BREAKING DOWN ALCOHOL DISTRIBUTION

We Can’t Go Over it, We Can’t Go Under it, We Have to Go Through it

You’ve spent the last year developing the perfect flavor balance in your drink, securing hard-to-find ingredients, designing eye-catching branding, and finding the right co-manufacturer. Now, you’re finally ready to launch your alcohol brand and share it with the soon-to-be adoring masses. There’s just one problem: you don’t have a distributor.

Of all the alcohol brands we spoke to for this issue, the most frequently cited headache was finding and working with a distributor. For good reason — alcohol distribution is a convoluted, confusing, and highly-regulated space. And yet, there is no way around distribution if you want to get your drink into the hands of consumers. So how are brands navigating their way through it?

WHAT IS THE THREE-TIER SYSTEM?

Much of the headache around distribution stems from the constraints of the three-tier system. As one brand I spoke to put it, the three-tier system is “a monster that no one should have to deal with.”

When the 21st Amendment passed, ending prohibition, states received the authority to regulate alcohol distribution as they saw fit, with one very significant caveat: the three-tier system. It was designed to control the distribution and consumption of alcohol and required all alcohol products to pass through three “tiers” before reaching consumers:

1. PRODUCERS

2. DISTRIBUTORS

3. RETAILERS

Producers make the product and sell it to distributors (typically at a 50% increase) who sell it to retailers who finally sell it to the public. Importantly, none of the tiers can be passed over or skipped. Chris Beyer, the founder of the modern aperitif brand Veso, explains, “You’ve never bought Budweiser from budweiser.com or gone to a Grey Goose bar, and that is because they’re illegal. They’re not allowed to operate bars, and they’re not allowed to sell directly to you.”

HOW DOES IT IMPACT DISTRIBUTION?

The three-tier system is partly to blame for the massive markups (sometimes up to 150%) we see in alcohol products as the price is raised as products pass through each tier. This puts the big guys at an advantage: they can move enough product to cut prices while smaller producers do not have the same flexibility.

To make matters worse, the exact constraints of the three-tier system vary from state to state, and beer, wine, and spirits are all handled differently. For example, wineries can ship directly to consumers (DTC) in 47 states, while breweries can only ship DTC in 10 states and distilleries only seven. Furthermore, with each state having different regulations, brands must obtain a new distributor for every state they want to sell in.

At the center of the three-tier system, distributors hold a great deal of power, but most consumers are unaware of the role they play in the alcohol industry. We go to the liquor store, buy the alcohol we want, and don’t consider the journey it has taken to get to us. In part, this is because distributors largely work in the background: a shadowy intermediary that some have jokingly compared to the mob, with strict operating territories, exclusivity rights, and fierce competition. But distributors, as unseen as they may be to the public, are essential to a brand’s success, and the only way to grow is through them.

SELF-DISTRIBUTION

With all of the complications of finding a distributor, is it possible for brands to just do it on their own? Yes and no.

Self-distribution offers emerging brands the chance to get their product out there without banging down the doors of a distributor and signing lengthy, binding contracts they might not be ready for. However, the legality of self-distribution depends on the state your brand operates in and the type of product you sell. In California, wineries and breweries are allowed to self-distribute if the product is made in-state but in Delaware self-distribution is illegal.

For Beyer, self-distribution allowed him to hit the ground running in the early days of his business. “People would text me to ask for more cases and I could drop them off that night. If I made a sale, I could run out to the trunk of my car, and drop off the cases immediately, and they could put Veso on the menu or on the shelves that night.”

Mizo, a hard-seltzer and hard lemonade company founded by Chris Tran and Holly Paul, also began by self-distributing their product from the trunk of their car. “Most brands start with independent markets because you can sell into them individually. You can just go down the street, talk to the manager, and say, ‘Hey we have this product. Do you want to take it?’”

Still, there is a ceiling many brands will hit when self-distributing. If you want to grow beyond your immediate radius and expand into larger retailers, brands will need to work with a distributor. Beyer says, “Self-distribution started becoming a bottleneck for our growth, and I realized that we could grow significantly more if we found a distributor.” Distributors can also accelerate growth by enabling brands to connect with larger retailers who might have otherwise been unwilling to open an email from them. “When talking to larger retailers,” Tran explains, “having a distributor is table stakes. If you don't have a distributor, they're not going to talk to you.”

Finding A Distributor

Unfortunately, finding a distributor is much more difficult than one would hope. Dave Bailey, who spent close to a decade buying and selling alcohol before starting his brand, explains, “It's not like if you Google distributors in your state, you’re going to find a source listing all of the quality distributors and their contact information. Most of the [distribution] sites are pretty old school and a lot of the distributors are family-run. It's not user-friendly for a new brand to navigate who they need to speak to and how to pitch their product.”

Currently, four distributors control about 60 percent of the market — Southern Glazer’s, Breakthru Beverage Group, Republic National Distributing Company (RNDC), and Young’s Market Co — but distributors operate on all levels from single cities to nationwide.

