September 2017 Issue of Wines & Vines

The Challenge of Distributor Consolidation 

As wine brands proliferate and the wholesale tier compresses, many wineries feel thwarted

by Andrew Adams 

Since he turned his hobby and passion into a small business in 2010, William Allen has enjoyed what could be described as exceptional success for a fledgling winery.

Allen wasn’t a complete novice when he started making wine. He was the author of the popular blog Simple Hedonisms and had a goal to make minimal-intervention Rhône variety wines. Knowing how to play the game, however, doesn’t ensure success. Allen delivered on quality to the acclaim of several wine writers including Jon Bonné, who listed Allen in his book The New California Wine. Just two years after launching his brand, Two Shepherds, Wine Business Monthly named the label one of its top 10 “hot” brands. And after several years of growth, Allen moved production in 2015 to a renovated warehouse in Windsor, Calif., that’s part of a cluster of other small wine, beer and spirits producers known as “Artisan Alley.”

With annual production now around 2,000 cases, Allen and his business partner and girlfriend Karen Daenen (they both still have other full-time jobs) decided to pause on growing the brand before tackling the next big hurdle for a growing wine producer: the wholesale market. 

For all his success, the prospect of finding the right distributor and ensuring that it turns into a mutually successful partnership in a good market is still a somewhat daunting prospect. Most of the wines Allen makes are 25- to 30-case lots, so he doesn’t have the inventory to meet the expectations of some wholesalers. At times he’s been disappointed by representatives who don’t seem to have any interest in opening new accounts. “We’re actually starting to revisit some of our strategy and not push to 3,000 cases,” he said. 

An inverse relationship 
The proliferating number of North American wineries has an inverse correlation with the shrinking number of distributors. According to winery and distributor sources, in 1995 the United States had about 1,800 wineries and 3,000 distributors. Today, there were more than 9,200 wineries and nearly 1,200 distributors. 

Distributor consolidation is often cited as a major challenge to the industry. The subject was part of University of California, Davis, professor emeritus Robert Smiley’s annual survey of wine industry executives. Those that participated in the anonymous survey acknowledged the problem, and while some had hopes in a new generation of smaller distributors, others don’t see that as a real viable alternative. A few of their answers: 

“Much of our route to market is handled by a single company now; it is rather frightening. The clout they have over us is remarkable.” 

“You will see smaller distributors opening up, but they will not have the same skill set or professionalism. They will open up, but they will get clobbered by the big guys.” 

“Smaller wineries are not really thinking about distributors and are going direct sale and making that their format to grow through their tasting rooms and wine clubs. Growth is smaller and not as quick, but it is more profitable.” 

While mergers and acquisitions among wholesalers have been happening for decades, the recent deals have come faster and are bigger, leaving fewer and fewer options for wineries hoping to expand. The deal between Southern Wine and Spirits and Glazer’s that culminated in the new Southern Glazer’s Wine & Spirits in 2016 sent shockwaves through the industry. The mergers are not over either. Most of the experts interviewed for this report say they expect another major deal in the near future and that consolidation will continue at the lower rungs of the wholesale industry for several years. 

In mid-July, two of the nation’s other major distributors, Breakthru Beverage and Allied Beverage Group, merged the two companies’ New Jersey operations. The new firm will become the largest wholesaler in the state with revenues of more than $1 billion.

As these deals continue, the good news for small and medium-sized wineries is that a new generation of smaller, independent distributors could crop up to serve smaller wineries, and the direct-to-consumer market is stronger than ever with shipping now legal in nearly all 50 states and revenues of $2.5 billion annually, according to the Wines Vines Analytics/ShipCompliant model. 

Jeff Carroll was one of the founders of ShipCompliant and is an expert on wine shipping compliance and the three-tier system. He said that system has become much harder to enter for new wineries. 

“If you’re small, or you are new and your brand is not well known, it is exceedingly difficult to get adequate representation,” he said. 

Carroll said it’s not just distributor mergers creating headwinds but also consolidation among retailers and the emergence of thousands of premium breweries and distillers that have entered the market. The market has compelled larger wine companies to acquire smaller brands to create a portfolio that’s attractive to the largest wholesalers. “All of a sudden they can take a brand that’s flat or struggling, and they can get that moving quickly and introduce it through those existing marketing and distribution relationships.”

