retailer.

When a chain store has locations in different states, you would think that an exception could be made to allow a purchase to be generated and distributed from a central location. It sounds reasonable, but the 3-Tier system has remained firmly in place since prohibition through vigorous lobbying efforts by influential state wholesalers, effectively preventing any crossover from wholesale to retail. Therefore, as the importer you have the option of:

  1. Using your existing distribution network to distribute to the chain’s stores, if you have distributors in each state in which the stores are located and where the buyer wishes to place your product
  2. Finding and appointing a new distributor in each state, which may be possible if the potential sales are large enough and therefore appealing to the new distributor
  3. Using the chain’s own distributor network relationship to satisfy the sales and 3-tier requirements.

The last option is the most common. The retail chain has presumably done this numerous times and already worked out the payment and logistical details with the distributors to make it a smooth order and delivery process. Plus, the chain is definitely realizing a pricing advantage from this relationship by negotiating a vastly reduced markup by the distributor. The retail chain may mark up the wines to be on a par with other retailers around the country, which allows them a greater profit margin. Or they may sell the wines at a considerable discount and still make a reasonable profit. Discuss the chain’s objective with them beforehand, so you can decide if this dovetails with your national pricing strategy.

To recap and expand on this concept:

  • All sales from an importer must be made individually to a licensed distributor in each state
  • No sales shipments can be made from an importer in CA direct to a retailer in any other state
  • If a chain is involved with stores in multiple states, buying may be a centralized decision, but each one orders product independently
  • Product is picked up by a state distributor’s trucker at the importer’s warehouse and taken to the wholesaler’s warehouse in their respective states
  • Some states have a workaround that is called a “bump the dock” state; in other words, the shipment can arrive at the dock of the wholesaler and not actually be unloaded, but receive paperwork showing that it arrived at the wholesaler location before going on to the retailer
  • Product must be delivered to retailer(s) of each individual state by the wholesaler
  • Depending upon the state laws (and they all vary) a retailer may have more than one store and the wine is delivered to a central store or depot for delivery to other stores from a centralized location. Again, for emphasis, this applies only to that one state and not multiple state locations.

I have been asked often which price list an importer should use when quoting to a retail chain. That’s a very fair question. After all, the sale is actually to the distributor which will, by the way, be the one to supply you with a purchase order and they’ll be the ones paying for the wine. But up to that point the importer may not have even met the distributor. All proposals and wine selection are conducted with the retailer. Please do not lose sight of the 3-tier system. Make no mistake that this sale is made from importer to appointed, approved, licensed state wholesaler.

As for all the other factors that may come into play in this transaction such as discounts, volume, promotions, market assistance, or market visits to educate sales staff, ongoing purchases, number of states involved and so on, this is going to depend on the chain. And if you get to the point where a chain is interested, they will advise you on their process and expectations. It is then up to you as to whether this is doable.

It’s Not All About Wine – the Ins and Outs of Beer Labels

27 Sunday Aug 2017

Posted by in malt beverage

≈ Leave a comment

Sirena e

For my entire importing career my focus was on wine, including sparkling and fortified which have some unique characteristics when it comes to labeling and licensing. But these are basically minor variations on standard wine principles. When I started submitted malt beverage labels to TTB for approval for clients, it opened up a whole new world of US labeling requirements.

Let’s face it, I’m a geek when it comes to this stuff. I really do love knowledge, even when it involves Alcohol Tobacco Tax and Trade Bureau regulations for US compliant labels!  I had no idea that almost all the rules were different and in my nascent malt beverage label submission journey I was on a first name basis with the TTB agents I spoke to on a regular basis.

Here are some of the requirements you won’t find on wine labels:

  • All net contents must be in US measurements, e.g. “1 pint 9.4 fluid oz”
  • Non-alcoholic beers do not require label approval but they do require formula approval.
  • Alcoholic beer requires label approval no matter what ABV (it is not required for wine below 7% ABV)

SpirituAle e

Ingredients must be listed. Some of them are approved as additives and some are not. There is an entire list of approved ingredients that include items like huckleberries, kale, grains of paradise, galangal root, Padang cassia and elder flowers. There are other ingredients that are considered by the FDA as GRAS (generally regarded as safe) which doesn’t sound terribly reassuring, nor particularly appetizing. I’m not at all sure what they would add to the beer either, other than roughage. This is only a fragment of that esoteric list:

  • Oak cork
  • Maidenhair fern
  • Blessed thistle
  • Iceland moss
  • Buckbean leaves
  • Simaruba bark
  • Virginia snakeroot
  • Angola weed

I discovered recently that TTB will not approve, without a detailed formula, items like Malagueta pepper or just “spices”. They will allow pepper, black or white, but required an explanation of “pink pepper” and honey ale is fine but they recently balked at “honey of Sicilian Black Bee”.  It does allow tea, but not kombucha.

Many beer label issues share a commonality with wine, such as the government warning and a defined class of alcohol, e.g. red wine or Shiraz for wine and ale or Belgian-style ale for beer. But the differences define the procedure. With TTB, there is no “close enough”; it is correct or incorrect, approved or rejected.

