Other Types of Market? Flashcards
What other types of market are there?
- Monopoly Markets
- The USA Three Tier System
How do monopoly markets work?
In some countries, in 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, licenced under special conditions.
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.
The aim of the retail monopolies is to limit alcohol consumption. This is achieved primarily through high pricing. By removing the incentive in a free market for stores to compete with each other, these monopolies encourage the sale of alcoholic beverages at responsible prices.
Furthermore, the stores 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.
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 apply to become anapproved supplier. 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 producers may then submit samples of wines which they believe satisfy the tender requests. All the samples from different producers are tasted blind by a panel to decide which 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 stores. 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 wineshops, offering the potential to sell larger volumes.
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 stores or by approved agencies (a number of local producers, including wine producers, are licensed to sell their own brands outside LCBO stores).
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.
How does USA’s three tier system work?
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 on the distributing and selling of alcoholic beverages makes doing business in the USA no easy task.
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 increase prices.
The three tiers are:
- Producer/Importer
- Distributor (including wholesalers, brokers)
- Off Premises Retailer (e.g. supermarkets, wine specialists) or On Premises Retailer (e.g. bars, restaurants)
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 the state and from outside to sell directly to consumers but usually with conditions attached. By contrast, some states still do not allow wines purchased in another state to cross their borders.
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 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 prohibited or tightly restricted at county level). Others established state alcohol monopolies.
The strengths and weaknesses of the three tier system are subject to debate. The distributors specialise 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.
One challenging characteristic of the US wine market is consolidation. In the last two decades, the number of distributors has decreased by approximately two thirds (from around 3000 to 1200), while the number of US wineries seeking entry to the market has increased by a factor of five (from almost 2000 to over 9500). This bottleneck works to the disadvantage of smaller producers who can find their products lost among the massive portfolio of brands held by the major distributors. The distributor sales force reduces the producer’s control over the marketing and business-to-business selling of the product, in the same way as a distributor in a free market would.
Although the number of US wineries has significantly increased in recent years, many of the largest companies involved in wine production (the conglomerates) have also become bigger, generally through the acquisition of smaller wineries. The benefit can be felt by the large companies throughout the system. The conglomerate can provide an attractive array of products for a large distributor (and indeed to importers in export markets); the large distributor needs only to deal with one large company to gain a range of desirable brands that need limited hand-selling; the multiple retailer can provide a range of products for their customers whilst only dealing with one or two large distributors.
Small producers can seek out smaller specialist distributors that may be better equipped to sell low-volume, boutique brands, however. However, 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 presented by a distributor, they may not be able to be distributed by someone else.
Consolidation has stimulated activity in the direct-to-consumer category (both shipping to consumers and cellar door sales) and gradually, state by state, restrictions are being loosened. While this is a popular option for wineries without the volume to justify participating in the three tier system, as mentioned in Selling Directly to Consumers, this route is not without its associated costs of labour, advertising, shipping and the burden of seeking to comply with the vagaries of each state’s regulatory framework.
