Most alcoholic products in the United States are sold in the “three tier system.” These three tiers are:
· Supplier (Winery, Distillery, Brewery)
· Trade (Restaurant, Retail)
This structure sets up a dynamic I call the “Margin Peanut.” It is an interesting game within a game that goes on between the supplier, distributor and trade that determines how much of the margin, or profit, each of these participants in the three tier system actually make on a product. The “game” can change dramatically based on the success and size of a brand because, in this world, not all brands created are equal.
The Margin Peanut always starts with how much a bottle of wine actually costs to produce. A bottle of wine that costs $10 at the store typically only costs $3 to produce, leaving the other $7 profit up for grabs between supplier, distributor and trade. Who gets what share of that $7 is the “Margin Peanut.” The goal of the game is to move as much of the Margin Peanut to you as possible. As mentioned previously, this peanut moves around to the participants in the game based on the success of the brand.
Note...This structure is in stark contrast to selling wine out of a tasting room, where the supplier retains the entire $7 profit. In this situation, of course, the whole $7 dollars is needed to pay for the tasting room, staff, marketing and ancillary costs associated with working directly with the public. I personally prefer to take my chances with the three- tier system.
When brands are young and need exposure and support from distributors and trade, it is they who will get the lion share of the $7 dollars of profit. They have the upper hand of controlling the Margin Peanut. It is helpful to think of it as an entry fee that has to be paid if you want to get your products into the three-tier game.
It is a brutal but fair system. The distributor and trade have many (probably too many) brands to sell. However, they are taking a risk by devoting resources to sell and develop your brand and will likely better be able to when the brand is new. If you believe your brand will ultimately be successful, you also must put faith in the idea that one day you can move the Margin Peanut in your direction to acquire more of the margin.
Although not exact, here is the rough breakdown of the $7 profit for a new brand, compared to a successful mature brand:
As a brand grows and gains more distribution and awareness, distributors and trade don’t have to devote as many resources to sell the brand. Just as it was fair for the distributors and trade to make more margin in the early days of brand development, it now becomes fair for the supplier to make more margin when the brand is successful. It is the supplier who has to take the most risk upfront and therefore gets the largest margin increase if it works.
There are no set rules in the “Margin Peanut” game. All sorts of variables and circumstances will dictate when it is appropriate for the supplier to try to move margin back to them. It’s all a negotiation. It’s the supplier’s responsibility to initiate the negotiations because there is no reason for the distributor or trade to voluntarily give up margin. They understand the game, but that doesn’t mean they don’t want to hold onto the margin as long as they can.
In order to give your brand a chance to succeed in the three-tier system, you have to learn to play “Margin Peanut”!