Deborah M. Gray's Blog

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I’m getting back to my blog after a long absence and that is true of the FAQ series as well. So, let’s get started.

Whether someone schedules one appointment, or a series of appointments with me I ask them to email me a list of issues they hope to cover. For them, it helps to organize their thoughts and focus their time. For me, it allows a preview of their thinking and goals. Often, it highlights early misconceptions that I can address. I receive everything from a paragraph of bullet point questions to a five-page background and proposed business plan. These are more of the most common questions from clients, presented here verbatim and taken from some of those emails. This first one often arises in different forms from others.

Would it be an advantage or a disadvantage for us (two partners in the import business under one Federal Basic Permit) to live in different states?

In this case, there are no real advantages or disadvantages. There are only various ways in which you choose to build your business, based on complying with laws, your personal preferences, and your financial and career goals. That there are two of you means two people to share the liabilities and profits and two people to share responsibilities. You can decide that one takes care of compliance, logistics, forecasting and communicating with distributors and the other can be working accounts in the state and traveling the country. Or you can split up regions of the country and both cover sales, working with appointed distributors in each state.

The Federal Basic Permit is tied to one fixed address. If you move, the Permit must be amended with TTB, but the business cannot occupy two different addresses in two different states.

In some cases, the state in which you are located may be an advantage. If one of you is in Texas and the other in California, e.g., choosing California as your import base allows the opportunity for DtC online sales and, with the right CA ABC “types” allows significant options overall in a state where the economy relies on the wine business.

Is the market oversaturated with importers? In other words, are there still a fair number of good wineries out there looking to partner with new importers?

There are always wineries looking for importers, far greater in number than importers looking for wineries. Apart from one brand, which is a special circumstance, I have not imported anything for ten years and yet I receive at least twenty emails a week from foreign producers looking for US representation. These are not the overlooked producers, the ones that were not good enough to be considered for export. They have awards, pedigrees, history, and exceptional vineyard management. There just happen to be so many appellations that have expanded or started a brand, and other recently “discovered” regions that are ready to export to the US.

The issue for a new importer is to identify the country or region they want to represent. Whether it is old world or new, there will always be available brands.

Wine knowledge.  How much is needed/expected?  Is it necessary to have certifications?

I began my business with rudimentary wine knowledge. I had never been in the wine industry. In fact, the only time I had even worked around alcohol was when I was a bartender in Spain, and I didn’t even drink! I took a basic, but thorough wine course before I started my importing company which gave me a broader understanding of varieties and regions. From there, I tasted through wines to start to identify flavors. I was fortunate to have someone in Australia who could do some sourcing for me, but this still did not guarantee that they would suit American palates, especially since I started at the very early stages of Australian export to the US. It was only with time that I began to understand not only what was good wine, but what could work in the US. This means finding that sweet spot of quality, flavor profile and price. There is plenty of competition and new brands must fight that much harder to be included in the lineup, but it doesn’t mean your new, unknown, untested brands can’t be the breakout stars.

Knowledge and experience are always good attributes, in all areas, but can sometimes mean less flexibility. Although this is an industry founded on rigid regulation, it also thrives on innovation, out of the box thinking and being open to doing things differently from other industries and other times. Although wine knowledge or certification can be a distinct advantage, it can fail without a good business plan.

One last thing I would add: make sure you taste wines with professionals before adding them to your portfolio. Your friends may love the wine, but will they pay $60 a bottle for it? It’s a buyer opinion that matters, because they’re the ones that know whether they have the prized shelf space for this wine and how it compares to others of the same category, or if it fits a restaurant wine list and will elevate the food.

Is it up to me to prepare the labels or is that on the winery?

Unless you are asking the producer for a completely different label that will only be used in the US, or have asked them to provide wine for your private label, the cost of label design, printing and applying to bottles is the expense of the producer.

US compliant changes will still have to be incorporated for approval by TTB, and some graphics and wording that may be prohibited by TTB. Anything objectionable in the descriptive text, which TTB calls the “puffery”, must be removed. There are ways to minimize the costs, especially on the first order when bottles are already labeled, by having the brand owner prepare additional, inexpensive labels with the mandatory information. It’s all a matter of aesthetics, budget and their inclination to provide entirely new, professionally prepared labels.

