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72 WINES&VINES August 2016 BUSINESS PRACTICAL WINERY & VINEYARD admittedly you might need to have a hair- raising tale like this one to obtain a swift verdict. Termination If the distributor situation in a franchise state has deteriorated to the point where you want to pursue termination despite the unfavorable odds, there are a few things to keep in mind: • First, make sure you have solid and docu- mented "good cause" reasons for termina- tion, backed by documentation to support such termination. • Any official termination for "cause" action must strictly follow the state's notice and cure requirements, including lengthy time periods for cure, certified mail instruc- tions, proper notice enumerating the rea- sons justifying good cause termination and more. Even so, expect an aggressive fight from the distributor and an unsympathetic Alcohol Beverage Commission response. (In states that make no provision for a regulatory hearing process, you may sim- ply be waiting for the distributor to file an action in state court, which they do not hesitate to do in most cases.) • If at all possible, given the bleak prospects outlined above, contact another distributor who is willing to buy out or trade brands with the existing distributor. Even if you have to contribute to the buyout, this could be money well spent. • In the event that the existing distributor is willing to agree to a buyout or settlement, secure a release from that distributor against any future actions under the fran- chise laws or any other laws. We routinely negotiate such releases, and your counsel should be instructed to draft such release in the event of impending termination. Rethinking your franchise mentality Managing relationships in franchise states is difficult, but not impossible. Doing it right requires discipline, experience and (more than anything else) knowledge. Distributors are business people every bit as dedicated to the success of their business as the suppliers they serve. A relationship founded on a mu- tual understanding of the role of each party—and recorded in a written agreement that reflects those understandings—is a re- lationship where the parties will both pros- per. This is as true in franchise states as it is in open states. This article is not intended to be a com- prehensive review of all the necessary terms and conditions that should go into every distribution agreement in a franchise or open state. There are many other important issues that vary between individual suppli- ers based on their marketing strategies, routes to market, promotional policies, price points and other factors. For this rea- son, we encourage all wineries to consult with their counsel before undertaking initia- tives that affect their brands in the many different U.S. markets. Suzanne DeGalan is a partner at Hinman & Carmichael LLP in San Francisco, Calif. Her practice includes counseling on alcoholic beverage licensing and distri- bution issues, direct-to-consumer laws and protocols, routes to market and tied-house and regulatory compli- ance. DeGalan regularly consults with and negotiates on behalf of clients with respect to distribution agree- ments, state franchise laws, distributor termination and other issues affecting alcoholic beverage suppliers, importers, distributors and sales agents. The viewpoints expressed in this article are provided for educational and informational use only and are not to be construed as legal advice. If you need legal advice, please consult with your counsel. FRANCHISE LAW Monitoring a distributor's sales performance By Paul Young W hen I was the sales and marketing director for a medium-size winery in the Sonoma Valley of California, I monitored a distributor's sales performance with the BDI/CDI Index. This helped me and many sales and marketing departments in other wineries to benchmark for each state how a distributor was doing for the winery's brands in that state. The BDI/CDI Index (BDI=Brand Develop- ment Index/CDI=Category Development Index) is available in the annual WINE Handbook published by Beverage Informa- tion Group of Norwalk, Conn. The BDI number shows the percentage of a winery brand's sales compared to all wine sales in one state. For example, the Sonoma Valley winery usually performed in the 1.5%-3% range for each state. The CDI number shows the overall percentage of how the competitors (determined by case volume) should be against all wines sold in that state, usually in the 1%-4% range. I could determine how well a distributor was doing by comparing his winery current case sales in one state (BDI number) against the other vintners' case sales in that state (CDI number), for wineries selling about 600,000 cases for the entire United States. If the BDI for my Sonoma Valley winery was 1.5% for one state, and the CDI was 3.0%, we would know that the distributor was underperform- ing for that state, compared to competitors. Our winery would usually include the BDI/ CDI numbers for each distributor during the winery's annual sales review and goal projections for the next year. The winery sales manager would fly to each major distributor's headquarters in January and set the goals for case sales, along with pricing, programming and incentives for the upcoming year. For example, the sales manager would meet with Young's Market (a California distributor) and break down sales by market channel/segments, chain stores, independent retailers (of importance), restaurants and hotels. That way, when the sales manager visited during the year with each distributor on sales progress, there was a benchmark that was agreed to in January. If the distributor fell behind their sales goals in a franchise state, a warning letter would be issued, asking how we could improve sales. If sales continued to be "substandard," a follow-up letter would be sent to warn the distributor of possible termination. These letters, along with the annual case goals and BDI/CDI numbers, form the basis for termination in a fran- chise state for due cause. Paul Young is a wine educator at Santa Rosa (Calif.) Junior College and the former sales and marketing director of a Sonoma Valley winery. There can be justice, even in a franchise state, although admittedly you might need to have a hair-raising tale to obtain a swift verdict. The references for this article are available online at winesandvines.com