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Anonymous

Diageo, Fever Tree, Naked Wines & A History of US Alcohol Distribution

Former Director, Naked Wines Australia

Naked Wines: Australia Market Performance

Naked Wines: Trading Update & New Customer Growth

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:20} Can we step back to the 1930s and look at how alcohol was distributed – or supposedly not distributed – during the Prohibition times, and then we can move on to look at post-Prohibition, up to today.

{audio:0:00:36} Let me just start by saying that what I’m going to share with you are my views and my opinions, that have been formed by well over 40 years of experience in the wine industry. We can go back to post-Prohibition, when repeal came and wine became, essentially, legal again, to be sold in the United States. It was illegal during Prohibition, but the wine producers – primarily in California – didn’t anticipate that wine was going to be caught up in that Amendment. It was directed at spirits, mostly and beer, to some degree. Wine producers never thought that that was going to happen and it caught them by surprise.

{audio:0:01:28} However, the really weird fact is, grape acreage grew in California because there was a loophole in the law that said you could make a certain amount of wine for home consumption. So California vintners started growing more hardy grapes, such as Zinfandel and Charbono, so they could ship them, in box cars, to the East Coast, to people making wine. Essentially, that was just a cottage industry; the real thing that happened during Prohibition was that it allowed organized crime to get into something else.

{audio:0:02:07} Once repeal came, they were in the best position to take advantage of this new open situation. That’s how you got liquor and wine distributors, initially. The people who were already dabbling in it, illicitly, were the best people who were ready to go ahead and provide it to the trade and the consumer. We created a commodity for organized crime to take advantage of, at that time.

{audio:0:02:43} So there were a myriad of laws, across the US, post-Prohibition. The state can, effectively, choose which system they follow. With regards to control states, like Pennsylvania, has there been a change in view as to whether that controlling system is fit for purpose?

{audio:0:03:06} Not at all. Most of the state stores and state-run alcoholic beverage industries have so many employees and are so protected by unionization, that to disband state-run systems would be very politically fraught. In fact, I think it was Governor Thornburgh in Pennsylvania, about 20 years ago, undid the state law before he was voted out of office and a new Governor came in and reinstated it. Most of the states who were state-run in the beginning are still state-run today.

{audio:0:03:51} How has the distribution for beer and spirits been structured differently?

{audio:0:04:00} Over time, beer managed to carve out their own relationship. You have to understand that a lot of this is regulated at state level. The beer and liquor distributors contribute a significant amount of money, to both sides, whether it’s Democrat or Republican, so they have the ear of the state legislators. The beer lobby is, without a doubt, the strongest. The beer distributors have the strongest protection of any alcoholic distributors in this country. They have been able to carve their own little fiefdom.

{audio:0:04:46} In fact, a little aside I like to tell people who have never been in the alcoholic business is, the beer people have all the money; the liquor people have all the margin; the wine folks have all the fun. If you’re in the wine business and you are not having any fun, you’d better get out. Besides the big mega companies, the only way a real producer in the wine industry really makes any money is when they sell the brand and sell the land, just like any farmer does.

{audio:0:05:16} Why are the beer companies the most protected?

{audio:0:05:23} In this country, most beer distribution is cash on delivery, COD. When the beer distributor rolls up to the small little mom-and-pop liquor store, or the 7-Eleven convenience store, that proprietor has to pay cash on delivery, as they wheel those goods through the front door.

{audio:0:05:47} Oh, yes. Beer has this incredible protection. Most beer has the largest amount of franchise protection in this country. It is its own little cottage industry that has all kinds of protections; it’s remarkable.

{audio:0:06:04} What could change that, in the beer industry?

{audio:0:06:06} It would be very, very difficult, given the amount of money that they shovel to political entities, at the state level. They just really control their destiny and it is all about money and political contributions.

{audio:0:06:28} Are they also family-run, similar to wine and spirits distribution?

