It’s been a turbulent year for the drinks industry’s middle tier. In January 2016, leading spirits and wine wholesaler Southern Wine & Spirits merged with No. 4–ranked Glazer’s to create a distribution powerhouse with nearly $16 billion in annual sales. That merger followed a deal between The Charmer Sunbelt Group and Wirtz Beverage Group—No. 3 and No. 6 in 2015, respectively—to form Breakthru Beverage, a $9 billion wholesale player. Other top-10 distributors have made smaller buys, including The Winebow Group, which acquired Purple Feet Wines in 2015—a move that gave them entry into the fragmented Wisconsin market.
Massive scale and a national reach are the paramount goals these days at all tiers, as Anheuser-Busch InBev acquires rival SABMiller, retailers Albertsons and Safeway join forces, and Walgreen’s and RiteAid seek to finalize their merger. “The trend to bigness is no surprise,” says Ian Downey, senior vice president and general manager of Leonardo LoCascio Selections at The Winebow Group. The company doubled its size in 2014 when The Vintner Group and Winebow merged to form The Winebow Group, followed by acquisitions in five more states since then. “There’s more wine coming into the market than ever before,” Downey says. “That’s forcing people into new expansions and partnerships. There’s pressure to grow, and acquisitions are the best way of doing it.”
In the face of this deal-making, there were fears that many small and mid-sized wholesalers would get squeezed out of business. How could a small wine importer get an appointment with buyers at the ever-expanding retail chains, whose priorities aligned with giants like Southern Glazer’s, Breakthru, Republic National Distributing Co. (RNDC) and Martignetti Cos.? Thus far, smaller wholesalers are prospering even amid all the consolidation. A survey by Market Watch has found that many of these players have been able to gain wine, spirits and beer labels cast off by the giants as they combined. Smaller brands are finding plenty of niche-hungry distributors eager to sign on with them.
And the smaller distributors continue to emerge. The Wine & Spirits Wholesalers of America (WSWA) says its membership is holding steady at nearly 400 companies—not far from where it was 15 years ago. WSWA president and CEO Craig Wolf predicts that consolidation will continue. But “at the same time, small firms are springing up to handle products the big guys aren’t representing,” he adds. “In many large markets there will be perhaps two or three major wholesalers, and then a lot of small and medium-sized players. So many new craft products are coming to market now that there will be a need for more wholesale representation in the years ahead.”
Two Guys And A Truck
Craig Purser, president and CEO of the 3,000-member National Beer Wholesalers Association (NBWA), notes that barriers to entry in distribution continue to be low in many places. “All it takes is two guys and a truck to get into this business,” Purser says. “There are now around 4,000 brewers in the United States, up from around 100 three decades ago. It requires a lot of distribution to get all their products to market.”
In Minneapolis, Small Lot Wine and its sister company, Small Lot Imports, have been in business since 2011 and butt heads with Southern Glazer’s, Breakthru and Johnson Brothers Liquor Co. in their market. In 2016, the company expected to sell about 20,000 cases worth nearly $3 million with a sales force of a dozen people. Revenues have doubled over the last 12 months.
“We’ve taken on nearly 20 new wine producers in the past year,” says Jay Johnson, a former restaurant owner who’s the president and owner of Small Lot, which has a portfolio of 70 producers and 300 SKUs. “We’ve found that the big distributors are more focused on their spirits business. A producer with 50 cases designated for the entire state can’t do business with the bigger players. We can step in and be their distributor. And smaller restaurants that do limited business with the big three love guys like us.”
In Chicago, the decade-old Candid Wines has a book of just 60 brands, three salespeople and annual sales of $3 million. Owner and president Damien Casten is content with his niche. “This is a great time to be in the market, and I’m happy with where we are,” he says. But Casten is realistic about his boundaries. “The big national steakhouse chains order their wines by the container based on price and turnover,” he notes. “For them, it’s all about logistics. We pick out an influential restaurant like Maple & Ash in Chicago and supply them with a grower Champagne like Serge Faust that’s absolutely exclusive to them. Serge Faust sells for $25 a glass and $90 by the bottle at Maple & Ash, which has developed into the largest single account in the world for the brand. Those are the types of relationships we try to establish.”
