Just two weeks into the new year, the wine industry witnessed what might be the most important business deal of 2016. On Jan. 11, Southern Wine & Spirits and Glazer's Inc. sealed a merger agreement, increasing the size of the largest distributor in the United States.
But what does that mean for you? For the average consumer, distributors are the invisible hand of the wine industry. You know the store where you buy your wine and you know which wineries make your favorites, but not the middleman.
Distributors are responsible for the logistics of getting wine to the retailers and restaurants as well as helping wineries navigate the thicket of regulations in each state. Ideally they're also a marketing and sales force for the wineries.
The middle part of any supply chain is crucial—distributors play a big role in what wines you see on store shelves and restaurant wine lists. The past two decades have brought a wave of consolidation at the wholesaler level, plus the growth of large chain retailers. Some industry observers worry that all this consolidation means higher prices or less selection. Others say no.
Here's a primer on what the Southern Glazer's deal means for consumers:
Why do I care about a distributor merger?
Size matters these days in distribution. Southern was already the largest wine and spirits wholesaler in the country. According to Impact, a sister publication of Wine Spectator, the firm had $11.8 billion in sales revenue in 2015. Glazer's was the country's fourth-largest distributor with $3.7 billion. Almost immediately after the deal, the new Southern Glazer's Wine and Spirits announced a new national supplier agreement with Bacardi, which is expected to bring in another $1 billion annually.
Combined, Southern and Glazer's will have roughly 20,000 employees, including a sales force of more than 12,000. It will distribute more than 150 million cases of wine and spirits annually, and serve more than 350,000 restaurants and retailers.
More important than size is market share. One of the biggest challenges for distributors is entering new states. Southern Glazer's will cover 41, as well as Washington, D.C., Canada and parts of the Caribbean. The firm will have nearly a 30 percent share of the U.S. spirits and wine market in dollar terms.
As Southern Glazer's CEO Wayne Chaplin told my colleagues at Shanken News Daily, they want "to create a national distributor and change the paradigm at the second tier. This deal will produce a totally unique route to market, offering suppliers a one-stop opportunity in the United States. It represents a changing of the landscape."
OK, but what's so good about being big?
Chaplin and his colleagues say it's all about efficiency. A distributor that serves almost every state can help a winery reach a lot of customers without having to work with a different partner in every market. Ideally, they should function as an extension of the winery's own sales and marketing efforts.
"Part of a distributor's role is to improve our business with retailers and restaurateurs," said Sandra LeDrew, Treasury Wine Estates' president for the Americas. Treasury sold 12.8 million cases in the U.S. last year, with brands like Beringer, Lindeman's and Penfolds. "Recently, suppliers of our size have had to put a lot of resources into reaching retailers and restaurants because distributors cannot reach them on that big a scale. But [Southern Glazer's] can reach across multiple markets."
For large wineries, the deal simplifies things. "The suppliers handled by Southern will see this deal as greatly simplifying their route to market in terms of selling, pricing, execution, IT and the overall supply chain," Chaplin told Shanken News Daily. "For suppliers with whom Glazer's does business and we do not, or vice versa, their newfound ability to expand across multiple markets represents a major opportunity."
Will this change what wines I see on store shelves or wine lists?
That depends on who you ask. Executives at larger wineries and major retailers told Wine Spectator that they believe the deal will not hurt selection.
"Southern is clearly a dominant player and they understand their space very well," said the CEO of one mid-size company that owns a dozen wineries. "There are so many different suppliers in the wine, spirits and beer business and they all have unique needs. Southern is evolving and even though they are getting bigger, they continue to focus on more specialization to better serve their suppliers and customers."
Southern and Glazer's both carry a huge variety of brands. But smaller wineries worry that the larger a distributor gets, the less attention they can give small brands. And since those distributors are such big players, they function as gatekeepers for the market.
"If you're a small winery with Southern, you didn't get much attention before this deal and now you'll probably get less," said the founder of one small California winery.
So my only hope for finding a bottle from a small winery is to get on their mailing list?
While direct shipping (if your state doesn't restrict it) is increasingly becoming the lifeblood of small wineries, it's not their only outlet. In many states—though not all—there are a growing wave of small, specialty wholesalers.
"This trend of consolidation has been going on for awhile," said Michael Binstein, CEO and owner of the Binny's Beverage Depot retail chain. "The growing number of boutique wholesalers means wineries can still find their way to market."
"As the big companies get bigger, it creates more opportunities on the smaller scale," said John Ragan, director of Wine and Restaurant Operations for Union Square Hospitality Group, the Danny Meyer-founded firm that owns New York restaurants such as Gramercy Tavern and The Modern. "Most family-owned wineries or wineries that produce 'wines of place' just can’t produce enough for it to make sense for a really large distributor to try and deal with them. So it leaves even more room for small distributors in the market. We currently work with over 100 distributors for wine and spirits and Southern is just one of those—we don’t mind the extra work to bring diverse and exceptional wines to the table."
Wine has always been a challenging business and a fantastic product because it is filled with so many different choices. That's not going away soon. "We find that spirits customers are extremely brand loyal. But we find our wine customers like to try a lot of different wines and explore," said Charles Bailes, CEO of ABC Fine Wine & Spirits, which owns 140 stores in Florida. "That's the fun of wine."
OK, but what about prices?
Smaller retailers worry that consolidation means fewer distributors to source wines from, possibly leading to higher prices. "You're getting pretty close to a monopoly here," said the owner of one successful retail shop in the Northeast in regard to the Southern Glazer's deal. "Prices are going to go up and selection is going to go down."
But most sources we spoke to don't see that happening—certainly not anytime soon. LeDrew points out that for a larger wine company like Treasury, working with the same distributor in 41 states means more efficiency and less expense. "In the past, we've had to put a lot of resources behind selling brands and reaching out to retailers and restaurateurs. Now we won't have to spend as much on that."
Annette Alvarez-Peters, who oversees wine buying for Costco, agrees. "I would suspect the merger will create more synergies in the planning of our business," she said, pointing to the fact Costco can deal with less people when planning wine purchases in multiple markets.
Don't expect prices to go down, however. None of the retailers we interviewed saw that happening either. "There's no question, increased efficiency can lead to more funds available," said Bailes. "It's just a question of how [wineries and wholesalers] spend them. If you have more dollars, do you want the price to go down? Do you want to spend it on service? Do you want to spend it on marketing?"
Consolidation has transformed many industries, from airlines to music stores. Small players often lose in the process. But a changing industry can also mean new opportunities. In the end, quality typically finds a market, and the best producers will find buyers for their wines. After all, wine customers are a demanding bunch.