{audio:0:06:35} A lot of them have been handed down through the families but there has been huge consolidation at the beer distribution level, just as it has happened at the liquor and wine distribution level. The same parallels exists but, yes, for most of the beer distributors, it was handed down, over time.

{audio:0:07:04} Could we step back to the early days, when you were working at a winery, marketing your brand to distributors? Back then, how would a distributor typically choose a brand?

{audio:0:07:16} When I started working with distributors – in the early to mid-1980s – the landscape was completely different. You had a significant amount of distributors who specialized in wine and they would generally look at new brands and say, do I have a hole in my portfolio? For instance, do I have a really top Chianti, from Italy? Do I have a Napa Valley Cabernet brand that makes sense? They would look through their portfolio, just as you would as a producer, when you targeted distributorships and try to get a partner. Do they have a hole? Do they have a need for what I have to offer?

{audio:0:08:01} The criteria for the distributor would be, if it meets the need, what’s the quality – because quality of the wine is important – and what’s the pricing? If the producer had the wherewithal to field a sales organization, somebody who could go into the marketplace and help the distributor make money, then that would be much more attractive to them.

{audio:0:08:34} Or they might see if they could steal a brand from somebody who already had traction in the marketplace. If you are a bigger distributor and feel as if you could give them a better footprint in this particular market, you might go after them and see if you could land that brand and steal it from another distributor.

{audio:0:08:52} What is the commercial relationship between the distributor and the supplier?

{audio:0:09:00} Most of the small wineries don’t have contractual obligations and contracts with the distributors. In fact, if we dig into that, that really brings up the whole question about what franchise means and how it works in the United States. There are about 24 or 25 states, right now, who have some form of what they call franchise laws. I’ll give you two examples. Georgia is the worst; if I’m a producer of wine or spirits and I give my brand to a distributor in Georgia, believe it or not, they now own the rights to that brand for life; I have no say. It’s rather remarkable. They trade brands down in Georgia – even in the days when I was trying to do distribution in the 1980s and 1990s – in the same way I traded baseball cards when I was a kid. If you’re a producer, the remedy in Georgia, is that you have to pull out of the state and sell no wine in that state, for over several years, before you can leave a distributor without compensation.

{audio:0:10:19} Laws vary in different states. Massachusetts has a franchise protection for the distributor but you, as a producer, could go dual. That is to say, you could choose two distributors to represent you in the same territory. That doesn’t work for most small wineries, because which distributor is going to go out and sell the wine, with the idea that they are going to lose a sale to their competitive distributor? They’re not. In some ways, laws that allow duality are even worse than laws that lock somebody in.

{audio:0:10:58} There are all kinds of variations of that, in the other states. Some states say, if you sell under a certain amount of wine every year, you can leave a distributor. There are a lot of different nuances. But really, Georgia is the worst and Virginia falls into that camp, as well; there are a number of them like that.

{audio:0:11:18} How do you see these franchise laws changing over time?

{audio:0:11:26} They’ve been growing and getting tighter. One of the misconceptions about franchise protection in this country, is that it was instituted post-repeal. But that’s just not the case. Most of the franchise laws started to develop when something that we used to have in this country – primarily in the Eastern Seaboard, from New York down to Florida – which was called fair trade laws, for alcoholic beverage distribution.

{audio:0:12:01} Basically, it said, if a producer sold a wine to a distributor, the distributor had to mark it up a minimum, no matter what, and pass that along; then the retailer had to mark it up a minimum and pass it on. That was called fair trade, but it was nothing more than fixed pricing.

{audio:0:12:20} We have one state with fair trade, in the United States, and it’s Ohio. But most of these fair trade laws got repealed so the distributors started going to their state legislators and saying, I need protection. I built these brands, ostensibly; I’ve been doing this business and now you’re taking away my ability to fix the pricing. That was the birth of most of the franchise laws.

{audio:0:12:52} And distributor’s argument is, I spend money marketing these brands; they can’t leave me because then I’ve just burnt a load of cash?

