7. Other Types of Markets

Question 1

What is a monopoly market?

Answer 1

Government run monopolies in the retail sector, ie. Scandinavia and Canada.

Question 2

What is the infrastructure of the market in Sweden?

Answer 2

A monopoly market, with the Systembolaget being the only retail outlet.

Some specialist distributors, who can sell to hospitality, feature small producers or less common wines.

Hospitality can buy from either of the above.

Question 3

What are some of the features of monopoly markets?

Answer 3

• Often have high tax rates on alcohol, making it expensive
• Shops and staff may not promote individual products or producers; removing incentive for promotion or price reduction (?)

Question 4

What are the pros and cons of selling through the Systembolaget?

Answer 4

• High level of bureaucracy involved in being listed, with a 7-8 month process from tender
  (1. Register with approved importer, 2. Submit sample to tender, 3. Blind tasting selection, 4. Second tasting & chemical analysis)

+ Small producers have similar opportunities to large ones
+ Wines approved are available in every store, so a large volume can be sold

Question 5

What is the infrastructure of the market in Canada, specifically Ontario and Alberta?

Answer 5

Ontario: LCBO controls all retail sales via own stores, with some approved agencies. Local producers can be licensed to sell outside LCBO stores.

Alberta: the only province with a private market for wholesale distribution and retailing; supervised closely by the AGLC

Question 6

What are the tiers in the 3-tier system?

Answer 6

1. Supplier (Producer or importer)
2. Distributor (Wholesaler or broker)
3. Retailer

Question 7

What is the history and purpose of the 3-tier system?

Answer 7

1919-1933 the Volstead Act prohibited producing, selling or consuming alcohol. On repeal, the 3-tier system was introduced, with federal gov giving control of alc sales to individual states.

Reason was in order to:

1. avoid producer monopolies
2. avoid increasing prices
3. create additional jobs
4. create additional tax revenue

Question 8

What is the appeal and deterrent of selling in the USA?

Answer 8

It is a very large market where domestic production can’t meet demand, but the system is very difficult to navigate.

Question 9

What are the 4 main laws involved in the 3-tier system?

Answer 9

1. Cross-ownership of a retailer, and a supplier OR distributor is limited or prohibited.
2. A producer can also be an importer (ie. EJ Gallo), but not a wholesaler.
3. A wholesaler can import (ie. Republic National Distribution Co.), but cannot also be a producer.
4. A producer cannot sell direct to a retailer, EXCEPT for SOME states that allow producers in- or out-of-state to sell D2C (via an on- or off-premise license, or both).
   Some states do not allow out-of-state wine purchases cross their border.

Question 10

What are the 3 main types of states in the 3-tier system?

Answer 10

1. Control States (17)
2. Open States
3. Franchise States

Question 11

What is a Control State?

Answer 11

The state holds monopoly over one or more of the tiers, usually the off-premise retail (though some might be for only spirits and not wine, and other exceptions)

Question 12

What are 4 examples of Control States?

Answer 12

1. IDAHO has monopoly on off-premise sales of anything above 16% ABV
2. MICHIGAN has monopoly on wholesale of spirits
3. NEW HAMPSHIRE - beer and wine in supermarkets and convenience shops only; state-operated prepackaged alc bev shops (“package shops”). Small number of off-premise permits
4. PENNSYLVANIA - all spirits sold in state package shops, and hospitality must buy them there.

Question 13

What is an Open State?

Answer 13

State involvement in regulation of 3-tiers is fairly minimal. Suppliers and distributors are free to enter or exit sales agreements, and distribute brands freely.

Question 14

What is a Franchise State?

Answer 14

Strong laws that severely restrict suppliers from changing their distributor, protecting distributors from significant changes or revenue/investment loss after investing in a brand.

There is little recourse for a supplier, except that they can appoint a second distributor in the same state

Question 15

What is one example of a Franchise State?

Answer 15

CONNECTICUT has strict franchise law

• restricts number of off-premise licenses that can be held by one entity; or in a city or town per population
• Prohibits quantity discounts by distributors, limiting advantage to larger retailers
• Enforced minimum bottle pricing for retailers
• Better environment for small producers, but encourages heavy competition from businesses just cross border

Question 16

What are 4 benefits that distributors bring?

Answer 16

1. Logistical efficiency, at times facilitating service cross -country
2. Promotional support a producer might not otherwise afford
3. Small producers can seek out specialist boutique distributors
4. Avoid costs and navigation of D2C

Question 17

What are 6 downsides of using distributors in the US?

Answer 17

1. Consolidation: from 3k to 1.2k in the last 20 years, while 9.5k (up from 2k) US wineries are seeking entry to market
2. Small producers can be lost in massive portfolios
3. Loss of control of brand image and marketing
4. Boutique distributors may be limited in their scope and coverage
5. It can be legally difficult to switch distributors
6. Easing restrictions of D2C make it a more appealing option