TOP STORY: In the shadow of giants

Southern Wine and Spirits’ joint venture with Glazer’s creates a drinks mega-distributor stateside. A great deal for the two protagonists, but what of smaller producers trying to break into the US market? Alexis Hercules reports

In a move that has been the subject of rumours for a while, with some analysts predicting it as long ago as 2005, Southern Wine & Spirits of (SWS) America and Glazer’s Distributors confirmed that they are to join forces, becoming the largest wine and spirits distributor in the US.  

The deal is still subject to approval from the Federal Trade Commission, but if it does go through the new venture will cover 38 states (17 of which are control state markets) – which represent more than 80% of the total wine and spirits volume in America.

Both companies were keen to stress that the deal was “not a merger”, and was instead a “strategic joint venture”, under the name Southern/Glazer’s Distributors of America. This venture follows a consolidation trend in other parts of the alcohol industry, and some are speculating whether or not wine and spirits wholesalers in America are moving towards a dual system.

In the official announcement, Harvey R Chaplin, chairman and CEO of SWS stated: “The strategic joint venture of our two leading organisations – each with a great history – will create the most capable and effective US distributor network in the business.”

These feelings were echoed by Bennett Glazer, chairman and CEO of Glazer’s, who said: “The joining together with Southern Wine & Spirits allows our company to progress to the next level. We are excited by the enhanced prospects for growth for both companies and believe there will be considerable benefits for all stakeholders involved.”  

Chaplin will be the chairman of the joint venture, and Glazer will take up the vice chairman position.

In the same statement, Wayne E Chaplin, president and COO of SWS added: “Given the highly competitive landscape at the distributor level and the ever more consolidated marketplace at the supplier tier, we believe the time is right for a more national-type distribution footprint.” Chaplin will take up the CEO role for the joint venture.

Since the repeal of prohibition, the US has distributed its alcohol via the three-tier system. This comprises producers, distributors and retailers, with producers only allowed to sell to distributors, and not directly to retailers. Although some states have various exceptions to this rule – such as brewpubs, or wineries that are allowed to sell bottles on-site – this rather fragmented system has been in place and largely unchanged since 1933.

Producers will usually give a distributor the exclusive rights to market their product within a geographical area, and as such single states could often have three or four distributors operating within their boundaries. The proposed intention of the Southern/Glazer’s move is that it will unify the whole system, making it less convoluted and easier to operate within.

Industry concerns
There are some concerns, however. For example, will smaller producers now find it harder to get a foothold? There is the fear that with such a large market share the new joint venture will prefer to deal with larger scale producers. If so, what would be the consequence for those who are trying to break into the US market? Projected figures for 2008 have the new Southern/Glazer’s combination with 26% market share in terms of volume, with sales revenue of $11.39 billion. 

Steve Raye, managing partner at Brand Action Team in Connecticut was mindful of such concerns when considering the announcement. “Clearly, the merger makes eminent strategic sense for both Southern and Glazer’s because of the geographic fit,” he says. “The rationale of being able to offer something approaching national coverage is a second compelling reason, and they’ll be able to serve the needs of National Accounts in a much more efficient manner.”

However, he is more than aware of the potential problems. “There is another side to the issue and that’s the impact on smaller or new suppliers and brands. The US three-tier system is like a funnel with a neck that keeps getting smaller, and the constriction caused by distributor consolidation means there are fewer ‘traditional’ distributor options for small and new suppliers.”

Indeed, as the choices among traditional distributors shrink, it means suppliers will have to become more creative and look beyond those channels that are disappearing. As a result, Brand Action Team is helping suppliers find new solutions to enter the US market.

“We’ve been counselling our clients to consider strategies that exploit the grey areas between the three tiers,” says Raye. “These include wine distributors that are establishing spirits divisions; traditional beer distributors that have set up operations to serve wines and spirits; e-commerce, which is frequently overlooked; existing importers who have or can establish distribution services, focusing on the 18 control states where the state functions as the distributor and may be open to newer and smaller brands; and building a track record outside of the major markets where the supplier can be a bigger fish in a smaller pond.”

Despite these options, many analysts are convinced that the deal is not good news, particularly for the consumer and smaller producers trying to innovate.

“I think it’s a good deal for Southern, but I think it’s a bad deal for the competition because it’s consolidated distribution,” says Stuart Whitwell, managing director of Intangible Business. “It’s rewritten the rules in terms of where the power lies, and brand owners and consumers should beware because distribution is everything. If you’re not in with Southern, you’re going to suffer.”

Whitwell feels that the most interesting point arising out of this announcement lies in considering those who will be trying to get into the US market post this JV.

“One of the beauties of the American three-tier system was that there was always the chance for an individual to break through,” he continues. “Here in the UK there isn’t such a system as it’s dominated by the big houses. You don’t see any developments in the UK and most parts of the world anymore, but in America you would see the likes of Grey Goose and Patrón coming through.” 

He regards this potential loss of innovation as a massive blow. “Entrepreneurs could come in and do something different, which the big houses are frankly quite incapable of. They’re capable of stopping them, but not innovating, which is what you want to see in the industry. This will lead to a few big players looking after a few flagship brands, and innovation being a 21 year old of the same old thing, or a bit of new packaging and that’s it.”

As well as entrepreneurs and innovators, he feels that the consumer has nothing to gain from this deal either. “It’s not really giving consumers what they want. If you look at it from a consumer’s point of view, I don’t think it’s going to provide any benefit whatsoever. It’s playing into the hands of territory power brokers and I think it should be subject to anti-trust regulation and stopped.”

SWS was founded in 1968 and is already the leading wine and spirits distributor and control states broker in the US. Glazer’s began in 1909, when Louis Glazer opened the Jumbo Bottling company in Dallas, Texas. It became more like the company it is today after prohibition ended in 1933.

Rudy Ruiz, SVP at Southern Wine and Spirits, will be speaking on aligning the expectations of distributors and suppliers in this era of consolidation at the upcoming US Drinks Conference, being held at the Marriott Marble Arch in London on October 14.

db © September 2008