US distributors get bigger

Two big deals took place in late 2015 that have changed the face of US wine distribution, says Jeff Siegel. This consolidation will make it harder for small wine brands to emerge.

Daniel Posner
Daniel Posner

Coaltrain Wine & Liquor, an independent Colorado retailer, is known for its unique, eclectic selection of imported wines, and especially those from France and Italy. Wine buyer Taylor Courey, whose passion is Italian wine, looks anywhere and everywhere for interesting and intriguing labels to carry.

And his job just got a lot more difficult.

Two big deals

“There isn’t going to be a real easy way anymore to find these kinds of wines unless I beat the bushes,” says Courey. What has him so worried? The ongoing consolidation among US wine and spirits distributors that culminated late last year in two deals, where four of the ten biggest companies combined: Charmer Sunbelt, the third-biggest distributor, merged with Wirtz Beverage Group, at number six, to form the Breakthru Beverage Group; then there was market leader Southern Wine & Spirits, which united with Glazer’s, the fourth largest distributor.

“A lot of smaller producers who make the interesting wines that we like are going to get lost in these bigger houses,” says Courey. “No matter how good they are, they’re going to be too small and aren’t going to be tasted in key accounts, unfortunately. “

This consolidation has revolutionised the US distribution segment, transforming it over the last 10 or 15 years from a variety of smaller, regional companies that weren’t national in scope, to the situation today, where almost two-thirds of the US wholesale market is controlled by the eight biggest companies. The combined Southern/Glazer’s, with operations in 40 of the 50 states, is close to becoming the first US-wide distributor, and its revenue in 2014 was more than one-third of the entire US wholesale market.

This is doubly important in the US, where the three-tier system that regulates US alcohol sales requires every producer, foreign or domestic, to have a distributor to sell its wines to retailers and restaurants.

“I think it’s important to first of all acknowledge that consolidation is a fact of life, and has been for a very long time,” says Jim Caudill, a California-based marketing and communications consultant who has worked in management at Kendall Jackson, Brown-Forman, and The Hess Collection. “It hasn’t happened in isolation, but as a response to a professed need in the system to make things efficient, effective and, of course, financially beneficial. How good this feels really depends on a supplier’s viewpoint.” 

So why now?

Talk to people in each of the three tiers in the US wine supply chain, and they agree on two things about consolidation, regardless of how they feel about it. First, the US government says it doesn’t violate anti-trust laws, so it’s here and it’s the landscape everyone has to deal with. In this, those two deals were just the latest in a succession of mergers, acquisitions, and joint ventures that included the formation of the The Winebow Group in 2014 from two East Coast wholesalers and that now has a 19-state reach.

Second, that other changes in the US wine industry, including supplier and retailer consolidation, have hastened distributor consolidation. By one estimate, grocery store wine sales in the US are close to 50% of the country’ s overall wine sales, the highest ever.

As the retailers that the distributors served grew and expanded to more of the US,  their distributors had to grow and expand as well, says Burak Kazaz, a consultant for Southern and the executive director of the H.H. Franklin Center for Supply Chain Management at the Whitman School of Management at Syracuse University in upstate New York. Bigger retailers like supermarket chain Kroger and superstores like Costco and Walmart demanded supply chain efficiencies and lower costs that only the bigger distributors could provide.

In addition, the peculiarities of the three-tier system helped push companies toward consolidation. In the US, some national brands are distributed in different states by different wholesalers, even if each distributor sells to the same national retailer. In other words, Kroger might deal with three different distributors for the same brand.

So if a distributor has a national brand in some of its states, but not all, and wants to pick up the brand in another state to cut a better deal with the national retailer, it’s often easier to buy the other distributor than to lure the brand away. That’s because three-tier includes various financial and legal obstacles to brand switching, including laws in the so-called franchise states that prohibit a brand from changing distributors.

“Consolidation is a response to the reality of an evolving marketplace that seems to prefer efficiency above all else, driving costs down so that margin opportunities are greater,” says Caudill. “The marketplace doesn’t care about your priorities as a producer or supplier, so it’s imperative to be customer focused and respond to what the customer wants. That means a healthy dose of realism needs to invade all levels of planning and execution.”

Is efficiency enough?

But will bigger mean better for anyone other than the biggest distributors, producers, and retailers? Not really, says Daniel Posner, owner of Grapes The Wine Company in White Plains, New York, and president of the National Association of Wine Retailers, a trade group for independent retailers.

“We’re headed for a monopoly among the distributors, and that means higher prices and less selection for the consumers,” he says, predicting that the top couple of wholesalers could control 85% of the second-tier market sooner rather than later. “Consumers won’t be able to get the wines they want.”

Posner’s point, which echoes Courey’s, is that smaller producers will get lost in the new distributor systems, overlooked and forgotten if only because the new distributor books will be so huge. Courey says the three biggest distributors in Colorado have so many divisions that they need 12 sales people to call on him; hence, representatives from the same companies end up competing against each other for his business. There is also the fear, say some retailers, that only the biggest brands will be be able to afford to offer the wholesalers the discounts, pricing, and incentives necessary to promote brands, further isolating smaller producers.

 And this assumes that the new bigger wholesalers will want to carry smaller brands, which may not be the case unless they’re cult wines, established high-end producers, come from top importers, or are otherwise unique. When Glazer’s shuttered Stoller Wholesale Wine & Spirits, a Chicago-area wholesaler that it owned after the Southern deal, it dropped all but a dozen of the Stoller brands.

Also a concern: That the new bigger distributors’ focus will be on spirits and not wine, as demonstrated by Bacardi’s decision earlier this year to move its $1bn worth of business to the combined Southern/Glazer’s, despite possible regulatory hurdles. Says Posner: “If wine isn’t already a stepchild for these companies, it soon will be.”

Making it work

So what’s a small producer to do? The good news, say analysts, is that smaller distributors better equipped to handle smaller brands are becoming more common in many states. Already, says Courey, he buys about one-third of his wine from two small Colorado distributors and expects to buy more. Yes, say some analysts, many smaller distributors don’t have the market presence or cash flow that their bigger counterparts have, but the best small distributors can get the job done.

“If you look at it one way, at some point, all these distributors getting bigger will help us,” says Andrew Stover, who oversees Vino 50 Selections, a distributor in the Washington, D.C. area that specialises in small US wineries from less-known wine states like New York, Virginia, and Texas, as well as singular European wines. “Yes, I’m probably going to lose some business, but I’m not sure how much business I would actually do with accounts like that.  This is going to set us up for discerning accounts who don’t want what’s in Southern’s book and who want something that is craft or boutique.”

In addition, importers will have to take on an increased role in marketing and promoting their smaller foreign brands. Mark Gmur, the president of Texas wine marketing consultancy The Mark Wine Group, says the smartest importers will set up networks among the various regional distributors to give their clients nationwide scope.

It will also be important, says Caudill, for importers to work the market for their clients so that they don’t get lost in big distributor books.

“It’s no time to stop doing the things that should have been at the forefront all along,” he says, “building awareness with influencers that matter, knowing your story and what makes you special, and effectively standing out. Small brands don’t necessarily need to invent new ideas, but they do need to do the time-honoured, intensive market work that builds business from the bottle up.”

Because bigger doesn’t have to mean better only for big brands.



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