Revolutionizing Alcohol Distribution: The Case for Virtual Wholesaling

The next beverage alcohol fin-tech company should be focusing on the potential billion-dollar craft distribution industry.

Yes, I know it sounds strange coming from me, but wholesalers need help from legislatures. From those I have spoken to, wholesalers would like to support small producers nationwide. However, they're hampered by outdated state regulations, that “protect” some wholesalers, but are now proving detrimental to most. The archaic three tier rules currently at play not only hike up costs for wholesalers, producers, and consumers but also contribute to environmental damage through inefficient logistics practices. 

What issue am I talking about? The inability of wholesalers to adopt a "virtual" model, a solution that promises a more streamlined, cost-effective, and environmentally friendly distribution system. The virtual model would remove the “come to rest”, “bump the dock”, or “franchise” issue. Instead, the wholesaler would adopt a drop ship model, where the producer could essentially deliver the products directly to the retailer on behalf of the wholesaler where the producer is in state or out of the state.  

Warehouse distribution does provide the ability to streamline the purchase and delivery of products for large producers to large trade accounts by splitting down pallets of products to individual case delivery units. It also allows for multi-brand delivery at the same time. Other than these two warehouse functions there is little else a traditional wholesaler does in this modern economy that cannot be done via technology without a warehouse. 

• State excise tax can be tracked and paid electronically. 

• Orders tracked from pick up to delivery electronically. 

• Electronic payment can be facilitated upon delivery. 

A state approved model 

Virginia has been successfully running a “virtual” wholesaling model in the state since 2007, when the Virginia General Assembly established the Virginia Winery Distribution Company (VWDC). While I do not believe these powers should be held by a state monopoly, they have allowed hundreds of small wineries to essentially self-distribute their products to retailers in the state. Find more information on the VWDC here: https://www.vwdc.org/about 

Without a virtual wholesaler in place, here is the real-life scenario that those in the three tier are currently living with. A retailer asks their wholesaler if they can get them a case from a small producer in another state for a special promotion. First off, the wholesaler would likely say no. The logistics for a single SKU and 12 bottles is far too much. But if they did take the order, they would have to make the purchase from the producer, who packages that single case, ships it to the wholesaler, who then receives the package, and then ships it back out to the retailer either via common carrier or via a licensed company truck or salesperson. The extra shipping can add $60+ to the cost of the case, with there being zero value added. Someone is paying that cost, but ultimately the states are to blame for increasing the consumer cost by enforcing a three tier model that is no longer relevant. 

Fulfill the potential of suppliers and customers  

Wholesalers need and want states to change their laws so they can drop ship small brands directly to retail/trade accounts because without it, cost are pushed up for everyone and the wholesalers, for financial reasons, have to reject smaller brands. This situation conflicts with the wholesalers' aspiration to broaden the range of choices for retailers and customers. For instance, consider Southern Glazers' value statement, which emphasizes their commitment to "fulfill the potential of our suppliers and customers." Under the current laws, however, they find themselves constrained in achieving this goal.  

WSWA 

I am sure this issue has plagued the WSWA for many years as they have been forced to support antiquated rules. They should use their huge political and financial capital ($29.5m in lobbying since 1998), to help the wholesale industry by relaxing the unnecessary bump the dock and come to rest rules. The WSWA requires all their members to “support the principles and purposes of WSWA, which include advocacy of the vital role of the independent wholesaler in the system of distribution.” 

I’m sure these independent wholesalers would be happier with the market’s state if they could move forward with virtual wholesaling. It would also support a flourishing market and not a shrinking market. Note, 2023 was the worst performing conditions since 1991. 

I know firsthand, many independent wholesalers would welcome these changes as it provides a better service to their small suppliers while also providing more choice to the consumers and lowering overall costs. 

The antiquated reasons for the current regulations, rooted in a time when alcohol was transported by horse and cart, are no longer valid. Today's advanced tracking systems, proven effective in the direct-to-consumer market, ensure accurate tax collection and compliance. It's high time for states to facilitate this transition, supporting wholesalers in their efforts to modernize distribution and promote a more vibrant, diverse market. 

The Wine & Spirits Wholesalers of America (WSWA) must leverage their influence to advocate for these necessary changes. By doing so, they can alleviate the undue criticism on wholesalers, help small producers, and ultimately contribute to a thriving alcohol industry. 

The industry cannot grow when it’s held back by rules from the 1930’s. No amount of marketing or national promotional programs will solve this problem until the laws change to allow the industry to flourish. Not to mention, this is a massive market for a wholesale company if they get it right. If I was a wholesaler I’d be pressuring my representative association to challenge the current legislation now.