The craft beer industry has exploded in the past few years and along with it, pushing the envelope on fermentation processes and innovative ingredients, which is great for the consumer but a bit of a minefield for COLAs (Certificate of Label Approval). In my 25 year importing career I’ve never had to submit a formula for a wine. In the past year, I’ve submitted three for beers. TTB is constantly updating their “approved ingredients and processes” lists as the agency sees what has become mainstream, but it is moving too fast. So for now, formulas, detailed explanations and reworking foreign labels to comply are the norm.

BlackHopSun e

*   *  *

The steampunk labels in this post are some of my favorites. Used by permission of the brand and the artist.

Malt Beverage Brand: Della Granda | Label Artwork: Fabio Garigliano

Take All the Margins you Deserve – The Only Way to Run a Successful Wholesale Wine Business

18 Friday Aug 2017

Posted by in margins

≈ 2 Comments

Tags

, , , , ,

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.

profit-margin-pie-chart-money-revenue-growth-38607407

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.

Pricing Your Imported Wine in an Era of Disruption

12 Saturday Aug 2017

Posted by in margins

≈ Leave a comment

Tags

, , , ,

profit margin error

Using long-range planning to price your wines is paramount to your business model, no matter what the political climate, and yet I have found that new importers often neglect this aspect. Most are very aware of getting the importer markup and margins right in the beginning, of course, but neglect to think long-term. It’s understandable. Those early days of logistics, compliance and business setup can be overwhelming.

Currently, the US Dollar has been getting weaker in the past few months, notably against the AUD and the Euro, after several years of favorable rates for imports into the U.S. This is what prompts me to address the subject of margins. In the U.S. there is a new administration and a president who says he wants a weak dollar to help US exports. However, a weak USD is exactly the opposite of what an importer wants. In addition to the state of affairs in the U.S., globally, Australia has a strong economy and instability within certain European Union member countries has created some fluctuation in the Euro. A looming Brexit has also taken its toll.

During the recession, imports of many wines slowed, especially those in the mid to upper tier, as disposable income became less available and importing of all wines became more expensive and therefore less viable. A significant factor was the very weak USD. During that time, the AUD was on a par with the USD, i.e. $1 AUD to $1 USD, and the Euro was in the 1.4-1.6 range. Are we heading into that realm again? I have no idea, but we appear to be on an upward trajectory and this could spell trouble for your imports if you haven’t planned accordingly. By that I mean built a cushion into your FX rate so that if you’re currently buying wines at 4 Euros a bottle, e.g., and the FX rate is 1.2, convert the wine to USD using a slightly higher ratio, such as 1.3 or 1.35 so that if rates go into that territory you’ll still have a reasonable markup and profit margin. In other words:

Purchase at 4 Euros = $4.80 at 1.2

  • This FX rate prices the wine on the shelf at approximately $16.99*

Purchase at 4 Euros = $5.20 at 1.3

  • This FX rate prices the wine on the shelf at approximately $18.99*

You have to decide whether your particular wine can sustain this type of increase in retail on the shelf and what the “sweet spot” price should be. Does it take it from a different category, for instance from < $10 to mid-tier pricing? Is it in line for that style, region, and quality and against your competition? Regardless of the FX rates and your normal markup, this is always a juggling act in the marketplace. The bottom line is that while it is optimal to offer wines that “over-deliver”, especially against such a crowded field, you can’t afford not to make a profit based on an unsustainable margin.

It is also important to note, that while you can and often should offer volume discounts and incentive programming to your distributor, once you set your wines at a standard lower price point it is much harder to increase them later, except as a natural cost-of-living adjustment or in instances where it is warranted and with notice. If you are able to build in a cushion, use that for early marketing. Later, if the foreign currency goes up you’ll still make a profit and if it stays the same or goes down, the money can again be used for promotion.

Can your supplier support a lower price to you in the event of an increasingly squeezed margin? This might be built into your initial contract or agreement with them. Before I transitioned into full-time consulting, teaching and writing and away from importing my own wines, we were deep into the worst of the recession and one of my wineries gave me a discount on each invoice of an additional 5% to offset the exchange rate as long as it maintained above a certain level. This was always noted on the purchase order.

The point is that nothing can eat away at margins and erode profits for your imported wine and spell disaster for your business than a strengthening foreign currency or a weakening U.S. dollar if you don’t factor this in from the beginning and keep your eye on the ball.

 

*retail around the country will differ for a variety of reasons, none of which are in your control, but this is used as an illustration of realistic examples of differences in FX rate.

Tied-House Trouble

07 Tuesday Apr 2015

Posted by in Wine law regulations

≈ Leave a comment

Tags

, , , ,

Tied-House rules are the foundation of the U.S. wine industry regulations, at both federal and state level. They permeate every activity that involves the commercial making, importing, distribution, sale and consumption of wine. As antiquated as they are, the federal and state licensing bodies still oversee their adherence as rigidly as a feudal lord once managed his fiefdom.

