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An Indiana Wine Distributor Throws a “Hail Mary” Pass

For non-football types, a “Hail Mary” pass is a desperation pass to avert defeat, with a narrow chance for success, the losing team has a so-called “prayer’s chance” at victory. National Wine & Spirits, a regional distributor of some size, operating in Indiana and Michigan, has just heaved their attempt at the end zone.

Several weeks back, I detailed Southern Wine & Spirits attempted entry into Indiana; they filed a lawsuit against the state to repeal a silly, but long-standing residency law.  In writing about this, I gathered perspectives from a couple of different sources – two independent retailers, a small distributor and an off-the-record employee from a large distributor.

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In that off-the-record conversation, I gleaned and paraphrased the following from the conversation:

… the shift in large wine companies from one book to another has the largest opportunity for impact.  If Terlato moves and Icon Estates moves, Southern may gain.  Yet, other businesses lose on a grand scale.  Now, one can argue that if those large books move it gives an opportunity for them to pick-up new sku’s for the market.  Yes, that is an argument, but not a very valid one, particularly when you consider that large-scale wine distribution is not about the end-customer, it is about velocity of inventory.

Well, the chickens are coming home to roost in this distributor game of consolidation, and for every winner there has to be a loser.

If this were a football game, handicapping becomes easy when the team that is facing 4th and 20 on the 40-yard line, with seconds on the clock, signals their play …

Is National Wine & Spirits standing pat and running out the clock?  Kind of, I think, well, actually, no, they are writing letters (throwing Hail Mary’s) to the editor of our weekly business journal.  The below is the unedited version of a letter that appeared in the Indianapolis Business Journal (IBJ) for the week of May 4th.

Last Call for National Wine & Spirits?
Printed in 5/4/09 Edition

Southern Wine and Spirits has applied for a license to do business in Indiana and it has been stated in the IBJ that Southern will stimulate competition. Everyone should understand that Southern does not enter a new market to stimulate competition. Their strategy is to buy out or force out of business the existing distributors until the market has only two primary distributors, with Southern controlling it. The Chairman of Southern has made the objective clear: “I’d like to see two distributors in every market. That’s our goal.” One only needs to look to Kentucky, where Southern has an 80% share of the liquor business and a 70% share of the non-Gallo wine business.

Because of their size (>$12B with their Glazer partnership), Southern has a commanding share of three-out-of-five of the major suppliers that sell 80% of the liquor in the United States. Those same three suppliers represent 90% of the spirits business and 70% of the total business of National Wine and Spirits, the only Indiana-owned wine and spirits distributor in the State. It is now National that is the target for Southern to buy or force out of business.

National has been told by some of its major suppliers that it should sell to Southern. Not for performance reasons, but because it’s time to consolidate. That may be the only decision. However, we do believe there is much more at stake here - for the welfare of our business, employees and community. The situation, though, can be defused by the Governor and the Alcohol and Tobacco Commission (ATC).

This story can have a different ending than a number of other headquartered Indiana companies that have sold, thanks to the 21st Amendment – it gave the State of Indiana the right to regulate the Alcohol Beverage Industry. The legislature has given the Governor broad powers to regulate beverage alcohol through the Indiana ATC and consider the public interest in their decision-making. With its general purpose being “to protect the economic welfare, health, peace, and morals of the people of this state,” the ATC has just-cause to deny Southern’s application for a license.

What is best for the people of Indiana? Does the Indiana community want National to become another “branch office” - exporting profits and jobs out of State? Or is keeping professional spending, investment and robust philanthropic contributions local important? At least it is for Hoosiers to decide.

John Baker
COO
National Wine & Spirits, Inc.

Besides being poorly executed in terms of persuasive quality, the letter does raise some interesting questions.

When you consider that the other large distributor of wine in the state, Olinger, is affiliated with Glazer’s and Glazer’s is affiliated with Southern, you begin to see that if Southern did come into the state and did consolidate books on large wine companies, National Wine & Spirits might immediately lose a significant portion of their portfolio.  In fact, the Southern quote about wanting two distributors in every market might become manifest destiny with numerous smaller distributors riding the large distributor’s flank, while not leaving a seat at the table for a deposed National Wine & Spirits.

To me, this issue of Southern coming into the state suddenly becomes a gray and difficult situation to draw a conclusion. 

On the one hand, I want Southern in the state as a consumer because I think we would have more product availability.  On the other hand, losing headquarters for mid-sized businesses is never good for community economic growth. 

However, it is hard to rationalize preventing Southern in the state because that means our Alcohol and Tobacco Commission continues to keep arcane protectionist laws on the books.  Yet, if Southern does execute their two distributors per state model, they will wield so much national influence that even thinking boutique wineries will have access to the market via spot distribution is a pipe dream. 

Finally, in this age of bailouts, my capitalistic, free market thinking is clouded by the Keynesian economic world in which we live.  Maybe the “winner takes all,” “count the bodies after their dead” model is not an appropriate model …

Alas, this would make for a fantastic high school debate topic because both sides can be argued in equal measure.

Ultimately, however, if you separate the issues, the greater loss in this conundrum is the continued protectionist laws that serve just a few, while lining pockets and locking out access to the market.