On the other hand, submitting label applications for approval (COLA) is entirely up to you. It’s not something they can do. Only the appointed, licensed importer and their authorized compliance consultants can submit label applications through COLAs Online.

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If the vineyard is organic and biodynamic can I say that on the label?

Organic terms are all subject to strict guidelines and must include paperwork from a certifying body to include with the application. If the producer has all of that, then yes. There is no current regulation regarding biodynamic, so it’s okay to include that without additional documentation.

What about the EU leaf? Can I leave that on if I have them remove the organic statement?

No, this is specifically associated with EU organic certification and cannot remain on the label if all other organic compliance is absent.

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Once I set up an import company in one state can I warehouse in another?

Absolutely. As long as you comply with the laws of that state. My import business moved from Georgia to Colorado to California. In all that time (except for a brief period early in my career when I didn’t know any better) I have warehoused in Northern California. In fact, if your objective is to achieve distribution in more than one state it is preferable to warehouse on either coast, specifically the area around the port in New Jersey and Northern California. Distributors across the country are all familiar with picking up multiple supplier goods from these warehouses and truckers will be able to consolidate loads.

Are we out of our minds?

Yes, true question! And it’s not the only time I’ve been asked, but mostly in the form of a reality check. Is what I’m thinking realistic? Does this sound logical? Have I missed the boat on this country, idea, model?

Although many potential or new importers come to me with what they consider revolutionary concepts that have never been thought of before (they usually have), each one also comes with a unique background, experience, perspective and personality. This is really a recurring theme with me, but I think it’s also the most important advice I could give: you can make a success of this business if you are prepared, realistic and persevere.

 

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It has been exactly two years to the month since my last post. How little I could anticipate the radical shifts that have taken place in the wine industry, and the world at large, as we all quarantine during a global pandemic.

I intended to make my next subject a continuation of the FAQ series. After all, there have been only two so far and there are so many questions to answer! But I couldn’t do that without first addressing our current situation.

Since October, 2019 many importers were already burdened with an additional 25% import tariff on still wines at 14% ABV or below from France, Germany, Spain and the UK, due to a trade dispute. (Wine above 14% ABV from those countries are exempt). To put that in perspective, duty/IRT normally in the hundreds of dollars for a shipment of wines

The Coronavirus impact, and the resulting stay at home orders, are felt in every corner of the world. Sadly, some businesses that have closed, particularly restaurants, may never open again. On the other hand, wine buying online has increased, as everyone has no choice but to stay at home.

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In the meantime, California ABC (Alcoholic Beverage Control) have temporarily revised its laws to allow takeout alcohol with food orders, illegal prior to the Coronavirus pandemic. Many other states have done the same. It would previously have been unimaginable to think you can order a Moscow Mule or a glass of wine with your to go order, but this creative way to handle the current crisis has helped restaurants survive. It won’t last in this exact form, but could become the genesis for something new in the future.

Several restaurants have converted to grocery outlets, providing fresh produce for sale to consumers. Street markets have opened in a limited way, with social distancing, to provide restaurant food alongside the fruit and vegetables.

Amid the wreckage of cancelled wine tours, tastings and educational experiences, mixologists and sommeliers are finding ways to conduct virtual tastings and education via online teleconferencing.

I was one of those who had never even heard of Zoom prior to this period. Now I’m on at least one Zoom call a week, both professional and personal.

The Wine Importing and Distribution class I teach at San Diego State is going online this year. SDSU is adapting by providing test tube type wine samples for students, delivering them before classes so that we can all taste together. My own class may not seem to need wine tasting the way French Wine or Sparkling Wine obviously does, but I feel it’s helpful to incorporate wine from different regions in my six-week course to evaluate and discuss the relationship between regional expectation, price, packaging and quality. These are all components of a brand that an importer should consider when sourcing for their portfolio, whether they are a new importer or have been in business for many years.

As a consultant, I represent potential importers that are now putting strategic plans on hold, and established importers who are seeing a decline in their sales and reevaluating scheduled projects. Others are pivoting to take advantage of online sales openings with companies such as wine.com, which has a national reach and whose business has increased dramatically.

I have a couple of clients who are waiting for their Federal Basic Permits to be approved and taking this time to establish their websites, take a deep dive into content and develop marketing materials. One had an extensive trip booked to Italy in March, with scheduled visits to winemakers and producers. Those travel arrangements were cancelled, naturally, but he is employing teleconferencing to meet with each of them and discuss future collaborations, so that when the world opens up again he won’t have lost an opportunity to form and develop relationships that are so indispensable in this industry.

