Wine across America Blog - Los Angeles

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Distribution in America is the key to success. Like anywhere in the world, ‘route to market’ is always going to be the killer attribute that can mean the difference between success and failure. Nowhere in the world is this more apparent than in the United States where the neo-prohibitionist hangover of federal liquor controls hangs thick in the air. Americans, it seems, have reached an uneasy state of acceptance of this extraordinary status quo where every facet of a wines journey to the end consumer pads somebody’s pocket. To recapr for those who are confised by these statements. America (generally) has a 3 tiered system of wine distribution whereby the non-American producer cannot legally sell wine to anyone but a wine importer. The absurdity starts when you understand that no single person or business entity may own both a distribution and import license. What this means is that the importer cannot sell wine to the consumer or even the retailer/restaurateur and can only sell wine toa distributor who in turn can also only sell wine to the trade. Technically speaking, the only place a consumer can gain access to imported wines is through the 3rd tier of the channel which is the retailer or restaurateur. Once you understand the vastness of the US market, it is understandable that perhaps this system would have evolved independently as few companies have the infrastructure and capabilities to own and distribute nationally with efficiency. But the system really falls down in the sense that it suppresses free market activities and that the larger National distributors have little in the way of competition. As a result of this and to further entrench this skewed power balance, the larger distributors are being consolidated at a rate that is unprecedented and fewer distributors are controlling more of the market. It feels sometimes that every medium-size distributor in the US is simply waiting for the ‘big guys’ to come along and buy them out. Might I be over-dramatising this? Maybe, but this is the feeling on the ground.
So what does this mean for South Africa? Well, for every distributor that gets purchased, this means fewer distribution slots for South African wines exist and fewer small producers are able to participate in what becomes a much larger structure. The larger a distributor gets, the larger the supplier has to become in order to become a meaningful contributor to bottom-line. The big brands become bigger and the smaller brands get squeezed out. The consolidation of distribution and ongoing production fragmentation continues apace. The two trends are not compatible and we will have to win over some serious buyers to grow South African wine in the US – usually at the expense of another global supplier.
So where are the opportunities?
The federal and state regulators are slowly (very slowly) dismantling the complex wine distribution laws, but a combineation of big business (distributor) lobbying in Washington, a very religious and conservative population and misplaced priorities is hampering this progress. A high-profile battle between retail giant Costco and the state of Washington recently threw up a couple of clues about the future when Costco won the first step in the battle to allow it to ship directly from the producer. Of course this judgement will go to appeal and will probably be held up for years, but Costco is being aggressive and has set a valuable precedent which any sensible judge cannot fail to respect.
Is this a good thing? Well, yes and no as it si being championed by the mammoth retailers and you can be sure that they are not pursuing a Samaritanian endeavour to make money for the supplier – no, they are chasing margin for their bottom-line because they know that through direct imports and direct shipments, that they can leverage their massive nation-wide distribution network to exponentially multiply their sales and balloon already embarrassing margins.
Opportunities exist for South African suppliers to find routes to market that narrow the gap between importer, distributor and retailer. In some states, it is (kind-of) legal for the husband to own an import license, the wife to own a distribution license and the kids to own multiple retail licenses. It happens – another symptom of an idiotic system. Many California wineries drive a substantial volume of their sales through wine clubs and direct shipments to customers. Of course there is a limited amount of states that you can ship to directly, but this has been growing over the years. Is there a business model here for South African wineries. Is there an effective model for a South African winery to run a wine club for direct sales to customers? The answer must be yes, but there has to be demand first and brand South Africa must become more entrenched before this will work. So the hard work lies ahead in this massive market opportunity that is the USA.