Tag Archives: importer

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

08 Friday Sep 2017

Posted by in Wine law regulations

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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

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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

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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.