Finally got my result back from W.S.E.T. in London. Course work send in on 12th of April, answer came yesterday. So, this is what it takes to get “Distincion” on this task.
I send a big thank you to Lars J. with help, and Christina L. for help with the las corrections.
Feel free to read about AGENTS, IMPORTERS AND DISTRIBUTORS the way I look at it.
Submitted April 12th 2011 by Frederik Kreutzer
0. List of Contents
- 1. Introduction to Intermediaries in the Wine Business
- Other intermediaries
- 2. Bodegas Primaria – Ribera del Duero
- The US Market
- The UK Market
- The Swedish Market
3. Conclusion and Personal Commentary
1. Introduction to Intermediaries in the Wine Business
Jean-Michel Valette MW has, in his “Rule #1”, stated that the main thing to remember about the wine business, is that it doesn’t exist. The background to this provocative statement is that the “wine business”, is an amalgamation of segments and not a single homogeneous industry. Along the distribution chain we have various products, price points and tiers as well as geographically dispersed markets. Each of these segments has their own competitive dynamism and game rules. In this assignment we will take a closer look at the intermediaries in the multi fragmented business.
An intermediary can be defined as an individual or a firm that links producers to other intermediaries or to the ultimate buyer/consumer. According to this definition a wine retailer will also belong to the category of intermediaries. The focus of this assigment is to look at the intermediaries in direct contact with the producers, so wine retailers are not included in the scope of this assignment. Below we will describe the tasks that various intermediaries can undertake on behalf of producers.
Intermediaries can be divided into three distinct categories:
- “Marketmakers” that takes ownership of the product.
- “Matchmakers” that receives commission on transactions.
- “Négotiants” that transforms or brands the product.
An agent in the wine business can be defined as a firm that is authorized to act on behalf of a producer and to create a legal relationship with a third party. It follows that agents do not take ownership of the wines which they market and belong to the “matchmaker” category, and they will typically be paid for their services in form of commissions. An agent can be employed by the supplier side or by the buyer side.
Agents will typically be employed by small producers with limited marketing experience and ressources. The agent can have several wine producers in his portfolio and the producers will benefit from the agent’s marketing network and not least market knowledge, when a producer enters a new export market. The agent will provide the producer with an importer that matches the producer’s needs in relation to price segment and volume. When entering a new market a producer takes the risk of being matched with an inadequate importer, if an agent is not used.
Wine importers are responsible for the transfer of wine across borders where local legislation may apply with regards to excise duty and taxes. A wine importer can be a large distributor with a chain of retail outlets attached, such as the Danish company Taster Wine A/S with their chain of 63 Skjold Burne retail outlets. At the other end of the spectrum a wine importer can also be a single retail outlet, taking home wine from a few selected small producers, using “direct import” as one of their key selling points. An example of a “direct importer” is the Danish company Bichel Vine ApS, who has a loyal base of local customers.
Importers always belong to the “marketmakers” category as they by definition take ownership of the wines, to enable duties and taxes to be paid. It is important for the producer to do business with a suitable importer. Volume producers of branded wine will be looking for importers with a distribution network that will cover the relevant retail outlets in the entire geographical area. Small scale producers will be better suited to specialist importers with a niche distribution to selected wine shops.
A wine distributor is involved in both the sales and the physical distribution of wines on a given market. When the geographical distances and the number of retail outlets are limited on small markets, importers and distributors will almost by default be the same company. For the same reasons, these functions will often be undertaken by separate companies on important markets. The importer will sell the wine to a distributor, who will have access to a number of retail outlets, making it a 3 tier system.
It is therefore clear that the tasks performed by distributors vary on different markets and we will look at three selected markets in section 2.
1d. Other Intermediaries
The intermediaries mentioned above are the most important types and we have seen overlaps between each type. Other types include négotiants buying in wines, juice or grapes to transform the product and market it under their own brands. Although négotiants are defined as intermediaries, the scope of their work is such that in a practical sense they are wine producers. Indeed many companies are both producers and négotiants as seen in the Burgundy region.
Like agents, brokers belong to the matchmaking category and their tasks for the wine producer can be to collect and to exhibit tasting samples and commercial terms to potential buyers. A system widely used in France where brokers outnumber agents. The difference between brokers and agents are that brokers remain independent, whereas agents represent one or several companies.
A wholesaler is not involved in retail and will also often be an importer, but will always be a distributor. An example from the Danish wine business is the company Supergros A/S.
2. Bodegas Primaria – Ribera del Duero
Bodegas Primaria is a newly established winery in the Ribera del Duero wine region. The yearly production is 50,000 cases all under the Bodegas Primaria label and all going into the four Ribera del Duero wines:
- Joven – 20,000 cases – € 3.-
- Crianza – 15,000 cases – € 8.-
- Reserva – 10,000 cases – € 14.-
- Gran Reserva – 5,000 cases – € 25.-
We have decided to target 3 different export markets. The US and UK markets for their size and the Swedish market, as this is considered highly prestigious. It’s prestigious because they are one of the world’s most important sole-importers measured by quantity and therefore only select high-quality wines.