Despite that, Tied-House violations that relate to “providing something of benefit”, from a wholesaler to a retailer, seem to occur frequently, judging by the number of issues I observe or have brought to my attention by questioning clients. It’s not surprising, really. With the proliferation of social media in general, and wineries and importers who are using social media to promote their wines, in particular, this very public arena is fraught with risk. Additionally, the law isn’t all that clear until you run afoul of it. And then it’s often too late.

Wine Tasting sign

Although this is a confusing subject for most, I thought the media attention given last year to a rash of offenses relating to a wine tasting event in Sacramento, CA, sufficiently addressed it. News outlets reported on it, as did several blogs. But I’m still seeing clear Tied-House violations in tweets, Facebook posts and, at least in theory, in the questions from clients. So, perhaps another explanation won’t go amiss.

Before we get into that, let’s run through a brief refresher of the Tied-House definition and the restrictions that apply to the U.S. wine industry. I think it will help relate it to ways in which it can be breached.

Tied-House originally referred historically to England’s public houses – pubs, as they’re more commonly known – and their tied relationships with breweries, requiring them to buy a significant percentage of their beer from a particular brewery. This could be because the brewery owned the pub, rented the business to the pub or had invested in some way that gave them an advantage in this relationship – the crux of this problem. In some cases, this resulted in a disproportionate number of pubs in an area restricting their beer options to the consumer and became an opportunity to control pricing. In other words, the breweries with the greatest financial clout could control what the customer drank and at what price.

In the U.S. the familiar practice in England was transferred to the new world as they established saloons, and continued until Prohibition (1920-1933). In Europe, tied-house relationships weren’t a good idea, but tradition and convention served to keep the peace. In the new world, it was a really bad idea. It was virtually an unregulated free-for-all, with rampant violence and corruption.  Upon Prohibition’s repeal, when alcohol consumption was legal again, the U.S. government decided to learn from past mistakes and enact laws that prohibited “tied houses” and prevent the vertical integration of wholesale and retail business.

The result of all this is that wholesale entities – wineries, distributors, importers – cannot own retail entities – restaurants, bars or retail alcohol shops. There are loopholes in California these days, particularly to allow for online sales, but essentially this is the law.

Tied-House laws exist in almost every state in some form or another. In the case of California, where I reside and the recent cases occurred, the California Alcoholic Beverage Control, the regulating and licensing body, told me it has limited resources and actually don’t actively seek out violators. They don’t have to; according to the CA ABC, a large distributor or two is doing the job for them by calling their attention to infractions from their competitors. Whatever the case, it is certainly considered a serious offence by the CA ABC and dealt with accordingly through either fines, probation, suspension or revocation of license.

Instead of becoming mired in quotes from statutes and codes, which are available at state alcohol regulation websites, I’d rather distill the essentials into something a lot simpler. Here’s what to keep in mind:

  • The phrase “nothing of value” can be given to a retailer from a wholesaler is the bedrock of Tied-House rules.
  • This means no mention of a retailer by a wholesaler in a tweet of a retail event promoted by the event itself or another party. An example, “come and try our wines at XXX wine bar on May 16th”.
  • No photo of an event on Facebook, or on a blog or a website, either before or after the event, if the name of the place is mentioned or any signage is visible. Even if nothing is said, if the retail establishment can be identified in your photo it is a violation.
  • No mention of any retail account in a tweet (e.g.) to indicate that you’ve sold to the account, plan on selling to them, or that the wines can be found at this account now or in the future. For example, you cannot say, “We’re proud to have our wines in XXX store” or “If you’ve been having trouble finding our wines, they will soon be available at XXX store”.
  • No mention of XXX store loving the wine. For example, “Joe, at XXX store, said this is the best NZ Sauvignon Blanc he’s tasted all year” or “Cheryl, at XXX wine bar, loves the new vintage of our Syrah”.
  • No mention of a tasting you’ve done, or a photo of a tasting, if it’s at a retail location. The retailer may not even be carrying your wine, but if the event is a retail location, which is now tweeted or posted to potential followers, it is considered providing something of value to the retailer, thereby establishing a de facto favorable relationship between wholesaler and retailer.
  • No retweet by the wholesaler of a tweet by another party to promote an event at which the wholesaler’s wines will be poured or sold.

To round this out, many states do allow something “of value” to be given to the retailer in the form of product displays, samples and signage, but TTB (Alcohol Tobacco Tax Bureau) defines these as items that are specifically for the promotion of alcohol that is bought by the store. It is not intended as an inducement to favor placement for the wholesaler and cannot be greater than $300 in value.

Today, promotion of wine is ubiquitous on the internet and every wholesaler must be familiar with Tied-House regulations to understand how they can do so legally. If you are engaged in social media for your winery, wholesale distribution or importing business, before you post that photo, tweet that tweet or comment on your website, consider whether you are in fact promoting a retailer in the process, even seemingly innocuously and tangentially.