Looking at Three-Tier from the Other Side Alfonso Cevola December 23, 2009 FCG, Food & Conversation, Soap Box 15 Comments So you think the three-tier alcohol (wine, beer and sprits) wholesale distribution model is broken and you want to flush it? Read this first. (In the interest of full disclosure, while I blog at night, I work during the day in the three-tier wine industry for a large company. My resume also includes working for small wine importers and as a waiter. Nobody asked me to write this. I am speaking up because you seldom see this is a point of view in the blogs. My only agenda – and it is a lifetime goal – is to help America become a wine-drinking culture.) Imagine a city like Houston. It’s Dec. 3, and there are 64,000 cases of wine, beer and spirits waiting to be delivered that morning by one of the large distributors. But wait, with all the distributors in play, large and small, triple that number to 192,000 cases – not at all an unusual number for that city at that time of year. Now imagine FedEx, UPS, DHL and the USPS delivering all those boxes, along with everything else they deliver. Keep in mind that anything going to a hotel or restaurant will need to be delivered at a specific time. And if any of those cases are going to a supermarket, they’ll be expected to arrive before 6 a.m. If beer and quality wine are on the trucks, the trucks will need to be temperature-controlled. More important in Houston are refrigerated trucks from May to October, but in some parts of the country, they’ll need to be heated. Do you think FedEx, UPS, DHL or the USPS is going to buy those trucks? Who’s going to pay for them? Now imagine that scenario all through the month of December, when other packages, mail, etc., are being delivered. And imagine that happening in Dallas, Denver, Los Angeles, San Francisco, Chicago, Atlanta, Boston and all the other large cities in the US. Then imagine New York City, where you can multiply those 192,000 cases by a factor of 5. And that’s for just one day. I know that many people who rail against the status quo aren’t advocating a complete overthrow of the current system nor would they really want to inherit the problems that would result from dumping it. But I hear a lot of irrational utterances on blogs and on the Internet that lead me to believe some of the ranters aren’t thinking this through. Besides what I hope is the obvious logistics problem, here are a few other issues to consider. The Local Issue When Jill Winelover reads about a wine and wants to get a bottle, she has several options. She can buy it at a neighborhood supermarket or wine store (which, in our culture of immediate gratification, is what most wine drinkers want to do). She can order it online (at this point in some states, not all) or she can order direct from the winery (also in some states, not all). Everyone who wants to order wine online ought to be able to do so, and I have no quarrel with people who want to work to make that come about. The staff at Chambers Street Wine But from a local perspective, if she buys online, the money leaves her community whereas if she buys from a store, a lot of the moneys stay in her community to pay things like salaries and wages of store workers, delivery people, local distributors and their employees. Any taxes accrued will be local taxes, benefiting her local state or community. The bottle of wine she buys is one of 12 in a case that were transported together to the store, saving on transit costs by making shipment more efficient. If she buys from a local wine store, she’ll have the opportunity to develop a relationship with her merchant who can learn her likes and dislikes. This can also happen online with some software. It would not be a face-to-face kind of relationship. If Jill wants more of the wine, again, it’s a short drive from her house. And if the wine is flawed, it’s easy for her to return it and get a replacement bottle. Jill won’t have to hassle with repackaging sending it – after it’s been uncorked. The wholesaler, importer and producer will take care of that. The Environmental Issue I have a writer friend who gets samples sent from producers on a regular basis. Sometimes it is a single bottle, sometimes a two-pack, three-pack even a six-pack or 12-pack. In each case, there is packaging. About half the time, it’s polystyrene foam that she can’t recycle. Now imagine tens of thousands of people getting their wine shipped to their houses. At a time when industries are trying to figure out ways to cut packaging and to create smaller carbon footprints, the packaging plus the fuel cost of shipping individual or small packages of bottles becomes staggering. I know some people will say that we already get a lot of products delivered to our doorsteps this way. But a bottle of wine isn’t like a mattress or a painting that gets shipped once. It’s a consumable product that is replenished regularly. The current wholesale distribution system offers vast economies of scale with transport both to central (and temperature-controlled) distribution centers and to retail stores. A consumer can