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Hughes

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I've been reading up lately on distribution laws and have stumbled across an article published a few days ago in the National Examiner discussing the right to self-distribute for breweries. They specifically referred to a law that is on the books in one state to take away self distribution, and different law that would strengthen it in another state.

I don't believe everything I read, it got me thinking. The three-tier system seems to be a disaster for small manufacturers in any of the three alcoholic beverage categories (if you disagree, please say why?). It makes it tougher to get new products on the selves and tougher to get a business going. If for some reason the breweries in the US were able to organize to fight the three tier system for the right to self distribute, at least in state, would DSPs stand a chance at joining or winning a similar fight? Why/why not?

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I don't have any answers, but I do have a question I've been wondering about; I hope I'm not budding it. Can a microbrewery make any beer they want and sell it, meaning does a microbrewery have to have formula and label approval for each and every beer they make, because it sure seems most microbreweries come out with special brews all the time.

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I've been reading up lately on distribution laws and have stumbled across an article published a few days ago in the National Examiner discussing the right to self-distribute for breweries. They specifically referred to a law that is on the books in one state to take away self distribution, and different law that would strengthen it in another state.

I don't believe everything I read, it got me thinking. The three-tier system seems to be a disaster for small manufacturers in any of the three alcoholic beverage categories (if you disagree, please say why?). It makes it tougher to get new products on the selves and tougher to get a business going. If for some reason the breweries in the US were able to organize to fight the three tier system for the right to self distribute, at least in state, would DSPs stand a chance at joining or winning a similar fight? Why/why not?

In Washington the state controls distribution and retail package sales of distilled beverages, which on first look would seem to be bad for the little guy. However, since WA considers craft distilling to be an agricultural product, requiring us to use at least 50% of our raw materials procured from within the state, they provide a bit of help for us, the little guy. We had the opportunity last fall to vote on opening up both distribution and package sales, and both got slapped down pretty hard. So for us, removing the divide between the three tiers is maybe not such a good idea.

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Welcome to the world of the double-edged sword. This sword cuts both ways.

You'll find that it's pretty tough to be in two places at once.

Classically trained MBAs (while scorned in many circles) can tell you the truth about life. Market channels exist because they work.

As a born-again capitalist, I can tell you that in an ideal market each task in the channel is compensated at the lowest possible rate because if someone else believes they can do the task for less money, they'll under-bid the other guy.

Sadly, no market is ideal, but food and beverage distribution is not far off.

We should take a lesson from the winegrowers in California. In California, "winegrowers" have a so-called 02 license. This license has the following privileges:

(1) to crush fruit and ferment it making wine, and to purchase bulk wine for all uses listed below

(2) to distill - to make fruit brandy (though an 06 still license is also required)

(3) to rectify - that is to blend wines and/or brandys with or without additional flavoring materials,

(4) to bottle the products made, and bottle as a service to other winegrowers

(5) to deal in warehouse receipts

(6) to accept returns and exchanges at the wholesale level

(7) to sell to licensed wholesalers

(8) to sell to licensed retailers

(9) to sell both by the bottle and by the glass directly to consumers at the primary place of business,

(10) to sell as in (9) above at a separately licensed off-site tasting room

(11) to sell other winegrower's products as in (9) and (10) above not to exceed 50% of sales.

(12) there's no prohibition against sale of other collateral - logo-wear, etc.

(13) there's no prohibition (AFIK) against having a restaurant as well.

So, (7,8,9) allows these guys to sell direct - period.

Imagine that. They can make wine, stick it in a bottle, and get the manufacturer's markup, plus they can sell the stuff to retailers and get the wholesaler's markup too, and in addition, they can sell directly to consumers and get the retailer's markup on top of all of that.

The numbers look SO GOOD that you'll never want to leave home.

And that's exactly where the sword cuts the other way. The margins are so good that you'll be trapped wearing golden handcuffs...and you'll be a wine maker who's also a shop keeper.

The problem is that this doesn't scale.

There are many small wineries struggling along like trap-door spiders waiting for tourists to trickle in and buy a bottle here and a bottle there. On a good day, they'll sell a thousand bucks worth of wine. Maybe they get two days like that per week in the tourist season.

It's not a business...it's a struggle.

Nice example, eh?

Let's get back on track. Every state is different, but even in the best state, the right to self-distribute is only good in your own state. If you want to get into another state, you'll have to deal with either the state itself, or a distributor in that state. So, the bottom-line is that you're going to have to deal with distribution sooner or later. The sooner you build those relationships, the sooner you'll have those relationships working for you.

Now, let's talk about a few myths:

(1) Black guys are....

(2) Distributors drive sales.

I can't tell you about (1), but I can tell you that (2) is false. You have to drive sales. This is true whether you're the distributor, or you employ one to do your deliveries. You're still the sales guy. Spend your time selling.

After all of this, you're probably thinking I'm a distributor. I am. I self-distribute....and it kinda sucks. The margins are pretty good, but I have to do all the work, and I have to do all the work because I need those margins because I need the money, so I can't afford a distributor. I'm stuck in a corner wearing golden handcuffs....and I can see that this doesn't scale. The only way I can see out of this predicament might be to be a better distributor. To do that, I have to hire some sales guys...but to hire them, I have to make it worth their while. For it to be worth their while, I need a pretty good sized portfolio so that each sales call makes money for them. Hey, that's IT! Maybe I should be selling your products too!

