- Thomas Pellechia
The 3-Tier U.S. Alcohol Distribution System Faces New Threats
Originally published on forbes.com
Brokering has been a part of the wine business for generations—generally, most brokers bring wines to market through existing distributors. One online business, LibDib has been challenging that model for a few years, but in only five or six U.S. states. A new digital Business-to-Business (B2B) wine and spirit site, GrapeIn. aims to break into the global sales market, bringing together foreign and domestic players across the industry-wide spectrum, and by-pass the distribution network in the process.
GrapeIn’s co-founder, Jack Cohen—Martin says, “…the leading platforms that are currently active in the market reinforce the 3-tier system by connecting distributors with trade-buyers, leaving the producer out of the loop.”
The company plans to connect producers, specialized importers, and brand owners directly with on and off-premise buyers, in Cohen—Martin’s words, “.. .so they do not need to rely on the distributor's sales power…the biggest challenge for most small brands is to be able to connect with trade buyers in order to generate a sale, and that's where we come in.”
Today, orders on the GrapeIn website go through licensee beverage alcohol clearing and logistics companies. But Cohen—Martin says the company will handle these responsibilities in the future.
He also says, “Traditional distributors charge around 30% commission…by using alternative methods for clearance and logistics it is possible to keep the majority of that commission and, most importantly, own the relationship with the on or off-premise buyer.”
GrapeIn is betting on success because, as Cohen—Martin puts it, “…buyers are open to this offering, as they are aware of the common conflict of interest with distributor sales reps.” By that, he means the incentive for distributor sales reps to push specific products at specific quantities, about which he says, “…these products don't always align with what's best for the trade buyer's business.”
The Wine and Spirits Wholesalers of America (WSWA), which represents distribution companies in the second tier of the system, last year vowed to increase its online presence. In light of the new B2B threat, that’s probably a good thing. But of more concern right now is what WSWA says economists at John Dunham & Associates (Dunham) have estimated to be a potential $921.4 million dollar loss facing distributors. The large amount of money lost would not be because of competition; instead it would be from uncollected on-premise accounts receivables.
Dated April 14, the Dunham report stated in part: “To date, 47 states and the District of Columbia, have ordered a total, or near total shutdown of hospitality venues, including those that serve alcoholic beverages…starting in the middle of March, most on-premise establishments (including hotels, bars, taverns, nightclubs, restaurants, etc.) saw their customers vanish and their sales disappear.”
Not all states allow for credit sales of beverage alcohol products from wholesalers to retailers, but 31 states do. According to WSWA, about 60% of all sales within those states are transacted on-credit, with usually a 30-day payment timeframe. At the time the study had been produced, 29 of the 31 states had ordered the hospitality businesses to shutdown, and social distancing had been taking a toll even where on-premise businesses have been allowed to remain open—many wholesalers were holding receivables for deliveries made before the response to the pandemic.
It’s not clear how many of the on-premise outlets will re-open when this is over. Losses probably can be absorbed by the big two or three distributors, but the loss of receivables as well as potential loss of future business could take out a large portion of small distributors which have survived industry consolidation over the past two or three decades.
With competitive brokers and pandemic-connected questionable accounts receivables to worry about, WSWA members also have a potential legal problem on their hands.
One day after the Dunham economic report, the executive director of the National Association of Wine Retailers (NAWR), Tom Wark, sent a letter to the Attorneys General and chief alcohol regulators in 18 states telling them: “NAWR and its legal advisors have concluded that your state’s laws and regulations barring shipment of wine from out-of-state licensed retailers are both unconstitutional and unenforceable. This follows from the discriminatory nature of the legal ban on shipments into the state from licensed wine retailers.”
NAWR cites the 2019 U.S. Supreme Court opinion in Tennessee Wine v Thomas and the Court’s 2005 Granholm v Heald decision as the basis for their notice to states.
From this perch, it appears NAWR stands on firm ground.