drive to a central location – a retail store – that has lots of options. And if she special-orders a wine which is at the warehouse, it’s delivered with a load of other wines, not as a single bottle, specially wrapped, in a single truck. But arguably, if that wine isn’t at the warehouse, she should still be able to order it from a winery or online store. Political Spending Bloggers commented recently about the amount wholesale alcohol distributors spend on political causes. A figure of $50 million has been put forth for spending by American wholesalers and their associations for state politicians from 2000 to 2006. I can’t vouch for the accuracy of that number, but I do agree companies spend, just as grocers and commodities groups and wineries and individuals do, to support/promote their interests. Larry Ruvo What’s also true – and never gets mentioned – is the charitable spending these companies do. For example, Larry Ruvo, Senior Managing Director of Southern Wine and Spirits of Nevada (a division of Southern Wine & Spirits of America, Inc.), is founder of the Keep Memory Alive Foundation and the Lou Ruvo Brain Institute. Since its inception, Keep Memory Alive has become one of Las Vegas’ most important charitable initiatives and a key player in the nation’s fight against Alzheimer’s disease. Larry has helped raise more than $50 million and recruited leading specialists to become part of this vital project. He also spearheaded the establishment of the UNLVino wine-tasting, America’s largest single-day wine-tasting charitable event, raising millions of dollars for the students of the William F. Harrah College of Hotel Administration at the University of Nevada Las Vegas. It’s not that I believe one somehow balances out the other, only that some blog entries have been one-dimensional and often simplistic in their observations. It’s often easier to track who gives what to politicians than whether someone’s doing some good in the world, and how much. Final Thoughts I know the three-tier distribution system is not perfect and often seems like a Paleolithic dinosaur to the average blogger or small business. I know its shortcomings better than most because I deal with them every day. And I know that rational folk are not advocating the total destruction of the current infrastructure. But as I read the rants posted all across bloggerdom, I ask myself, “What’s in it for them?” Are people writing posts because they have commercial interests that are at odds with the current system? Are they writing something controversial to raise the traffic on their site? And as for disgruntled participants in the three-tier system, show me the industry that doesn’t have insider critics and lots of room to improve. Whatever the three-tier system is not, it has the capacity to move enormous amounts of wine over vast and small distances economically, to move those wines quickly to retail outlets and consumers, and to keep a perishable beverage from getting too hot or too cold along the way. I keep coming back to this: Do the rants do anything to bring more wine-lovers into the fold? Do they move the wine business forward? Do they follow-up with reasoned, practical solutions? Or is this just a case of shooting first and asking questions later. — Alfonso Cevola, the Italian wine director for Glazer’s in Texas, has been involved in the selling, educating and advancing the cause of Italian wines since 1978. His blog is On the Wine Trail in Italy. He is a Certified Specialist in Wine and a Special Contributor to the Dallas Morning News and Sommelier Journal. In recognition of noteworthy support of the wines of Italy in America, the Italian Trade Commission honored him with the Distinguished Service Award in 2009. Marc Stubblefield To be fair, I think it’s a little disingenuous to claim that the folks ‘posting the rants across bloggerdom’ are advocating dismantling distributorships as businesses that provide a conduit for wine to reach consumers. The argument is that legally mandating transit through the three-tier system (instead of direct-to-consumer, or direct-to-trade) is anti-consumer, anti-business, and anti-interstate commerce. There is no reason to support a state-granted (mandated!) monopoly over bringing beer, wine and liquor wine to the consumer or trade. As a consumer, restaurateur, or retail outlet, I should be able to acquire a bottle/case/pallet of wine from my local bottle shop or restaurant, a national retailer (or distributor), the winery, or a specialty retailer anywhere in the country. I can do this for guns and ammunition today – why not wine? I should also have to pay state and local taxes on that product, which is currently the law regardless of where or how you make your purchases (whether they are mattresses or cabernets). To suggest that Glazer or Southern would cease to exist, cease to fill the needs you so correctly describe, is absurd. Glazer would still service supermarkets looking to stock their endcaps at 6am. Southern would service the bars and hotels without change. Smaller distributors with niche books would still populate the