Another client, with a fledgling business is working with his producers to get all their labels US compliant and submitted for approval. TTB (Alcohol Tobacco Tax and Trade Bureau) is still operational and processing label applications from their homes. He’s also organizing freight options and getting quotes, so that he’s putting downtime to good use.

In a newsletter from San Diego Bay Wine & Food Festival (that also gives a detailed rundown of local restaurants that are open for takeout), I read about one local company making lemons out of lemonade. This will not presumably be a long-term strategy, but shows more out of the box thinking that will help a lot of people and engender good will:

“ Pacific Coast Spirits in Oceanside, CA

Pacific Coast Sprits is producing batches of hand sanitizer for local residents. They are now partnering with local breweries to purchase beer that is going bad due to business being closed and turning it into alcohol to be used for hand sanitizer. The hand sanitizer will be both donated and sold back to the community. The projects, called #SDSanitizerCollab, will make use of product that would otherwise go to waste and provide work and jobs for both partnering breweries and the Pacific Coast Spirits Distillery.”

There are many of us that don’t think it will be ‘business as usual’ when the economy does come back. There are signs that the shift to online sales, as a robust part of new business strategy, is here to stay. Whether your business model includes online sales or not, it is still advantageous to know how it works. As an importer, your channel (within the 3-tier system) is to distributors. Ensuring that your distributor customer has a balanced concentration of on-premise and off-premise accounts in their region could make a difference to your sales down the road.

If you are just starting out, you are possibly considering a new model or weighing your options in what will undoubtedly be a changed environment. A Federal Basic Permit allows for the importation of wine, beer and distilled spirits if you check those boxes when you first apply. It requires neither additional paperwork nor additional fees. Is it possible that you have options in the distilled spirits category? Gin with locally sourced botanicals, e.g. Or a whiskey from France, along with the French wines you are sourcing? A special liqueur? Laws are more rigid for distilled spirits in some states and licensing fees may be higher, so become familiar with those restrictions and factor that in your decision making, but diversification and reinvention can include carving out a niche that will maintain a revenue source during difficult times.

There may, and should, be more challenges to the 3-tier system to allow flexibility in wine sales and shipping. Yes, distributors and state taxes should be protected, but the stranglehold that the 3-tier system has had on the alcohol industry since the repeal of Prohibition in 1933 is inhibiting trade and restricting consumer choice. Opening it up is simply expanding a free market economy, a cornerstone of democracy.

One of the ways to keep up with developments within the industry is to subscribe to M Shanken Communication. They are the publisher of Wine Spectator, but also have links on their website to Market Watch and Shanken News Daily, which are free to industry people (importers, distributors, retailers, etc.) http://www.mshanken.com

Thinking in terms of your portfolio, don’t necessarily make any changes to the countries of origin that motivated you to take this journey in the first place. If those countries happen to be France and Spain, the tariff adds additional challenges to a post-COVID-19 world, but I know that many producers are sharing the costs of the tariff with their importers or dropping their prices to accommodate the additional expense. It won’t last forever, but right now it is definitely a budgetary consideration. You might consider adding Italy (no 25% tariff) and being conservative about the investment in tariff-heavy countries for now. Diversification is never a bad thing, if the choice fits your goals and objectives

In 2011, post-recession, I wrote, “When difficult times are the catalyst for change it is extremely daunting, but leaping into that void can sometimes be the most rewarding thing you’ll ever do.” I still believe the most challenging period of our lives produce the best opportunities for change, but during quarantine take a moment for reflection before making that leap into the void. Don’t abandon your new career, but take the time to write your business plan if you’ve been putting if off, or consider a course correction based on new information. Even bigger questions might arise: what do you really want to do with your life? How will it be meaningful? How will you position your wine business to weather unexpected storms along the way? Balance in all things.

We hear pundits on TV and government officials say, “we will get through this”. It is motivating and comforting. But this is uncharted territory with potentially deadly consequences. Take care, keep distance and stay safe.

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The importance of relationships was true when I first started my US wine importing business twenty-six years ago and through dramatic ebb and flow, trends, recession and evolution, it’s still true. I’m always aware of it, because it’s how I relate to my customers, clients and students, but reminded of it in the past few weeks in a very tangible way.

