Name three types of markets for alcoholic beverages.
- ‘Free’ markets;
- Monopoly markets;
- The Three-Tier System in the U.S.
What are ‘free’ markets?
A market where producers are somewhat free to choose whether to sell directly to consumer (DTC), retailer, or through an intermediary.
Retailers (stores and restaurants) can be either on-premise or off-premise.
What is the difference?
- ‘On-premise’ are businesses where consumers can consume wine and alcohol on the premises of the business; these are usually restaurants.
- ‘Off-premise’ are businesses where consumers can not consume wine and alcohol on the premises of the business – they have to consume them off of the business’s premises; these are typically stores.
What are three advantages for producers who sell directly to retailers (stores, restaurants) in ‘free’ markets?
- No intermediary, so profits are maximized;
- Producers decide which retailers stock their wines;
- Can weigh in on marketing to control brand messaging.
What are two disadvantages for producers who sell directly to retailers (stores, restaurants) in ‘free’ markets?
- Administrative onus lies entirely with producer (e.g. delivery, label compliance, taxes);
- Producer may be bound to take on the full financial risk of wine being lost, damaged, or destroyed while in transit.*
*This financial burden may shift if the producer chooses to work with large chains of supermarkets, shops, or bars who may assume some of the financial risk.
Describe what a wine distributor does.
Buys wine from a variety of producers from different regions and countries, and sells it to a variety of retailers (both on- and off-premise).
The inventory of products in their portfolio fluctuates, and they may or may not have exclusive rights to import certain products in their market.
True or False:
Typically, distributors are located in the same country as the retailers they sell to.
True
However, distributors may or may not be located in the same country as the producer.
What are four pros for a producer to work with a distributor?
- Ease of introduction into new markets;
- Distributors help absorb some of the administrative burden (from transportation to risk during transit to legal compliance);
- Distributors usually assume marketing responsibilities and costs;
- Increased exposure for the producer through a distributor’s wine tastings.
What are four cons for a producer to work with a distributor?
- Producer can lose control over how their wine is marketed and at which retailer it ends up with;
- No distributor works exclusively with one producer, so the distributor’s attention is spread out across all brands;
- A distributor’s overall marketing strategy may not align with every individual producer;
- If a producer’s wines are not selling well, they risk being dropped by the distributor.
What are the differences between a merger and an acquisition?
- Merger: a unification of two businesses to create a business with greater resources, capabilities, and reach than the individual businesses had on their own. In theory, the two companies form an equal partnership.
- Acquisition: when one company purchases most or all of another company’s shares to gain control of that company; the purchased company then becomes a subsidiary of the purchasing company. Acquisitions occur usually to diversify, acquire greater market share or capabilities (e.g. resources, prime vineyard locations) which the purchasing company believes it lacks, creating a more competitive business.
In the truest sense of the word, what is a ‘broker’ in the wine business?
They are facilitators that help make deals happen between producers and buyers, and they do not represent either party.
What is a benefit for a producer to use a broker?
Brokers have different specialities – some concentrating on bulk wine, others on small-production wine – so depending on the type of producer, a broker can help find the best outlets for their wines.
What are four direct-to-consumer (DTC) sales options?
- Cellar door sales (includes tasting room sales);
- Events;
- Wine clubs;
- Online.
What is a ‘monopoly’ market?
A market in which the supply chain is limited, and a monopoly – usually government owned – controls the sale of wine to the end consumer.
This monopoly not only sells alcohol in its own retail outlets, it also buys all the alcohol that comes into (or is made in) the country, thereby controlling every aspect of buying and selling alcohol.
Give an example of a government-run monopoly.
Systembolaget in Sweden
What is the aim of government-run monopolies?
To limit alcohol consumption, which is achieved primarily through high pricing.
Name three obstacles a producer faces when trying to be picked up by a government-owned monopoly.
- Producer must first apply to become an authorized supplier;
- Monopoly usually meets only a few times per year to make big buying decisions, so the process to be approved can be lengthy;
- Producers must submit several samples which the monopoly may send to a lab to have analyzed, which remains out of their control.
What is the benefit for a producer of becoming an approved supplier for a government-owned monopoly?
The opportunity to sell large tranches of their wine in one large drop and having their wine sold throughout that country.
What was the Volstead Act, and in what years was it in effect?
The Volstead Act (1919 - 1933, also known as Prohibition) prohibited the manufacture, sale and consumption of alcohol in the United States with the exception of homemade wine and wine used for religious purposes.
When was the Three-Tier System introduced in the U.S., and what did it aim to do?
- 1933 upon the repeal of Prohibition;
- Aimed to act like a safety net for consumers by preventing suppliers from selling directly to retailers, or acting as both the supplier and retailer at the same time (which would create a monopoly or lead to unfair and manipulative practices) – the idea was to stick an independent middle man between suppliers and retailers, allowing all players to compete on a relatively level playing field.
What are the three tiers of the Three-Tier System in the U.S.?
- Supplier (producer, Importer);
- Distributor, which includes brokers and wholesalers;
- Retailer (off-premise and on-premise retailers).
What is a ‘joint venture’?
When companies in the wine industry at different stages in the supply chain look to come together to save costs.
Name 2 factors that ought to be met to make a joint venture successful.
- The companies need to be of comparable size
- The contractual arrangements need to be carefully agreed and documented to ensure each party knows their responsibilities and obligations
In a joint venture, if the companies are NOT of comparable size, what is the general (negative) effect?
It’s more of a takeover