He said DtC is really the best option to enter the market, and that there hasn’t been any significant breakthrough alternative to the three-tier system. “You will start to see new models evolve, but I’m not sure if anyone has cracked the code yet.” 

There are boutique wholesalers who focus on new brands, and Carroll mentioned other firms that provide the logistical services of distributorship cheaper because they leave it up to wineries to do the sales and marketing. He added that some of the larger retailers have been pushing to open up the three-tier system, too. “There are some major companies out there that are putting some pressure on the traditional laws,” he said. “I think you’re going to see a lot of challenges.” 

Consumers are also waking up to the challenges of the three-tier system. As they continue to demand more choices when it comes to wine, they are increasingly frustrated when they can’t find those brands in their state. “That’s a market force that will apply pressure on the system,” he said. 

‘Bigger, bigger and bigger’ 
Since launching the Napa, Calif.-based sales and marketing, import and distribution company Quintessential Wines with his father in 2002, Dennis Kreps said the consolidating wholesale market has compelled his company to expand its sales team nationwide. “Because of the consolidation of wholesalers— they get bigger, bigger and bigger—they want to do a good job for everybody, so we have to have people in the marketplace working closely with them and helping to drive the business, or execution just doesn’t happen,” he said. “They have too many brands in their portfolios, too many priorities. That’s our strength in the manpower of our sales force around the country.” 

Most of the wines Quintessential represents are imports, but Kreps said domestic wineries are “the biggest opportunity for growth for us,” and his sales team of nearly 60 is the foundation for that growth because they can do all the routine sales work of calling on accounts and meeting with buyers. “Twenty years ago wholesalers did all that because there were a lot of wholesalers and they had smaller portfolios, but you can’t really expect them to do it now,” he said. “We believe in salespeople in the streets building our brands.” 

Consolidation has “snowballed” in recent years because of major deals like Southern Glazer’s and the creation of Breakthru Beverage in 2016 through a merger of Charmer Sunbelt Group and Wirtz Beverage Group. Kreps said he expects it to continue. “It’s made it more and more difficult for the independent distributor to be successful,” he said. “But that has allowed us to be more successful because of our manpower.”

Build the brand for success
John Jordan, owner and CEO of Sonoma County’s Jordan Vineyard & Winery, which produces around 90,000 cases per year, said consolidation has been “a fact of life for a couple of decades” and long before he joined the wine industry. He said the wholesale market is a competitive business driven by tight margins, and so wholesalers need to be assured that a brand will sell through each quarter. 

Jordan wines are distributed in all 50 states and by many of the largest wholesalers. Jordan said that’s because his family invested heavily in building that brand through public relations, digital media content and a strong sales team. “The responsibility is on the supplier to build that brand equity, because a wholesaler won’t do it for you,” he said. “You need to build that brand.” 

Such brand work is also vital to convince consumers as well. Jordan said the typical U.S. wine consumer is not a wine cognoscenti, and rather than wanting to discover something new they typically just want a trusted brand. “That’s a battle you have to win when a consumer is looking at the retail shelf or wine list,” he said. 

And if the consumer does stick with the trusted brand, it’s often better for the retailer and wholesaler. “Access to the three-tier market is getting ever more restrictive because there’s just so many brands out there,” Jordan said. “Wholesalers don’t want the inventory of obscure brands that in turn may have a hard time selling through retail accounts.” 

When asked if had any advice for a new winery seeking to grow through the three-tier system, Jordan conceded it would be very tough. “I’m not sure it could be done,” he said. “You have to convince the wholesaler their margins will be really high and they’ll sell through. Frankly there’s just so much noise out there it’s very tough to do.” 

For distributors, the situation is reversed. They need to be even more selective about who they choose to represent. 

“I can’t comment on the specifics, but the proportion of brands we accept compared to those presented is getting smaller with each passing day. We are very disciplined with regard to which brands we elect to represent, and the choices feel virtually endless,” said Erle Martin, executive vice president-wholesale west for The Winebow Group. 

Martin said consolidation is the No. 1 factor in the wholesale environment in the United States, and with that comes additional competitive pressure. That squeeze is also leading to innovations in technology to better understand sales patterns and manage multiple brands effectively. 

