Overview of the U.S. Wine Industry 3-Tier Sales Channel
The following is a quick overview of the three-tier sales system in the U.S. and the terminology used in describing it.
In the U.S. the state is empowered to regulate the sale of wine to the degree that it does not compromise federal laws, and each state is unique in the set of laws governing sales of wine. Only the production, importation, packaging, and marketing of wine are regulated by the federal government.
This is the sales tier where a supplier – winery, importer, or other producer – sells to wholesale distributors either in-state or out-of-state. The pricing terminology for this tier is called “distributor FOB,” the price of the wine by the case to a wholesale distributor ex-supplier’s warehouse. This price sets the subsequent market pricing and, unless the supplier holds a wholesale and/or retail license, the only price the supplier sets directly.
This tier may engage a regional broker to facilitate sales and provides marketing support to a group of wholesale distributors. For their services, a regional broker receives a commission on all sales to the distributors that they manage. That commission is traditionally paid by the supplier – not the wholesale distributors.
A supplier must be compliant in each state they sell into according to each state’s requirements regarding the sale of wines. The level of compliance varies greatly for each state in terms of cost and requirements. Regional brokers must be licensed according to each state where they conduct business according to that state’s laws.
Wholesale distributors will pick up wines directly from a supplier’s warehouse after purchasing it at the FOB price, truck it to their warehouse, and add a markup to cover freight, operating costs, and profit margins. This price from the wholesale distributor to restaurants and retailers is the “wholesale price.” While the supplier can influence the wholesale price (through FOB pricing, discounting, various promotional programs, and cajoling), the supplier cannot dictate the wholesale price to a third-party wholesale distributor. In some states, wholesale margins are set by the state alcohol regulatory bureau.
Traditionally, trade accounts such as restaurants and retailers are referred to as “on-premise” (for restaurants, wine bars, nightclubs, bars, taverns, private clubs, etc.) and “off-premise” (for retailers, wine merchants, supermarkets, etc.). The terminology refers to where the wine will be consumed by the consumer.
The wholesale distributor will typically have a pricing strategy that may include volume-purchased discounts, by-the-glass (BTG) special pricing, incentive programs (where legal), coupons, etc. The wholesale distributor may or may not involve the supplier in either supporting or assisting with special pricing or programming, and often the supplier initiates with the wholesale distributor promotions and programming to spur sales.
In the state where a supplier is based, the supplier may be allowed to have a wholesale license, whereupon the supplier can then sell directly to, or engage a broker to sell their wines to on- and off-premise accounts. In the latter instance, a broker makes the sale for a negotiated commission on the sale. In this model, the supplier is directly responsible for setting wholesale pricing, promotions and programming, delivering, invoicing, and collecting payment from the on- or off-premise account. Likewise, a wholesale distributor may be allowed to hold an import license and import wines directly if the state allows it.
Both wholesale distributors and brokers employ sales representatives, the number depending on the size of the company, that regularly call upon on- and off-premise accounts, generating sales and distribution in the market.
Some wholesale distributors are multi-state companies, but in each state the wholesale distributor (and sometimes the wholesale distributor's regional market branches) is independently managed and run. It is not mandatory for a multi-state wholesale distributor to carry a supplier’s products in every state they operate.
Typically wholesale distributors are legally prohibited from, or opt not to sell directly to consumers.
Wholesale distributors and brokers are licensed and regulated to sell wine by the state's alcohol regulatory bureau in which they operate.
On-Premise and Off-Premise Sales
As noted above, on-premise refers to restaurants, bars, clubs, etc. Off-premise refers to stores, wine shops, merchants, etc.
On-premise sales comprise of bottle and by-the-glass (BTG) offerings. Wine list (bottle offerings) pricing is dictated by the wholesale price, any special discounts or promotions the wholesale distributor may be offering, and a margin that covers fixed expenses, profit margin, and potentially a premium based on the brand and/or vintage.
BTG pricing is typically different than wine list pricing. In calculating BTG pricing, a general rule is the cost of the bottle (not including fixed expenses, etc.) is covered by the first glass of wine from the bottle purchased. For example, if a bottle of wine cost $8.00 wholesale, the BTG price would be $8.00. Though this is a general rule, calculating BTG pricing varies from establishment to establishment, and also factors in product branding, scarcity, vintage, etc.
In some cases, depending on state regulations, an on-premise account is allowed to sell as an off-premise account. Furthermore, some states allow a consumer to take an unfinished bottle of wine with them, as long as it is properly closed.
Off-premise pricing truly varies depending on the establishment. Big box and national chain retail stores often work on extremely narrow margins using volume to create profitability. A small wine shop with high fixed costs and expert sales representatives may need up to a 33+% gross margin over the wholesale price to maintain profitability (33% is the typical calculated margin used in deriving supplier published suggested retail price, i.e., SRP).
Retail Sales (Direct-to-Consumer, Consumer-Direct)
Retail sales are sales by a supplier direct to the end consumers. Regulated by each state, such sales may be conducted through:
- Tasting rooms;
- Retail operations;
- Consumer events;
- Supplier-managed wine clubs or subscription sales;
- Direct mail, such as catalogs or newsletters;
- Telephone sales;
- Internet sales.
Suppliers set pricing for retail sales based on traditional, industry-standard markups in each sales tier to create a national, “suggested retail price” (SRP). The SRP can only be enforced in supplier-to-consumer retail sales, and not through the three-tier sales channels. In most cases, a wine’s SRP or “frontline” price will be the highest published retail price, and everyday “street” pricing will often be lower, reflecting the markups by the different companies that own the wine throughout the three-tier sales channel, and the effect of each company’s pricing strategy, including discounts, promotions, and programming.
Retail sales in-state and out-of-state are regulated by the state where the consumer makes the purchase. Retail sales vary in legality greatly state-to-state, and even county-to-county within some states. A supplier or the consumer may be required to purchase an annual license to conduct retail sales and/or pay state sales taxes. The level of compliance varies greatly for each state in terms of cost and requirements, and whether the supplier or the consumer is responsible for filing and paying for compliance and taxes.
Distributor FOB = price from the supplier to a wholesale distributor.
Wholesale = price from the wholesaler to an on- or off-premise account.
Suggested Retail Pricing (SRP) = the price from a supplier or off-premise account to a consumer:
- Super Value (sometimes referred to as Jug Wines or Ultra Value) = wines priced $1.99 or under per 750-ml bottle;
- Value = wines priced between $2.00 – $5.99 per 750-ml bottle;
- Fighting Varietal (sometimes referred to as Economy) = $6.00 – $8.99 per 750-ml bottle;
- Popular Premium = wines priced between $9.00 – $11.99 per 750-ml bottle;
- Premium = wines priced between $12.00 – $14.99 per 750-ml bottle;
- Super Premium = wines priced between $15.00 – $24.99 per 750-ml bottle;
- Ultra-Premium = wines priced between $25.00 – $49.99 per 750-ml bottle;
- Luxury = wines priced $50.00 and over per 750-ml bottle.
*Please note that the precise breakdown of the SRP pricing categories varies to a degree between industry sources.
Wine List = the price on a restaurant wine menu.
By-The-Glass (BTG) = the price of a glass of wine in an on-premise account. Sometimes refers to a special discounted price offered by the distributor to on-premise accounts.