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Tag Archives: importer

Client FAQs – First in a Series

02 Thursday Nov 2017

Posted by deborahgraywine in FAQ, new importer

≈ 2 Comments

Tags

budget, distribution, forecasting, importer, sales, warehousing

These are actual questions that I am asked many times by prospective new importers, sometimes in different forms but always from a similar perspective. Many of the answers are not cut-and-dried unfortunately. But they might stimulate your own thought process to find the answer that best suits you. The question I am most often asked is this first one:

How much money do I need to start my import business?

How much money someone “needs” is purely a function of individual goals and budget. Let’s start with an illustration, addressing just the initial wine purchase:

  • If you select inexpensive wines at $35 a case and you bring in a container of 500 cases this will run about $17,500, before freight, duty, insurance.
  • If you choose to source more costly wines, e.g. at $300 a case, you don’t have to start with a container, which would be $150,000 for even 500 cases. You could start with just two pallets (112 cases) and this will run $33,600.

The second example is almost double the first expense, but still within a reasonable budget for a beginning enterprise. With startup expenses, freight, warehouse and taxes, the initial budget might run around $30,000 for the first example and around $50,000 for the second.

But there are obviously other factors:

Do you have a market for this wine? If not, the more expensive wine will usually take longer to sell just based on price, which will result in slower turnover and higher warehousing costs.

The less expensive wine, assuming it is good quality and preferably “over-delivering”, has the opportunity for glass pours in restaurants and higher volume sales in retail stores and to distributors.

Does the expensive wine attract great press and high ratings? These aren’t quite the arbiter of sales they once were, but still important enhancers.

Is the expensive wine in high demand as a category or style, e.g. Bordeaux or Barolo? Pre-selling could be an advantage in this case, essentially creating a sales base for the wine before it arrives.

Another factor is profit. In its raw form without sample usage and other expenses, the profit on the $35 case would be around $16.45 per case or a total of $8,225 on 500 cases.

The profit on the second wine, using the same basis, would be around $109.20 or $12,230 on 112 cases.

Keep in mind that 500 cases will necessitate higher warehouse costs and taxes, which are predicated on number of cases stored, not value of the wine. But a full container (FCL) will be less expensive per case than a less-than-container-load (LCL) of the 112 cases.

There is the further matter of terms. Do you have to pay the winery COD or are extended terms available – 30, 60, 90 days?

This may start to look like a confusing muddle but it’s really to demonstrate that the idea of foundational budget is an arbitrary and subjective matter. You must begin with some money, but you can expand or contract your business according to ability and desire.

Is it reasonable to keep our full-time jobs while we develop our business?

This all depends on how quickly you want to ramp up your sales and how big you want your company to be. If you can only start an import wine business by continuing to bring in an income from full-time jobs, this can certainly be done but will limit the time necessary to find distribution and make sales and naturally growth will be slower. Eventually, you will not be able to run an import company while holding down full-time jobs, unless you have very efficient office staff, because some actions need to be taken in immediate response to the situation such as purchase orders, troubleshooting, inventory management, compliance reporting and so on.

Should we become a distributor when we start our import business or wait until the importing is established?

To start with I want to emphasize something important: you can only become a distributor in the state in which you reside/are licensed as an importer. So with that premise, here are the issues:

Importing is a long game with very little immediate gratification but rewards a much greater return with patience and perseverance.

Distribution is an immediate gratification (i.e. short term income) with smaller sales and greater effort vs. return.

To expand on that, as an importer your objective is to find and appoint distributors who will purchase your wines for distribution in their state or region. This can be a very time-consuming process when competition is stiff, distributor consolidation has reduced the number of available options and finding the right partner can be challenging. Added to that, decision-making by the potential distributor can take months. But once made, orders can start at 14-112 cases, as a rule, and continue as long as wine is in demand, support is provided by you and sales staff get behind it.

