We published one of our favourite interviews of 2021 last week: A History of Wine and Spirits Distribution. There are two specific areas of the industry that we think are attractive:
We interviewed an executive with over 40 years of experience across all three tiers of distribution to understand the regulatory structures that define the way alcohol is distributed in the US.
In 1933, the 21st Amendment repealed Prohibition and the organized crime groups previously distributing alcohol were in prime position to begin trading legally. Contrary to popular myth, the Act didn’t specifically require any regulatory framework such as control states or a three-tier system. The major changes that define the industry structure today came in 1975 with the repeal of alcohol fair trade laws and the introduction of franchise laws:
"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. 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. Most of these fair trade laws were repealed so the distributors started going to their state legislators and saying, I need protection.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."
The franchise laws were effectively introduced to protect wholesalers after fixed pricing was repealed. One protectionist policy replaced another. Wholesalers argue that they need protection from brands that may leave after they have spent large sums marketing their products. The terms of the franchise law go a long way to protect the distributors and requires the brand to sign over lifetime rights to wholesalers:
"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."
The franchise laws seem archaic given the market power of distributors today. Wholesalers such as Southern Glazer’s and Reyes Holdings don’t need unwaivable statutory protection from small brewers; the distributor has all the power.
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