Wholesale Change: Could New Models Emerge in the Three-Tier System?

Pressure on the System Is Increasing

The three-tier system, which legally mandates separate roles for suppliers, wholesalers, and retailers of alcoholic beverages in the U.S. market, has evolved since its inception—though not nearly as quickly as many suppliers and retailers would wish. Some brand owners see value in the system (less regulated markets, such as the U.K., tend to see negotiating power shift to large retailers, who then squeeze supplier margins), but many others are frustrated—either because of the cost of wholesaler services or because they feel the system limits their access to the market.

Wholesaler margins are higher in the U.S. than in other markets, in part because U.S. wholesalers typically include sales and marketing services that go beyond the basic delivery service. But small suppliers—if they can find a wholesaler—often feel they don’t get the marketing support they pay for. Large suppliers (and large retailers as well) believe they could create a more efficient system if they were not forced to go through a wholesaler, or if they were at least able to negotiate variable levels of services with different corresponding fees.

These frustrations with the system are not new, but they have intensified—particularly among small suppliers—in the wake of the most recent round of wholesaler consolidation. However, we would note that there are a number of strategic moves being made by actors along the value chain which may help to drive changes as to how the system operates in the coming years.

New Distribution Models Are Emerging

Some of the change seen in the market is being driven from within the wholesale tier itself. New models, such as LibDib, create opportunities for small brands that were previously kept out of the market by their lack of access to distribution. LibDib is essentially an open marketplace that connects small brands with retailers and on-premise operators who are looking for something unique. The LibDib model has some clear limitations in its ability to service brands that achieve scale, but it is an innovative model that satisfies a tangible demand in the marketplace, and, as such, we expect it to continue to evolve and expand.

While some changes are being driven by the emergence of new wholesaler models, others are driven by suppliers. Treasury Wine Estates (TWE) recently announced that it was making profound changes to its route to market in the U.S., using direct distribution to key accounts in some markets, creating a hybrid distribution model in Florida, and changing wholesalers in a number of others in order to gain more direct access to clients and assure strong support for its brands.

While the motivations and potential upside of Treasury’s latest move are clear, the risks of this move should not be underestimated. Treasury will be trying to develop a completely new distribution system, even as the wholesaler it terminated will be actively trying to reposition new brands in the market in order to fill the void left by TWE. Switching wholesalers is always challenging, but this has an added level of complexity and risk.

Other suppliers in the market are watching the move with interest. Many are sceptical, as they recognize the high degree of risk in the move, but if TWE can ultimately build a successful structure, others will likely follow in those states in which it is permissible and where it makes sense.

Implications

To the degree that other suppliers are willing to follow the TWE move and begin to deal directly with retailers—or at least look for wholesalers who are willing to create more flexible models—wholesalers who offer greater flexibility in services and fees will stand to gain share.

New models are emerging within the three-tier system. Perhaps the examples cited above will not create a massive restructuring of how the current system works, but it is clear that there is increasing demand to test new models of operation. To the degree that these new structures are successful and create alternative structures for suppliers, they will create pressure for existing players to adjust their models. Ultimately, we believe the middle tier will likely evolve to a point at which large wholesalers will offer suppliers a more flexible range of services with varying fee structures… though this will take time.