A brief guide to the USA's three-tier system

Exports of Australian wine to the United States of America (USA) are growing by value, with 4 per cent growth in the year ended March 2021. There are opportunities for Australian wine exports to continue to grow. However, the market is difficult to navigate. In this Market Bulletin, we explore the nuances of accessing the USA market.

Exports to the United States of America over time

^{Source: Wine Australia}

Lasting influence of Prohibition

The main reasons for the USA's market structure reach back to the 1930s. In ending Prohibition in 1933, the 21^st Amendment to the US Constitution granted primary control over the regulation of production, transport, sale and marketing of liquor, including wine, to the states. This means that each state today has its own legislation and its own regulatory model and regulatory bodies for controlling the production and sale of wine.

It means realistically that it is not possible to speak of a single USA market for wine; rather it is more like 50 different markets, each with its own quirks (not to mention regulations in other jurisdictions like Washington D.C., and at regional and local government levels). It also makes the cross-border traffic of wine between states far more complex.

However, the system makes a targeted single state or state-by-state market approach very worthwhile. Population-wise there are two states that are considerably larger than Australia and there are a further eight states with 10 million or more inhabitants, and wine consumption per person is at around 9.8 litres per person.

^{USA population by state – source USA Census Data, www.census.gov/popclock/}  

The three-tier system

In addition to creating a mass of conflicting legal systems, the fallout from Prohibition also created a mandatory three-tier system for the sale of alcohol. This means that in order to get to market, and into the hands of retailers and consumers, wine must be sold through an in-state wholesaler or distributor in each state. Wine also cannot enter the USA without consignment to a licensed importer or wholesaler. It is not possible to ship directly to USA consumers. The state of Pennsylvania created a shipping permit that purports to be open to foreign wine producers, but it has not been practically accessible to date. Although some state wholesalers will direct import product, most work through importers to acquire imported wine.

In light of the mandatory three-tier structure, USA wholesalers have considerable power over the sale of alcoholic beverages; over the suppliers above them and the retailers below them. This is accentuated by ongoing consolidation of the wholesale tier, with wholesalers such as Southern Glazer’s Wine & Spirits and Republic National Distributing Company operating in multiple markets and distributing significant market share volumes. These mega wholesalers exert strong control over markets and can make it difficult to get attention from potential retail customers, particularly large-scale multi-state retail purchasers.

It is also highlighted in the so-called ‘franchise’ laws that wholesalers have pushed for across the country. These laws create a legal relationship between a seller or brand of wine and its in-state wholesaler; laws that make it extremely difficult to terminate, change or refuse to sell to a wholesaler to whom you have previously sold in a particular market. In combination with laws only allowing one wholesaler to sell a brand by market, a wine can quickly be tied up with a wholesaler who does not necessarily have much buy-in to your brand. These laws exist in around 19 states for wine, including some key markets like Massachusetts and Nevada. Many of the laws require very large compensation payments for terminated wholesalers, or simply prohibit termination other than in exceptional circumstances. In a market like Georgia, if you wish to change wholesaler because they aren’t performing, you can be forced to leave the market for four years before changing.

As well as open or licence states, where the three-tier system operates privately, there are also 17 states and four local jurisdictions that operate some form of control market for alcohol sales, both at wholesale and off-sale retail levels. Where retail is controlled as well as wholesale, the markets operate in a similar manner to the Scandinavian and Canadian provincial monopolies.

The US control jurisdictions mostly control the sale of spirits. However, some control wine sales as well and four jurisdictions have government operated retail sales of wine (Pennsylvania, Utah, New Hampshire and Montgomery County, Maryland). The most interesting of these is Pennsylvania, as its state control body, the Pennsylvania Liquor Control Board (PLCB), is one of the top five largest purchasers of wine in the world and it is one of the USA’s top five most populous states. Sales of wine there have been on the increase since grocery stores were authorised to sell wine on a limited basis in 2016 (the stores still have to purchase wine only through the PLCB). Giving consumers easier access to wine purchases has benefited the sales of wine generally. All of this makes the Pennsylvania market a target worth considering. It is not easy to obtain a listing with the state, but with a listing and an in-state marketing approach, it can be very profitable.

Taking a targeted approach

Obviously, getting wine to a market is only a small part of the process, however complicated it might be in the USA. The other key component to a USA market strategy needs to be ensuring that your wine is being adequately marketed to trade and consumers. Unfortunately, this is not necessarily something that you can expect as part of your import or wholesale relationships with operators there.

It is worth considering, particularly in a targeted market approach, hiring your own marketing consultants or advisers, to assist in pull-through to ultimate purchasers of your wine. You will benefit in your relationships with your importer and/or wholesaler as well if you have on the ground marketing for your brand. Indeed, you may want to look at some alternative wholesale models in the USA, where you work with a wholesaler with limited or no salesforce, and take the bulk of the responsibility for sales and marketing on to your own dedicated team. Having said that, it is key to work with experienced marketers in the USA, as there is significant and varying regulation of marketing for wine in states across the country. In particular, you need to be aware that your relationship with retail customers is heavily regulated, due to the three-tier system, and you can face substantial penalties for marketing practices in your dealings with these licensees.

There are many things to consider when looking at getting into or expanding your operations in the USA, but with almost 330 million people there it offers huge opportunities.

Wine Australia has a range of services and activities in the USA market that can complement your market approach. If you’re interested in entering or re-entering the market, the US Market Entry Program assists with the intricacies of the USA market (compliance, marketing, pricing and logistics) as well as assisting in securing importation. Australian Wine Connect will be providing a range of marketing opportunities throughout 2021–22 to build commercial outcomes for Australian wine brands.