list at that hipster wine bar. BUT. All those folks would ALSO have options to obtain their wine from any other source in the country. Which would be good for competition. Good for diversity in the market. Good for access to good/bad/indifferent wine. There is only one loser in this scenario – the bottom line of distributors who have built a revenue model not on fair price competition, but on a state mandated monopoly that amounts to little more than a 30% transit charge between one truck and another, with no incentive to compete in the market. I agree with you that there are “a lot of irrational utterances on blogs and on the Internet that lead me to believe some of the ranters aren’t thinking this through.” There is a lot of ‘stick it to the man’ attitude that pervades discussion on this issue. Unfortunately, I feel your post is just as irrational on the other side of the debate. Respectfully, -Marc http://www.alfonsocevola.com alfonsocevola Well, Marc, we’ll just have to agree to disagree if we cannot come to terms with the definition of the word rational (or irrational). Good luck… Pingback: Looking at Three-Tier from the Other Side : PALATE PRESS XV China() http://www.alfonsocevola.com Alfonso Cevola Marc- Thanks for your comment. The post is based on the rational of decades of experience, not conjecture. There are thousands of people in the industry who do a lot more than support the transit of wine from one place to another and to minimize those efforts, made for decades by these legions of dedicated professional, and many of us wine lovers, is to greatly underestimate the efficacy of the wine trade. A company like Glazer’s or Southern supports education and backs it up with legions of master sommeliers, certified wine specialists and wine educators, not exclusively in support of supermarkets and hotels and bars. In fact, my whole life’s work, whether it be with a small or a large distrib, is the same, like I said, and that is to help America become a wine-drinking culture. And I and many of my colleagues are not going to stop or be deterred or marginalized from striving to achieve these goals. The hundreds of people I talk to on a weekly basis, from boutique wine stores to hipster wine bars to people just looking for a bottle of Chianti to have with the lasagna tonight, daily reinforce the need for one-on-one relationship marketing. But thanks for chiming in. In the political framework of our democracy, the argument that will effect the change you wish would be best directed in front of the Supreme Court in support of repealing the 21st amendment. Merry Christmas! Pingback: Tweets that mention Looking at Three-Tier from the Other Side : PALATE PRESS -- Topsy.com() Marc Stubblefield Alfonso, I don’t disagree with a single thing you just said in your above comment. Southern and Glazer do all of that – education, development, supply chain management – and do it well. No one is saying that they shouldn’t, or that what they do is bad. Only that they should not do it propped up by a state mandated monopoly. There are great parallels in the food/restaurant world. If I run a bistro, and want to feature chicken (also a perishable good), I have a world of options to source that chicken. I can choose to get my chicken from SYSCO, a large distributor of various product lines of chicken, with a local presence and local rep (Southern/Glazer). Or, I can find that perfect earthy-crunchy free-range farm in Northeastern Vermont and order directly from them, dealing with shipping issues as I see fit (Winery Direct). Maybe I’m in a big city, and there’s one guy who is passionate about bringing in all the best heritage birds to his shop, and I regularly buy various products from him (Boutique Distributor/Local Retailer). If I don’t live in that big city, maybe I need to find that same passionate guy, but he’s three states away, but I order from him when I need something specific, and am conscientious about the shipping arrangements (Out of State Distributor/Retailer). Shouldn’t I have the same legal right to a bottle of wine that I have to a chicken? SYSCO also does all the things you laud the large distributors for doing – consumer education, trade education, supply chain management, meeting specific delivery time/truck needs, and having local representation to build relationships with customers. They continue to exist, and thrive, without a state mandated pass through. I believe that Southern and Glazer could, would, and should do as well. Once again, the argument falls not to services or support, but to dollars and cents, and an easy, guaranteed revenue stream without real competition. The problem is with the laws, and the artificial structure they impose, not with account reps at Southern. It’s nice to have a reasonable conversation about this, and I thank you for that! Happy Holidays! -Marc Pingback: uberVU - social comments() http://www.libationstation.com in2wine This is all valid information however, sometime, you should address the small wine shops/grocery stores that have to compete with their own state in wine sales..