tiers for fears Print
Written by Nikitas Magel   

Tiers for Fears

The Future of U.S. Wine Distribution and its Three-Tier System
A Provocative Viewpoint by an Online Wine Retailer

The climate is altering.  The landscape is shifting.  Momentous change is unfolding in the wine world around us.  And it's being induced by something subtle yet powerful in its capacity to affect the way we think about wine in the marketplace: the internet.  Traditional distribution under the three-tier model, which has long held a stranglehold on the availability of wine we consume in this country, would do well to take heed.  Otherwise, those who have long enjoyed the privileges afforded them by the current model risk being toppled from their lofty heights of power and influence in wine sales by the strengthening quake of e-commerce.  An audacious pronouncement?  Perhaps.  But it's an opinion shared by an increasing number of internet-based retailers who are witnessing significant growth in consumer purchasing of wine on the web.  During a recent interview focusing on her online wine retail business,  the founder and CEO of Bottlenotes.com, Alyssa Rapp, shared some of her strong and well-informed views with me on the current state of wine distribution and retail in the U.S., as well as some provocative assertions about its direction in the future.


NM:  What broader changes do you see the wine industry going through in the next decade that you feel may significantly alter the state of the industry as we know it?

AR:  I think the world of online wine buying and conversing is just going to explode.  Amazon is entering the space in the next few months, so the story goes, and I think it's going to be an unbelievable sea change in the wine world — that, alone!  One e-commerce monolith entering this world is going to dramatically, dramatically change the landscape.  Because if their goal (which it is, to the best of my knowledge) is to have the most expansive collection of wine available, plus a lot of the stuff you don't find in stores and that's not picked up by major distributors — all of a sudden there's a single place that you can come for all that wine — then that's going to change consumer behavior!  With Amazon, it could be a situation where it's a rising tide; their entrance [into wine e-commerce] will make consumers so much more comfortable buying wine online, that it could be just a huge sea change.  Because, except when you're going to a specific shop where you trust the buyer, really, what's the point of going into a shop at all?  To schlep the wine?  It's a big pain in the tail!  If you know what you want, there's no reason not to buy it online!  And if you don't know what you want, then you have an alternate form of recommendations at your disposal, so why wouldn't still you get it online anyway?

NM:  Let's take it a step further: how do you see online wine retail working with — or without — the existing three tier system?

AR:  Frankly, I think that the three-tier system is broken.  I think a model where there are built-in regional monopolies of distributors with locks on the markets that are elbowing out phenomenal boutique producers is not a sustainable model.  I think a model in which they put their head in the sand is about the fact that this direct-to-consumer model is here, and it's here to stay.  They can fight it as long as they want to; at some point these walls of Berlin are going to come tearing down.  And what that means is that at first there'll be a workaround, like the distribution model [used by a number of online wine retailers] where we're shipping legally but still technically through the three-tier system — but eventually even those laws will change.  If you want fine wine in central Illinois, it should not be any different from buying shoes!  It shouldn't; it's absolutely ridiculous!  Consumers should have access to whatever they want, and it's better for the economic engine of America that that be the case.  Now, mind you, I'm not saying it shouldn't be taxed; it should be taxed by the state governments.  But the reality is that direct-to-consumer shipping has been in the direct interest of the producers and the consumers, so the only thing stopping it from happening is archaic thinking.


Wine ShoppingAR: (con'd) Of course, the distributors with tight strongholds on regional markets aren't going to let it go without a fight.  But the smart distributors, those who truly get it, would start partnering with people like us to really crack the code as to what their online strategy should be.  But that won't be happening just yet — initially there's going to be a real battle: direct-to-consumer shippers (like Amazon or Bottlenotes or whomever) versus the distributors.  And I think if that war continues, it'll certainly delay the outcome, but ultimately the outcome will be the same: consumers will get what they want, and producers will be able to ship where they want and where they have the demand.  Because that's the American way.  That's what a free market economy does, in spite of the fact that we live in what historically has been a puritanical society that hasn't allowed shipping of these things.  We're not talking about tequila!  We're not talking about whiskey!  Although even with those, I personally don't have a problem, but I understand regulating their shipping.  What we are talking about is fine wine, wine for dinner parties, wine for everyday use, wine where you don't want to be limited to the selection in your grocery store.  And so, I think that is where the wine industry is going.

