The Silver Bullet for Wine Retailers

There is one silver bullet that will secure the future for retailers, revitalize the wine industry and give wine consumers what they want.

For wine retailers, the single most important reform that can help them compete and stay relevant and successful at this moment is the introduction of Self Distribution.

Self Distribution is perhaps the simplest form of distribution. It amounts to retailers purchasing inventory directly from importers and producers, be it wine, beer or spirits. It also means retailers are allowed to bypass wholesalers in their inventory procurement. Self Distribution is the single most threatening reform for the wholesale tier. But that’s not the best reason for retailers to lobby for this reform and for states to enact it.

The Key For Wine Retailers Being Able To Compete and Flourish

When producers and importers can sell directly to retailers instead of all products having to be distributed in a state by wholesalers, it provides retailers with the opportunity to compete by distinguishing their inventory and offerings from the retailer down the street or across town. By being able to separate themselves from other retailers through inventory diversity, a retailer has a much better chance of cultivating a loyal customer base.

As it stands now, retailers, all being required to purchase their inventory from the same stock offered by the same in-state wholesalers, there is little or no opportunity to compete with other retailers on selection. Price becomes the method of competing…lower prices and lower margins. This particularly becomes the case when smaller, independent retailers compete not only with other small, independent retailers all buying their inventory from the same wholesalers but when they also have to compete with the likes of the big box Total Wines and Costcos that can buy in larger quantities and receive bigger discounts from wholesalers.

It’s not hard to imagine a creative retailer that wants to be the go-to Burgundy seller in town being stymied by the fact that they can’t get their hands on smaller producers that are sold by U.S. importers that don’t distribute in their state and therefore are inaccessible to them. Instead, the creative retailer is forced to try to be that Burgundy specialist by offering the same Burgundies that every other retailer in the state has access to.

This is a particular problem for retailers that are not located in California, New York or the coasts where most creative importers reside. The Nebraska, Michigan, Arizona or Missouri retailer, for instance, will have far less access to unique, small production, interesting wines that are not distributed in their state.

But imagine if that Nebraska retailer could ring up the importer of a particular Burgundian natural wine producer and ask to buy three cases. The price to the retailer with shipping would be somewhat less than he could buy it from a wholesaler and the importer would sell the wine from somewhat more than his wholesaler would pay. Meanwhile, the Nebraska wholesalers have something to offer that other retailers in the state do not and Nebraska consumers have access to something they might not otherwise. It’s a win-win.

The Irony of the Opposition

Naturally, wholesalers will oppose this commonsense reform because they are wholesalers and can’t imagine having to operate in a competitive environment like the rest of the world. The idea is offensive to them after having been protected from competition and not having to work hard and smart for nearly a century now.

The great irony, however, is that most of America’s retailers will also oppose Self Distribution by importers and producers. The good ones will embrace the idea because they are good, they care about their customers and they know that given the chance to break free of the dull, uninspired,

and pitiful collection of wines wholesalers push on them they could increase their customer base and sales easily.

But most retailers have become so wed to their wholesalers, so reliant, they simply can’t imagine a multi-layered distribution system that will put them at a disadvantage if they don’t step up their game by having to rely on their own hard work.

The three-tier distribution system where producers and importers must sell to a single state wholesaler if they want their wine on the shelves and on wine lists in a given state and where retailers may only procure goods from in-state wholesalers that only represent a very tiny proportion of the wines actually on offer in the country has made everyone in the industry lazy, particularly retailers and wholesalers.

Where the three-tier system rules, innovation among retailers and wholesalers amounts to the existence of databases that hold information about wines and downloadable labels for websites and Drizly. THAT’S the extent of “innovation” in the three-tier system.

This is not how you grow a marketplace. It’s not how you grow a business. And it’s certainly not how you satisfy customers who are smart enough to notice that with the exception of how a retailer organizes their wines, there isn’t much difference between on that on this street and the other one on that street.

Sometimes regulators complain that wine shipments are illegally coming into their state from out-of-state stores. They whoop and yell about tax dollars being lost by these “bootleg” sales. They complain that local retailers are being hurt. But they never ask why so many consumers in their states are willing to pay the extra shipping to buy from an out-of-state retailer. I know why. And so do they. Because their retailers can’t offer the customers what they want because the three-tier system in their state makes it impossible for retailers to satisfy consumers.

How Self Distribution Should Work

Self Distribution is the silver bullet to help retailers succeed, to revitalize the wine industry in the United States, and to give consumers what they want: real selection.

The first place Self Distribution ought to be pursued and implemented is in California. Well, actually California wineries may already sell directly to the state’s retailers. However, out-of-state wineries may not. This is a direct violation of the Constitution’s dormant Commerce Clause. Just as the 2005 Granholm v Heald Supreme Court decision ruled a state may not allow its own wineries to ship wine directly to consumers in the state while barring out-of-state wineries from doing the say, it would be equally unconstitutional for a state like California to allow its wineries to sell wine directly to an in-state retailer by barring out-of-state retailers from doing the same.

In all, roughly 14 states allow some form of self-distribution where in and out-of-state wineries may sell directly to its state’s retailers and go around wholesalers. However, the restrictions on how this may be done are generally severe. Some states restrict Self Distribution to only the very smallest wineries. Others restrict the amount of wine that may be sold directly to retailers. Some will restrict winery Self Distribution by requiring the winery and not a common carrier delivers the wine to the retailer. In general, most Self Distribution laws are designed to dissuade the practice.

Honest and fair Self Distribution laws won’t have restrictions on the size of the winery that may self-distribute or the amount that may be distributed to retailers in this way. These are only wholesaler-protection provisions. Rather a winery of any size ought to be allowed to choose to distribute via a state’s wholesaler or do so on its own. In this way, wholesalers learn the value of competition, while retailers will gain access to a far greater diversity of wines that will allow them to distinguish their offerings, better serve consumers and have a better chance of succeeding without racing to the bottom on price.