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Perhaps no other name in the US wine industry provokes a wider range of reactions, from adulation to outright scorn, than that of Southern Wine & Spirits of America, Inc. Large wine companies, or those that aspire to be, tend to view the Miami-based megadistributor as a key partner performing a valuable service that no other distributor can deliver – access to tens of millions of wine drinkers.
Smaller wineries, however, can resent the massive wholesaler for declining to represent their wines, which in some markets leaves them with few, if any, other routes to market. Smaller producers that do gain Southern’s representation often worry they’ll be nothing more than a footnote in a book that includes 1,500 producers and 5,000 brands.
Free-trade and direct-shipping advocates are some of the company’s harshest critics. They paint Southern and other major distributors as bloated middlemen selfishly fighting any reforms to bring efficiency and competition to the outdated regulatory system that mandates their existence. But through it all, Southern continues to grow and expand at an astounding rate, defying those who insist the foundation upon which it is built is fast eroding. That foundation is the so-called ‘three-tiered system’ of alcohol distribution in the United States, which is designed to separate alcohol producers from retailers by inserting an a layer of independent distributors as a buffer between the two.
The system, established in a patchwork fashion by individual states after the repeal of Prohibition, was designed, in large part, to keep those who made alcohol from having any say in how it was as sold to consumers. The system mandates that a producer must sell to a distributor who must then sell to a retailer. To understand Southern and the forces affecting it, a short course in the three-tiered system is, unfortunately, required reading.
The beginnings
As misguided as Prohibition now seems, the US temperance movement pushed for a ban on alcohol in 1918 in part because evidence of abuse was everywhere. Alcohol companies exerted significant control over the nation’s bars and taverns and in many cases owned them outright. This gave the companies that made alcohol a huge incentive to make sure people drank as much of their own product as regularly as possible. The phrase ‘there’s no such thing as a free lunch’ originated during this era, as bars served free lunches to get drinkers through their doors as early in the day as possible. There were other concerns at the time, as well. Fears of tainted products made some call for alcohol producers to be licensed. And the influence of organized crime in the alcohol trade during Prohibition was hard to miss. So when Congress in 1933 passed the 21st Amendment repealing Prohibition leaving control of the alcohol trade up to the individual states, most soon adopted some version of the three-tiered system.
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Fast forward to 1968
By 1968, more than 10,000 distributors had taken root in the nation, a fragmented regulatory system to say the least. But a small group of investors from New York and Florida sought to change that, purchasing a small Miami-based distributor that would become Southern Wine and Spirits of American, Inc. One of key early leaders was Harvey Chaplin, who remains CEO today and whose son Wayne is its president and COO.
Signaling its growth plans in 1969, Southern moved into the competitive California market. They were a long way from home and up against some the toughest competition in the industry, but the company persevered. Today Southern is the US’s largest distributor of wine and spirits by a wide margin, with licenses in 29 states and revenues of $7 billion (€4.9b). It is in most major markets, except Texas, where the law requires distributors to be Texas-based.
“It is no exaggeration to say that Southern Wine and Spirits of America’s record of expansion and growth is unparalleled in the history of the U.S. wine and spirits distribution business,” boasts the company’s Web site. In a recent interview, Wayne Chaplin stresses the company size less than its record of customer service and wide variety of products that keep them ahead of the fast-dwindling competition. Alcohol producers admittedly reap significant benefits from being able to work with a single distributor across 29 states, but Chaplin says Southern offers more to its partners than just scale and broad market access. “It’s not about just being big,” he says. “Suppliers like to have a single point of contact, but I think that’s just part of the puzzle.”
Many flock to Southern because of its people, who are some of the most experienced in the industry. Mel Dick, for example, a senior vice president at Southern and president of the company’s wine division, is widely respected. Dick recognized in the 60’s and 70’s that American tastes were broadening beyond whisky, martinis and beer. He pushed Southern to carry more French wines, realizing that consumers were becoming more adventurous and sophisticated. In 2000, French President Jacques Chirac recognized Dick’s contributions with the Legion of Honor, for his efforts to promote the appreciation of French wine in the U.S.
The company’s reputation for fairness helped its growth, as well. Southern is known as a tough negotiator, but also a distributor that followed through on its promises, says Jonathan Fabio, director of wine and spirits education for Brown-Forman “When you meet with Southern, you may not get what you wanted when you walked in the room, but they’ll do what they tell you they will,” Fabio says. “You can’t say that about every distributor.”
Brown-Forman has a unique perspective on Southern because the two companies worked together for several years, |
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but ceased doing business two years ago. Fabio declined to detail the reasons for the break-up. By the late 1990s, Southern operated in eight states and had posted $2.8b in revenue. Since then the company has added 21 states and more than doubled its revenue. “They are as close as is comes to a national distributor, and that in itself is an anomaly,” Fabio says. Today the company services around 200,000 accounts, about twice as many on-premise accounts as retail accounts (translation to roughly 133,000 on premise and 66,000 retailers). On a volume basis, it’s the opposite, with about two-thirds of the wine that passes through its hands sold at retail and one-third sold on-premise. Its top four markets are California, Florida, New York, and Illinois, in that order.