{audio:0:13:02} Exactly, which is really nonsensical in today’s market because they spend no money on marketing for a winery. In fact, there are no brand builders left, on the distribution side of things.

{audio:0:13:16} Because of the consolidation. Just as recently as 1995, there were well over 3,000 alcoholic beverage distributors in this country. Today, there are less than 1,200 unique distributors. Nowadays, you have two very large distributors – Southern Glazer’s and RNDC, Republic National – who control well over 50% of what is estimated to be $65 billion worth of alcoholic beverage that goes through the three-tier system; not direct to the consumer. We have two people who control over 50% of that.

{audio:0:14:14} Don’t they invest in sales and marketing, with the supplier, to build the brand?

{audio:0:14:20} They may if you are a really large supplier, such as a Treasury or a Diageo, where they will give you your own division within their distribution company, where you might have shared costs of sales, but that is rare in this marketplace. There used to be a lot more shared expenses between distributors and producers which has been whittled away, over time. As the distributors have got more and more power and clout, their margins have gone up significantly.

{audio:0:15:02} When I started selling wine, back when I was building the William Hill brand in the eighties and then Sonoma-Cutrer in the late eighties and early nineties, the distributors demanded and needed to make somewhere in the 25 gross profit margin; that was their floor. They would go down to 22, sometimes even 21 gross profit, depending on the volume. Today, their mandatory minimum is well over 30 points. They have continued to raise their margins, at the expense of the producer. If you want to do any discount promotions, you almost have to pay them, dollar for dollar, what your discount promotion has backed. After the fact, you will give them the money back so that they can meet their margin requirements.

{audio:0:15:55} If you want to sell your wine that has been selling for $19.99 retail and you want to see it at $17.99, they will work with you and do what they need to do, but then you will have to compensate their margin and pay them back. They’re cash machines, at this point.

{audio:0:16:20} Keep in mind, there are about 10,000 wineries in the United States today. A half of a percent of them, just a little over 50 of these wineries or wine companies, produce over 500,000 cases a year. If you go down another level to who produces between 50,000 and 500,000 cases, that’s another 2.5%. Of the 10,000 wineries in this country, 3% of them produce 50,000 cases or more. That’s about 300 out of 10,000. You’ve got 9,700 producers who produce less than 50,000 cases and they have no clout with the distributors. That is why they need direct-to-consumer sales.

{audio:0:17:22} Before we go onto D2C, could we go back to the point of how the distributor treats large and small brands differently; I’m just thinking about the positioning of LVMH or Diageo. It seems as if this is a real competitive advantage for those bigger brands, in actually just having cemented their position in the market, because of the consolidation at the distributor level?

{audio:0:17:48} They can absolutely get price concessions from the distributor. I was the largest Clicquot distributor at one time, when I was CEO of the Henry Wine Group on the West Coast, before they did the Faustian deal with Diageo, back in 2004. Most of those wines and those brands are now marketed like liquor. Remember what I said about liquor before, in terms of margin. They will get price concessions and distributors will work with them because the volume is so significant and the turn is so guaranteed. They are almost like liquor products. The bar has to have Jack Daniels; they’ve got to have certain call brands of liquor. If you look at Champagnes and some of these big mega wine companies, their brands are like call brands now, so they have to have them.

{audio:0:18:51} So the two big distributors fight for having market alignment, where LVMH says, I’m going to go with such and such a distributor, in all 27 of their states. They do have clout in that regard, but the small producer really does not.

{audio:0:19:12} This also includes wine. I’ll give you a good example and I cited this example in a testimony I gave to Senate Select Hearing in 1997, in California. When I was at William Hill, a brand that I was struggling to try and build, I had a distributor, who will go unnamed, in a southern part of this country, who I couldn’t get the attention of; I was treated like a leper. I had to go and do all the work myself. Fast forward, all of a sudden, I become sales and marketing VP at Sonoma-Cutrer, which was a well-established brand at the time and everybody wanted it. Same distributor, I was the same guy, same set of skills and, all of a sudden, I was treated like a king; I could get anything I wanted. I’m assuming that’s exactly what happens at high level spirits, where these big call brands can really get the attention and get whatever they want, versus some smaller spirit brand who can’t get their attention.

