Distribution 101: Three-tier state

[lboe]

I plan to open a distillery in a three-tier state and therefore must contract with a distribution company. This is something with which I am not familiar in the slightest so I'm hoping that the collective experience of the people on this board can help as I work on my plan. Here are some of the questions that I have:

1. Locating a distributor: I have only been able to find three distributors operating in my state. Is there a central list anywhere?

2. Large vs. small distributors - Advantages/Disadvantages of each? My initial market will be the city in which I am located.

3. Requirements of the distributor: I know that I'm going to be in charge of my own marketing and producing the product. What can you reasonably expect the distributor to bring to the table?

4. Requirements of the distiller: Is there anything in addition to the above, I will be expected to provide to the distributor?

5. Initial product requirements: Is there an initial volume of product they usually ask for in their warehouse? Minimum annual production?

6. What if they say, "No"? - Getting a bit paranoid that all three could pass on my product. Then where does that leave me? Is there a Plan B out there?

7. Typical contract terms - Who determines the percentages of MSRP earned my the producer, the distributor, and the retailer? Are there any benchmarks anyone can share?

8. When do you get a distributor? - During planning? After permitting? First bottling? I would think earlier is better, but don't know what the standard is.

Any other nuggets of wisdom on the topic would be greatly appreciated. I'm sure there are things I haven't even thought to ask. If there is anywhere on the web I've overlooked with good information on the topic please pass them along.

Thanks in advance!

[Jonathan Forester]

What state?

[heartland distillers]

I plan to open a distillery in a three-tier state and therefore must contract with a distribution company. This is something with which I am not familiar in the slightest so I'm hoping that the collective experience of the people on this board can help as I work on my plan. Here are some of the questions that I have:

1. Locating a distributor: I have only been able to find three distributors operating in my state. Is there a central list anywhere?

2. Large vs. small distributors - Advantages/Disadvantages of each? My initial market will be the city in which I am located.

3. Requirements of the distributor: I know that I'm going to be in charge of my own marketing and producing the product. What can you reasonably expect the distributor to bring to the table?

4. Requirements of the distiller: Is there anything in addition to the above, I will be expected to provide to the distributor?

5. Initial product requirements: Is there an initial volume of product they usually ask for in their warehouse? Minimum annual production?

6. What if they say, "No"? - Getting a bit paranoid that all three could pass on my product. Then where does that leave me? Is there a Plan B out there?

7. Typical contract terms - Who determines the percentages of MSRP earned my the producer, the distributor, and the retailer? Are there any benchmarks anyone can share?

8. When do you get a distributor? - During planning? After permitting? First bottling? I would think earlier is better, but don't know what the standard is.

Any other nuggets of wisdom on the topic would be greatly appreciated. I'm sure there are things I haven't even thought to ask. If there is anywhere on the web I've overlooked with good information on the topic please pass them along.

Thanks in advance!

Before opening my distillery, I was in the alcoholic beverage for 15 years, so here are my observations:

1. The TTB website has a master list of distributors, however I'd check with your state authority. Additionally, ask some of the bigger retailers who the best 1 or 2 distributors are and why. That will give you an idea of who to approach.

2. Large vs Small. Larger distributors have more resources and a larger sales force, however they may be preoccupied with servicing their larger suppliers and you will get ignored. If you only intend to be in high end bars, restaurants, an a few liquor store, I'd suggest a small more specialized distributor if there is one in your area. If you want to be everywhere, you will probably need a bigger guy.

3. A distributor will initially help you kick off a product and present it to the retail trade. This is a big deal since it would take you quite awhile to present your product to all the licensed retailers in your intended area. You can expect the distributor sales force to do some retail point of sale marketing for you i.e. shelf talkers, table toppers, posters, but you may have to supply those items. Also, don't underestimate the value of the distributor actually distributing product. That takes time and money to do yourself.

4. The distributor will want to use you. You are your best marketing tool. Plan to ride shotgun with the salesforce. You will want to do this too. Take advantage of tastings if allowed in your state.

