D2C07 Other Types Of Market

Question 1

Define other types of market compared with free market and what effect these are intended to have?

Answer 1

• Monopoly,
• USA three-tier system

Effect:

• legal structures which limit the supply chain options available to producers
• control the sale of wine to the end consumer

Question 2

Which countries operate monopolies and explain the process followed to be able to supply to these monopolies and the advantages and disadvantages to the producer.

Answer 2

Canada except Alberta.

• Liquor Control Board of Ontario (LCBO) controls retail sales
• Own stores or approved agencies (which might include allowing a local producer to sell his own wine).
• Alberta is a free market but supervised by Alberta Gaming and Liquor Commission

Sweden - Systembolaget

• only retail outlet allowed to sell alcohol;
• also allowed - specialist independent distributors licensed under special conditions
• Bars/Restaurants can only purchase from monopoly
  
  • or from specialist distributors - wines from smaller producers / less common regions but prices are high
• Staff do not promote or encourage exploration - advise customers based on their requirements to avoid incentivisation

Objective

• limit consumption of alcohol
  
  • privatisation would lead to increased availability
  • in turn would lead to price pressure and cheaper alcohol

Benefits

• Final decision to stock is based on quality alone - chance for small producers
• Once adopted, available throughout the country (good volume sales for producer)

Disadvantages

• Reduced sale because of high price
• Very difficult to enter and considerable amount of bureaucracy to deal with

Process:

• Register with approved importer/supplier
• Respond to tenders issued by Systembolaget if you can supply the style/type requested
• Submit samples to satisfy tender request
• Samples are blind tasted to select those that meet the tender provision
• If a wine is selected it is tasted again, and chem analysis undertaken to verify supplied wine = sample
• Whole process can take 7/8 mths from date of tender - launch in store.
• Final decision on quality alone, (equal opportunity for smaller producers)
• Once wine is accepted it will be available throughout Sweden and offers good volumes to producers.

Question 3

The reason for introducing the three-tier system

Answer 3

Volstead Act prohibited the production, sale and consumption of alcohol in the USA, with the exception of wine used for religious purposes

This was motivated by the temperance movement which tried to suppress “Saloon behaviour” and what was perceived to be the unhealthy effects of drinking alcohol. The Volstead Act known as “Prohibition” did not address the issue, rather gave rise to an enormous system of organised crime in the USA. It was clear that the sale of alcohols was highly lucrative, and essentially the 3-Tier system is designed to prevent a monopoly of production/distribution/retail as well as to facilitate the collection of tax revenue from this line of commerce.

• Repeal of Prohibition
• Prevent return to drunkenness, of “saloon days” prior to prohibiltion.
• 3-tier system prevents direct sales from producer/supplier to the retailer,
• to avoid producer monopolies
• increase prices

Question 4

What are the three tiers and the rules/principles behind the system?

Answer 4

Supplier (Producer/importer)

Distributor (wholesalers, brokers)

Retailer (Off premise/on premise)

Rules:

• There is a strict division between retailer and the other two parties.
• (some states also restrict relations between supplier and distributor)
• A supplier cannot by-pass a wholesaler and sell direct to retailer
• A producer can be importer but not wholesaler
• A wholesaler can importer but not produce

In practice:

• Some states allow producers to sell directly under licence either on or off premise - under certain conditions.
• Some states prohibit cross-border trade of alcohol
• Within 3-Tier, states can adapt the law individually and these laws are monitored by compliance officers.

Question 5

Explain the structure of the 3-Tier System

Answer 5

Broadly three categories (with some “blurred” lines)

Open States:

• Here the state has minimal involvement
• Suppliers, distributors may enter into / exit agreements to sell/distribute wines freely.

Control States

• The state itself holds a monopoly on 1 or more of the 3 tiers
• Generally in control states the state is the only licenced off-premise retailer of alcohol, although this only includes spirits, not wine. Examples:
• Idaho state controls off-premise sales of beverages >16%abv
• Michigan - monopoly on only wholesale sales and only spirits
• New Hampshire - allows wine tb sold in Convenience Stores/Smarkets
  
  • operates “State Package” stores
  • also alllows a small no. of permits for off-premise who may sell only brands the state does not carry
• Pennsylvania - all spirits sold in “State Package” stores
  
  • Bars/Restaurants selling on premise must by from State Package stores.

Franchise States

• Laws restrict suppliers from changing distributor arrangements once agreed. (dist contract tantamount to lifetime agreement)
• If Dist does not perform and will not release the producer, producer can appoint 2nd distributor
• These laws protect the distributor who makes a significant investment (infrastructure/resources) from the catastrophic conseq if a producer simply pulls out.

Unique Laws - example Connecticut

• Strong franchise law
• Restricts no. of off-premise licence by city, town, per population
• Demand always > supply therefore stores mb bought purely for licence
• Qty discount by dist. prohibited - means no advantage for larger retailers.
• Means smaller businesses prosper and little consolidation takes place.
• Minimum bottle price sold by Distributor determines the min retail price
• Previously prohibited sales on Sunday
• Border wars exist as in neighbour states prices are competiive, hours longer and more variety.

Advantages for Producers

• Distributors specialize in logistical efficiency, serve huge areas of country
• Trained sales force and marketing material
• Above potentially provide producer with exposure that would be extremely costly to gain otherwise

Disadvantages

• Complicated state-level laws to deal with
• Higher price overall to the consumer / lack of competition
• Consolidation means that
  
  • Smaller producers at disdadvantage as their wines are “lost” in the massive portfolios of the Distributors
  • Producer loses control of the end marketing of his product

Question 6

Why is there a trend for consolidation throughout the supply chain in the US

Answer 6

Distributor numbers have decreased (3000-1200 last 20 yrs)

Producers seeking entry increased by factor of 5

• Bottleneck works to the disadvantage of smaller producer
• product lost in the massive portfolio of large distributors;
• reduced control over marketing and selling

The largest producers have grown by acquisition in parallel with the consolidation amongst the distributors.

As a result:

• Conglomerate can provide an wide array of products to a large distributor who deals with one large company to gain a wide range of brands.
• Retailer has to deal with only one large distributor to get access to this wide range of brands.
• This leaves the small/medium producer looking for one of the smaller distributors which does not offer the same advantages and the producer cannot change the deal if it is not working out.
• This situation has stirred up activity in the “direct to consumer” category (cellar door/direct sales) which may solve some of the producers problems but does have the burden of costs (labour, shipping, compliance)