{audio:0:20:15} Let’s say that I am LVMH and I’ve got my top brand and I come to you, as a distributor. How does it work? Do I have to commit a certain sales and marketing spend? Do you have to match that?

{audio:0:20:31} The short answer is, the distributor, with minor exceptions, doesn’t have to match it and won’t match it. The supplier comes to them saying, we’re going to do this for you and, for this, we want you to work on a smaller margin; not to commit as much money and resources to help me, but let me, as the producer, make higher margin and that will cover my cost. That is really how these negotiations work, for the most part.

{audio:0:21:01} You agree a gross profit margin for the distributor?

{audio:0:21:05} Correct; you will make a concession there because you’re getting all this volume and it’s built-in business. It’s like a call brand; it’s going to sell.

{audio:0:21:16} You mentioned how the margins of distributors have increased; how do you see that evolving over the next five to 10 years?

{audio:0:21:26} With wine, I only see it getting higher for the distributor because they have more and more control over the marketplace. I can’t speak to liquor because I’m not in the liquor business. As the distributor’s volume erodes slightly because of different avenues they have developed around direct-to-consumer, they are going to want more margin because they are going to have less volume going through their entity.

{audio:0:22:03} So the distributors take less margin from the big Constellations of the world and then take more margin from the smaller brands and suppliers?

{audio:0:22:15} Yes, because ultimately, what a distributor looks at is their gross profit, at the end of the year, for all brands rolled up. They have a number they want to hit. If they say, at the end of the year, when I’m done with everything, I need to make 30 points GP, if they’re giving concessions to large producers, they’re going to have to extract that higher margin from the other, less clout worthy suppliers, so they can balance and get that blend they need.

{audio:0:22:51} If you’re having a concession or you’re offering 20% gross profit margin for the bigger brands, that means you must be 40% or 50% gross margin for smaller suppliers?

{audio:0:23:03} A lot of these smaller brands are starting at 40% margin now.

{audio:0:23:10} Again, these are typically the franchise agreements where you almost give up your rights for life?

{audio:0:23:17} Yes, but this doesn’t just happen in franchise states; this happens in just about any state, with any distributor.

{audio:0:23:23} You mentioned you had the Clicquot account and then you lost it, so can you terminate the agreement mutually, if you wish?

{audio:0:23:34} If there’s no contractual agreement, a distributor can certainly discontinue and can fire a supplier. Generally, it’s the other way around. In franchise situations, you can often leave a distributor but you have to pay a year’s worth – sometimes two years’ worth – of gross margin in order to buy your way out.

{audio:0:24:00} Why are they so protected?

{audio:0:24:02} Again, they control the state legislators; they have all the money. If you look up how much money is contributed politically, by the Wine and Spirits Wholesalers of America or by the beer wholesalers, there is nothing like that, collectively done, from the supplier side. It is the distribution side that has really funneled this money. As I said, it’s both aisles of the political spectrum that they give money to; it’s not just one side.

{audio:0:24:31} From following Southern, I’ve noticed that, when they make a deal with a new brand, it’s typically nationwide and exclusive. Are they always exclusive and why would that be?

{audio:0:24:46} That would be pretty much part of their requirement. If you’re trying to get into their houses, they will say, consolidate with us. You only have to make one phone call; we’re going to make your life really easy. That’s the pitch. You don’t legally have to consolidate with them, but if you want to get any clout or you want to get any return phone calls, you probably should because that’s going to be the best way to get their attention.

{audio:0:25:20} I dealt with Southern for a long time and they were always trying to get me to go exclusively with them, which I refused to do, at the time. But it was a different landscape in the eighties and nineties.

