Other Types Of Markets

Question 1

Besides free markets, what are the two “other” types of markets?

Answer 1

• Monopoly markets
• Three Tier System (USA)

Question 2

How is a monopoly market structured?

Answer 2

• One retailer (Systembolaget in Sweden)
• Some independent distributors with special licensing may be allowed
• Usually impose high taxes on alcohol

Question 3

How do independent distributors operate within a monopoly market?

Answer 3

• Specialize in small producers, less familiar regions
• Only sell to bars and restaurants

Question 4

What is the purpose of a monopoly market?

Answer 4

• 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

Question 5

In Sweden, how do new producers enter the market? How long does the process take?

Answer 5

The process takes 7-8 months from original request

1. Register with an approved importer
2. Wait for Systembolaget to send out a request (4 times a year) for specific styles of wine that the producer fits
3. Have the importer send a sample to the buying panel
4. Undergo a blind tasting by the panel
5. Undergo a second tasting and chemical analyses after selection

Question 6

Why would a producer choose to sell wine in Sweden?

Answer 6

• Equal access to market as its competitors
• Selections based on quality
• Wines are distributed throughout the entire country, leading to higher volume

Question 7

What was the Volstead Act?

Answer 7

The prohibition of the production, sale and consumption of alcohol in the USA. 1919-1933.

Question 8

Why was the Three Tier System initially created in the USA?

Answer 8

• To prevent producers from selling directly to retailers, which created producer monopolies and increased prices
• Easier regulation
• Additional jobs and tax revenue

Question 9

What are the three tiers?

Answer 9

• Supplier (includes producers and importers)
• Distributor (includes wholesaler and broker)
• Retailer (on-premise/off-premise)

Question 10

What regulations exist to separate the tiers?

Answer 10

• 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)

Question 11

How can producers by-pass the three tier system?

Answer 11

• DTC sales (either on-premise or off-premise)
• Some states do not allow wines purchased out of state to cross their border

Question 12

What are the main complications that exist with the three tier system?

Answer 12

• 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

Question 13

What are the three general categories of states?

Answer 13

• Control States
• Franchise States
• Open States

Question 14

What are the key characteristics of a control state?

Answer 14

• Government holds a monopoly on at least one of the three tiers (usually off-premise retail)
• Specific regulations vary between states

Question 15

What are three examples of how control states operate?

Answer 15

• 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

Question 16

What are the key characteristics of how an open state operates?

Answer 16

• Limited government intervention
• Suppliers and distributors are free to enter/exit agreements freely

Question 17

What are the key characteristics of how a franchise state operates?

Answer 17

• 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

Question 18

How does the difference between open states and franchise states benefit one tier vs. another

Answer 18

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

Question 19

How do Connecticut’s regulations affect it’s retailers?

Answer 19

• 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

Question 20

What are some perceived benefits to retaining the distribution tier of the system?

Answer 20

• 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

Question 21

What are two larger trends within the three tier system?

Answer 21

• 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)

Question 22

What are the benefits to consolidation within the supplier tier?

Answer 22

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

Question 23

How are smaller producers affected by corporate consolidation?

Answer 23

• Their product can get lost in large portfolios
• Less control over brand image and B2B selling

Question 24

From a producer perspective, what are the pros and cons of a smaller, boutique distributor?

Answer 24

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)

Question 25

What are the pros/cons of online DTC sales for smaller producers?

Answer 25

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