Just like many other industries, Martin said consolidation is driven by companies looking to expand their business volume and enter new markets through acquiring competitors or smaller entities. Greater scale also brings more opportunity for efficiencies in operations and other costs, which are a huge factor in the wholesale market where margins are tighter. 

With every major merger, other distributors feel more pressure to find their own deals to stay competitive. “There’s a bit of a domino effect,” Martin said.

Martin also readily admits wineries face a challenge when trying to secure distribution. “It is tough. You’ve got these two trends moving in opposite directions,” he said. 

He also pointed out that it’s not just wholesalers consolidating but retailers as well. Smaller stores and wine shops are getting marginalized by the concentration of larger retail groups including Costco and Amazon. Large grocery chains also are offering a greater variety and number of wines than before, and many of those wines used to be only found in high-end specialty shops. 

All the while, the number of wineries and brands seems to grow at an exponential rate. As of June 2017, there were 9,217 wineries in the United States, according to Wines Vines Analytics’ winery database. Martin said he recently spoke at a networking event for wine entrepreneurs, and in a room filled with 30 to 40 winery owners, he only had heard of a couple of brands. “How are they going to compete?” he asked.

Many of them are hoping DtC will be their answer, but that takes time to scale. 

Have a plan and stick to what you do well 
Martin said Winebow is “philosophically a fine wine distributor,” but that does not mean the company is focused on just wine quality or critical reviews. Rather, he said they look for well-differentiated brands with a track record and predictable sales, a well-organized and capitalized plan with professional management, a prepared understanding of the marketplace and a strategy to keep the brand relevant. A few good account placements (such as Whole Foods or a restaurant group) also help. “That’s sort of winning the lottery as a relationship with a supplier goes” if a winery can check all those boxes, he said.

A national sales manager and in-house sales team is great, but those won’t necessarily secure the attention of a distributor, Martin added. 

“It’s a challenging dynamic in the marketplace,” he said. “There’s a number of otherwise high-quality brands we don’t accept; Napa Cabernet with scores in the 90s we turn down. It’s not enough to just make wine that gets scores.” 

A sales and marketing firm can help, but Martin said that’s no guarantee of finding a distributor as well. 

Delicato Family Vineyards recently acquired one of the more successful such firms, V2 Wine Group, which was founded by Dan and Katy Leese. “The investment in V2 Wine Group by Delicato was a strategic one,” Chris Indelicato, president and CEO of Delicato Family Vineyards, said in an email. “As consolidation has accelerated within all three tiers, the need for a broader, valuable portfolio becomes even more necessary; distributors and retailers alike are looking for it.”

The two companies will manage chain retail together but keep their unique portfolios outside of chains separate. “With DFV and V2 working closely together now in chain retail and finding synergies where we can, we are well positioned to offer those retailers a broader, more valuable alternative: the ability to offer many brands in the fastest growing categories.”

Delicato said the company is a leader in the “exploding” premium bag-in-box category, and its Gnarly Head and Noble Vines brands do well in the premium glass category. V2 adds a complementary super-premium and luxury portfolio. “While DFV has tremendous penetration in the retail chain world, V2 has built a strong business that is well balanced in the broad market retail and on-premise sectors.” 

With Quintessential, Kreps focuses on a niche of multi-generational, family-owned wineries but said, in general, the best route for a winery to find and build a good wholesaler relationship is to do one thing well and stay consistent. “The biggest challenge for a wholesaler is wineries that change focus on a monthly or quarterly basis based on what they produce or what’s not selling fast enough,” he said. 

If, for example, a winery is well known as a Cabernet producer, and 70% of its total production is Cab, they should stick with pushing that varietal. “Don’t change because you get a little backed up on Chardonnay. Keep your message consistent. Deal with your Chardonnay issue with key accounts or whatever you have to do, but your wholesale message needs to remain consistent.” 

DtC sales can help wholesale and vice versa, but Kreps said it’s best if wineries keep DtC to vineyard designates or specialty releases so they aren’t competing with retailers. “If you want full, broad distribution and a vibrant direct-to-consumer business on the same product, I think you’re going to run into some roadblocks,” he said. 

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