At the end of 2007, right on the cusp of the Great Recession (although I had no idea at the time), I left my own company, the one I founded in 1992. After twelve years alone, I took on a partner in 2004 who promised to be the investment boost I needed to take my import business to the next level. Three years later, all those hopes were long gone, replaced by chronic stress, and the partner had virtually bankrupted me. Here was a man who was the antithesis of a relationship builder.

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In a perfect storm at that time, Australian wines had lost their allure to the American consumer and the exchange rate was decimating margins. Despite that, one of the wineries that I had brought to the partnership remained an iconic brand with market demand and the producer approached me to be my first client. I was very excited about the fresh start and guaranteed income. What I hadn’t counted on was the resistance (to put it mildly) of my partner. Despite the absence of a non-compete in our agreement, he decided to challenge the contractual language. He also threatened the Australian producer with lawsuits that would tie him up and keep the brand out of the US for years if he became my client.

Unfortunately, the producer was in a very public battle of his own with an investor in his company in Australia and couldn’t afford the time or money to fight lawsuits in America or stay out of a lucrative export market. So I went out on my own with no money, no clients and no prospects. The producer ended up losing his wine company to his investor anyway and the new owner discharged my ex-partner as their importer.

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My years between 2007 and 2018 involved immense challenges and reinvention, but I never blamed the producer, nor tried to hold him to our original oral agreement. He had too much on the line with his own situation. Along with relationships, I’m also a big believer in not burning your bridges (with the exception of my ex-partner who was a bridge I never wanted to cross again). Aside from just letting it go and moving on, consider that you never know when you’ll encounter that person in another role in a different business or in a position to provide a character reference when you need it. As with every other industry, the wine world is a small one. I’m still a licensed wine importer, but eventually I forged a different and very satisfying path as a consultant, writer and educator.

Then out of the blue, this same producer approached me early this year, over ten years later, to ask if I was interested in importing his new, smaller brand. He remained very much in demand for his talent for sourcing the best grapes and his consummate skill as a winemaker and now, with his son as his partner, he was ready for a second act. But this time his approach would be much different. After the loss of his first company, many had abandoned him or engaged in gleeful schadenfreude and he was well aware of it. The priority for him now was to align himself with familiar people he could trust and manage his company’s growth within sustainable limits. A far cry from the explosive expansion of the previous brand.

My enthusiasm for an association with him has not diminished over the years. If anything, it is a more satisfying outcome after such a prolonged delay and I don’t take it for granted, as I might once have done. We also both feel forged in fire and can relate to what it has taken for each of us to get us here.

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Life is not a series of positive experiences, but this one definitely reaffirms my belief in the enduring value of relationships. I hope it resonates with anyone who doubts this in an increasingly competitive and sometimes cutthroat wine business environment. Massive distributor takeovers and consolidations and giant retail liquor chains have reduced access to the personal exchange, but that doesn’t mean you can’t find it or be consistent in your own approach. The greater the number of vendors knocking on any door, large or small, the more alternatives they have. My belief is that given a choice they’ll choose the alcohol brand or vendor they can more easily relate to and rely on.

 

 

 

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Once again, these are real questions asked by real clients, quoted verbatim. Therefore, I believe they will resonate with most first-time importers or anyone thinking about entering the wine business at the wholesale level.

What would be the best order of the steps to get started? For example, do we start exploring potential distributors before we make our first trip to explore potential suppliers?

Whoa, definitely do not start looking for distributors at this stage. There is nothing yet for your customer to buy, you don’t know what you’ll have to sell, and most importantly, there is only one chance to make a first impression. Distributors are not waiting for new products and competition for space is very stiff. Consolidation has decreased the number of available options and many portfolios are already packed. That doesn’t mean there aren’t opportunities. Increasingly, post-recession, there is more demand for interesting, new products from a growing consumer market. However, any alcoholic beverage being presented has to come with a convincing pitch and a compelling reason to even warrant a call back or email response. It doesn’t have to be in the country yet to attract a potential distributor, but it definitely has to be sourced and ready to go. Additionally, it has to align with the right fit in terms of price point, region, style and timing.