Some distributors are growing especially fast. Chicago-based Tenzing Wine & Spirits, founded by former Wirtz salesman Ken Fredrickson, saw its sales jump by almost 20 percent in 2016 to 125,000 cases, worth $26.5 million. Fredrickson calculates that small distributors in Illinois—which has some 200 small players in all—together share about $350 million in sales, or one-tenth of the state’s wholesale volume. Fredrickson doesn’t try to be everywhere: He calls on just 1,200 off-premise accounts—roughly 5 percent of the 21,000 licensed retailers in the state. He also doesn’t try to outmaneuver rivals on marketing. “The biggest distributors can do bar buys, wet promotions, trip incentives and gift cards at restaurants,” he says. “We don’t have the same price levers and incentives for our salespeople. We hire people who are passionate about our products, and they sell on that passion.”
This approach resonates with some suppliers, according to Winebow’s Downey. “Suppliers want to know that people are passionately connected to the world of wine,” he explains. “They want to know that they’re in a portfolio of like-minded brands—a portfolio rich with other estate families and caretakers of unique areas. And they want a distributor network that’s equally committed.” Downey says that’s why even as Winebow expands, it continues to work primarily with family-owned and boutique wineries. “These labels are our niche and our strength,” he notes.
Of course, sometimes passion isn’t enough. Tenzing introduced WhistlePig whiskey into the Illinois market five years ago, and the firm has since made the brand a success story there. But its distribution will likely move on to a bigger player with more market reach before long—something that Fredrickson is philosophical about. “We were their incubator and worked our tails off for them,” he says. “But soon they’ll probably outgrow us and want to make a change. That shift is pretty common.”
Nicolas Palazzi, owner of Brooklyn, New York–based importer and distributor PM Spirits, says he hasn’t lost a brand to larger rivals yet, but like Fredrickson, he fully expects it to happen eventually. “I’m sure that will occur at some point because that’s the name of the game,” Palazzi says. “We do the legwork, we get the brand recognized with the people who have leverage and will create a bigger buzz, and then the brand moves on to a larger, more national company.”
Palazzi, who launched his business in 2011, says he’s building a “curated selection” of brands. He’s directly involved with suppliers, and his sales force knows the ins and outs of each individual brand—an approach that creates a compelling alternative to the larger distributors. “We appeal to people who are looking for experiences that are more hand-crafted,” he explains. “It’s a small business. I know all my suppliers. They have my cell number. We talk and we plan. There’s not a huge corporate structure.”
Importing Component
While the biggest distributors often downplay their importing capabilities, many smaller firms regard direct deals from overseas as an essential part of their business. At Winchester, Virginia–based Kysela Père et Fils Ltd., 85 percent of its annual 400,000-case volume—$30 million by value—is composed of self-imported products. President and owner Fran Kysela deliberately seeks out small, family-owned brands. “Many of our wines are for wine lovers, geeks and sommeliers who think our portfolio is sexy,” Kysela says. “But bigger companies don’t see this segment as a sexy niche. On some wines, we get only 10 cases a year, which exasperates a lot of people. We can handle it.”
Kysela stocks over a dozen different sake brands with aggregate annual sales of 600 cases a year. He hopes to raise that volume to 3,000 cases within five years as sushi restaurants proliferate across Virginia. “We look for niche products,” Kysela says. He’ll venture into higher-volume categories such as California Pinot Noir when a special opportunity arises, such as from Trombetta Family Wines out of Sonoma County. “Those wines were retail-priced from $48 to $65 and had rich, fruit-forward flavors, garnering scores of 94 and 95,” Kysela notes. “But they couldn’t get distribution, because bigger companies saw that niche as being filled.”
No wonder little wineries like Trombetta find themselves orphaned in the marketplace. CEO Rickey Trombetta Stancliff and her family founded the winery in 2010 and still make just 1,500 cases a year, with production split between Pinot Noir and Chardonnay. “We sell a third of our volume in California, and we’re distributed in just a few other states,” Stancliff says. “It’s a real challenge. Some distributors don’t pay on time, and others go out of business or don’t pay at all. We’d love to be making 8,000 cases a year and selling in a lot more states, but we need to get more good distributors like Kysela interested in us.”
Tad Seestedt, founder of Sheridan, Oregon–based Ransom Spirits, can relate to those frustrations. Seestedt says he would generally prefer to work with small- to medium-sized distributors, but that strategy can be risky. “A severe disadvantage with the smaller to medium-sized distributors is that they often go bankrupt,” he says. “This is my 19th year of business, and I think I’ve suffered six or seven distributor bankruptcies. In these situations, we get paid nothing.”
