The existence of the three-tier system has been around since the repeal of prohibition. As a result, sales strategy, especially for fine wines that are imported, or more limited production domestic wines are significantly handicapped today due to the three-tier system and how it impacts distribution. But with COVID--19 we have seen a steady erosion of the three-tier system in many parts of the United States and at the end of the day all the three-tier system is limiting is where wine can be sold and who can buy it.Let's first look at the situation overall.
1) Wine distributors sell to retailers and on-premise sales businesses, usually restaurants and bars, country clubs, and hotels.
2) Distributors across the country have been laying off their field sales force in record numbers due to the reduction in the number of restaurants open for business, or only doing take out and delivery. This change means cases of fine wine are sitting in the warehouses of importers or their distributors.
3) Wine, beer, and spirits, previously directed to the on-premise channel, restaurants or wine bars, are now finding their way to smart and savvy retailers who hunt for deals.
Importers, especially those who bring in fine wine, are forced to rethink brand distribution, especially when it comes to allocation. Wine sales for imports in general work this way. The producer sells to an importer. The importer marks up wine, usually by 33 percent. The importer then sells to the distributor marked up another 33 percent who sells it to the retailer, who marks it up another 33 percent on average. The result is the retail price is double what the winery's wholesale price. If the wine is sold to a restaurant, it is marked up three times the wholesale price from the distributor in theory. Domestic wineries sell to their distributors, and then the markup chain is pretty much the same.
But here's the rub. In the past, wines, especially the cult wines and those from small boutique producers, have been either allocated or on the mailing list where wineries have embraced the direct to consumer approach.
That works this way:
The usual wholesale price for a bottle of wine is $10.00 to the distributor. If the markup process is followed, that same wine will be marked up to between $17-$20 retail or $40-$50 on a restaurant list. If the wine is sold direct, the price of $20 per bottle means more profit for wineries. However, due to state laws, the winery can't ship everywhere, and for imported brands, the hurdles make it very difficult for them to sell to their fans and collectors.
Due to the Covid-19 pandemic, wine sales that traditionally went to restaurants are not going there. Restaurants with hordes of cash could buy wine in volume became retailers, often selling wines at prices far below their 300 percent markup prices, but liquidating inventory to regular customers and savvy buyers. In turn, they began to buy more wine to create cash flow. But those were few and far between, so wines that were "allocated" to them often went unsold to them, and in turn, they have been sitting on the floor of warehouses or still in the stockrooms of importers. Alcohol credit terms are usually 30 days from the day of delivery. Smart retailers can flip cases of wine in less time and are making money under those terms. But once thirty days go by, everyday wine sits on the retailer's floor, the gain on the money is less. That's why flash sales drive profits. That's why wine on restaurant lists is priced higher, as the restaurant has invested in the wine, but the return is over a much longer duration.
But here's where the three-tier system keeps some wines from reaching the buyers who want the wines. Let's say importer x is in New York. They have distributors in 20 states who sell to retailers and on-premise buyers. But the U.S. has 50 states, and people in every state would like to buy the wine. Depending on state laws, the wines can't be sold or shipped to them. Even a licensed retailer who may want to buy the wine can't find the wine in some states if the distributor in that state isn't carrying the wine.
But times are changing. New intermediaries are popping up to import consolidated containers of imported wine that are coming through via the gray market. Given importers who claim to have exclusives fail to protect themselves using parallel import laws, wines previously only imported by the so-called importer often find their way via other importers. On the domestic front, depending on the state, we're starting to see a new distributor who clears the wines coming into the state and then redirects the wine to the retailer. While laws tend to require the wine to touch the wholesaler's floor, these new "distributors" or clearinghouses are basically only digitally taking possession of the wine, as it's being moved from the producer (domestically) to the retailer or even in some cases based on licenses, to consumers.
Why is this important? Let's say you're an importer sitting on cases of wine previously allocated to restaurants. That wine is sitting in the warehouse, not making money for the importer who already paid for the wine. They sell to the new distributor who "processes" the order and the wine is then shipped to the retailer as if the "distributor" handled the order. The clearinghouse model is no different than how Amazon and many online sellers of consumer products work. The concept, known as transdocking, is not new. But for wine, it is very much a new concept.
It's time to toss it away and put the control back in the hands of the public and let wine, beer, and spirits to be able to be sold to retailers and consumers, just as quickly as they can purchase a light bulb.