Wednesday, January 25, 2017
Profits in the Wine Value Chain
Angel’s question in class regarding wholesaler / distributor profits struck me as an interesting one. As a reminder, she asked why their share of the profit pie was so low given that they had so much power as the middlemen. I think the logic here makes sense insofar as they connect a fragmented market of suppliers to a potentially fragmented market of retailers. As a result, this should allow them to capture a disproportionate amount of the value from the chain. I had a related but slightly different question – relatively speaking, why are supplier / importer margins so high? They actually retain an equal proportion of the profit pie (33%) as the wholesaler / distributor. Obviously suppliers create the actual product and they definitely deserve to get a lot of the value from their product. But at the same time, there are so many different wineries and so many different SKUs that it feels like competition would eat away at profits. I wonder whether the big producers (Constellation or Wine Group) comprise the majority of not only volume of wine, but also industry profits.
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I agree that it seems like the distributors hold an insane amount of power in the value chain. One thought I had was that a distributor may be incentivized to be a "good actor" by the threat of regulatory change brought on by a perception of being a "bad actor." In other words, they know how good they have it in the current three-tier system, and if they start taking all of the profits for themselves public perception could turn against them and force regulators to change the system they love. So to answer your question, perhaps the suppliers/importers are able to retain 33% because the distributors let them...
ReplyDeleteDefinitely an interesting argument, although I'm not sure the threat of regulatory change is significant enough to act as a deterrent on distributors. I got the impression that legislative loyalty to the three-tier system is as much perpetuated by an antiquated notion of alcohol being morally "bad" as it is by distributor / wholesaler lobbyists. But maybe (probably) I'm underestimating the power of these lobbies, and if more distributors were "bad actors," the lobbies would lose some sway.
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