- What started as a means of enforcing competition has become anti-competitive; distributors with regional monopolies may not be incentivized to help newer or niche wineries
- Distributors are simply another mouth to feed, increasing prices to consumers
- Newer wineries may have a difficult time landing a distribution contract without first establishing their place in the market, this leads to a chicken and egg problem
- Politics with retails may lead to distributor acting in manners that compromise the producers
The list goes on and on. I actually happen to agree with or at least find the validity in many of these points as raised by critics of the system. However, many arguments in opposition of the system fail to adequately think about one key constituent: big box retailers. I'd like to make three points regarding this large but influential set of folks that I think aren't often taking into consideration.
First, and I'm being lazy here and deciding not to find the data so feel free to stop reading, I'd bet that the majority of wine sales in the US go through big box retailers like Safeway or Costco. At this point it makes sense to think about the business model of these companies. Margins are razor thin; both Safeway and Costco have operating margins below 5%. In a business model with margins that thin, inventory turns become paramount, i.e. they need to move good as fast as possible. What that means in practice is that retailers don't want to carry the 1984 vintage red from Burgundy. The want the two-buck chuck that moves quickly. Many point to the distributors as stifling competition by promoting certain wines but the reality is, they respond to retailers. Without, distributors bundling wines together, I'd bet it's likely that consumer choice would be even more limited than it already is.
Second, I'd like to introduce retail slotting fees. What most people don't know is that when you walk into a Safeway or Whole Foods and see an item on a shelf, the producer or manufacturer of that item has in may cases payed for that item to be put there. Think of it like rent or legal bribery. These slotting fees are often pretty hefty with big box retailers collection hundreds of millions of dollars in slotting fees annually. Fortunately for wineries, they have been shielded from this because of the three-tier protections. Thus, the three-tier system
restrains the ability of large retailers to exercise their massive purchasing power and
unfairly stifle competition. Were wineries not under this protection, they would be subject to massive slotting fees that would pit them in a competition with large grocery producers with sizable assets (Proctor and Gamble, Campbell's, etc.) who could simply afford to pay higher prices than most wineries for slotting fees. Needless to say, the largest wineries would get shelf allocation, and the rest would not.
Finally, I want to address this notion that retailers are in the business of promoting choice to consumers. Specialty retailers (a term that derived from selling niche products) are in that business but big-box retailers are not. They want to sell what moves quickly (inventory turns) at the highest margins possibly (lowering their costs) and will bully their way to do so. Recently in Indiana, the state briefly allowed beer distributors to sell anywhere in the
state. In response, the major big box retailers went from distributor to
distributor, negotiating the best price possible on large orders. In
the end, the retailers were able to force prices so low that a number
of the distributors wound up out of business. As a result, craft
brewers who had relied on some of those distributors lost their
access to the retail market. To prevent further damage, Indiana re-instituted a territory system, so
that retailers could no longer play the distributors against each
other, to the death. While this has to do with distributors, the reality is that retailers would do this to anyone if allowed (distributors, producers, importers, etc.). The three-tiered system at least prevents some of this egregious behavior.
For the record - I'm not sitting here waving the flag for the three-tiered system. I see the good and bad of it and I think I can be objective about its pros and where it falls flat. I'm also not suggesting there is not a better system; their must be. All I'm trying to point out is that wholesale repeal of the system needs to be more well-thought out, accounting for the incentives of each participant in the supply chain.
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