Chapter 7: Other types of market Flashcards
What is the aim of the monopoly system?
To limit alcohol consumption
Broadly describe the USA’s Three-Tier System.
- The three-tier system was introduced to prevent direct sales from the producer/supplier to the retailer to avoid producer monopolies and increase prices.
- The three tiers are: supplier, distributor, retailer
- These laws generally limit or completely prohibit cross ownership between most retailers and the upper two tiers.
- A producer may also be an importer (Gallo) but cannot be a wholesaler
- A wholesaler can also import, but cannot produce. (Republic National Distributing Company)
- In principle, a producer cannot by-pass a wholesaler and sell direct to a retailer. Although this is changing in a number of states as wineries, breweries, distilleries from within the state and from outside are able to sell directly to customers, but usually with conditions attached.
Why are there drastically different laws in different states within the US?
When Prohibition was repealed, the federal government ceded control of beverage alcohol sales to the individual states. Some states remained dry, although that is not the case now. However some states have dry counties.
What is a “control” state?
A state in which the state itself holds monopoly over one or more of the three tiers. In these states generally the only licensed off-premise retailer of alcohol is the state itself, though in some states, this might be only for spirits and not wine, and myriad other exceptions.
What is an “open” state?
State involvement in the regulation of the three-tier system is relatively minimal. Suppliers and distributors are free to enter into and exit out of agreements to sell and distribute brands freely.
What is a “franchise” state?
Have strong franchise laws that severely restrict the freedom of suppliers to change distributor agreements. In a franchise state, an appointment of a distributor by a supplier is almost tantamount to a lifetime appointment due to the strength of the laws.
Why do franchise laws exist?
to protect distributors against sudden and massive changes to their business.
Give an example of franchise laws in effect.
For instance, in an open state, a distributor may enter into an agreement with an
industry leading supplier, and in doing so be compelled to drop distribution rights of other
brands, invest heavily in trade marketing of that supplier’s brands, make investments in
staffing and infrastructure, etc. If that supplier abruptly decides to change distributors, the
immediate loss of revenue could be catastrophic to the distributor. Hence, the franchise law
provides a strong benefit to the distributor, but for the supplier, even if there is a legitimate
reason to be dissatisfied with the performance of a distributor, there is little recourse if the
distributor does not agree to release the supplier. When this occurs, the supplier may appoint
an additional distributor of their choosing in the same State, and in some instances a brand
may be sold simultaneously by multiple distributors as a result.
What is generated through the three tiers?
By maintaining three tiers of business, significant tax revenue is generated as taxes are levied upon each tier.
What benefits are there to maintaining the distributor tier?
These businesses specialize in logistical efficiency and the largest of them service huge areas of the country.
-They also provide a trained sales force and marketing materials, and in these ways, can potentially provide a producer with exposure that would be extremely costly in time, effort, and money to gain otherwise.
How is consolidation working to the disadvantage of smaller producers?
Small producers can find their products lost among the massive portfolio of brands held by major distributors. The distributor sales force reduces the producers control over the marketing and business to business selling of the product, in the same way as a distributor in a free market would.
What activity has consolidation stimulated?
activity in the direct to consumer category (both shipping and cellar door sales) and gradually, state by state, restrictions are being loosened.
Even though a small producer may get lost in a large portfolio of a large distributor, why may working with a small distributor be a disadvantage?
While small distributors may be better equipped to sell low-volume, boutique brands, these distributors tend to be more limited in their scope without coverage across so many states. Furthermore, distribution contracts can be hard to break, and therefore even if the producer feels they are not well represented by a distributor, they make not be able to be distributed by someone else.
