Tag Archives: retailer

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.

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.