So, where do you start? If you are definitely committed to importing you probably already have a region in mind, if not a specific vineyard or wines. But whether you do or not, you can still go ahead with your importing license:

The Federal Basic Permit. Before that, there are these steps:

Establish your business entity – LLC, Corporation, S Corp, Partnership or Sole Proprietorship. There is no one way to do this part and no right or wrong entity. Of course, if you have partners you can’t be a sole proprietor, but other than that the choice is up to you. You may decide that a gaggle of shareholders would warrant a corporation or a partner feels more comfortable with an LLC. These are personal decisions. But don’t just form an LLC because you think you should, or a corporation because it sounds more professional.

Commit to your business address – the address is tied to the Permit.

File for an EIN with irs.gov – very easy, free application with an instantaneous result.

Obtain a LOI (letter of Intent) from a foreign winery – this sounds more difficult than it actually is. It does not have to be a winery with which you are engaged in discussions or to whom you have committed to importing. It just has to state a simple “intent”.  The easiest way is to obtain one from a winery you’ve visited, explaining the circumstances without making a commitment. If you don’t have any connections through direct relationships, see if you know of anyone in the field who can help obtain one, or even contact a trade organization representing the country in which you are interested to see if they can help.

These are all necessary before you can even begin the application, or information to give to your consultant if one is obtaining the Permit on your behalf.

Next step, often concurrent with the Federal Basic Permit is:

Obtain a state license in your business location state. In most states, you will have to have the Basic Permit issued first, but state licenses usually take much longer so it saves time to get started at the same time. Regardless of whether you choose to distribute in your home state or not, you will be required to have some sort of license issued by the respective state.

Select a warehouse – This is an important consideration for ocean and land logistics, budget and convenience. But be well-informed about why your choices matter.

Selection of freight forwarder, customs broker and most importantly, wines, beers and/or spirits are all important, of course, but the order is going to depend on your own circumstances.

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From your experience are there any regions that are exceptionally difficult to import from and should be avoided?

I don’t think “difficult” in this context necessarily applies in an era when wines from even previously unknown and inaccessible regions are finding their way into the world market. The answer is more in the realm of whether the style will appeal to the U.S. consumer at an affordable or competitive price, and whether you can work with the suppliers and establish a relationship that is mutually productive and profitable. Some countries and/or regions are more difficult by virtue of their reluctance to comply with stringent U.S. regulations or can be trusted to supply the wines that were selected. Although I never recommend approaching any potential business relationship with mistrust or cynicism, it is advisable to cover contingencies in discussions and have an agreement to avoid misunderstandings.

Conversely…

Are there any specific regions that are really trending that you would recommend focusing on?

For the most part, this changes all the time and it would be very helpful to talk to retail shops, read industry publications and Google trends online to see what stands out and appeals to you. You can follow a trend, such as prosecco, Provençal rosé or organic, infused vodka, e.g., but determine first if this is a waning or saturated trend or if you can source the right product to compete. Whether you’re on the leading or trailing edge of a trend doesn’t really matter; just make sure you are well-placed to take advantage of it and that this fits your own business model.

Is there a suggested number of regions to start with?

As with most issues, this isn’t a one size fits all. You can be a specialist in one region or offer a different brand from each of a variety of regions. Other than logistics (explained in more detail two questions down) the most important consideration is to import what you believe in – whether this is an inexpensive, everyday wine or a pricey, single vineyard gem. If you don’t feel proud to represent what you are taking the time to import, through all the steps it requires to get here, then it will diminish your enjoyment of your business and ultimately your productivity will suffer. I will never forget that after even after nearly two decades as an importer of my own portfolio, the two comments I heard most often were, “I can’t believe how passionate you still are about your wines” and “I’ve rarely tasted through a lineup where every wine was good.” Now, that doesn’t mean they selected them all, nor will they from you, but it feels good to get that feedback.

What should I consider in terms of selection?

In reality, I think this question applies mostly to wine. Malt beverages can be any number and style, as long as they adhere to the general principle of good quality for the price and appeal to the U.S. consumer. There are so many interesting beers now the question really should be: where do you stop? For distilled spirits, the answer lies with the product itself. If it is a new discovery from a country or basis (agave, fruit, etc.) or innovative method of distillation perhaps you only need one. In the case of wine, I believe this also somewhat applies to your choice of region or style but, more often for unknown brands from a new importer, the emphasis should be on offering diversity in styles and price points. Not everything should be highly allocated and expensive, no matter how great the accolades. If you have some mid-point wines and a “bread and butter” range $12-$15 (forget the

My only suggestion on this is not to start with too few wines, even if it’s from one region. It’s not uncommon for a client to have fallen in love with a particular vineyard which produces three or four wines and wanting to establish an import portfolio with just those wines. If that is the case, you’ll run out of new wines to show very quickly, unless what you’ve sourced has a built-in demand that drives sales and volume.