The strategy is to perform price point benchmarking against similarly sized Ribera de Duero producer, Bodegas Pesquera. The allocation between the four quality levels is expected to gradually move towards the higher priced qualities within the next five years which is covering home and export markets.
To raise the brand value of Primaria, all four qualities will be widely submitted for ratings by international wine publications, such as The Wine Advocate, Wine Spectator, Decanter and JamesSuckling.com. This will provide a pull demand on our wines.
|First year sales budget / cases||
2a. The US Market
In the United States the 3 tier system is established by law as the distribution and wholesaling of wine requires a license. The license is granted by the Alcohol and Tobacco Tax and Trade Bureau (TTB) and there are approximately 16,000 granted licenses in the country owned by a number of companies. There is a tendency towards consolidation in the distribution chains as economies of scale becomes an important factor. In the United States the number of distributors/wholesalers decreased from 5,000 in 1995 to 500-700 in 2007. United States also have individual legislation for each of the 50 states. The common legislation requires that an importer, seperate from inter state distribution, is selected.
We have decided to focus on only the three more expensive qualities, as the American market for cheaper wines are served well by Central Valley Californian producers, such as Gallo and Robert Mondavi. To compensate the mark-ups through the 3 tier system, a 20-30% discount will be granted on our standard ex cellar price list. However, it is important that the discount is not transferred unaltered to the consumers as this could destroy the brand.
Since our production is limited and focused on high and premium priced wines, a specialist value chain of distribution is chosen. This distribution system sources small scale producers for niche distribution to specialist wine stores, small restaurants and gourmet supermarkets. Choosing specialist distribution will enable gradual increasing sales and retail prices, as the Primaria brand will become more and more well- established. Specialist distribution will optimize client feedback and build strong relationships to the retail outlets.
The Seattle wine importer Classical Wines was established in the 1980’s and is sourcing all its wines from Spain. Classical Wines already represent 3 different Ribera del Duero producers as their aim is to offer a selection of related producers to their distributors, rather than seeking to be sole supplier. Their imports are widely available to consumers across the US. Our export department will therefore target Classical Wines, and if unsuccesful, similar specialist importers such as: Olé Imports, The Rare Wine Company and Signature Imports.
2b. The UK Market
Spain is the 5th largest exporter of wines into the UK and being the 3rd largest wine producer, it is striking below its weight. Compared to the US and Swedish markets, it is a free market without monopolies (Sweden) or stringent legislation (US). The market is mature with a low annual growth rate. However, the Spanish wines have grown approximately 25% by volume from 2003 to 2007.
The UK market is fragmented with almost all constellations of supply chains as discussed in section 1. The dominating retail forces are, supermarket chains (Waitrose, Tesco, Sainsbury’s, Co-op, Marks & Spencer, Morrisons, etc.) with more than 70% of off-trade sales, and large chains of independent retailers (Berry Brothers, Oddbins, Majestic, Bibendum, etc.). Both channels are characterized by taking on imports, distribution and retail sales.
Bodegas Primaria is a premium brand and we would like to sell it at high-profile shops and the on-trade market. Our first choice would be Bibendum, they have high-profile shops and a section for the on-trade market as well. Their portfolio today is 93 different produceres from Spain, but only 2 wines from Ribera del Duero so we see a good place for our wines in their portfolio. They have been around for more than 30 years and still growing. They sell for more than 120 million GBP a year, with 200 employees. We would like to be a part of this success and we hope to sell a good amount of Joven quality the first year, to break into the market. In the coming years our strategy is to convince consumers to drink the better qualities, as our volumes will gradually move away from joven and upwards towards crianza and reserva.
We are aiming at a lower discount than on the US and Swedish markets so the price level to UK importer(s) must be negotiated. Partly because we aim at high profiles market, leaving a higher margin to us. As the number of links in the supply chain is less (more links being covered by each market player), the retail price will match the retail prices on other markets none the less. We would like to stay out of the supermarket chains as this will diminish the value of our brand.
2c. The Swedish Market
The Swedish market is dominated by the state monopoly Systembolaget. Although Systembolaget enjoys a monopoly on retail outlets, they are not the only importer of wines in Sweden. There is also a number of small and medium sized specialist importers. These non government importers can submit wines to Systembolaget, for inclusion on the retail lists (off trade). However, if licensed, they can also sell directly to restaurants on the on trade market.
The purchasing proces of Systembolaget is well described on their website. Registered suppliers are invited to submit tenders. All wines are tasted blind and the decision is for the tasting panel to take.
