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September 2017 WINES&VINES 47 DISTRIBUTOR MARKET 2017 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 "good cause" reasons for termination, 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 unsym- pathetic Alcohol Beverage Commission re- sponse. (In states that make no provision for a regulatory hearing process, you may simply 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 pros- pects outlined above, contact another distributor who is willing to buy out or trade brands with the existing distribu- tor. 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 settle- ment, secure a release from that distrib- utor against any future actions under the franchise laws or any other laws. We routinely negotiate such releases, and your counsel should be instructed to draft such a release in the event of im- pending termination. Rethinking your franchise mentality Managing relationships in franchise states is dif- ficult, but not impossible. Doing it right requires discipline, experience and (more than anything else) knowledge. In the best of all worlds, dis- tributors are business people every bit as dedi- cated to the success of their business as the suppliers they serve. A relationship founded on a mutual understanding of the role of each party—and recorded in a written agreement that reflects those understandings—is a relationship where both parties will prosper. This is as true in franchise states as it is in open states. This article is not intended to be a comprehen- sive review of all the necessary terms and condi- tions that should go into every distribution agreement in a franchise or open state. There are many other important issues that vary between individual suppliers based on their marketing strategies, routes to market, promotional policies, price points and other factors. For this reason, we encourage all wineries to consult with their coun- sel before undertaking initiatives 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 distribution issues, direct- to-consumer laws and protocols, routes to market and tied-house and regulatory compliance. DeGalan regularly consults with and negotiates on behalf of clients with respect to distribution agreements, 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. The references for this article are available online at winesandvines.com/features Source: Wines & Vines Distributor Market Service, domestic wines in IRI channels. "Other" includes Vintage Wines, Heritage Wine Cellars, Lagniappe and 40 others distributors. Millions $60 $50 $40 $30 $20 $10 0 2Q 2016 3Q 2016 4Q 2016 1Q 2017 Quarter ILLINOIS DISTRIBUTOR WINE SALES Source: Wines & Vines Distributor Market Service, domestic wines in IRI channels. "Other" includes National Distributing Co., Favorite Brands, Pioneer Wine and 16 other distributors. Millions $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 0 2Q 2016 3Q 2016 4Q 2016 1Q 2017 Quarter TEXAS DISTRIBUTOR WINE SALES Southern Glazer's Wine & Spirits Breakthru Beverage Illinois Other Republic National Distributing Co. Glazer's of Texas Other A phenomenon that has accompanied the consolidation of wine dis- tributors is the creation of duopolies in many markets. Data from Wines & Vines' Distributor Market Service shows that states like Texas and Illinois (shown here) have two dominant distributors of U.S. wine with 90% or more market share, while dozens of others split the remainder. "Well, it's certainly the consolidation," said Steve Lohr, chairman and CEO of J. Lohr Vineyards & Wines in San Jose and Paso Robles, Calif. He observed that mergers and acquisitions often add up to more than just the sum of the two parts. "When companies merge, they gain size and strength, and with that comes more weight after the merger than before." According to Bill Leigon, a 30-plus year veteran of wine sales and founder of Jamieson Ranch Vineyards, "This is where it's been headed for a long time. California is a perfect example. Young's and Southern are way out ahead of everyone else. Then you drop to Wine Warehouse in third position. The third one kind of rotates. It tends to get absorbed. And right behind that are usually a couple that for small wineries are fine. For example, we're with Favorite Brands in Texas." MANY MARKETS ARE DISTRIBUTOR DUOPOLIES