Other Types Of Markets Flashcards
Besides free markets, what are the two “other” types of markets?
- Monopoly markets
- Three Tier System (USA)
How is a monopoly market structured?
- One retailer (Systembolaget in Sweden)
- Some independent distributors with special licensing may be allowed
- Usually impose high taxes on alcohol
How do independent distributors operate within a monopoly market?
- Specialize in small producers, less familiar regions
- Only sell to bars and restaurants
What is the purpose of a monopoly market?
- Limit alcohol consumption
- Limit competition and price pressure on distributors and producers (keeps prices higher)
- Buying based on blind test for quality, and theoretically producers of any size have an equal access to market
In Sweden, how do new producers enter the market? How long does the process take?
The process takes 7-8 months from original request
- Register with an approved importer
- Wait for Systembolaget to send out a request (4 times a year) for specific styles of wine that the producer fits
- Have the importer send a sample to the buying panel
- Undergo a blind tasting by the panel
- Undergo a second tasting and chemical analyses after selection
Why would a producer choose to sell wine in Sweden?
- Equal access to market as its competitors
- Selections based on quality
- Wines are distributed throughout the entire country, leading to higher volume
What was the Volstead Act?
The prohibition of the production, sale and consumption of alcohol in the USA. 1919-1933.
Why was the Three Tier System initially created in the USA?
- To prevent producers from selling directly to retailers, which created producer monopolies and increased prices
- Easier regulation
- Additional jobs and tax revenue
What are the three tiers?
- Supplier (includes producers and importers)
- Distributor (includes wholesaler and broker)
- Retailer (on-premise/off-premise)
What regulations exist to separate the tiers?
- No cross-ownership between retailers and other tiers
- Producer-importer cross-ownership allowed, but they cannot distribute (eg. E & J Gallo)
- Importer-distributor cross-ownership allowed, but they cannot produce (eg. RNDC)
How can producers by-pass the three tier system?
- DTC sales (either on-premise or off-premise)
- Some states do not allow wines purchased out of state to cross their border
What are the main complications that exist with the three tier system?
- Federal government ceded control of alcohol regulations to states
- Variance between states can drastically differ (open states vs. dry states)
- Distributers/importers need to hire compliance officers to ensure regulations are being followed
What are the three general categories of states?
- Control States
- Franchise States
- Open States
What are the key characteristics of a control state?
- Government holds a monopoly on at least one of the three tiers (usually off-premise retail)
- Specific regulations vary between states
What are three examples of how control states operate?
- Idaho has a monopoly on off-premise sales of beverages greater than 16% ABV
- Pennsylvania is the only retailer of spirits, and on-premise retailers must buy from state package stores
- Michigan has a monopoly on the wholesale of spirits
What are the key characteristics of how an open state operates?
- Limited government intervention
- Suppliers and distributors are free to enter/exit agreements freely
What are the key characteristics of how a franchise state operates?
- Severely limits the freedom of suppliers to change distributors
- If there is a legitimate reason for supplier to change, they might be able to have another distributor within the state to sell simultaneously
How does the difference between open states and franchise states benefit one tier vs. another
Open states:
- Can benefit the supplier, who could require its distributor to drop its competitors and invest heavily in marketing/infrastructure and then abruptly sell distribution rights for a higher price to another distributor
Franchise states:
- Heavily benefits the distributor by protecting them from sudden changes to their business (“lifetime appointments”)
- Little recourse for producers who aren’t satisfied with the performance of their distributor
How do Connecticut’s regulations affect it’s retailers?
- Limits off-premise licenses given to a single entity, and has a set amount distributed geographically based on population
- Prohibits distributor discounts based on quantity
- Minimum pricing
Protects from consolidation and advantages typically held by larger stores
Creates fierce out-of-state competition for retailers close to state lines
What are some perceived benefits to retaining the distribution tier of the system?
- Efficiency provided by logistics specialists, especially for distributors who are able to service retailers on a national scale
- Larger tax revenue from having an additional tier
- Trained sales force with significant marketing resources can lower costs for producers entering new markets
What are two larger trends within the three tier system?
- Distributors are consolidating (by almost 66% in the past two decades)
- Proliferation of US wineries (2,000 to 9,500 in the past two decades)
What are the benefits to consolidation within the supplier tier?
Heavily benefits larger companies
- Through acquisition, conglomerates have larger portfolios to sell
- Distributors only need to work with one company have access to large portfolios needing limited hand-selling
- Retailers can offer a range to consumers through one or two distributors
- Efficiencies in the supply chain could result in lower prices for consumers, with consistent availability
How are smaller producers affected by corporate consolidation?
- Their product can get lost in large portfolios
- Less control over brand image and B2B selling
From a producer perspective, what are the pros and cons of a smaller, boutique distributor?
Pros:
- More willing to sell to retailers with a high-involvement consumer base
- Better control over brand image
- Less pressure to scale up/meet contractual obligations for supply
Cons:
- Limited range of exposure comes with multiple distributor contracts between markets
- Contractual agreements with poor performers make it hard to switch distributors (especially in franchise states)
What are the pros/cons of online DTC sales for smaller producers?
Pro:
- Larger profits
- Total control over marketing/brand image
- Better engagement with consumers/builds brand loyalty
Con:
- Cost of additional shipping supplies
- Cost of labor to manage logistics and marketing
- Liable for ensuring compliance with state regulations