Indeed, the finances of smaller distributors are sometimes perilous. In Virginia, Kysela says that his pricing is held to a standard 35-percent mark-up, with the retailer taking another 50 percent. “You can’t take any more price because the competition is so fierce,” Kysela says, explaining that he acquires some new brands in the aftermath of distributor mergers. “Two companies come together and they each have an Alsace producer. They may decide they need only one and cut the other one loose. We then might go after it.”
Charles Zoulias founded Perfecta Wine Co. in Manchester, New Hampshire, in 1998 with the aim of specializing in wines from Alsace. “Back then, the market for Alsace was minuscule, but I liked the wine,” Zoulias says. “So I ordered 225 cases and decided that if it didn’t sell I would put it in my basement and drink it myself.” The wines did sell, and today Perfecta has 13 employees, annual sales of 70,000 cases worth $9 million and a growth rate of 10 percent in 2016. Some of its brands are prestigious, such as Dunn Vineyards from the Napa Valley and Williams Selyem from Sonoma County. But it has also lost some up-and-coming labels like 90+ Cellars to bigger rivals such as Southern Glazer’s. “You might lose 5 percent or 10 percent of your sales when a brand moves away from you,” Zoulias says. “Then you have to find another brand to replace it.”
Atlantic Beverage Distributors in Massachusetts and Rhode Island is enjoying rapid growth and has a staff of 78 people selling wine, beer and spirits. Volume reached 1.1 million cases valued at $50 million last year. Six years ago, owner Sean Siegal had only a dozen salespeople. He has embraced the craft movement, stocking 44 craft beers, with local labels such as Lord Hobo Brewing Co. and Jack’s Abby Craft Lagers exploding onto the scene.
The Lure Of Large
Many small producers say they’re torn between the intimacy and attention a smaller distributor can provide and the breadth of coverage offered by the larger players. Thomas Mooney, co-owner and CEO of Portland, Oregon’s House Spirits Distillery, started out using Oregon-based distributors who built the company’s key brands in the local market for during its first five years of operations. “We had cultivated relationships with really great one-state distributors,” Mooney says. “Those relationships were wonderful, but there was no way to build a national distribution network based on that model. Our choice to become a national business necessitated that we evaluate who we worked with from a distributor standpoint. Once you’re trying to build a national footprint there really aren’t that many choices.” House Spirits Distillery is now represented by Southern Glazer’s in most markets.
Brian Ellison, president and CEO of Death’s Door Spirits in Middleton, Wisconsin, has also experienced distributor upheaval while his company builds its national presence. As second-tier consolidation has increased, changing distributor alliances have forced the company to shift partnerships. “We end up having to switch distributors simply because we’re part of a multistate alliance,” Ellison explains. “It’s creating bigger swings for us, which aren’t quite ideal.” He’d like to have the ability to choose the best fit in an individual market or state.
Evanston, Illinois–based FEW Spirits’ brands find a home with some smaller distributorships, but are increasingly trending toward the larger players, according to founder Paul Hletko. “We have some great partnerships with big houses, and at the same time, we have some nice arrangements with smaller houses too,” Hletko says, noting that his preference is the larger distributors. “As a distiller, your goal could be very narrow, focused distribution, and there’s a lot of houses that can get you that. But if your goal is very widespread distribution, you need a bigger house.”
Smaller producers acknowledge the threat of becoming lost in the labyrinth of brands within a large distribution organization. And distributors are increasingly relying on producers to do a portion of the legwork in a given market. “The most important thing we’ve learned over the past four years is that if you’re going to launch in a market, you need to have the resources to support a distributor, their teams and the different programs you want to put in place,” says David Defazio, cofounder and chief operating officer of Wyoming Whiskey. “We’ve done a good job with that in some markets and we’ve done a poor job in others because we don’t have the resources to support some of them.”
Ransom Spirits’ Seestedt agrees, and he bristles somewhat at the expectations placed on producers. “A lot of the distributors—small, medium and large—really want the producer to come to the market and work the market,” he notes. “A lot of smaller producers feel that our job is to make a good product, price it appropriately and put it in a nice package, and the distributor’s job is to sell it.”