{audio:0:25:35} Could you just paint a picture of that? Take the nineties, for example, and you are working at a winery, could you just walk us through how you worked with a distributor? Do you travel to the retail or on-prem accounts together?

{audio:0:25:52} It is interesting that you bring that up because, yes, that is exactly what happened. Whether it was you, yourself, as the VP of sales, or whether you had a sales organization, with regional managers, they would set up and arrange the work, in the streets and in the accounts, both independently and with the distributor’s sales people. They were commonly called work-withs.

{audio:0:26:18} Over the last decade, if not more, the distributors have made it more and more difficult to have work-withs. A lot of them say, if you want to work with my sales organization, we’re already scheduled six months out. So all of a sudden, you have to make your schedule with these folks 90 or 180 days out and commit to a day, not really knowing whether you are going to have a good day in the marketplace or not; whether it’s going to be a waste of your time or not.

{audio:0:26:51} What’s happened with Covid is that it gave the distributors a really good, potent excuse to do away with any work-withs. Today, it’s virtually impossible to work, hand in hand, with any distributor sales people or managers, in the marketplace. It’s all on the shoulders of the supplier – especially the small winery suppliers – to go out and create the business themselves, directly in the accounts. They have the excuse they have been looking for, for a long time, and they have been moving towards this. In the wine and spirits industry, all Covid did was push all the trends and the places we were headed into warp drive and we got there a lot faster than we were originally going to.

{audio:0:27:42} Effectively, the distributors cut the employee headcount so there are not enough people, internally, at the distributor, to work with all the accounts?

{audio:0:27:52} That’s also happened, as well. To some degree, the distributor has cut its workforce and has gone to different models. Yes, there is less coverage, there is less of working directly with the distributor, in the marketplace, and it’s made it that much more important for the winery producer themselves to go and create the business and have the account relationships.

{audio:0:28:23} How do the big accounts work together with the distributors?

{audio:0:28:30} The big accounts will obviously be working with their preferred state-wide distributor. However, we’ve got a trend that’s happened over the years, which are national accounts – whether it’s Costco, whether it’s the grocery store, whether it’s the club stores or whether it’s the chain restaurant groups – and they generally have arrangements that they get with the national sales managers with producers who cut a deal with a particular Costco or with a Mastro’s steakhouse, and that gets, essentially, handed to the distributor as given business. In fact, there are several different large companies, in the United States, who specialize in working with various producers, to be their national account agent. They have the relationship with these accounts and they will set these programs up. Then it just gets dumped in the lap of the distributor; they execute against it and take the sale.

{audio:0:29:40} Do you think those bigger companies could ever disintermediate the distributors?

{audio:0:29:44} Costco tried to do that. There was a lawsuit that took place, up in Kirkland, Washington, which is their headquarters. That lawsuit never really made it through the courts. They tried to get the ability to buy nationally, direct from producers. That really led to Costco developing their own brands. They just took the model they had with their toilet paper and everything else – their Kirkland brand – applied it to wine and started developing their own brands.

{audio:0:30:23} What exactly is the role of the distributor today?

{audio:0:30:26} This is what I always tell people: until we can beam a bottle of wine to a consumer’s dinner table, we’re going to need logistics. We’re going to need trucks; we’re going to need warehouses. That is really what they are. At the end of the day, they are mostly a delivery agent. They are warehousing, delivery and a credit and collection agency. That is the major function they serve today.

{audio:0:30:59} What about UPS and FedEx? Why can’t they do this eventually?

{audio:0:31:01} They can’t do it to the trade yet, because the suppliers can’t go direct to the trade. There are only two absolutely free alcoholic beverage markets in the United States. One is California and the other is the District of Columbia. The District of Columbia is an interesting anomaly because it has never been a state. Because it was never a state, there are no alcoholic beverage laws on the books. I was a retailer in Washington, DC; that’s how I got started in the business. The way the law reads is that if you, as the retail merchant – this goes for restaurateurs as well – cannot buy the alcoholic beverage of your choice from the local distributor, you have the right to go directly to the primary source, the producer. If they will sell to you, you go to city government, pull the permit, bring it in yourself and pay the excise tax.

