Berkshire Hathaway vs the Three-Tier System
The Warren Buffet-owned McLane food distribution company moves forward with its quest for a Texas wine distribution license.
Source: Wine-Searcher
By Liza B. Zimmerman
05-Jun-2017
While it’s debatable whether the US’s three-tier, wine-distribution system may be outdated and inefficient, most of the industry players in Texas seem to be happy with its current structure. – both the Texas courts and local wine executives seem to be showing a cold shoulder to a food service company’s continued push to get a wine distribution license in Texas.
The current system has been outdated for 40 years, says a beverage attorney on background. “The big guys control the capital and they are making a lot of money.” But they also provide a great service, he adds. Perhaps that is why many key players still value their services in Texas.
The McLane Company Inc – which has sold food products in Texas since the 1980s through the AmeriServ and McLane Foodservice trademarks – has been litigating with the state’s regulatory board the Texas Alcoholic Beverage Commission (TABC) to get their own wine distribution license for several years.
The company is challenging Texas’ “One Share Rule”, by having filed a complaint last year with the TACB in Austin. McLane’s parent company, Berkshire Hathaway Inc, owns shares in Walmart and is therefore prohibited from having a distribution license per the TABC’s “Tied House” laws. These regulations prohibit any overlapping ownership of different types of businesses in the alcoholic beverage industry.
The same beverage attorney who said that the system is outdated adds that McLane’s investment in Walmart may go beyond just owning shares. He intimated that they may even have a seat on the Walmart board, something I was not able to confirm through research.
The same legal hurdle has been faced by Mexican convenience store OXXO and its Texas subsidiary Cadena Commercial USA Corp – which indirectly owns shares in Heineken via its parent company FEMSA – when tried to sell wine in the Texas market. Last month the Texas Supreme Court ruled in favor of the TABC over Cadena showing its support of current enforcement of the tied house laws.
Maintaining the status quo
The three-tier system was established for the sale of alcohol in the US when Prohibition was repealed in 1933, to ostensibly protect the American consumer and make sure that no one sector had “undue” control of the sales of alcoholic beverages.
While many wine producers have lamented that that dominance of two major wholesalers in most markets prevents them from gaining wider distribution, most of them have yet to come up with a different solution as to how their brands would get to market without the wholesale tier. Some sommeliers also do dream of a world where they could buy directly from top estates in Napa, but many also fear a market that would be chain retailer-driven – much like what exists in the UK – if the three-tier system wasn’t in place in the US.
Wholesalers rarely help their case by not making it about the range of valuable services they provide – at a cost – to their clients. Despite this, most beverage executives seem to understand the benefits of, and are comfortable with, the way the current US wine distribution system works.
The three-tier system functions well in part because the US is such a big, spread-out market, says Houston-based sommelier Sean Beck, who oversees a group of fine dinning restaurants – including Carcarol, Backstreet and the newly opened Xochi Oaxacan restaurant. Especially in a large state like Texas, deliveries need to be made at often great distances, requiring temperature-controlled fleets of trucks to get the wine to the restaurants in good condition.
“Everyone has to play by the same rules,” adds Michael Newman, a beverage alcohol attorney and partner in San Francisco the law firm of Holland & Knight LLP. So, if wholesale giants such as Southern Glazer’s can’t have shares in retail stores such as Walmart, why should McLane be allowed to do so, questions the attorney. He added that the distribution laws are similar enough in both states for him to be able to accurately comment on the current events in the Texas market, as many prominent attorneys in that state would not do so on the record.
Unfortunately, executives at McLane, both major Texas distributors, the major financial industry analyst for the three-tier system in New York’ and a handful of major Texas beverage alcohol attorneys involved with the case, would not comment on the record for this story. Their silence only leads me to think that most Texans are somewhat satisfied with the status quo or, as one major sommelier notes, Berkshire Hawathay’s legal moves may no longer be winning favor among the fine wine and restaurant community in Texas.
Additional challenges
When two major wholesalers – Southern Glazer’s and Republic National Distributing Company (RNDC) – have what is reported to be at least 90 percent of the Texas market, one questions how wine brands would get to market if they were sold by McLane or almost any other smaller-scale distributor. One major wholesaler, who declined to be identified, inquired why a wine producer would even want to be represented by what is essentially a logistical/food delivery service, whose sales staff ostensibly has no wine sales background.
While sommelier Beck thinks McLane may well get their sought-after distribution license, “it is a crowded market and they have a lot of people against them.”. What is more, “the TABC is also being really intense in following the laws as [they are] written”, he noted, as is evidenced by the ruling on the Oxxo case.
He doesn’t believe that another wholesaler entering the Texas market is going to drastically affect current wine pricing. He also fears that another distributor’s entry into the market could also damage his, and other restaurants’, existing relationships with the big players.
He adds that he has access to plenty of wine brands and appreciates the frequent, temperature-controlled delivery his wholesalers provide as he doesn’t have much storage at many of his restaurants. The days of the $1 million-plus inventory of wine are over, he sarcastically notes. He adds that he can regularly taste through a wide selection of wines – as needed – with his current wholesale partners and calls their temperature-controlled warehouses his “de facto pantry” It’s “a symbiotic relationship and it should be a two-way street”, he concludes.
For a food distribution model to work in the wine sales arena, it would do best to represent name brand wines that would sell themselves onto the shelves, like Wonder Bread and Campbell’s Soup. And while this sales model might work well for small retailers and convenience stores it isn’t likely to drive fine-wine sales.
“Unless you are dealing with high-volume, low-margin, inexpensive products there’s a lot of hand selling” in the wine business, notes the attorney Newman. Wine is not, he adds, just like any other commodity, there’s a level of education that needs to be part of the sale.
Wines that sell though food distribution channels will need to be like a “milk brand”, something you really need and require, concurs Beck. McLane, along with anyone else new to the Texas distribution market, “won’t have an army on the ground like other distributors”.
The reality
Executives at McLane seem to think – with good reason – that they might bring more brands into the state via their supermarket and convenience store contacts, although many locals seem to have their doubts.
“It’s conceivable that they might bring more products to the state,” by getting a distribution license, said Newman. However “they wouldn’t be different than any other wholesaler”, he comments. They could also be worse if their sales reps don’t have sufficient fine wine background to sell a broad portfolio of wines, as well as a network of key sales relationships already in place.
Major wine wholesalers have been pouring money into both in-house education and Master Sommelier and Wine & Spirit Education Trust wine-track programs for their staff over the past decade. Many have also formed fine-wine divisions, so select sales reps with a good fine-wine background are ideally calling on top restaurant accounts.
While McLane”s attorneys were very forthcoming when I interviewed them nine months ago for another story, I am not sure why they choose to keep mum this time. In July of last year McLane’s vice president of governmental affairs Neftali Garcia, at the company’s Temple, Texas office said: “The way the law is applied in Texas doesn’t reflect the nature of modern business.”
He went on to say that having a small share in another tier of the wine business shouldn’t be a deal breaker, and added that the “big wholesalers aren’t universally applying the one share rule across the business”. However last week McLane’s vice president and in-house counsel Eric Hildenbrand declined to comment on the case or have Garcia do so.
What the future holds
McLane’s well-funded, legal battle in Texas is encouraging many in the business to reflect upon what types of wine sales vehicles genuinely work well and why they do within the unique, three-tier system in the United States.
Beck says that he would be comfortable with potentially paying higher prices for product if it would insure the same level of quality service he is currently getting from his distributors.
“If you start to create exceptions it weakens the tiers,” concludes Newman, alluding to that fact that most of the industry seems to support the way the current way that sales process works.