THE THREE-TIER system in the United States of America refers to what potential exporters of wine (and other alcoholic beverages) must negotiate to get product into the hands of the end-user, the wine consumer. The USA is one of the most difficult beverage alcohol markets to penetrate for export wine and spirits producers. The challenges are:
– Government regulation is managed by the 50 individual states (plus Washington D.C. and Montgomery County MD) under laws put in place since they were originally written after the repeal of Prohibition in 1933.
– The Three-Tier System means Suppliers can only sell to Distributors. Distributors can only sell to stores and restaurants. Stores and restaurants can sell to consumers. For exporters there is effectively a fourth tier, the US importer which represents the doorway to America. They add another layer of marginal cost to price structures.
Tier Zero–The Supplier | A winery or co-operative etc.
Tier one–The importer | Importers are licensed to import a wine brand from a supplier (eg. a winery) outside the U.S. into the U.S. The importer’s licence is issued by the Federal Government and is therefore national. Importers may or may not have distributor licenses or operations in individual states.
Tier Two–The Distributor | Steve Raye says ‘distributors/wholesalers are logistics companies that warehouse and distribute wine and spirits to on and off premise accounts (the retailer). That’s how they got the name “Distributor”. Distributors are licensed to to buy wine from an importer or domestic supplier and sell to an on- or off-premise retailer. Its licence is issued by an individual state. Getting a distributor is not the end objective. Distributors are not free. Getting them to sell your brand requires funds: support budgets for discounts, samples, brand ambassadors, advertising, PR, incentive programs etc. Distributors want money, margin, manpower, marketing and media.
Distributors can help build brands, and can provide significant added value to the basics of just storing and moving cases [of liquor]. But most successful businesses focus on the 80/20 rule. In the case of wine and spirit distributors, that means 20% of the suppliers generate 80% of the revenue. It’s an economic fact of life. The burden falls on the supplier (the winery) or importer to find creative ways of getting a disproportionate of time and attention from their distributors. No easy task when the distributor’s goal is to focus time and attention on the brands generating the revenue right now, not those that might be important in the future.’
Tier Three–The Consumers | Raye says the pyramid is becoming like an hour-glass, with the constriction being getting brands into and through the import and distribution tiers. This is due to consolidation. In 1988 many states had wholesalers with local, active ownership and many of these wholesalers were not statewide. Now there are just 2 major wholesalers in most states. The Wine and Spirits Wholesalers of America (WSWA) had 3,000+ members 30 years ago. Now it is just under 400 (Raye, p80). The distributors that started business after repeal are now in the 3rd or 4th generation. They see the need to scale up to survive. This has meant that whereas wholesalers had to fight for brands and even small vendors, by committing to sales and distribution, suppliers are now struggling to get presentation opportunities as wholesalers are dedicating more time to big vendors. It is thus harder–but not impossible–for smaller brands to succeed. And whereas suppliers could use the threat of moving to another another, now the supplier/importer must show how they will help sell and promote the brand(s) in the market.
Raye (p51) points out that consolidation among distributors (wholesalers) is further constricting the available route to market for exporters. In 2018 the top two wholesalers (Southern Glazer’s Wine and Spirits, and Breakthru Beverages +Republic National Distribution Co. now control over 55% of the business in the USA.
Steve Raye, How to get U.S. Market-Ready (Positive Press, 2018).