(like the state being able to buy wines for less than the wine shop/grocery) Also as a Mainstreet director of a small town the paragraph about buying local is the most important. Keep those mom and pop stores strong and alive. http://www.specialtywineretailers.org Tom Wark Al, No bad. Your defense of the 3 tier system hits some notes you don’t hear to often. However, if you are going to mount a defense of the three tier system, then you really are required to address that aspect of this system that makes it unique and which is most objected to by critics of it: The use of the the three tier system is mandated by the state. Put more succinctly, use of a wholesaler is mandated by the state in order to sell wine in most states. No one disputes that wholesalers can move large quantities of wine efficiently. However, what if I’m a winery that doesn’t need large quantities of wine moved into a state? What if I’m a retailer or restaurateur that doesn’t need a wholesaler to bring me a case or two of a specific wine? What is it about wine that makes it imperative that middle men do the moving of it when it’s completely unnecessary for the wholesaler to be involved? Clearly it’s not tax collection. Business across every state efficiently and easily remit taxes to the state. Clearly it’s not necessary to use a wholesaler to keep wine out of the hands of minors since we know that minors still get their hands on wine even when the wholesaler is mandated. And clearly the use of wholesalers are not necessary to determine if retailers and restaurateurs are abiding by the laws. Before you tell us how generous wholesalers are, before you tell us how efficient they are, before you tell us how useful wholesalers have been for 70 years, first you really need to explain why it should be illegal for a winery in California to sell and ship wine directly to a restaurant in Texas. First you have to explain why it’s imperative that we keep in place a system designed 70 years ago to regulate an industry that no longer exist. Tom Wark Specialty Wine Retailers Association Nick Lucca I believe that Mr. Cevola speaks to many of the issues raised in the direct shipping / three tier saga that has been going on for years. I agree with him that the three tier systems serves many needs in our society and should continue. However, what I have always taken exception to is the large industry players and their spokesmen that advocate complete adherence to the 3 tier system that cannot and does not address the changing needs and interests in our society and evolving wine consumption habits. Their protectionism of the monopoly that the laws provide indicates their lack of flexibilty and desire to keep pace with the consumers interests. If it was not for the mandated laws in many of the states these distributors would fail. They are far too protected. With that said there are clearly methods in which product can and is being shipped directly to adult consumers using the 3 Tier system while insuring that taxes are paid and jobs created. Including locally. The flexibiity that some state legislators have implemented has allowed companies to adapt to the changing landscape while operating through the three tier system. Pulling the product through vs pushing. When the large companies and the WSWA realize they can participate in this change and inhance their businesses there will be far fewer challenges to the system and the consumer will benefit as well as the industry. NL Mark Norman Al, you present a good argument for those who don’t really understand. I happen to be with Tom. You present logically..I’ll respond logically You start out mentioning the “complexities” of moving so many packages by the 4 main carriers, if we could approach the executive staff at each and tell them how much of a added strain moving several million small packages (divided by 4) spread across a year they would laugh at us. Lets start with Jill WineLover and “needing” her local liquor store for help versus choosing online. Jill Winelover probably knows as much or far more than many of the clerks who are working at many of the liquor retailers cross America. Unless it is the owner of a smaller mom & pop she wouldn’t get much advice. Truth be told, many of the mom & pops are suffering big time. Simply, they can no longer compete. Jill can find much advice (from many peers) online. She can also find the wine at much lower prices. Many of the smaller liquor stores are being forced out of business anyway because the larger ones are developing their own online sales presence. In fact it is statistically those retail operations that will survive the economic crisis. Lets talk about the practice used by the wholesalers that force retailers to take lower quality wines if they want certain higher quality wines. Think you forgot to mention that. Keeping the money in the local community is a good argument, except that 2/3 of the sale of wine in a local shop is going elsewhere. No way is it local unless the wholesaler is in the same town. Today, people are much more concerned about saving money than the few pennies that will end up