Wednesday, January 25, 2017

Are the wine behemoths helped or hurt by the 3-tier system?

Except for the few top brands, most smaller and mid-size wineries are being locked out of the current three-tier distribution system. But how do the major producers like E&J Gallo, Constellation Brands, and The Wine Group feel about the three-tier system? In class we spoke about the clear benefits of cutting out the middle-man – lower prices for the consumer and higher margins for the producer. From that lens, it seems obvious that the high-volume wineries would be in favor of cutting out the middleman. However, I wonder if they would be losing a key aspect of their competitive advantage if the 70% of volume no longer passed through a single distributor. Because the major producers account for such a high percentage volume, Southern likely pushes their products and the small batch wines are never shown to the buyer. If other producers can start selling direct to retailer, the retail buyer may be faced with more choices and the major producers will have to market their products more aggressively. However, despite the potential for increased competitive pressure, the top producers have achieved such scale and have deep enough pockets that the benefits of removing the middle man far outweigh the costs.

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