November’s passage of Initiative 1183—which will shut down the state liquor stores on May 31 and privatize liquor sales— has opened the door to a new era of liquor distribution in Washington State. Since November, many distillers have been concerned about how they would continue to get their products in the hands of customers. Starting March 1, distillers can sell liquor directly to restaurants, bars and nightclubs. On June 1, distillers can distribute to supermarkets and other retailers.
At inVigor Law Group we started thinking about the different approaches local distilleries may use to distribute their products. Generally, there are a limited number of ways to distribute your product, below are two of the more common ways we believe local distilleries, and other businesses, may use.
Taking Matters into Your Own Hands —Direct (or Self) Distribution
One way to distribute is to distribute your product yourself. By employing this approach you can cut the costs of paying a third-party distributor to distribute your product. Generally you have greater flexibility; since you’re the one distributing the product you can decide the details of your distribution techniques. Furthermore, you can lower the cost of goods which will translate to increased margins on your sales. Many smaller businesses appreciate a lower cost of goods because they can keep their prices lower to accommodate their customers. Many self-distributors also cut down costs further by sharing warehouse space and vehicles with other businesses.
However, you take on the added liability and costs of distributing your product yourself. You may need to employ additional staff or risk spreading your current staff too thin by adding additional distribution tasks to the scope of their work. Also, you will need the necessary equipment to handle distributing your product. This may include vehicles, labelling equipment, warehouse software, etc. If you decide to self-distribute your product you will need to be aware of and account for common distribution issues including shipping problems, stock shortages, over-shipments and damages.
Prior to deciding to self-distribute, you should define your objectives and develop a comprehensive distribution plan.
Handing Over the Reigns— Third-party Distribution (Wholesalers)
Especially for larger companies, the most common way to distribute a product is to use a third-party distributor or wholesaler (there is little difference between a “distributor” and “wholesaler,” e.g. a distributor often sells to end users as well as retailers, whereas wholesalers tend to sell only to retailers. For purposes of this section both will be referred as “wholesalers”). The wholesaler buys your product and sells the goods to retail stores. The key to using this distribution channel is convincing retail stores to stock your product. In most cases, you will still be responsible for advertising your product. However, some wholesalers agree to share marketing and advertising responsibilities, especially for promotions.
The advantages of using a wholesaler include efficient distribution, increased cash flow, steadier flow of inventory, and reduced market risk. Wholesalers are often better suited to distribute your products, especially in large amounts. By delivering large quantities of your product in one shipment to a wholesaler you can cut down the costs of making several smaller deliveries to your customers. Also, wholesalers may have access to larger markets than your business does on its own.
However, there are some disadvantages to using a wholesaler to distribute your product. You’ll have to give up some control over your product. It will depend on the terms of the contract between you and the distributor, but at the very least you will have to give up control over the eventual delivery of your product. Furthermore, it is often less profitable for a manufacturer to use a wholesaler because the wholesaler will require a certain percentage of the sale.
If you rely on a third-party to deliver your products directly to the customer, then you may be giving up control over the “message” that is conveyed to the customer. That is, your distributor (not you) is the final face of your product. The brand and reputation of your product may be extremely valuable, and giving up (to a certain extent) control over this aspect of your product is risky.
As we await the draft of the final rules set forth by the State Liquor Control Board, many local distilleries will be weighing the benefits and costs of different ways to sell their product to customers, retailers, and distributors.
If you’re interested in learning more about protecting your business through distribution agreements, please contact us or submit a question using our free, confidential Q & A service.