The wines submitted must meet certain criteria such as price point, sales, volume etc.
The market share by volume of Spanish wines is 12.7%. 60% of all Spanish wines are priced between SEK 60.- and 80.-. Sale by volume of Spanish wines in the high and premium segment (above SEK 100.-) were rising 7.1% in 2010. These upper segments are the ones targeted by us. Systembolaget also provides potential suppliers with a pricing key. The € 8.- demanded by us, for the Crianza, equals a retail price including VAT of SEK 170.-. Respectively the Reserva would be priced at SEK 250.-. Systembolaget imports Villacampa de Marques Ribera del Duero Crianza and is retailing this at SEK 119.-. To meet this price point it is clear that a discount as offered to US importers must be granted.
The projected sales of 2,000 cases of crianza and 1,000 cases of reserva is set as a midway point between sales obtainable through Systembolaget and sales through an independent importer, which must be expected to be less. To reap the benefits of getting on the standard list of Systembolaget, the first step will be to take part in the tendering proces. If this proves to be an unsuccesful approach, independent importers will be targeted.
3. Conclusion and Personal Commentary
In the introduction we claimed that the wine business does not exist. It is fragmented. There are endless permutations of setting up supply chains: different market legislation, target customers, price points, products, etc. etc. Of course the wine business does exist, only not as a homegeneous marketplace. We have seen, there are several different ways to efficiently reach the consumers.
When browsing through newspaper ads from many wine retailers, the general consensus seems to be that intermediaries are an evil to the consumers. The selling point is often that the retailer is importing directly from the producers, cutting out the intermediaries from the supply chain, and therefore offering their wines at lower prices. Is this true? Is the justification of intermediaries to rip of the consumers?
Comparing the two different distribution models in Figure 1 and Figure 2 below, a more complex picture emerges. The “direct import” model shows that 10 producers are reaching the consumers through 10 retail outlets. To achieve this distribution, one hundred business deals, financial transactions and physical shipments need to take place.
The “wholesale model”, where we as an intermediary have included wholesaler X, is more efficient.
10 deals/transactions/shipments are taking place between producers and the wholesaler and 10 between the wholesaler and the retail outlets. In our simplified example, this 80% reduction must surely means a cost reduction in itself. Whether or not this outweighs the extra mark-up added by the longer supply chain, is down to economies of scale.
Retail chains with many outlets will have the financial ability and manpower to efficiently bring a large selection of wines to their outlets, whereas small retailers will face increasing distribution costs, or alternatively provide their customers with a significantly smaller selection to choose from. It should also be noted that companies undertaking all the tasks in the supply chain may be operating with a higher overall profit margin to cover fixed costs, than a specialist importer leaving distribution and retailing to a separate economic entity.
Finally, it should not be forgotten that agents and brokers are helping small producers to bring their wines to markets that would otherwise be out of reach. Again the consumer benefits from a larger selection to choose from.
Even if the economic models are not working in a perfect market and cutting out intermediaries in some cases are justified, surely intermediaries have their rightful place in the wine business – even seen from the perspective of the consumer.
Marketing Management – Philip Kotler a.o., Pearson Education Limited 2009
- The Business of Wine – Geralyn and Jack Brostrom, Greenwood Press 2009
- The Business of Wine – Jean-Michel Valette MW, Rust Seminar IMW January 17, 2010
- Wine Marketing – C. Michael Hall and Richard Mitchell, Butterworth-Heinemann 2008
- Taster Wine A/S – www.taster-wine.com/uk/Taster%20Wine/TheGroup.asp
- Bichel Vine ApS – www.bichel.dk
- Supergros A/S – www.supergros.dk
- Drink Ribera Wine – www.drinkriberawine.com
- Classical Wines – www.classicalwines.com
- Systembolaget – www.systembolaget.se
- WSET Diploma Unit 1 The UK Drinks Market – www.wset.co.uk
- Quora – what’s the best place to buy Spanish wines in London? –
 Source no. 3.
 For reasons of space, only the term firm is used in the remainder of this assignment, to cover both firms and individuals.
 Source no. 4.
 Source no. 5.
 Source no. 6.
 Source no. 7.
 The american market is an example of a 3 tier system. Please see description in section 2a below.
 Source no. 8.
 Bodegas Primaria is a hypothetical example created for this assignment.
 Equal to 600,000 bottles.
 Ex cellar price excl. VAT.
 Source no. 9.
 Source no. 1.
 Source no. 1.
 As opposed to a volume supply chain (see Source no. 5, Figure 5.2).
 Bodegas Pesquera, Condado de Haza and Gormaz.
 Source no. 12.
 Source no. 13.
 Source no. 11.
 Exchange rate pr. 18.03.2011 between swedish kroner (SEK) and british pouds (GBP) were 10.30 SEK/GBP.
 Source no. 11.