As brands begin seeking distributors, Bailey first recommends research: “Use any sort of industry connections you have to hear about other brand’s experiences, good or bad, to gain knowledge of the current landscape.”

It is also worth considering if your brand is ready before approaching distributors. Large distributors are wary of taking on new brands— if they are unable to sell the product, they will be left with it collecting dust in their warehouse. Because of this risk, distributors typically don’t take on brands until they’ve reached a reliable threshold of growth. This reality was part of the reason Veso self-distributed for as long as they did. Beyer explains, “Distributors pay upfront for the product, so it's a risk for them, and they don't want to take on a brand until it has acquired enough accounts that they can reliably profit from. We would not have been able to get into a distributor when we only had one account, so we had to wait until we grew.”

Once your brand is ready and you have identified the distributors you might want to work with, “you can either do a cold outreach and hope they respond,” Bailey says, “or find someone in the industry — a buyer at a grocery store you’re doing well at or an advisor to your brand — and ask them to facilitate an introduction.” This approach tends to be more effective, Bailey admits, as many distributors, particularly the larger ones, require a warm introduction before they are willing to engage.

Small distributors are often easier to reach than one of the “big four,” but, generally it can be hard for new brands to get in touch with a distributor without a connection. We found the same in researching this very article; we attempted to get in touch with a distributor, but after a few weeks of back and forth, they stopped responding. And on more than one distributor’s website, the “learn more” or “let’s get started” pages for prospective brands were broken links. The metaphor is not lost on us.

“As a small brand in alcohol, it's really difficult to get a hold of a distributor,” Tran explains. “The distributor wants to know that you have XYZ retail accounts on board. But many retailers won’t talk to you if you're not working with their set list of preferred distributors.”

Anna Zesbaugh, the founder of the hard kombucha brand Hooch Booch, likened it to getting a job after college, “Employers ask, ‘Do you have five years of experience?’ and you’re like, ‘No. I just graduated college.”

START SMALL AND GET CREATIVE

Bailey knew of this reality when he and Camillia Taffe started their hard tepache brand Crooked Owl, so they started working with a small distributor who would essentially allow them to self-distribute without the legal headache. They teamed up with TapRm, a B2B SaaS platform that operates both nationwide e-commerce sales and a more traditional distribution model in New York City.

“Their business model requires they take a higher profit margin, and they also take a monthly fee to operate your direct-to-consumer offering. In this way, they lower their risk and are more open to young brands.” For a small brand like Crooked Owl, working with TapRm has been immensely helpful in getting their footing in New York City. They’ve worked with sales reps from TapRm’s team who have helped them connect with both off and on-premise locations. That being said, a service like TapRm, while great for emerging brands, does require a bit more leg work on the part of the founders. “The brands that are successful with companies like TapRm are the ones that are going to be boots on the ground. They have to be comfortable going to the bars themselves and selling the product.” For brands without any proven history, such a route can be a great way to prove viability in the market, and as they gain more accounts, they can start to meet with distributors who have a greater sales force behind them.

Another brand we spoke with (who chose to remain anonymous) decided to take a slightly more unorthodox approach. When they first got in touch with a large regional liquor store chain, the store asked for the name of their distributor. The problem was, the brand didn’t have one yet. Scrambling and eager to jump on the retail opportunity, they gave the retailer the name of a regional distributor in their area. When it came time to onboard, and the retailer asked to get in touch with their distributor, they told them, “We’re just in advanced conversations with that distributor. But who are your preferred distributors? We would love to be good partners with you by working with your preferred distributor.” When the retailer gave them their preferred list, the brand asked for an introduction. This intro got the ball rolling, and after close to a year of negotiations, they signed with RNDC.

DISTRIBUTION IS LIKE A MARRIAGE — GO INTO IT WISELY

Knowing how challenging it can be to find a distributor, brands may be excited to hear that a distributor wants to work with them. However, brands shouldn’t always leap at the first opportunity they get without considering if the distributor is the right fit. Meeting with a distributor should be an interview for both sides; they want to know how viable your product is and you need to know what capabilities they have to sell your product. Consider, what does this distributor typically sell? Are they relevant in your market? And who do the retailers you want to work with prefer?

This is especially essential as you move up in scale to larger distributors. One emerging brand we spoke to initially signed a contract with RNDC. “We had big eyes. We saw ‘second largest distributor in the nation,’ and we had senior buy-in so we thought it would be huge for our small brand. But the problem was, we’re a small brand in a big house.” The brand found there was a disconnect between senior leadership’s interest and the sales team’s understanding of how to sell their product. Now, they’re rethinking their strategy and seeking out a smaller distributor who specializes in craft products. The problem is, getting out of a distribution contract can be extremely challenging. “It’s not dissimilar to a marriage. There are a lot of binding legal contracts and if you break them it can be expensive and contentious.”

If your brand does decide to work with a large distributor, Bailey explains, “You have to make sure they have buy-in to push your product — otherwise you can get lost.” In some cases, buy-in might require offering outsize incentives to the sales reps to encourage them to push your brand over others. If your distributor sells Tito's, a product sales reps are likely to make a large commission on, brands will need to overpay sales reps at first with incentives to make sure the team is fully bought in.