What I think is going to happen, ultimately, is that there will be some additional direct-to-consumer shipping to restaurants and hotels.  I think that's also where distributors are going to get hammered.  Say that you're [a wine buyer for] the Venetian [in Las Vegas] and you only wanted Italian wine — why would you not work directly with the best Italian wine importers in the country?  The way it is now, you have to go through the distributors in Las Vegas; it makes no sense!

NM:  And so where do you see traditional distributors going?  Because usually there's only one victor in the wake of a battle.

"The distributors with tight strongholds on regional markets aren't going to let it go without a fight. But the smart distributors, those who truly get it, would start partnering with people like us to really crack the code as to what their online strategy should be."

AR:  Listen, I'm not here to bash distributors.  I worked for a distributor while at a boutique wine import company in Manhattan a few years ago.  And I was constantly impressed by the knowledge of their salespeople — my god, did they know wine!  I mean, any of them could write a book, no question; they were really knowledgeable people, really!  But in Manhattan, it makes total sense, right?  There's a completely entrenched market of supply and demand of restaurants and wines to be sold.  And if you're a restauranteur and you build up a relationship with three or four distributors, with very knowledgeable salespeople, and they can get you what you want rapidly (because you don't have any storage for excess inventory) and/or they can offer you alternatives matched to what they know you would like — all of a sudden, these distributors are providing a huge service to you.  They're a filtering system!  That's what the old distributors did; they created demand and they marketed products.  And that is the role that online wine retailers are increasingly going to fill — in marketing. We online marketing firms for wine are really the next generation of distributors.  So, if the [traditional distributors] are smart, they'll invest in us or buy us or even create other versions of us or whatever.  But that's what's happening, and the wine world is not going to be held back from evolving and exploding into the online domain just because old school distributors don't want it to; it is going to happen!  So the question is, are they going to embrace it or are they going to be left in the dust?

Wine ShoppingSpeaking honestly, though, I'm cautiously optimistic that a lot of them will, in fact, embrace it.  Because the distributors have a tremendous amount of wine knowledge that could be of better service in marketing to consumers precisely where those customers are increasingly going right now [to buy their wine] — particularly in this economy.  It's a tough time.  And times are too tough not to be willing to think creatively.

NM:  So, from your perspective, online wine retailers are, in many cases, getting back to basics, as it were, by taking on the marketing role that traditional distributors used to have but which has fallen by the wayside.  Although this time around, they're doing so in the context of modern, online tools and technologies.  In other words, wine e-commerce is reclaiming some of the core values that traditional wine distribution of late has neglected.


AR:  Yes.  It's about marketing brands of wine, only now we're doing it through different distribution channels.  That's it.  And that's profound; it's a sea change.  After all, effectively at its core, when it's not really a logistics management play, every wine distributor should be a marketing firm! And what's happened is because of the regulation and because of the inherent monopolies that have built up, a lot of them put locks on the market.  And that is not about marketing — it's about locking other people out, it's about forbidding, it's about creating barriers to entry for other brands.  And you know what?… That system has lasted thus far, but it is not going to be here forever.  It's not!  On the other hand, there will always be a role in the marketplace for great distributors who hand-sell their products in an otherwise saturated market.  If I started a restaurant tomorrow, I would try to build up relationships with those folks.  But it's not going to be the only way to do business in another ten or fifteen years.  And I firmly believe that!


In any sea change, much of the transformation occurs just beneath the surface.  Though ripples brought about by the increasing prevalence of online wine buying are growing in number and frequency, it will be some time before they turn into the industry-altering tempest predicted by many of its more progressive watchers.  How much time, exactly, is anyone's guess.  For now, it will be interesting to see if, and to what extent, traditional wine distributors will continue to ignore the encroaching threat to their primacy that online wine retail poses.  Regardless, as Rapp and many of her fellow e-tailers believe, an end to the monopoly enjoyed by existing wine distributors is really in everyone's interest.    v