Good luck to you!

Will

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I disagree with Will. I own a DSP in California and I would love to have the same privileges that California wineries have anytime. Will, how can you think that the Cal WInery business model makes it more of a struggle to do business? First off, every business has struggles but they have HUGE advantages going in that little DSP's like us dont have. The lower excise taxes that they pay alone adds up to enough to emply 2-3 people. We have a MAJOR handicap over California wineries. We are in more of a struggle than they are.

In Oregon, I read that about 60% of micro-distillers comes from direct to consumer sales. I dont consider that opportunity a struggle at all. I welcome it. I rather deal with the public who is interested in my product than a distributor who is interested in my profits.

Cheers,

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I've been reading up lately on distribution laws and have stumbled across an article published a few days ago in the National Examiner discussing the right to self-distribute for breweries. They specifically referred to a law that is on the books in one state to take away self distribution, and different law that would strengthen it in another state.

I don't believe everything I read, it got me thinking. The three-tier system seems to be a disaster for small manufacturers in any of the three alcoholic beverage categories (if you disagree, please say why?). It makes it tougher to get new products on the selves and tougher to get a business going. If for some reason the breweries in the US were able to organize to fight the three tier system for the right to self distribute, at least in state, would DSPs stand a chance at joining or winning a similar fight? Why/why not?

You are absolutely right....that is why my business is folding. I found too much resistance from the distribution to the government. The small DSP's have been shut out for years.

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I agree with both Will and Arthur. The problem is complex and very situation dependent. It's hard to scale direct sales (unless you're in a state that allows multiple tasting rooms) and direct sales aren't necessarily cheap. I know a cidermaker in NY who argures that direct sales are the most expensive - because he has to compete with all the other tasting rooms in the Finger Lakes area. For myself, I long ago figured out that 90% of the time, I'm ineffective at self-distribution. But I keep hoping that off-site sales will have a different seasonality than on-site. All that speaks to the situation dependency.

But here's something else I've been considering lately - and it applies to more than alcohol.

The three tier system is mandatory for social policy reasons. The primary reason (IMHO) being to drive up costs - hypothetically reducing consumption. There are other policy goals given - but I think that times have changed, and the rest are bogus.

So going through the middle tier is mandatory, rather than being driven by the market seeking effficiencies.

Which means the market is deliberately in-efficient.

Which means there is more money in the market than needed by that market.

And it ends up pooling in the middle tier - since that's the mandatory bit.

And the middle tier uses it to maintain the status quo - by corrupting the policy process.

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The three tier system is not the preferred channel for alcoholic beverage distribution because it works. It has to be imposed precisely because it is not the most efficient or effective way to get the product from the maker to the end user. The exact opposite is the case. The three tier system is imposed on this industry because, right or wrong, effective or ineffective, the government uses it to achieve a policy goal unrelated to the efficient and effective distribution of the product, that ostensible goal being the control of alcohol to manage its use and thereby to mitigate against its abuse. To claim it must be the best system because it is the system we have is absurd on its face because we clearly and obviously would not have it were it not legally imposed.

This is especially true for small producers. You just have to look at the way small producers of non-alcoholic products distribute their goods to see all of the possibilities foreclosed to producers of alcohol.

But this is something anyone pondering entry into this business has to consider. If you want to get into this business, accept that you are going to have to work within the system as it is. Beating your head against it and trying to change it, especially if your viability depends on changing it, is bound to lead to disappointment.

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I personally don't believe in the 3-tier system as a mandated system. Thankfully I'm in a state the allows self-distribution.

I think Chuck and Charles are right. But Will is right in that there are limitations to self-distribution. There's only so much driving you can do in one day. And when you're driving you're not making product, which limits also your production capacity.

Selling only at the winery/distillery is very self-limiting because you have to wait for all your customers to come to you. Any retailer will tell you that's a challenge. It's also important to get the product into the hands of bars and restaurants and also in retail stores outside your geographic direct sales area.

It'd be great if states would allow small scale spirits wholesalers, small companies that could stock and sell specialty/craft spirits just as there are small wholesalers for wine and beer. But I don't think it'll happen as the National Wine and Spirits Wholesale association will nip that in the bud the instant it appears.

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Limitations to self distribution!! We here at Ryan & Wood currently limit our delivery sphere to 1/2 a tank of gas. That way I can find my way back home. Also, that sphere is only a semi-sphere. The Atlantic Ocean takes the other half. But seriously, we self distribute. The actual physical deliver is only a part of the hassel. The invoicing account management, collections, and here is the biggie: shelf protection! Mom & Pop can go to the shelves and visibly place an order on the floor, if you are calling each account each week. The bigger stores (notice I did not say "chains", in MA vendors are limited to 3 locations per company), have inventory software which can trigger a call to us. It is the tweeners that are vulneable. We find our product moved to behind lolly columns, pushed to the back so no label facing, relocated to the floor shelf for sticker shock, and other various tactics employed by commission or sales goal oriented entities. That all is discussion on off-premis Retail sales. On-premise,..oye! The real world people. My point is, there is a tipping point to number of accounts you can manage efficiently. We are currently interviewing distributors, there are about 50 covering MA, to get basically 40 "product protectors" out there in the field rather than us one or two.

