The end of the three-tier system?

three-tier systemPaul Mabray, who knows this stuff better than almost anyone, says the end of the three-tier system is coming. It will probably be later rather than sooner, but Mabray is convinced that technology, combined with three-tier’s built-in inefficiency, will make the system obsolete.

The Wine Curmudgeon mentions this because my views on three-tier are well known. The system, which mandates how wine is sold in every state, says consumers can’t buy wine from the producer (with some exceptions), but must buy it from a retailer, who must buy it from a distributor. Buying wine from an Internet retailer, the way we buy clothes from Overstock.com or computers from New Egg, is almost always illegal. In this, three-tier is constitutionally protected, so we’re stuck with it until the end of time or until we reform campaign finance laws, which is about the same thing.

But Mabray, the chief executive officer for VinTank, which helps wineries use the Internet and social media to market their products, sees the situation from a completely different perspective.

Market access should not be constricted by antiquated regulations, but by market choice,” he says. “Yes, there needs to be regulation to enforce a regulated product but forcing it to go through a mandated tier structure is outdated.”

Mabray said this during last month’s Silicon Valley Bank State of the Wine Industry presentation, and I was so intrigued by what he said that we talked about the subject this week. He reiterated it during our chat: Trying to stop the advance of technology with artificial barriers is almost always futile, and three-tier will eventually break itself.

How that will happen involves lots of supply chain geekiness, but Mabray is convinced that Internet technology — the same thing that has allowed Amazon to make money by selling diapers for next day delivery, unheard of a decade ago — will come to wine. Three-tier as we know it will break down because it will be too expensive and too complicated to work the way it does now. Even the distributors, who have the most to lose, will want to change it to make it more consumer-friendly.

Perhaps. One reason our views are so different (besides my crankiness) is that Mabray sees an economic model ruled by efficiency. I see an economic model ruled by state legislatures with vested interests, whose idea of a supply chain is something you tow your car with. I hope he’s right about this, but I won’t be surprised if he isn’t.

More about three-tier and direct shipping:
? Could the Internet screw up direct shipping?
? Amazon.com, Prohibition, and the three-tier system
? The Supreme Court and retail direct shipping

10 thoughts on “The end of the three-tier system?

  • By Adam - Reply

    It’s crazy to me how much clout the distributors have accrued, considering that they’re essentially trucking companies. I do not have much respect for their ilk.

  • By AC - Reply

    congratulation! There are still a lot of ignorant views about what Distribs really do, who they are…they are a lot more than trucking companies and anyone who makes a statement like that without really knowing the whole picture, let me just say, they are no threat to the future of the 3 tier system…

    • By Paul Mabray - Reply

      Alfonso,
      As you know, I agree with you about the ignorance and that wholesalers do more than just truck wine. I think that 3T is essential for a certain tier of wines but it has also become grossly inefficient/ineffective for other categories of wine. Ironically it is not the fault of the wholesaler but the explosive growth of brands coupled with the inability to have a virtual inventory model that truly inhibits wholesalers addressing this challenge. Moreover the fact that wholesalers don’t need to change since they are a mandated middleman inhibits them addressing the problems stemming from consumer choice and technological innovations. Instead of fighting it, they should be looking for a way to leverage it properly IMHO.

      You are one of the small network of people that work within the 3T construct that truly get it.

      • By Alfonso Cevola - Reply

        Thanks Paul…

        As you know, I have no problem with change and change is coming. There is a lot of energy within 3T to make it more efficient and more of a service and less of an obligatory channel. As well, there are many of us who want wine lovers to be able to be more informed in order to make better purchasing decisions. I think seven fifty is a great bridge for that kind of business.

        And as you already know, I believe there is room for all manner of routes to market in this world which has way too many wines to go through one channel only.

        thanks for your kind and intelligent response.

  • By Rex - Reply

    Many small wineries have already opted out because they cannot make money. They are into tasting room sales, clubs and local restaurants. Restaurants might be a bigger threat to wine than three tier because of outrageous prices and dubious quality. There are some excellent choices out there however. Here in San Diego the Wine Vault & Bistro offers a $15 wine program with a pour for each course. A very nice deal.

  • By Blake Gray - Reply

    Wishing it away won’t make it go. I would bet you real money that we won’t see the end of the three-tier system in our lifetimes.

    • By Wine Curmudgeon - Reply

      I agree with you, Blake. We’ve spent too much time in the newspaper business to think otherwise.

      But what intrigues me about Mabray’s argument is that his perspective is completely different from those of us who aren’t supply chain guys. Maybe he sees something we can’t see. The flip side of that, though, is that maybe we know something he doesn’t.