Distribution in your home state delivers immediate income for your short term financial plan, gives you the boost you might need to confirm your wine’s desirability, establishes relationships in your community and, by selling directly to retail and restaurants, gets your sales one step closer to the consumer. It may take a long time to sell even one case, as you ‘prove’ yourself to an account or wait until a slot becomes available on the wine list but there are many accounts to visit and, with diligence, continual sales can be made.

There are intangible factors as well. Do you enjoy that one-on-one interaction with an account and the first hand sales experience? Is it especially meaningful to see your wine stacked in a store or on a wine list? Is taking time away from sourcing distributors by making your own sales a worthwhile tradeoff?

Research the cost of distribution in your home state to see whether that is something you can afford. In California, e.g., the annual fee is around $400 for wine, beer and spirits. In New York a three year wine license is $3,760. If you add a spirits license to that it is an additional $27,280. And an annual beer license is $1,460.

What is a reasonable sales forecast for the first year?

Sometimes this question is asked in conjunction with “to make a profit”, but the underlying premise is often the same. When can I start to see light at the end of the tunnel?

As frustrating as it may be to read this, the answer is very similar to the first question and is very dependent on the model you choose. For this reason I think it is important to write a mission statement for yourself, where the purpose is to explore your objectives in the business you want to establish. Questions to ask yourself would include:

  • How much time do I intend to spend on the business?
  • How quickly can I achieve the initial stages – sourcing, licensing, COLAs, labeling, shipping, selling, etc.?
  • How much money am I investing?
  • Where is the money being spent?
  • Do I have a partner, employee or broker to assist in this effort?
  • What have I done/am doing to ensure a successful launch and support ongoing sales?
  • Are the wines I chose enabling me to get there?

Even if your background or skill is not especially geared towards accounting, a simple spreadsheet will be a very useful tool in laying out a visual map of wines purchased, costs incurred and path to profit.

If we focus on the southern US and our imports arrive in New Jersey, where should I warehouse?   

If I live in California and bring in European wines, should I warehouse on the east or west coast?

These are two specific questions asked by different clients, but variations on the warehouse question are common. It is a puzzling issue for first time importers, mostly because the answer does not appear logical and is largely dependent on understanding how the wine industry works.

In the first instance, I would say if you live on the east coast, then New Jersey is a logical place to warehouse, regardless of where you will seek distribution. Licensed, bonded warehouses are available in NJ for wholesale storage of wines that arrive at port from foreign sources and trucked from local wine regions. Distributors from any state are accustomed to picking up from them.

Living/working in CA is a somewhat different matter. European routes are closest to the east coast, so this is less expensive and takes less time in transit, but is your distribution going to be all west coast? Are you seeking distributors anywhere and everywhere? Unless you live and work in Ohio, e.g. and plan on only distributing with Ohio, either east or west coast are, to me, the only viable options.

In any given circumstance, where you warehouse is not necessarily where you personally have most access to the wine. It is easy for samples to ship to you or potential wholesale customers via commercial carriers such as UPS or FedEx Ground. It is far more important to consider either coast as access for your distributors. A common mistake (I made it too) in the early days of your career is to warehouse where you can select, visit and pick up wine. But my first company was established in Atlanta, GA and not only was this an expensive warehousing option it was also completely out of the way for any distributor except the one in Atlanta. Distributors send trucks to pick up various suppliers’ products in warehouses at the same time to make an economical truck load. If they are only picking up 14 cases from you, because no one else warehouses at the same location, this will either deter them from purchasing from you at all or make the wine more expensive when they mark it up. Neither of these is a good starting point for you.

I’ll save other FAQs for another post. If you need clarification on any of these concepts, I’ll be happy to answer short questions. Otherwise, I am available for consulting options.

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

08 Friday Sep 2017

Posted by deborahgraywine in Wine law regulations

≈ Leave a comment

Tags

distribution, distributors, importer, pricing, retailer, sales

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.

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

18 Friday Aug 2017

Posted by deborahgraywine in margins

≈ 2 Comments

Tags

distributors, importer, margins, markup, pricing, sales

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 deborahgraywine in margins

≈ Leave a comment

Tags

importer, incentives, margins, marketing, markup

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.

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