Another item, was not the 3 tier system put in place 1933, with no regard for the year 2011? No computers, criminals were legitimatized for their talent to distribute, all in an effort to get product to the consumer with a bottleneck, the distributor, to collect the tax base, the reason for Repeal? Am I wrong on that?

Fingers are tired now.

Cheers,

Bob

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We find our product moved to behind lolly columns, pushed to the back so no label facing, relocated to the floor shelf for sticker shock, and other various tactics employed by commission or sales goal oriented entities. That all is discussion on off-premis Retail sales. On-premise,..oye!

:lol: Tip of the iceberg, that's for sure.

We used to guest lecture young MBA students at the University of Michigan on sustainability, but also on entrepreneurship. For the entrepreneurship classes, we always played the following clip:

Best business advice ever. Clearly stated, and gets you gets you to realize that spreadsheets won't save you out there with the sharks circling.

We're competing with some of the largest businesses the world has ever seen, and they have no interest in taking prisoners.

One of my favorite war stories on the beer side of things involved August Busch III, nicknamed "three sticks", and Jim Koch of Sam Adams fame. This was back when Koch didn't have a brewery, and just had it made for him a few regional shops. Anyway, Koch made the mistake of releasing TV ads where he touted the quality of the hops in his Boston Lager. Specifically, he boasted that the quality of his Halleratau Mittelfrueh, a lovely variety found near Lake Constance, was second to none. As it happened, Three Sticks hated Koch, mostly because he wasn't a brewer....just a marketing guy pretending to be a brewer. So after these ads ran, Three Sticks picked up the phone, and bought up the next years crop. All of it. Koch didn't have nearly enough hops under contract, so he got hosed in the spot market, and had to pull the TV ads. I got this story from two separate hop brokers having a laugh over a beer in Nuremberg.

Be careful out there, my friends.

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From my experience (as a self distributing entity) it really pays to build a good relationship with key customers. Our distillery has 4 people that basically do everything including sales. In my experience its the fact that we make it, we push it ourselves that gets us on a lot of high quality shelves. I have talked to a LOT of owners that hate to deal with the big guys, and move their products over to get us on the shelf. With that said, there are some owners that are the exact opposite of that. They ignore us outright, or give us the run around.

That is the way it is -- some people are interested in supporting the craft industry, others just want to sell the high yield "main stream" brands to make a buck. That is fine, I am not going to say they are bad people because of that, its just that you need to know your product and the market you appeal to. I have taken to researching stores as best I can before I actually contact them and try to open the account. It is a waste of my time to try to pitch a store that doesn't carry anything but smirnoff. But it is a huge advantage to be carried by a store whose owner and staff believes in our product/new york distillers and is willing to hand sell it.

Just my two cents.

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Be careful out there, my friends.

Great advise. It's like Spy v.s. Spy out there. The world is filled with dirty little tricksters.

As a further illustration of the point I was making earlier - perhaps looking at the other side of the coin:

Go to any food or beverage production company in your town, and try to buy something at retail. It doesn't matter if it's booze or salad dressing, they won't do it. Even though the three-tier channel structure is not mandated, it's what works best, even in non-regulated sectors. Each tier is a different business, and each demands different skills.

This is not to say that laws should not allow micro-distillers to have the right to sell directly to retailers and consumers (I'm all for freedom of choice), it's simply that the real world does not work that way, and exercising that right might not be in the long-term best interest of the micro-distiller because there's a built-in "golden fence" that traps your business and keeps it from growing beyond it's own location.

I think it's very interesting to note that some of the most successful micro-distilling businesses are in control states. In those states, the likelihood that micro-distillers will EVER be allowed to sell to retailers and consumers is very low. Nonetheless, their products often fly off the shelves. One has to ponder the question of why that happens.

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:lol: Tip of the iceberg, that's for sure.

Oh, how I would love to hear about more "tactics" to anticipate once we get up & running... anyone want to share more war stories? Pleeeeeze?

Be careful out there, my friends.

"Stay thirsty, my friends." :P

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I think it's very interesting to note that some of the most successful micro-distilling businesses are in control states. In those states, the likelihood that micro-distillers will EVER be allowed to sell to retailers and consumers is very low. Nonetheless, their products often fly off the shelves. One has to ponder the question of why that happens.

IMHO, fewer SKU's does the trick. In particular, fewer SKU's at their pricepoint. Control States are still operating like it's 1975, with the notion that it's all about volume, and if it doesn't sell in the thousands of cases, it's not worth their time. For the local spirits, they feel pressure to pick them up. So far, at least. I'm still waiting to hear how Wash State will shake out with all the new shops opening.

Any update on that, fellas/fellettes? Anyone having problems getting a full listing?

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  • 4 years later...

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