Wine markups at the wholesale, restaurant and retail level
February 16, 2009
I try not to rant about the wholesale market for wine in the United States. Really I do. I know that distributors and retailers play an important role both in marketing and in delivering wine to the millions of American wine consumers, and I am grateful for the work of the dedicated wholesalers, restaurateurs and retailers who support Tablas Creek wines every year.
But there are times when the entire wholesale channel can be discouraging, when I eye jealously the producers around here who sell most or all their production direct.
The economic challenges of a recession hit both ends of the distribution chain. Restaurants have so far taken the largest hit, with several notable top spots already closed and others, particularly those who rely on businesspeople with expense accounts or tourists, down as much as 30%. Retailers as well have seen the effects of consumers tightening their belts, and though they continue to sell plenty of wine, most of what is selling now is on the less-expensive (and less profitable) end of the price spectrum. Similarly, smaller, higher-end wineries are impacted by having to convince several people along the distribution path that they should have enough confidence to sell their wines. As I wrote a few weeks back in my post Succeeding in a poor economy:
"for a wine to sell in the wholesale market, the distributor manager has to believe in the product enough to maintain a healthy inventory, the distributor rep has to believe he or she can sell the wine enough to pull a sample and show it to his or her accounts, and the buyers at the accounts have to have enough confidence to buy the wine in a crowded marketplace full of people offering them hitherto-unimaginable deals. That's a lot of people whose confidence you have to win or keep before the consumer even gets the opportunity to buy your wine."
While both restaurant/retailers and wineries struggle, the system is set up such that wholesalers are guaranteed to make healthy money off of wine. For example: a typical wine that retails for $25/bottle ($300/case) a retailer would expect to buy for $200/case. The distributor who sells it for $200/case would expect to buy it for $150/case. An agent who sells to distributors for $150/case would expect to buy it for somewhere around $120/case. So, a winery starts off with $10 of the eventual price of $25, and bears most the real costs of the wine (including, but not limited to, land, winery building, farming, harvest labor, winery labor, barrels, bottles, corks, and marketing). Nearly every wholesaler and many retailers pay their sales force on commission, so if they sell less, they're paid less. It's a great way to make sure that whatever sales are, the business ends up in the black.
The world of restaurants has even more dramatic markups on wine (which go to subsidize food and labor costs). That same wine which the retailer sold for $25/bottle would normally sell on a restaurant list for triple the restaurant's cost, or $50. If the restaurant were to pour it by the glass, the typical markup is to charge bottle cost for each glass of wine. So, a glass of the wine would be $16. I wonder if most people realize what a small percentage of the price that they are paying for wine at the retail shop or restaurant goes back to the producer.
It's worth mentioning that I am not particularly complaining about restaurant markups, at least not wine list markups. Restaurants typically use the margins they make on wine to help subsidize the rest of the astronomical costs of building out and running their operations, and given that 60% of restaurants close or change ownership in the first three years, most restaurateurs are not in the business getting rich. I do think, though, that the standard 400% by-the-glass markup and the resulting $12 bottle cost limit for by-the-glass wines, is often self-defeating for restaurants, as most restaurants therefore can't offer great wines for their by-the-glass selections.
Why did this system evolve in a way that protects the profitability of wholesalers at the expense of restaurants and producers? In my opinion, it's a combination of legislation that protects the distribution tier (the famous three-tier system) and natural economies of scale. For a distributor to be effective, they must be relatively large, and sell many dozens (probably many hundreds) of wineries' wines. This means that the success of any individual small winery or any individual restaurant or retailer means relatively little to them financially.
In addition to these natural economies of scale, wholesalers are protected by the laws that license them to make deliveries of alcohol to restaurant and retail customers. (A few states do permit wineries to do this, but it's usually only practical in the winery's own home region.) Many states give even more explicit protection from competition to the wholesalers, including roughly 20 states with franchise laws that expressly prohibit wineries who are dissatisfied from choosing to move their custom elsewhere. This has always seemed to me a clear violation of antitrust laws, and on a more pragmatic level allows distributors in franchise states to routinely work on higher markups. With distributors' large size comes political clout and efforts to protect their privileges through favorable state legislation, as advocacy groups like the Specialty Wine Retailers Association point out.
It's worth noting that there are exceptions to every generalization. We have several wholesalers in key states around the country who are terrific, who share the costs of offering better deals to our customers, and who are out on the streets regularly advocating for our wines. But those distributors who provide advocacy and education in addition to their warehousing and delivery tend to be our smaller, wine-focused distributors rather than larger we-sell-everything-from-Jack Daniels-to-boutique-wine wholesalers, and mostly (though not entirely) come from states without franchise laws. It doesn't take a rocket scientist to guess in which sort of wholesaler Tablas Creek does best.
How does a small to medium-sized winery who makes their livelihood in the wholesale market survive? I have no idea (thank goodness for our tasting room and our mailing list, through which channels we can offer customers good discounts on wines and still make a much better margin than on what we sell wholesale). My dad and I have come to the conclusion that for a winery to be successful focusing solely on the wholesale market they need to make somewhere above 50,000 cases. I wouldn't know about that. But I do know that at Tablas Creek, we've been forced to think of our money-losing efforts in the wholesale market as a portion of our marketing budget. It's about the only way that we can avoid throwing the mouse at the computer when we get a request from a wholesaler that we lower our price on a bottle of wine that we sell for $9 (out of which come all the concrete costs of making the wine) so that the distributor can make their $4 for delivering a bottle of wine from their warehouse to a restaurant and the restaurant can make $58 on that bottle when pouring it by the glass.
So, where does this leave us? Get involved in your state legislatures' discussions on wine-related matters. Oppose franchise laws, exclusivity for wholesalers and other laws that protect the middle tier from competition. Support direct shipping legislation. Free market capitalism stops working when the markets aren't free, and the wholesale wine market, at least outside California, isn't very free. And both producers and consumers suffer the consequences.