Solving the Distribution Dilemma at Smaller Wineries

Ever considered self-distribution? Or, does the prospect of doing it all yourself make you cringe at the thought of doing it ALL yourself? As with anything, there are advantages and disadvantages to self-distribution.

Obviously, you first need to determine whether it is even permitted in your state. In the Midwest, wineries are generally permitted to self-distribute in Missouri, Michigan, Minnesota, Illinois, Nebraska, Kansas, Iowa, and Ohio.

There are annual production limits that restrict self-distribution in certain states. In Illinois, a winery must have production of less than 25,000 gallons per year to self distribute. In Ohio, wineries over 250,000 gallons per year must use a distributor.   The upper limit for self distribution in Minnesota is 50,000 gallons, which means that all Minnesota farm wineries can currently sell direct to restaurants and retailers.

In Michigan, Iowa and Missouri all wineries may self-distribute regardless of size.

Nebraska has a more complex self-distribution law that favors wine made from fruit grown in-state. If a winery in Nebraska is designated a “farm winery,” which means that 75% of the grapes used in finished product are grown in state, then the winery is allowed to self-distribute, but not more than 30,000 gallons per year.

Kansas has a similar law, but requirements for using local grapes are less restrictive than Nebraska.  First, first only Kansas farm wineries may self-distribute their wines. To qualify as a Kansas farm winery, among other criteria, 30% of total production must be from Kansas grapes.

Generally, wineries are not permitted to self-distribute in Wisconsin, Kentucky and Indiana. You should consult with legal counsel to determine the specifics of the laws in your state, including any possible exceptions to the general provisions regarding self-distribution. Some Midwestern states require that distributors get an exclusive agreement for a defined geographic territory, which adds another layer of complexity.

In determining whether self-distribution is right for you, you will be faced not only with legal considerations, but also with a number of practical and business considerations. If you self-distribute, you will be doing the work of both supplier and wholesaler. You will have to market, promote and advertise your products. You will have to sell to retailers and develop and maintain relationships with them. You will have to do your own pricing, and you will have to deliver the product, which may include financial investments, as you will need a delivery system, including, trucks and more employees to serve as truck drivers.

See related Story:  Minnesota and Wisconsin Distribution Differences Wider Than the Mississippi

If you are in the country, and you want state-wide coverage, there may be practical problems distributing to the entire state on your own. If you appoint a wholesaler, there may be a concern with them giving your product the attention you want. On the other hand, picking a wholesaler with more interests in common, such as a boutique wine wholesaler, may make that issue less relevant. Additionally, if you appoint a wholesaler, there will be franchise law implications that are not present if you self-distribute.

Cory Bomgaars of Les Bourgeois Vineyards in Missouri believes that if a winery wants to get into the local market and establish itself in that market, then self-distribution is a good idea. However, it may be economically unreasonable for the winery to make a lengthy drive to make a small delivery, so a wholesaler may come in handy to make timely and regular deliveries to keep retailers happy and to help the winery compete in the marketplace.

According to Mr. Bomgaars, the challenge is finding a match with the right distributor. A small winery needs to evaluate the goals and objectives of its brands and understand what a wholesaler can do for it. A large wholesaler may be more powerful, but the winery may not receive the brand development it wants. Alternatively, a small wholesaler may be too narrowly focused to expand the winery’s brands. It’s about finding the right balance.

Adam Satchwell of Shady Lane Cellars in the Leelanau Peninsula of Michigan has watched his winery progress from having a distributor to moving into self-distribution and then back again to a distributor. The winery started with a distributor, but found that the distributor was not providing them with the attention, service or market penetration they wanted.

Shady Lane then switched to self-distribution to gain these advantages, which understandably caused an investment in time, vehicles and personnel. Logistically, given the winery’s location in the state in comparison to the location of the bigger markets, it was difficult to make self-distribution pay for itself, and the winery found it difficult to build sufficient local territories to make it work.

However, the winery was able to get into accounts that it could not get into with a distributor, and it was able to build accounts that became attractive to distributors. So, when the winery changed its model, it was able to hand distributors ready-made accounts due to its efforts while self-distributing.

Clearly, wineries face a number of variables in determining whether to self-distribute, and there is no one size fits all answer. The winery will have to evaluate its goals and its ability to achieve them with or without the help of a wholesaler.

Jamie J. Cox, is an associate with the law firm Brydon, Swearengen & England P.C. in Jefferson City, Missouri. Jamie practices primarily administrative law and represents professionals before the Administrative Hearing Commission, as well as a number of Missouri licensing board