There is no magic number. If budget is tight, you can begin with a small selection but again your business model and sales goals will dictate a reasonable and profitable solution.

I want to start by importing wines from Spain, Argentina and Chile. Does that seem like a reasonable approach?

This particular client speaks Spanish fluently and thought it would be an advantage in her relationships with suppliers. As indeed it is, both from a communication and trust perspective. But logistically, this could be a nightmare. Unless you’re going to bring in a full container from each of these locations, it will require sharing space with unrelated products in a freight forwarder’s container, a more expensive and time-consuming process. A better approach is to consolidate different regions from the same country, thereby offering diversity and selection in your own FCL (full container load). Importing from different countries is achievable, but unless the initial budget, business plan and projections support this approach it’s better to make this Phase Two or Three.

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What are your views on seasonality? I am launching my products September/October. Will distributors take on new products during the holiday season?

The short answer is no. You cannot have new products land and start approaching distributors in OND (October/November/December) when they are full to the gills with inventory and scrambling to make sales that will provide pull-through during the all-important holiday season.

But that doesn’t mean you can’t bring in wines in September or October in anticipation of distributor launches, as long as you have done a tremendous amount of groundwork and pre-selling before the container arrives. This means doing the following well ahead of container arrival:

Having the wineries/breweries/distilleries send samples of the products to you that you will be importing. Not a ‘representative’ sampling of the supplier’s selection, the exact products that will be available on US shelves. They don’t have to have COLAs (certificate of label approval) at that point, but will need a COLA waiver.
Set pricing.
Contact and generate interest from a reasonable number of distributors who will then taste samples and place pre-orders.
Establish allocations from the supplier that can be communicated to distributor.
Confirm availability of product from supplier at the exact time you need it and schedule ship with freight forwarder when appropriate, to arrive when you promised distributor.

These are just a few of the common questions that address the early stages of the alcohol import business.  I’ll continue with some of the other launch issues in Part Three.

 

 

Filed under: FAQ, first steps, new importer, wine selection

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These are actual questions that I am asked many times, sometimes in different forms but always with a similar perspective. Many of the answers are not cut-and-dried unfortunately. But they might stimulate your own thought process to find the answer that best suits you. The question I am most often asked is this first one:

How much money do I need to start my import business?

How much money someone “needs” is purely a function of individual goals and budget. Let’s start with an illustration, addressing just the initial wine purchase:

If you select inexpensive wines at $35 a case and you bring in a container of 500 cases this will run about $17,500, before freight, duty, insurance.
If you choose to source more costly wines, e.g. at $300 a case, you don’t have to start with a container, which would be $150,000 for even 500 cases. You could start with just two pallets (112 cases) and this will run $33,600.

The second example is almost double the first expense, but still within a reasonable budget for a beginning enterprise. With startup expenses, freight, warehouse and taxes, the initial budget might run around $30,000 for the first example and around $50,000 for the second.

But there are obviously other factors:

Do you have a market for this wine? If not, the more expensive wine will usually take longer to sell just based on price, which will result in slower turnover and higher warehousing costs.

The less expensive wine, assuming it is good quality and preferably “over-delivering”, has the opportunity for glass pours in restaurants and higher volume sales in retail stores and to distributors.

Does the expensive wine attract great press and high ratings? These aren’t quite the arbiter of sales they once were, but still important enhancers.

Is the expensive wine in high demand as a category or style, e.g. Bordeaux or Barolo? Pre-selling could be an advantage in this case, essentially creating a sales base for the wine before it arrives.

Another factor is profit. In its raw form without sample usage and other expenses, the profit on the $35 case would be around $16.45 per case or a total of $8,225 on 500 cases.

The profit on the second wine, using the same basis, would be around $109.20 or $12,230 on 112 cases.

Keep in mind that 500 cases will necessitate higher warehouse costs and taxes, which are predicated on number of cases stored, not value of the wine. But a full container (FCL) will be less expensive per case than a less-than-container-load (LCL) of the 112 cases.

