Four things to know about the three-tier system
#1. Size matters.
- Over 64% of all domestic and import wine sales in the U.S. comes from the six largest suppliers
- The top-30 suppliers control almost 90% of the entire domestic wine category
- Independent wineries are fighting for share within a narrow 18% segment of the U.S. wine market
#2. U.S. wineries continue to open, with 8,287 and counting.
- Proliferation of new wineries and brands is cluttering the market
- Over 17K domestic and imported wine brands account for 80K individual SKUs vying for retail space
- Only 312 U.S. wineries have annual production levels above 50K cases
- Mid-sized independent wineries between 5K and 50K cases face the biggest challenges
467 new U.S. wineries opened their doors from March 2014 to March 2015, growing total national winery count by 6%. But there is more to this winery proliferation story than first meets the eye.
U.S. wineries account for over 12K wine brands, including both active brands and aliases. Add 5K+ imported brandsand the total competitive field increases to between 17K and 18K wine labels. These metrics refer to brands, not the SKU facings within brands. Around 80,000 individual wine SKUs are sold across all channels of the U.S. marketplace today.
The majority of American wineries are small. Only 312 bonded U.S. wineries have managed to build annual sales to more than 50K cases. That's under 4% of all active wineries. Conversely, a whopping 79% of U.S. wineries produce no more than 5K cases per year. These micro-production wineries typically channel most of their sales through tasting rooms, wine clubs and local retailers, so they tend to be less constrained by the three-tier system.
However, the 1,480 mid-sized wineries between 5K and 50K cases face a much larger challenge: how to build a profitable business and sustainable distribution footprint in a marketplace dominated by a small number of powerful wine suppliers with multi-million dollar brand budgets, aggressive selling organizations, and formidable sales and marketing leadership.
#3. Three tiers of barriers stand between wineries and potential consumers.
- Consolidation at both the distributor and retail tiers constrains market access for independent wineries.
- The top ten U.S. distributors control two thirds of wine sales revenue, increasing share year on year.
- Elitist media gatekeepers use the 100-point scoring system to judge brands and influence consumers.
- Large corporate suppliers enjoy superior leverage at all three tiers of the distribution system.
The three U.S. distribution tiers increase final consumer price while also limiting market access for wineries and their brands. This part of the wine value chain effectively works like a series of barrier gates that wineries must pass through to get their wines in front of the consumer audience that might actually purchase them. It is critical for wineries to understand the pressure points and opportunities in each market tier, and develop strategies to meet and exceed requirements and expectations of various "gatekeepers."
Distributor gatekeepers determine which brands to make available for sale to retail accounts in their state. Due to ongoing consolidation, in 2014 the Top 10 national wine and spirits wholesalers took in more than two-thirds of total U.S. wine sales revenues. The five largest national distributors control a 56.8% revenue share, up 4% from 52.8% just two years earlier.
Consolidation is occurring within retail trade channels as well, with grocery chains, big box stores and other national accounts increasing share of market year on year. High volume grocery and club stores offer hundreds of facings in their wine aisles, yet present a bottleneck for an exponentially larger number of wine brands and individual SKUs fighting for limited shelf space every year.
Consumer gatekeepers tend to be media influence-leaders who drive public perception, especially for wines above $12 retail. Media gatekeepers like the Wine Spectator and Robert Parker, Jr. use the 90-point scoring system to pass judgement on which brands are mediocre (de facto, any wine scoring below 88 points), which will be anointed category leaders, and which do not even deserve to be mentioned. Wine Spectator now requires wineries to submit a written application for the privilege of sending them free samples and being considered for review.The three-tier market structure poses challenges for all wine businesses regardless of size, but large suppliers enjoy significant leverage. They can afford to run aggressive discounting and value-add promotions as enticements, and several of the largest suppliers even control their own exclusive sales divisions within designated state-level wholesalers. Large suppliers also enjoy economies of scale that lead to lower shelf price and provide extra marketing dollars for promotional investment.
Needless to say, small to mid-sized wineries not owned or managed by a major sales and marketing company have very little leverage in the U.S. three-tier system. Consumer-direct marketing plays an enormous role in the distribution and financial strategies of most small wineries. However, wineries with annual sales above 5K cases will find it difficult to maximize production capacity and generate sufficient cash flow through consumer-direct sales alone. For these mid-sized wineries the three-tier system is a flawed but necessary means of achieving critical volume goals in the U.S. market.
#4. Demand still exists for authentic, high-quality wines with a "reason for being."
- Distributors are pressured by large suppliers to squeeze margins and hit mandated volume goals.
- Independent winery brands improve distributor margins and appeal to discriminating trade buyers.
- Openings do exist for smaller wineries if they meet distributor and trade needs; but the bar is high.
While the largest suppliers continue to build sales revenue through aggressive price promotion, relentless creation of flashy new labels, and financial acquisition of revered legacy brands founded once upon a time by iconic winemakers, one thing remains extremely difficult to fabricate even for the cleverest wine marketers: authenticity.
Many distributors fill their delivery trucks with big brands in lower price segments; but they still need smaller, more authentic wine brands to make each truckload profitable. Elite restaurants and bottle shops often refuse to consider wines and brands that come up short in terms of product integrity and brand image. Consequently, distributors eager to gain access to influential "cherry-picker" accounts are careful to fill out their portfolios with a solid selection of high-quality, limited production wines that may appeal to these buyers.
Distributors have another incentive to selectively represent small wineries: several of the biggest U.S. suppliers have gained so much leverage that they are now able to squeeze distributor margins and contractually mandate sales revenue targets, with heavy penalties for wholesale houses that fail to deliver on annual volume commitments. By contrast, small independent winery brands are often willing to accept a higher retail price in exchange for market access and targeted distribution in the right accounts. This high-margin business model offers positive trade-offs for distributors, even if it represents only a small fraction of their overall case volume.
However, the bar is quite high for unaffiliated winery brands looking for new distributors or stronger execution from current distributors. Wine quality alone is not enough anymore.
Brand integrity, market support and a clear strategic road map are all critical considerations for wineries seeking a better path into the three-tier marketplace. The business and marketing standards expected by distributor decision makers today include coherent and integrated brand identity, sensible brand architecture and price positioning, long-term strategies for volume growth, clear understanding of target consumers and channel focus, a full range of accessible sales support tools, effective logistics and compliance management, and a general understanding of distributor issues, needs and opportunities in each individual market.
In other words, to be ready for prime time wineries need to do their homework.