Furthermore, when it comes time to negotiate and sign a contract, brands should be careful not to agree to the distributor's terms just because they feel they have no other choice. Tran explains, “As a small brand, distributors think that they have all the negotiating leverage and they will try to squeeze you out of your margins and the contract terms. But as hard as it is, brands have to remember that no matter how small we are, we have leverage. We're giving them business and they wouldn't have anything to distribute if we did not give them a product.”

These negotiations will not be short — they stretched up to a year for many brands — but by taking the time, brands will avoid getting locked into a contract they will regret signing.

CHOOSING YOUR DISTRIBUTION STRATEGY

Once you have a distributor, you will probably feel ready to sit back, relax, and watch as your product flies off the shelves. Unfortunately, that is rarely the case. Every distribution house is different, and, depending on its size and capacity, will be more or less willing to help build your brand and sell your product.

In Tran and Paul’s experience, “with less established, smaller distributors, they inherently have more buy-in to your brand because they cannot rest on their laurels, knowing they’ll sell enough Tito’s and Tanqueray to meet their margins. They want to be your partner in building out your brand in the regions they handle.”

Larger distributors like RNDC and Southern, on the other hand, are often “glorified shipping trucks,” they say. “They’re delivering your product and you’re doing 99% of the work selling it.” Because of this, brands need to weigh the pros and cons of small and large distributors when it comes to their distribution strategies. RNDC might give you the ability to expand into large retailers like Walmart and Costco because they already have the connection, but they will not do much to help sell your product once it hits the shelves. A more regional distributor might not have immediate access to Walmart, but they are incentivized to get out there and move your product, selling on your behalf at independent stores and restaurants.

Smaller distributors also tend to have very specific distribution zones that one might liken to a gerrymandered congressional map. Within those zones, your distributor will have exclusivity on your product, and if there is a store outside of their borders, they won’t touch it. This can present a problem if you want to work with large distributors who will want exclusivity over the entire state, not just regions.

“A lot of small brands will start working with a regional distributor who can handle an area like Los Angeles,” Trans says. “As they grow, they will decide to start talking to a distributor like RNDC. Unfortunately, the brand now has a lot less leverage in these conversations because they can’t give RNDC exclusivity on all of California.” Without exclusivity, RNDC’s job becomes more complicated. It is much easier to sell your product to Walmarts across the state without discretion than it is to have to avoid certain counties where another distributor has control, Because of this, large distributors may be less willing to work with your brand if another distributor already has exclusivity over part of the state.

As brands grow, they should consider the strategy they want to use to move their product. Do you want to get your product into large retail chains or focus on smaller independent stores? If you want to work with a large distributor, remember that much of the work of selling the product will be in your hands. In this case, some brands may hire brand ambassadors to build out their market presence and sell-product without relying on their distributor.

ON-PREMISE VS. OFF-PREMISE DISTRIBUTION

Another element of a brand’s distribution strategy will be its approach to on-premise and off-premise locations. Which should come first: restaurants or retail?

The answer to this question will vary for each brand depending on their offering. An RTD product, for example, might have better luck at retail stores, as consumers tend to drink RTDs at home or parties, while a new liqueur might find success partnering with craft cocktail bars. No matter what you sell, however, most brands will likely want to do a bit of both to get as many eyeballs on their product as possible.

On-premise can mean anything from your small local bar to a massive concert venue. For smaller restaurants and bars, brands will need to build relationships with the lead bartender and or beverage director to get their product stocked. Large restaurant groups and venues, however, tend to have a bit more infrastructure and are typically easier to reach via email. Getting stocked in off-premise stores is similarly a bit more straightforward than in small bars and restaurants. Retail buyers tend to be available via email and brands can work with their distributors to schedule meetings and tastings.

WHAT ABOUT DIRECT-TO-CONSUMER?

The final distribution element for alcohol brands to consider is their Direct-to-Consumer offerings. DTC presents yet another challenge for alcohol brands as they navigate high shipping costs and three-tier-compliance. Most brands admit that DTC is far from their priority when it comes to distribution, but they will set it up on their site (through a third-party) so consumers can convert their interest should they not live close to a local store.

Overall, however, most brands have found their products to be much more successful in IRL shopping experiences. Tran explains, “Consumers want that immediate satisfaction in buying alcohol that you can only really get shopping in the store.”

SLOW AND STEADY WINS THE RACE

Of all of the advice we heard from brands around distribution, the most frequently mentioned might also be the most annoying: have patience. The alcohol industry, with all of its rules and regulations, is extremely hard to break into, let alone become a major player. It can take years for brands to expand into more than one state and even longer to go nationwide. Building a brand takes time, and alcohol brands will need to prepare themselves for the many hoops they will be forced to jump through as they grow.

But if you’re willing to trust that slow and steady wins the race, building an alcohol brand is possible, and what’s more, “it doesn’t have to be perfect before going to market,” Zesbaugh argues, “just get it out there.” Our tip? Before you launch, get a lawyer on speed dial — we have a feeling you’ll be asking quite a few questions along the way.