If you look at the long road, this isn’t a Southern vs. local National Wine & Spirits issue.  This is about access to the market by many distributors, not just Southern, which ultimately can lead to more consumer choice.

While the National Wine & Spirits plays to local hot buttons of headquarter locations and philanthropic engagement, their “Hail Mary” pass will likely fall short of the goal line.  While unfortunate, I think it is in the best interest of the most people, even if it hurts a few.

Uttering words I thought I would never breathe, I must now say, “Welcome to Indiana, Southern Wine & Spirits.”



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Posted in, Wine: A Business Doing Pleasure. Permalink | Comments (13) |


Comments

On 05/15, .(JavaScript must be enabled to view this email address) wrote:

National Wine and Spirits may be on the losing end of the argument about state protectionism.  However, make no mistake, the entry of Southern Wines and Spirits into Indiana will not lead to more consumer choice or better prices.  They do not enter a market to compete.

The Indiana market might see an increase in tiny boutique distributors who seek to fill the niche that SWS has no interest in but the presence of SWS makes it difficult for companies to grow because they are so hard to compete with. 

You might want to see what has happened to the Chicago market since SWS arrived in 2003.  Indiana might not be able to stop the SWS behemoth but neither should you welcome its presence in your market.

On 05/16, tom merle wrote:

So what happened in the Chicago market? Theoretically, a true market economy is dynamic. Monopoly forces are offset by entrepreneurial ingenuity. Microsoft is dominant, but hasn’t yet snuffed out a myriad other platforms.

It’s also worth noting that wine distribution is pretty formulaic without a lot of room for variation.  The markups are all standardized.  Sure incentives can be used, fairly and unfairly, but not really disruptive to an efficient market (except, apparently, if you are Intel in Europe…).

In the end there will be the behemoth(s) and the little guy wholesalers and brokers finding retail outlets for the little guy wineries.

On 05/18, Dylan wrote:

I tend to lean more toward Tom’s argument on this. It’s very easy to hate on the larger companies that exist. They are “too corporate” and some people even throw in the dimension of lacking a soul. However, there’s nothing wrong with being successful and having pull in your market, or new markets that you move into. I think if you look at any product you will find that there is usual one for with the overall share of the market, and then more nimble companies taking up the rest. I believe in the power of entrepreneurial ingenuity.

On 05/18, .(JavaScript must be enabled to view this email address) wrote:

The Indiana ownership rule should stand. A company in business to distribute alcohol in Indiana will put the best interests of Hoosiers first only if they are Hoosiers. As soon as SWS enters the state they will raise prices to support their business in sun belt markets that are currently suffering. Hoosiers should not have to pay a tax imposed by SWS to bailout other markets.
If we have to support the sun belt will SWS at least support Hoosiers with the warmer winters enjoyed by the staff in their corporate offices in Miami? I would only trade the inevitable extra dollar a bottle I would have to pay for my favorite alcoholic beverage for a winter free of shoveling snow!

On 05/18, tom merle wrote:

Protectionism in whatever form is anti consumer.  Interstate commerce should rule.  In the end it keeps prices down.  Indiana has been in the vanguard of resisting consumer direct programs, no doubt led by National.  Screw ‘em.

On 07/31, .(JavaScript must be enabled to view this email address) wrote:

There is no reason to try to bash SWS. I have been employed by them for 3 years and have not seen how they are a monster or how they have hurt anyone.  The company is growing and will continue to grow.

On 11/27, Jordan wrote:

Spirits and Wine, certainly not interested, Its better to drink water and stay healthy instead of drinking alcohol and deteriorate you. Drinking alcohol, wine, spirit is all a waste of money and time and of course SENSE! I won’t recommend any one to have a chance at this opportunity and certainly I am happy that these businesses are losing their profit and revenue!

On 02/01, .(JavaScript must be enabled to view this email address) wrote:

What is also the fuzz about it? I mean if they really have to do what they did… so be it! web development chicago

On 02/16, average gas price wrote:

There is no reason to try to bash SWS. I have been employed by them for 3 years and have not seen how they are a monster or how they have hurt anyone.

On 04/17, Pes 2012 Patch wrote:

Thanks for great article.Its better to drink water and stay healthy instead of drinking alcohol and deteriorate you. Drinking alcohol, wine, spirit is all a waste of money and time and of course SENSE!

On 09/26, .(JavaScript must be enabled to view this email address) wrote:

visible in this blog. Thanks a lot for visiting the nice technology is visible in this blog.  mattress brand reviews

On 10/18, computer games wrote:

It’s also worth mentioning that the distribution of the wine is very formal, without a lot of room for variation. Profit margins are all standard

On 10/18, tom merle wrote:

No one is a monster in this saga.  The distributors are pursuing their own self interest which is fundamental in a market economy.  What isn’t fundamental in the protection of market share are oligopolies and monopolies, even for public entities like Federal bureaucracies (ask New Jerseyans what happened after the state DMV was privatized—vast improvements)

Given the dominance of the big guys someone will have to bring a restraint of trade lawsuit not unlike the suit that made it to Supreme Count (Granholm) which struck down protectionism. Or bring in the Dept. of Justice using the same arguments.


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