Chapter 7: Other Types of Markets Flashcards
Other Types of Markets
Not all countries have a ‘free market’ for wine sales. Certain countries have adopted legal structures that limit the supply chain options available to producers and control the sale of wine to the end consumer. The two most significant are monopoly markets and the American ‘three-tier system’.
Monopoly Markets
In some countries, particularly the Scandinavian countries and Canada, there is a government- run monopoly for the retail sale of alcoholic drinks. In Sweden, for example, the government- owned chain Systembolaget is the only retail outlet allowed to sell alcohol. There are also some specialist independent distributors in Sweden, licensed under special conditions.
Monopoly Markets: Bars & Restaurants
Note that bars and restaurants can buy from the monopoly or from specialist independent distributors (who will often stock wines from small-volume producers or less-common wine regions, particularly for bars and restaurants). However, such countries usually impose high levels of tax on alcoholic drinks, making them very expensive.
Monopoly Markets: Goals
The aim of the monopoly system is to limit alcohol consumption. Research has shown that privatisation of the market would lead to the greater accessibility of alcoholic beverages as well as greater competition, which, in turn, would lead to price pressure.[1]
Furthermore, the shops and their staff do not promote either individual products or producers, but simply advise customers, based on their requirements. Again, this removes any incentive for promotion or price reduction.
Monopoly Markets: Producers
For producers, it is much harder to enter the retail sector in one of these markets and there is a considerable amount of bureaucracy to deal with.
For example, to get a wine stocked by Systembolaget, a producer must first register with an importer who is an approved supplier of Systembolaget. However, this does not mean the producer is guaranteed to have its wines stocked.
Four times a year, Systembolaget issues tender requests for various styles or types of wine that it wants to add to its range. Approved suppliers may then submit samples of wines that they believe satisfy the tender requests. All the samples from different producers are tasted blind by a panel to decide which ones best correspond to each tender request.
Even once they have been selected, wines will be tasted again and chemically analysed prior to launch to confirm that they are identical to the tasting samples.
This is a lengthy process, and it can take seven to eight months from the original tender before the wine is launched in shops. However, as the final decision is based on quality alone, the process is intended to give smaller producers the same access to the market as larger ones. Also, once a wine is accepted, it will be available throughout Sweden and not just in a handful of small wine shops, offering the potential to sell larger volumes.
Monopoly Markets: Canada
Strict controls on the retail sale of alcoholic beverages also exist in all but one of Canada’s provinces and territories. For example, in Ontario, retail sales are controlled entirely by the Liquor Control Board of Ontario (LCBO), either through their own shops or by approved agencies (a number of local producers, including wine producers, are licensed to sell their own brands outside LCBO shops).
The one exception is Alberta, which now has a private market for the wholesale distribution and retailing of alcoholic drinks, although it is supervised closely by the Alberta Gaming and Liquor Commission.
The USA’s Three-Tier System
The growth and size of the wine market in the USA makes it desirable for both domestic producers and those seeking to export to the USA. Domestic production has not been able to keep up with rises in consumption.
However, strict and complex legislation, implemented on a state-by-state level regarding the distribution and sale of alcoholic beverages, makes doing business in the USA no easy task.
The USA’s Three-Tier System: History
Between 1919 and 1933, the Volstead Act prohibited the production, sale and consumption of alcohol in the USA (with the exception of wine to be used for religious purposes). The ‘Three-Tier System’ was introduced in the USA in 1933, upon the repeal of prohibition, with the aim of preventing a return to the pre-prohibition ‘saloon’ days of gambling, prostitution, crime and drunkenness. Many of these saloons were in effect tied houses, required to buy all products sold from a particular brewer or distiller.
The three-tier system was introduced to prevent direct sales from the producer/supplier to the retailer to avoid producer monopolies and increased prices. Other perceived benefits to each state of implementing a distributor tier included the provision of additional jobs and easier regulation and collection of taxes, as well as the tax revenue generated by the creation of this additional tier of businesses.
The USA’s Three-Tier System: Three Tiers
- supplier (including producers, importers)
- distributor (including wholesalers, brokers)
- retailer (including off-premises licencees, e.g. supermarkets and wine specialists, and on-premises licences, e.g. bars and restaurants).
The USA’s Three-Tier System: Three-Tier separation
These laws generally limit or completely prohibit cross ownership between most retailers and the upper two tiers. Separations between the producer and distributor tiers developed later, but are far from universal. A producer may also be an importer (e.g. E & J Gallo), but cannot be a wholesaler. A wholesaler can also import, but cannot produce (e.g. Republic National Distributing Company).
In principle, a producer cannot by-pass a wholesaler and sell direct to a retailer. That said, an increasing number of states allow wineries (as well as other producers of alcoholic beverages, such as breweries and micro-distilleries), from within and from outside the state, to sell directly to consumers (either through an on-premises licence, an off-premises licence or a combination of both), but usually with conditions attached. By contrast, some states still do not allow wines purchased in another state to cross their borders.
The USA’s Three-Tier System: States Rights
One of the vestiges of the repeal of prohibition in 1933 is that the Federal government ceded control of beverage alcohol sales to the individual states. Within the three-tier framework, this means that each state of the USA can have drastically different laws, which are very complicated and have led to a need for ‘compliance officers’ within alcoholic beverage companies.
Following pressure from the temperance movement, some states remained ‘dry’ (manufacture, distribution and sale of alcohol is prohibited or tightly restricted at county level). No states are dry today, though there are still some dry counties throughout the USA.
The USA’s Three-Tier System: State Categories control states
States in the USA fall into one of three categories with regard to their legislation of the three-tier system, though in many cases these lines may be blurred in some aspects. States in which the state itself holds monopoly over one or more of the three tiers are called ‘control’ states.
In these states, generally the only licensed off-premises retailer of alcohol is the state itself, though in some states this might be only for spirits and not wine, and many other exceptions. There are 17 control states currently in the USA.
The USA’s Three-Tier System: Examples of control states
- Idaho has a monopoly on off-premises sales of beverages with greater than 16% abv.
- Michigan has a monopoly only on wholesale sales and only of spirits.
- New Hampshire allows beer and wine to be sold in grocery and convenience shops only and operates state package shops (shops that sell prepackaged alcoholic beverages), but also allows a small number of private off-premises permits, which tend to specialise in smaller brands that the state shops do not carry.
- Pennsylvania has one of the strictest controls, with all spirits sold in state package shops, and where bars and restaurants who are permitted to sell on-premises must buy from the state package shops.
The USA’s Three-Tier System: Non-control states
States in which the state does not participate directly in the sale of alcohol comprise the other two categories, ‘open’ states and ‘franchise’ states. In 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.
The USA’s Three-Tier System: Franchise States
Franchise states have strong franchise laws that severely restrict the freedom of suppliers to change distributor arrangements. In a franchise state, an appointment of a distributor by
a supplier is almost tantamount to a ‘lifetime appointment’ due to the strength of these laws.
Franchise laws exist to protect distributors against sudden and massive changes to their business. 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, and so on.
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.
