A History of US Wine & Spirits Distribution

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.

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.

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.

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.

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.

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?

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.

How has the distribution for beer and spirits been structured differently?

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.

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.

Why are the beer companies the most protected?

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.

They still pay cash?

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.

What could change that, in the beer industry?

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.

Are they also family-run, similar to wine and spirits distribution?

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.

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?

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?