{audio:0:32:24} That’s why, in the heyday, in DC, we had a lot of different independent merchants who bought direct from people all over the world. That’s the nuance of the law. There was another nuance that was interesting. If you couldn’t buy the alcoholic beverage from the local distributor, at the quantities you wanted, you also had the right to go to the primary source and buy, if they would sell it to you.

{audio:0:32:51} California is interesting; I was CEO of the largest fine wine distributor at the time, for well over 15 years. The producers that I represented, could sell through me, they could sell around me or they could sell direct. They could do anything they wanted. You could have independent logistics companies, such as UPS or FedEx, who could do delivery, but they didn’t do warehousing or inventory control, for wineries. So big fulfilment houses have popped up all around the country, to fill that role that the distributor fills, which is the inventory function, the warehousing function and, in most states, the collection function.

{audio:0:33:48} As wineries go direct, and Costco have tried to go direct already, it seems as if the distributor is being somewhat disintermediated, yet their margins are increasing because they have so much power. How do you see this evolving over the next decade or so?

{audio:0:34:13} As I said, let’s keep in mind, only California – and Oregon to a limited degree – and the District of Columbia, can wineries and imported wine, be sold directly to the trade account, whether that’s a retailer, a restaurateur or a hotel. In the other states, they can’t do that. They have to go through the distributor in some shape or form; it has to pass through the distributor’s hands. I don’t see how that is going to change as long as the distributors enjoy the political clout that they have. It has to be changed on a state-by-state basis and that’s a really heavy lift, especially when you’ve got well over 50% of states who then have a franchise law that is on top of all that.

{audio:0:35:11} What was the story in California?

{audio:0:35:15} It had a wine industry, at the time of post-repeal, so they didn’t mandate a distribution system because they had a wine business that they didn’t want to hamper and they wanted to grow. Additionally, I am assuming they had a better voice at Sacramento at that time. That’s how the laws were set up; it was a state choice to do that.

{audio:0:35:50} You mentioned how two of the big distributors in the US own 50% to 55% of volume. What has driven that consolidation?

{audio:0:36:06} It really has been due to the consolidation on the supplier side. As the Treasurys, the Constellations, the Diageos, the Brown-Formans, all these entities that were generally spirits driven, started to either buy or develop brands, they become larger and larger and larger. Then you have Chateau Ste Michelle or family-owned companies like Jackson Family Wines and, basically, by giving the alignment of their brands to one large distributor, that just continued to consolidate. You would have a distributor that would have XYZ brand and it got bought. For instance, we were the Sonoma-Cutrer distributor, in California, at the time. When Brown-Forman bought them, they took Sonoma-Cutrer away from me. That is what happens to small, independent wine distributors when a brand gets large enough and a large entity buys them. It then takes it to a big distributor because it feels as if the smaller entity can’t do the job for them anymore; they want a bigger footprint, both in this marketplace and state, and a bigger footprint nationally.

{audio:0:37:24} As more and more of that happened, especially with California wineries getting sold, it just forced more and more of the small, family-owned distributors out of business because brands they had built and put money behind would leave them and they started to go to bigger and bigger distributors. Then those bigger and bigger distributors started buying up smaller and smaller distributors. There are very few, really high-quality independent wine distributors left in the country. They can’t compete. Distribution is really capital intensive.

{audio:0:38:08} Is there not a limit, in terms of anti-trust, of market share?

{audio:0:38:17} Yes, indeed. It’s interesting you bought that up because after this successful fight to get direct shipping, or the Granholm vs Heald ruling of the Supreme Court, which I was involved with, I formed another entity called the Fairtrade Wine Coalition, FTWC; it was a non-profit. Essentially, it was to develop a White Paper, for the Federal Trade Commission. The Federal Trade Commission issued a big report in 2003 on ecommerce and why it was necessary. Eventually, that was a very powerful argument that led to the Supreme Court ruling.

