Big Box Retailers are the Ones to Watch

FILED APRIL 9, 2012

Dear Client:

The passage of I-1183 in Washington State was a major milestone in the industry and a big theme at the WSWA's annual convention in Las Vegas last week. Will other control states follow in its footsteps? What does it mean for suppliers, wholesalers and retailers in Washington? And is this the beginning of the end for the middle tier? While we certainly don't think the situation is that drastic, it is an important issue to watch. An all-star panel led by MHW ceo John Beaudette at the US Beverage Alcohol Forum (immediately following the WSWA convention in conjunction with US Drinks Conference) explored the topic at length. Their conjecture is that yes, big box retailers are pushing for privatization, but panelists believe consumers and even those retailers will eventually learn that a ballot-initiative is not the way to go.

History is a great example for why wholesalers are a necessary part of the three-tier system, said Vince O'Brien, senior counsel at Nixon Peabody. "When I came into the industry every major supplier.all had their own distributor networks in key markets. They owned their own wholesale houses. One by one they gave them all up.. Why did they give them up? Simple economics," he continued. "It didn't pay for a supplier to do what a distributor does." So Vince doesn't anticipate "any threat from the suppliers trying to compete with wholesalers in taking over distributorships because.they just can't do it."

The threat, it seems, is coming from big box retailers. "I think this Costco situation remains to be seen how far it goes because they're" pushing direct-to-retail shipments from suppliers. "I think that is very dangerous.. There are a lot of people unhappy with the way things turned out in Washington" across all three tiers, "other than maybe Costco and some other big box retailers."

THE NORMALIZATION OF ALCOHOL. "Big box retailers are getting bigger and they want to carry everything from potato chips to health care," said Jim Sgueo, ceo of NABCA. "My suspicion is that the more customers they get, the more influence they will have and they will be able to make changes." Their influence goes beyond control states, he noted, using Oklahoma as an example where big box retailers were pushing wine in grocery stores. "We can't expect them to go away. They've been very successful."

Social factors such as the normalization of alcohol also plays a part. "Alcohol has been normalized a great deal over the past decade.. The more normalized this product becomes the more questions customers and consumers will have. 'Why are we treating this differently?'"

"This has been the worst wave [of privatization] that we have seen, at least in my tenure, and I do believe it is primarily because of the economy and growth of anti-government sentiment out there," in addition to the growth of big box retailers and the normalization of alcohol.

COSTCO WATCHING OTHER STATES. Over the past decade Costco has spent roughly $40 million lobbying for privatization and other measures, such as central warehousing, in Washington State through the legislature, the courts and finally the ballots. Last year alone Costco spent $20 million on Initiative 1183 and apparently that is enough for the retail chain.

"From what I'm hearing, they don't want to spend that amount of money in other jurisdictions to make it happen. Outgoing president Jim Sinegal seemed to have it in for the Washington Liquor Board," Jim continued.

Now it appears that while the Northwest Grocery is leading the charge in Oregon and Idaho, Costco is content with "cheering on the sidelines," said Costco's lawyer Joel Benoliel to the Associated Press. The retail chain was reportedly disappointed at "essentially going it alone" in funding Washington.

Jim noted during the panel discussion that going the legislative route is tougher because legislators "are married to the revenue stream. From an initiative basis I think there is some susceptibility for control states. However, if Washington turns out as bad as everyone is expecting it to, people may run away from the initiative process."

"I think Idaho is being looked at. Oregon is probably more susceptible because of its proximity to Washington." But if Washington implodes, then Oregon would also be more likely to back out.

A lobbyist for the grocery trade group in Oregon was quoted by the AP saying: "We do believe it is coming. We believe it's popular in Oregon." In the coming months a House committee will look into privatization and potentially introduce supporting legislation.

Recall that a conservative group (the Idaho Federation of Reagan Republicans) in Idaho not associated with beverage alcohol proposed a privatization measure in February. However, the attorney general said the initiative might be illegal because the state constitution says such decisions should be made by the legislature. It was also opposed by the NW Grocery Association.

"The game's not over. But I think WSWA and all of us are tracking this closely," said Alan Dreeben, a partner in Republic National Distributing Company. "I don't think we were as involved as we should have been, and if the consumer finds out how much more it's going to cost them," then it may deter future ballot initiatives. "Every bottle is going to go up anywhere from $2 to $20," he continued.

THE IMPORTANCE OF DISTRIBUTORS. "I've very proud and passionate about what we do. I don't believe everybody realizes all the functions that we play.. It's incumbent on us as distributors to provide services that validate our existence," said Alan, noting that suppliers in most states have the freedom to yank their brands.

Furthermore, "I don't believe people understand the back of the house. I'm thinking of the facility I office out of in South Central Texas." The warehouse is 300,000 square feet with room up to 550,000 square feet, and has 31 to 37 foot clearance. Besides housing hundreds of SKUs, they keep the warehouse temperature controlled and have to give out credit. "There's a real need for who we are.. I know everybody thinks we're getting bigger and bigger, but no one on the distributor end wants to be tied to just a few suppliers." Rather, the ultimate goal with increasing their size is to grow their "revenue base to shrink the cost of our operation to provide" better service to the suppliers they represent.

WASHINGTON SUPREME COURT DENIES TEMPORARY INJUNCTION

The Washington State Supreme Court is scheduled to hear an appeal in May to overturn a lower court ruling that upheld Initiative 1183. However, the court denied a motion to delay implementation of I-1183 until next month's appeal, reports The Olympian. Why? Washington Supreme Court Commissioner Steven Goff argued a delay would "cost the state money and hurt retailers, distributors and others who are making changes in anticipation of the new law," said the article. It went on to say that "it seems unlikely the Supreme Court would reverse six months of work and overturn the initiative, but opponents are determined to" fight it.