About 70% of the wine the company handles is domestic, but those numbers can vary significantly, Chaplin says. The import numbers are generally far higher in markets like New York and lower in a market like California. On the whole, though, those numbers reflect American consumption patterns almost to the decimal point. Southern’s phenomenal growth can only be properly understood in the context of the unprecedented consolidation occurring in the US alcohol distribution industry. Between 1990 and 2000, the number of US distributors was cut in half, according to MKF Research, a Californian-based industry consulting firm. While the late 1960s saw 10,000 distributors, by 2004 just 20 were estimated to control over 70% of the national wine market. Southern is responsible for a good chunk of that consolidation. The company has grown largely by acquisitions, moving into new territories by buying or beating out entrenched local distributors. Such moves are often made with the blessing of suppliers who prefer to work with a nationwide distributor like Southern, Chaplin says. Sometimes local laws make such moves difficult, if not impossible. So-called franchise laws in some US states can make it difficult for brand owners to switch distributors. Such laws can be a double-edged sword for a company like Southern, making it easier to hold onto existing territory, but tougher to break into new ones. That’s fine with Chaplin, who worries less about being everywhere than about helping Southern’s partners succeed in the markets they are in. “I don’t think we need to be in all 50 states to bring together the vision that we want,” he says.
The company sees significant growth opportunities in the south and mid-west, but is content to pass over certain sparsely populated areas. “North Dakota and South Dakota, we could probably live without,” says Chaplin.
Another view of the company
As Southern has grown larger, so has the chorus of critics. Small wineries in particular have assailed the company for accelerating the consolidation trend while at the same time blocking their efforts to bypass the distributor bottleneck and allowing them to ship directly to their |
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clients. A 2003 survey by the Wine Institute, the San Francisco-based trade organization, showed that 75% of wineries polled felt distributor consolidation had made it harder for them to find representation. But Chaplin strongly denies small wineries get short shrift from his organization.
The company has separate fine wine sales forces in several markets, something few general alcohol distributors can say. “We’re very open to new products,” Chaplin says. “They don’t have to be massive in size, but they have to be something consumers or restaurants want.”
Therein lies the rub. New wineries, or those seeking to expand their distribution with Southern, need to show that their wines have a ‘point of difference’ from the hundreds of others in the market. Virtually all wineries say they have a product that distinguishes them from their competition, but that isn’t always the case. One of the many items that Southern sells well is a fast-growing Sonoma County brand called Red Truck. Dan Leese is president of 585 Wine Partners, the Sonoma company that purchased the $10 brand from Cline Cellars in an effort to take it to the next level. Southern is a crucial partner in growing Red Truck and 585’s other brands, but sometimes wineries mistakenly think their distributors are the ones responsible for growing wine brands, Leese said. “I believe the onus is on suppliers to be relevant, smart, creative, and strategic,”adds Leese, who was formerly an executive at Foster’s Wine Estates before starting 585 Partners in 2005. “If your strategy is sound and focused, your products of consistently excellent quality and you work the market aggressively, you can get through.”
But that can be little consolation to the smaller wineries that aren’t large enough for major distributors and still find themselves blocked from shipping directly to consumers in large part because of the efforts of Southern and others.
Paths to markets blocked
Southern may take credit for helping make the US the world’s fastest growing wine market, but in fact its efforts have retarded the industry’s growth by orchestrating wholesalers’ ‘anti-consumer, anti-competitive’ political agenda, says Tom Wark, president of the Specialty Wine Retailers Association. Southern has, at every opportunity, thwarted efforts at industry reform by contributing millions to politicians in an effort to prop up the existing regulatory system for its own benefit. “To the extent that the American wine industry is vibrant today, it’s in spite of Southern Wine & Spirits,” says Wark.
The group is seeking similar rights as those that wineries won in 2005 when the U.S. Supreme Court ruled certain states had unfairly allowed in-state wineries to ship directly to consumers while denying out-of-state wineries the same privilege. The group feels the court ruling set a clear free-trade precedent and consumers in all states should be allowed to purchase wine from any retailer in any part of the country. But wholesalers have fought such an extension of the law, claiming it would open the door to allowing all kinds of alcohol to circumvent the existing system. The prospect of teenagers being able to purchase alcohol through the Internet to have it shipped directly to their homes has distributors waving every red flag they can get their hands on. Chaplin admits such concerns may be overblown when it comes to wine. “A kid isn’t going to chug a $50 bottle of Cabernet, I don’t disagree with that,” he says. “But we still believe that shipping wine or beer or other kinds of alcohol is not like shipping cheese.”
If wineries can win their case for direct shipping, then Southern worries that beer and spirits producers will be able to argue for similar exceptions. “I think what we are doing is we’re moving then needle to a point where it’s dangerous, because it starts with wine, then it goes to beer then it goes to spirits, and I have a real problem with a kid being able to get a $9 bottle of whiskey through the mail,” Chaplin says.
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