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36 WINES&VINES September 2017 DISTRIBUTOR MARKET 2017 S ince he turned his hobby and passion into a small business in 2010, William Allen has enjoyed what could be de- scribed as exceptional success for a fledgling winery. Allen wasn't a complete novice when he started making wine. He was the author of the popular blog Simple Hedonisms and had a goal to make minimal-intervention Rhône variety wines. Knowing how to play the game, however, doesn't ensure success. Allen delivered on qual- ity to the acclaim of several wine writers includ- ing Jon Bonné, who listed Allen in his book The New California Wine. Just two years after launching his brand, Two Shepherds, Wine Busi- ness Monthly named the label one of its top 10 "hot" brands. And after several years of growth, Allen moved production in 2015 to a renovated warehouse in Windsor, Calif., that's part of a cluster of other small wine, beer and spirits producers known as "Artisan Alley." With annual production now around 2,000 cases, Allen and his business partner and girl- friend Karen Daenen (they both still have other full-time jobs) decided to pause on growing the brand before tackling the next big hurdle for a growing wine producer: the wholesale market. For all his success, the prospect of finding the right distributor and ensuring that it turns into a mutually successful partnership in a good market is still a somewhat daunting prospect. Most of the wines Allen makes are 25- to 30-case lots, so he doesn't have the inventory to meet the expecta- tions of some wholesalers. At times he's been disappointed by representatives who don't seem to have any interest in opening new accounts. "We're actually starting to revisit some of our strategy and not push to 3,000 cases," he said. An inverse relationship The proliferating number of North American wineries has an inverse correlation with the shrinking number of distributors. According to winery and distributor sources, in 1995 the United States had about 1,800 wineries and 3,000 distributors. Today, there were more than 9,200 wineries and nearly 1,200 distributors. Distributor consolidation is often cited as a major challenge to the industry. The subject was part of University of California, Davis, professor emeritus Robert Smiley's annual sur- vey of wine industry executives. Those that participated in the anonymous survey acknowl- edged the problem, and while some had hopes in a new generation of smaller distributors, others don't see that as a real viable alternative. A few of their answers: "Much of our route to market is handled by a single company now; it is rather frightening. The clout they have over us is remarkable." "You will see smaller distributors opening up, but they will not have the same skill set or professionalism. They will open up, but they will get clobbered by the big guys." "Smaller wineries are not really thinking about distributors and are going direct sale and making that their format to grow through their tasting rooms and wine clubs. Growth is smaller and not as quick, but it is more profitable." While mergers and acquisitions among wholesalers have been happening for decades, the recent deals have come faster and are bigger, leaving fewer and fewer options for wineries hoping to expand. The deal between Southern Wine and Spirits and Glazer's that culminated in the new Southern Glazer's Wine & Spirits in 2016 sent shockwaves through the industry. The mergers are not over either. Most of the experts interviewed for this report say they expect an- other major deal in the near future and that consolidation will continue at the lower rungs of the wholesale industry for several years. In mid-July, two of the nation's other major distributors, Breakthru Beverage and Allied Beverage Group, merged the two companies' New Jersey operations. The new firm will be- come the largest wholesaler in the state with revenues of more than $1 billion. As these deals continue, the good news for small and medium-sized wineries is that a new generation of smaller, independent distributors could crop up to serve smaller wineries, and the direct-to-consumer market is stronger than ever with shipping now legal in nearly all 50 states and revenues of $2.5 billion annually, according to the Wines Vines Analytics/ShipCompliant model. Jeff Carroll was one of the founders of Ship- Compliant and is an expert on wine shipping compliance and the three-tier system. He said that system has become much harder to enter for new wineries. "If you're small, or you are new and your brand is not well known, it is exceedingly dif- ficult to get adequate representation," he said. Carroll said it's not just distributor mergers creating headwinds but also consolidation among retailers and the emergence of thou- sands of premium breweries and distillers that have entered the market. The market has com- pelled larger wine companies to acquire smaller brands to create a portfolio that's at- tractive to the largest wholesalers. "All of a sudden they can take a brand that's flat or KEY POINTS Consolidation has continued as each merger puts competitive pressure on other companies. Over the past two decades the number of wineries has more than quadrupled, while the number of distributors has diminished by more than half. Distributors seek strong brands with con- sistent and predictable sales. The Challenge of Distributor Consolidation As wine brands proliferate and the wholesale tier compresses, many wineries feel thwarted Andrew Adams "Much of our route to market is handled by a single company now; it is rather frightening. The clout they have over us is remarkable." —UC Davis survey of wine industry executives