5. Initial product requirements vary, depending on what they think they can do volume wise. Most distributors will only want to buy by the pallet. Be sure to ask their payment terms (I'd also require that they make an initial purchase COD, if it's sitting in their warehouse unpaid for they don't have much incentive to get moving).

6. Plan B. In most (maybe all) three tier states a producer can't own a wholesalers license. There are work arounds to this, mostly pertaining to how/who ownership is allocated. A local attorney versed in alcoholic beverage law would be the best person to advise you (contact your local bar association and ask them for a referral).

7. Contract terms. You set your price to the wholesaler. You cannot dictate his price to the retailer or the retail price. However, a good distributor will help you analyze the market and determine how your product should be priced based on average margins in your state. I do know that margins vary state to state more than most people would think. Retailers will make a higher margin than the wholesalers. A good place to start is to go to a retailer you know well and ask if you can see his wholesale pricing catalog.

8. Having just started talking to distributors about my product only after a few months production, I would suggest doing so sooner rather than later. In my case I already knew personally all the wholesale trade so it wasn't as big a deal for me. But if you don't know anyone, I would think it is better to at least establish an initial relationship sooner rather than later. Most wholesalers won't get serious with you until they can see the final product in the bottle. But that doesn't mean they won't talk to you about your idea and brainstorm with you about marketing ideas and pricing. Liquor wholesalers want new products and new suppliers.

Remember, wholesalers can be your best friend (BFF as my son would say), but they too are out to make money, they will base their recommendations FIRST on what they think will make them the most money. So be sure the pricing/distribution advice they give you makes sense to you too. If you are not sure, ask retailers and restaurateurs what they think (at least as far as the suggested retail price point). Also, don't tell them your bottle cost or any internal pricing info. They don't need to know that and it only gives them ammunition to talk you down on price. As long as you work from a retail price point, know what margin the wholesalers want, and what average margin the retailers charge you can start to estimate pricing and negotiate.

Make sure your distribution agreement spells out exactly under what conditions you will accept product back from the distributor and what type of credit you will issue them. For example, they terminate the distribution agreement but have 3 pallets on hand, will you be required to take those pallets back and credit them any money? If you terminate, you may want them to be required to send back all the product they have in stock, since they could flood the market with cheap product and ruin your price point (I've seen this happen several times), however you must be able to pay them back if those are the terms.

This leads to one final thought, make sure you spell out under what conditions you or they can terminate your agreement. Think through all possibilities.

Ask the distributor for a pro forma distribution agreement, then get an attorney and go through it line by line. The distributor may tell you it's not negotiable, but it is.

Also, don't forget federal and state excise tax when figuring your price.

Hope that helps.

[Denver Distiller]

It was very kind of you to post that info., heartland. People new to the biz would do well to read your advice several times over. 15 years of experience, indeed.

The two pieces of advice I would add would be to be prepared for the wholesaler to do absolutely nothing to sell your spirits. I don't mean for you to expect this, but you should be prepared for it.

The other is that mergers have really taken its toll on the number of distributors. Those big shops may be tempting, but you have to remember that the easiest way to cut your competition is to take them into your house, and do absolutely nothing with them.

[Paul G]

Great question...fantastic answers. Thank you all!

[heartland distillers]

It was very kind of you to post that info., heartland. People new to the biz would do well to read your advice several times over. 15 years of experience, indeed.

The two pieces of advice I would add would be to be prepared for the wholesaler to do absolutely nothing to sell your spirits. I don't mean for you to expect this, but you should be prepared for it.

The other is that mergers have really taken its toll on the number of distributors. Those big shops may be tempting, but you have to remember that the easiest way to cut your competition is to take them into your house, and do absolutely nothing with them.

Denver, two excellant points. This does happen quite often, sometimes intentionally, more often because you are one more product out of hundreds or thousands in their book. To mitigate this make sure you are a profitable item to them, that means giving them a few more points than they get on comparable brands/products and, if allowed in your state, come up with sales force incentives and/or retailer incentives to make your product stand out financially. Also, after the initial kickoff make sure you maintain your presence and relationships--out of site means out of mind.

[lboe]

Thanks everyone for all of their great advice. I'm getting more invaluable information than I could have ever hoped for.