It’s not an uncommon lament, even when producers know that they can’t expect more from their distributor given the volume of their brands. Mooney says that “for fun,” he once calculated his fair share of Southern Glazer’s time. “The answer was about six seconds a year,” Mooney says. “It’s up to us to really leverage what they can do because of their size and to be realistic in our expectations.”
Further Shakeout
Former Georgia wholesaler Joe Best predicts that the current consolidation trend will eventually reach deeper into the ranks of smaller distributors. In 2013, Best sold his 13-year-old company, Quality Wine & Spirits in Atlanta, to The Vintner Group. At the time of the deal, Quality had $55 million in sales and was Georgia’s sixth-largest distributor. Best got more than one offer to sell out. He had a contract to stay on for three years and manage the business, but left after just five months, disenchanted by big-company decision-making. He believes that smaller firms will hit a wall in trying to carve out space occupied by bigger rivals, due to sheer logistics. He notes that selling to the 7-Eleven chain, for instance, means that a distributor occupies a shelf planogram that requires weekly service. “You can’t sell each store 100 cases and expect them to warehouse it,” Best explains. “You sell them six bottles each of six items and then have to replenish those products constantly in each store. That’s hard for the little guy to do. That’s why the big companies are so dominant—they can afford this type of labor.”
FEW Spirits’ Hletko expects consolidation to continue, with the market ultimately shaking out into a tier of major distributors—numbering perhaps just two—and a large tranche of very small distributors offering alternatives. The smaller players will be instrumental in “making sure the first-tier distributors don’t take over the entire marketplace and gain all sorts of pricing power,” Hletko says.
With or without further consolidation, the small distributor can play an important role for regional products. Dr. Konstantin Frank Wine Cellars in the Finger Lakes region of New York produces 40,000 cases of wine a year. But even with 85,000 visitors to its tasting rooms, the winemaker still relies on distribution in 30 states to sell all its production. In Maryland, for example, the company is with Boutique Vineyards. “Boutique gets us to the sommeliers who want to diversify their wine lists beyond California and imports,” says the winery’s third-generation owner, Frederick Frank.
Unsurprisingly, small distributors do best with independent retailers and restaurants. Doug Hotz, the owner of the single-unit Rio Hill Wine & Gourmet in Charlottesville, Virginia, says that of the 1,300 wine labels he stocks, around 80 percent come from small distributors. “The sales staff at the big distribution houses seems to turn over more often,” he explains. “And their salespeople are under pressure to sell me brands that are already offered in every chain store.” Instead, Hotz delights in offering items like the 2015 H.B. Picpoul de Pinet from France’s Languedoc region, priced at a bargain $8.99 a 750-ml. bottle. “It’s turned out to be one of our best-selling white wines,” Hotz says. “Customers at a store like ours are more likely to respond to the more obscure offerings, such as a Viognier from South Africa.”
Bob Kreston, president of Wilmington, Delaware–based Kreston Wine & Spirits, generally prefers to work with the smaller middle-tier players, although he notes that he has been well taken care of by distributors of all sizes. “The smaller guys seem hungrier for their paycheck and for making their numbers,” Kreston says. “They offer good quality wines—things that are more of a hand-sell—and we have the staff and expertise to sell them. With those products, we typically have an opportunity to make a little more profit. There’s been a lot of consolidation among the larger companies, and I think they’re all worried about losing brands or not performing well enough to keep those brands.” Kreston adds that the high-volume brands are among the least profitable for retailers.
The big distributors aren’t ceding any ground to the niche players, however. Southern Glazer’s and others have added fine wine experts to their sales teams in many states and have formed separate sales forces to handle craft products. “Southern Glazer’s has 12,000 wines on its inventory list in Illinois, and there are a lot of hidden gems there,” says Robert Bansberg, general manager of The Stained Glass Wine Bar Bistro in the Chicago suburb of Evanston, Illinois. “And they provide extra services like printing out the wine lists for you.”
Bansberg lauds the big houses for their consistency and the smaller distributors for their passion and product knowledge. “The little guys are always running out of things, though they’re also willing to deliver a case or two with just a few hours’ notice,” he says. He’s refashioning the wine list at Stained Glass: A year ago, 80 percent of it was dominated by wines from big wholesalers. “The little distributor now represents 50 percent of our list,” Bansberg says. “We increasingly want to be able to offer our guests the esoteric labels that fly under the radar. It’s the smaller house that’s most likely to have those.”