{audio:0:39:17} In that sense, they were ready to look at more anti-trust type laws, within the alcoholic beverage space, but they needed a roadmap; they needed a White Paper. I took it upon myself to form an organization, to develop that White Paper and to have a meeting with the Federal Trade Commission, and to show them how franchise protection harmed the small producer.

{audio:0:39:46} Like all initiatives that I have been involved with in the wine business, when I think the wineries will support you financially, I couldn’t raise the money that I needed to even do this, even though I went through with it and got it done. I had a meeting with the Federal Trade Commission in December 2006 and presented my findings.

{audio:0:40:07} However, those are political appointees and, with the change in administration in 2008, that report died somewhere and never really saw the light of day and my entity got stuck with a bill that I ended up having to pay to unwind the legal bills. But yes, there is a lot of anti-trust implications here. In fact, the latest merger got stopped. Republic National wanted to merge with Breakthru, which is basically Charmer Group, out in New York. The Federal Trade Commission weighed in and it was very lengthy and very prolonged. I was on a call with the Federal Trade Commission, explaining to them why they shouldn’t allow this to happen. I like to think I might have had a tiny impact there.

{audio:0:41:07} Eventually, RNDC dropped their discussions because they didn’t want to go through the lengthy legal process that it was going to take. In essence, it got stopped but the first thing I said to the FDC was, where were you when the Glazer Southern merger happened? To me, that was more problematic than this one. I think they weighed in because they realized they had been asleep when that happened and they didn’t want to see it happen again.

{audio:0:41:42} Do you think there is somewhat of a limitation here to further consolidation, potentially?

{audio:0:41:48} Yes, because the Biden administration has just enabled the Treasury and the Federal Trade Commission to look at a lot of anti-trust matters in business, in America, and they did single out the alcoholic beverage industry. There is ongoing angst, and probably a lot of political contributions, happening right now, behind the scenes, because there is an initiative to really take a ground up look at what is going on in the business.

{audio:0:42:24} I’m not privy to anything specific, but I’m sure there is a lot of angst right now because there are some eyes that are going to start to look at all this.

{audio:0:42:36} Taking Southern Glazer’s, have they been going back since Prohibition or post-Prohibition days and what is the history of these families?

{audio:0:42:47} This is a very interesting history and all I can say is, if you really want to see some interesting history in distribution, as it relates to alcoholic beverage, check out the founding of Schenley Distillers and who the founder was and then just trace his steps. That will give you some really interesting clues into how we got to where we got.

{audio:0:43:46} It doesn’t exist as a known entity today, but if you take it back to pre-Prohibition when it was founded, it will give you a trail to follow.

{audio:0:43:59} That leads us onto D2C which is the biggest threat to these distributors. Can you provide some context to the D2C regulatory evolution from 1997, up to the Grandholm case in 2005?

{audio:0:44:14} I can because I was involved in it. In late 1996, I was approached by the original founders of what was called the Coalition for Free Trade, CFT. At that time, I was CEO of the Henry Wine Group in California and they asked me if I would be on their board, because they knew I was sympathetic to their desires. I was the only distributor in America to be on the side of the producers, to sell directly to consumers. People thought I was crazy. I said, this is very simple. I’m in the business of sales and marketing of wine; I just happen to be a distributor. To the extent that the market grows, my opportunity grows. To the extent that the market shrinks, my opportunity shrinks. This looks like simple business to me.

{audio:0:45:09} I joined their board. Eventually, they tried to draft me to be president of the organization, in late 1998, which I refused to do because it was a vintner producer fight and not a distributor fight; I said I would be happy to serve as vice president, which I did, along with Patrick Campbell, who was president, and a producer. We had a three-year term and we were done, as officers, at the end of 2001.