in the local economy. Environmentally, the wholesalers do a better job…a better job. What, they don’t use packing material when they ship or receive wine? If you research this topic, environmentally friendly packing material is being developed right now. Very soon, the day of packing foam will be behind the consumer. Political Spending…yes Virginia there is a Santa Claus. I have read that the number spent by wholesalers is much larger than $50 miilion. There is no other group that comes remotely close to that number so has no where near the impact. Why are they spending so much or the consumers money anyway??? Donations to the community is a wonderful thing…and I’m sure that when the online companies get large enough and profitable enough they will make large donations just like Microsoft does today. Lastly you mention about bringing people into the wine fold…unfortunately here I have to disagree with you. This argument that you are using here is by far the worst of all of them. I have seen no effort AT ALL from any wholesaler to bring more people into the wine fold. Point in fact, because I spend a lot of time online I see much more of an effort here to help the average individual understand and appreciate wine from the online community. Even the local mom and pop do next to nothing to help (sorry they just don’t have the time, the monney, or the staff to do very much). Now let me add that the wholesalers does all this for a mere 35% of the cost of wine. You know why at the big professional tasting events that are held they try to keep the public out? They don’t want the general public to see the true cost of wine. Sorry, but you are going to have to do a whole lot better next time. Mark Norman Oooopps…forgot a few MINOR points. Jill Winelover..if she goes to the mom & pop retailer (if the owners are there) she’ll get help buying her wine (if she needs it) but her selection will be very limited. If she goes to a larger warehouse style retailer she’ll have more selections but next to no help…but if she knows where to look online she’ll have some help and a tremendous choice of selections. The smaller wineries are being shove out of the equation entirely by the wholesalers, many are no longer being carried and from the ones I have spoken to, can’t get the time of day from other wholesalers. Don’t believe me? Check Silicon Valley Bank’s 2009 – 2010 State of the Wine Industry report that even 8 months ago warned these smaller wineries to develop their Direct To Consumer or DTC sales (or else)…for those who are not familiar DTC is another way of saying online. In the last six month alone I have collected the names of at least several hundred wine producers from overseas. I know two other sources who might help me push that list a near a thousand of wine producers who are looking for an importer (wholesaler) but the wonderful 3 tier system is holding them out. So much so that many have even come here (to the US) in hopes of finding someone but all in vain. So much for Jill’s freedom of choice. Lastly, it is great that the wholesalers are donating so much back to people in need and that they have the where with all to spend money on political support. Are the online companies doing that yet? NO! They don’t have huge amounts of excess capital to do this. Let me be impolite and ask how come in these troubled economic times the wholesalers have that much excess money? Wayne Shipman Wholesalers and distributors have one purpose – move HUGE QUANTITIES of wine and liquor. Small wine stores have to purchase a minimum amount and often are forced to buy jug and box wines in order to have the chance to purchase better wines their customer want. Being selective will reduce their standing with the sales reps, who often work on 100% commission. Sales reps are forced to sell certain bulk items first, then the boutique wines and wineries. Similar problems for restaurants and bars. It is not about choice, it’s forcing volume through the supply chain. Pingback: Good Reads Wednesday « Artisan Family of Wines() Boomer It seems to me the issue isn’t that wholesalers shouldn’t exist (any rational person acknowledges they perform a necesary function) it’s the overall fairness and competition having the state mandate wholesalers are the only vehicle to get wine and spirirts to the point of purchase. To me, the retailers are more greedy than the distributors. I have worked in all 3 phases of the 3 tier system and the retail side is where the most money is wasted and where the system gets abused. How many times does the local retailer squeeze the sales rep for that extra (illegal) free case? How many times does the sales rep have to give the retailer his/her incentive money to pay off the retailer? Who works at a substantially higher mark up? Who would the retailer bitch at when he/she doesn’t get that case of wine they need on Friday night and the rep brings it out personally? Where does underage drinking get abused? Retailer associations obstain from political donations? Who pays for the wine at retail “charity” functions? Yes, the distributors are the bad guys.