  • By Bill Haydon - Reply

    Unlike almost everybody who comments on the end of the three tier system, I have actually been part of an effort to legally circumvent it and distribute California wine directly to retailers and restaurants. It ended in failure for a myriad of reasons including winery hubris (“everybody will rush to buy our wine once the evil, inefficient distributor is out of the way”), winery greed (little or no savings were being passed on to the accounts and absolutely no thought was given to how the people on the ground doing the actual selling could make a living), inefficient logistics, warehousing and delivery and needless hassles for the buyer such as having to be invoiced individually by each winery.

    Each of these failures alone would have been enough to sink the project. In their totality, they’ve convinced me that the 3-tier system for all its inefficiencies and frustrations is still the most efficient mechanism to distribute wine on a national or regional scale.

    And this was in a very large and highly concentrated market–Chciago. If it failed here, how is it ever going to work in more spread out markets such as Ohio or Texas where gaining any economies of scale either in the selling/marketing or logistics areas would become infinitely more difficult.

  • By Tom Wark - Reply

    BILL HAYDON SAID:
    “Each of these failures alone would have been enough to sink the project. In their totality, they???ve convinced me that the 3-tier system for all its inefficiencies and frustrations is still the most efficient mechanism to distribute wine on a national or regional scale.”

    I don’t think you mean what you wrote. I think you mean that selling to distributors who then sell to retailers is “the most efficient mechanism to distribute wine on a national scale.”

    The three tier system has nothing to do with that process. The Three tier system MANDATES one sell their wine directly to a distributor (at half their suggested retail cost) rather than directly to a retailer or restaurant if they choose. There is nothing about this legal mandate that a middleman must take a cut that relates to efficiency of distribution.

    • By Joe Jensen - Reply

      To Tom Wark and the other anti distributor folks out there I have one simple idea for you!

      Actually do what we small distributors do for a year or two and then tell me how easy it is going to be for all of those wineries who complain about distributors ignoring their wines and keeping them out of the markets and you will see that 99.99% of them will fail miserably.

      Most of the pontificators of this argument have never spent a day actually selling wine and have no idea what the daily battle is like out there!

      There are select wineries with owners who have relations in markets and relatives to stay with that make it happen by bringing their tasting room experience to the market but the vast majority can’t spend the $ for the plane ticket, car rental, hotels, meals, etc which will cost more than the distributors margin.

      Truly the big distributors rule the market with their give aways bought by their liquor profits, blitz’s and other tactics which fogs the shelves and the BTG lists but the over 125 small
      distributors in the Chicago market represent thousands of California wines and fight for shelf space that accommodates maybe half of what is flooding the market.

      Most of us small distributors are the marketing and distribution arm of many small wineries that realize the value of what we do, they actually make good wine that is priced right and performs well at its price point.

      Good small distributors develop a portfolio and a sales team who work with their customers on a weekly basis bringing them the wines they need to fit holes on their shelves or holes on a tasting menu or BTG list, sometimes bringing up to a dozen examples of wines that fits the customer wishes and we are only one of maybe 6 others who will bring 4 to 12 wines to fill that one spot which means that a customer may taste up to 36 wines to fill one spot that may last 1 case or 100 cases!

      Many who don’t get distribution don’t get it because they make mediocre over priced wines that no one will buy a second bottle or case of once the romance of meeting the winemaker washes off!

      Many of these wineries also sell their wines so cheap in California that they actually set the price too low for a distributor to make a margin that works.

      I have seen FOB direct sales prices to California retailers and restaurants that were almost the same as they wanted to sell to me for and still at 50% of the winery price. Smart small wineries balance their FOB across the country taking into consideration shipping costs and excise taxes so that the average distributor work on 30pts GP after laid in costs will be selling to local retailers at a price that makes them competitive across the country when you do a wine searcher search.

      I won’t touch a wine that shows up on WineX in California for
      $30.99 when my FOB is $20.00 plus laid in and margin.

      My retailers expect that they may not be the lowest price on wine searcher but they can’t work with wines that sell in California for what is almost my wholesale price and that is purely the fault of the winery and a lack of understanding of the market.

      There is no question that wineries should be allowed to sell direct which they are in Illinois as long as they pay the same excise taxes and local sales taxes, etc which adds up to a lot of headaches for a small amount of business.

      Wineries should be allowed to sell direct to the restaurants who want them but are they prepared to send 3 bottles by FedEx overnight to get to the restaurant tomorrow since most even Michelin starred restaurants don’t have the budget or room to store several cases of a single wine. I can assure you that many of us terrible distributors are making last minute runs to warehouses to get the wine that the buyer forgot to order on a quite regular basis.

      Wineries can do all of this right now in Chicago which is a coveted market but somehow most of them aren’t and that is the truth that shoots your anti 3 tier argument to the ground.

      Go ahead and get rid of the 3 tier system but you still need an effective way to get wine to the market.

      The smart move for most wineries on top of their tasting room sales, club sales and DTC or DTT would be to develop an effective distribution plan taking all factors into consideration for the markets that you desire to be in!

      Speaking from the trenches!

      Joe

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