SPICY, SWEET FLAVORS GAIN IN TOP 250 SPIRITS BRANDS

The top 250 spirits brands have grown 3.1% in 2011 and are responsible for 89% of total 2011 retail spirits sales, according experts at Technomic's Adult Beverage Resource Group. "Among the fastest-growing spirits brands, we see a definitive shift towards sweet and also spicy flavors, with flavored vodka, rum and whiskey products gaining steam," said Donna Hood Crecca, senior director of the Adult Beverage Resource Group. This represents a change from the savory flavor profiles that were popular in recent years, she said.

Although not at the top, smaller brands "grew swiftly" in 2011, with the bottom 50 brands showing 6.5% volume growth overall. "What's more, the expansion among brands not included on the Top 250 list outpaced that of these leading brands," said Donna. "These include small artisanal brands, new line extensions and product launches that have ramped up following the recession."

CRAFT DISTILLERIES TO NUMBER 1,000 IN TEN YEARS

The artisan distillery movement is on a roll as the number of identifiable craft distilleries in production have gone from 24 in 2000, to 52 in 2005 and 234 in 2011. If the industry continues on this current trajectory, then the number of firms in the market will likely grow to over 1,000 in the next 10 years, predicted Coppersea Distilling in a new report.

METHODOLOGY. The company arrived at such an aggressive estimate by looking at the "wide scale" of how wineries, breweries and distilleries have evolved since 1880. The craft distillery industry is following closely in the footsteps of farm wineries and craft breweries, whose unique products have "transformed" their respective industries, Michael Kinslick, chief of Coppersea distillery wrote. "The view is suggestive of a 20-year lag between the rebirth of the Wineries, Brewers, and, now, Distillers," he continued, although noting that the lag may be a coincidence. "What seems more apparent is that the number of Distilleries in the United States is returning to more historically 'normal' levels, and that Distilled Spirits consumers, like Beer and Wine consumers before them, are turning to more hand-crafted, smaller scale producers for a variety of taste and perceptual reasons."

BREAKDOWN BY NUMBERS. Although there are exceptions, most (46%) of the craft entrants are single category distilleries. Another 40% are making products in two or three categories, and only 14% are producing a wider range of products. However, two-thirds of the entrants into craft distilling in 2011 started out as single-category firms, but as they mature some will move into multiple categories, wrote Michael. Half of craft distilleries produce and sell vodka, and 30% produce gin although the category has seen a "slight decline" over time in the percentage of craft distillers devoting energy to the category. Rum has held "fairly steady as a product" category through time, with about 25% of distillers in that category. And as you know, whiskey has undergone a revival in craft distilleries and has become "the single most popular category of products amongst the more recent entrants," with 52% of distilleries shipping a product in this category.

A GOOD SIGN FOR THE FUTURE. In 2000 only 12 states had operating craft distilleries, today there are 45 wrote Michael. "I believe the resurgence of Craft Distilleries in the United States is still in the early innings."

WSD BRIEFS:

PROMOTIONAL PRICES UP IN MARCH. The average retail price of wine on promotion was higher in March 2012 than it was in February 2012 and March 2011, based on the Competitive Promotional Price Summary report by ECRM. The average price per 750ml bottle was up +5% nationwide in March year over year to $8.77. Compared to February 2012, prices were up +2% from $9.09. As for 1.5 Liters, average prices were down -1% from $8.82 in March 2011 to $8.77 in March 2012. That's about +3% higher than February 2012 when average promotional prices were at $8.53.

BRAZIL AND US AGREE TO RECOGNIZE RESPECTIVE SPIRITS. US whiskey exports to Brazil have shot up 519% from $517,000 in 2001 to $3.2 million in 2011. Thus, at a signing ceremony today the US agreed to begin a process of formally recognizing the Brazilian Cachaca category, after which Brazil will begin the same process for Bourbon and Tennessee Whiskey. "Brazilians are rapidly acquiring a taste for the finest American whiskeys, and today's agreement-when implemented-will ensure the integrity and authenticity of these world class drinks," said Distilled Spirits Council president Peter Cressy.

GLAZER'S APPOINTS TWO NEW EXECS IN LA. Effective May 1, Johnny Licciardi will assumed duties as senior vp sales and marketing for Louisiana at Glazer's. Johnny began his career at Glazer's in Louisiana, but previously spent 13 years at Brown Forman. He will work under regional president Andy Halpern. Glazer's also announced Denis Johnston has been appointed vp of Diageo/Moet Hennessy Louisiana. Denis is a 24-year industry veteran with prior management roles at Serralles USA, Allied-Domecq, Diageo, Proctor & Gamble and Sidney Frank Importing. Denis will be responsible for sales and marketing performance of Diageo and Moet Hennessy in the state.

VA AND WVA OPEN SPIRITS REGULATIONS. West Virginia Gov Earl Ray Tomblin signed legislation allowing consumers to sample up to one ounce of spirits at a pre-planned tasting event at eligible outlets. It takes effect June 8. Meanwhile, Virginia Gov Bob McDonnell signed legislation giving the VABC authority to expand Sunday alcohol sales into markets statewide. The new law takes effect July 1. "Control states across the country are updating their liquor laws to reflect modern convenience and demand," said DISCUS vp David Wojnar.


Until tomorrow, Megan

"Thirty-five is a very attractive age. London society is full of women of the very highest birth who have, of their own free choice, remained thirty-five for years."
Oscar Wilde

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