There is the further matter of terms. Do you have to pay the winery COD or are extended terms available – 30, 60, 90 days?

This may start to look like a confusing muddle but it’s really to demonstrate that the idea of foundational budget is an arbitrary and subjective matter. You must begin with some money, but you can expand or contract your business according to ability and desire.

Is it reasonable to keep our full-time jobs while we develop our business?

This all depends on how quickly you want to ramp up your sales and how big you want your company to be. If you can only start an import wine business by continuing to bring in an income from full-time jobs, this can certainly be done but will limit the time necessary to find distribution and make sales and naturally growth will be slower. Eventually, you will not be able to run an import company while holding down full-time jobs, unless you have very efficient office staff, because some actions need to be taken in immediate response to the situation such as purchase orders, troubleshooting, inventory management, compliance reporting and so on.

Should we become a distributor when we start our import business or wait until the importing is established?

To start with I want to emphasize something important: you can only become a distributor in the state in which you reside/are licensed as an importer. So with that premise, here are the issues:

Importing is a long game with very little immediate gratification but rewards a much greater return with patience and perseverance.

Distribution is an immediate gratification (i.e. short term income) with smaller sales and greater effort vs. return.

To expand on that, as an importer your objective is to find and appoint distributors who will purchase your wines for distribution in their state or region. This can be a very time-consuming process when competition is stiff, distributor consolidation has reduced the number of available options and finding the right partner can be challenging. Added to that, decision-making by the potential distributor can take months. But once made, orders can start at 14-112 cases, as a rule, and continue as long as wine is in demand, support is provided by you and sales staff get behind it.

Distribution in your home state delivers immediate income for your short term financial plan, gives you the boost you might need to confirm your wine’s desirability, establishes relationships in your community and, by selling directly to retail and restaurants, gets your sales one step closer to the consumer. It may take a long time to sell even one case, as you ‘prove’ yourself to an account or wait until a slot becomes available on the wine list but there are many accounts to visit and, with diligence, continual sales can be made.

There are intangible factors as well. Do you enjoy that one-on-one interaction with an account and enjoy the first hand sales experience? Is it especially meaningful to see your wine stacked in a store or on a wine list? Is taking time away from sourcing distributors by making your own sales a worthwhile tradeoff?

Research the cost of distribution in your home state to see whether that is something you can afford. In California, e.g., the annual fee is around $400 for wine, beer and spirits. In New York a three year wine license is $3,760. If you add a spirits license to that it is an additional $27,280. And an annual beer license is $1,460.

What is a reasonable sales forecast for the first year?

Sometimes this question is asked in conjunction with “to make a profit”, but the underlying premise is often the same. When can I start to see light at the end of the tunnel?

As frustrating as it may be to read this, the answer is very similar to the first question and is very dependent on the model you choose. For this reason I think it is important to write a mission statement for yourself, where the purpose is to explore your objectives in the business you want to establish. Questions to ask yourself would include:

How much time do I intend to spend on the business?
How quickly can I achieve the initial stages – sourcing, licensing, COLAs, labeling, shipping, selling, etc.?
How much money am I investing?
Where is the money being spent?
Do I have a partner, employee or broker to assist in this effort?
What have I done/am doing to ensure a successful launch and support ongoing sales?
Are the wines I chose enabling me to get there?

Even if your background or skill is not especially geared towards accounting, a simple spreadsheet will be a very useful tool in laying out a visual map of wines purchased, costs incurred and path to profit.

If we focus on the southern US and our imports arrive in New Jersey, where should I warehouse?   

If I live in California and bring in European wines, should I warehouse on the east or west coast?

These are two specific questions asked by different clients, but variations on the warehouse question are common. It is a puzzling issue for first time importers, mostly because the answer does not appear logical and is largely dependent on understanding how the wine industry works.

In the first instance, I would say if you live on the east coast, then New Jersey is a logical place to warehouse, regardless of where you will seek distribution. Licensed, bonded warehouses are available in NJ for wholesale storage of wines that arrive at port from foreign sources and trucked from local wine regions. Distributors from any state are accustomed to picking up from them.

Living/working in CA is a somewhat different matter. European routes are closest to the east coast, so this is less expensive and takes less time in transit, but is your distribution going to be all west coast? Are you seeking distributors anywhere and everywhere? Unless you live and work in Ohio, e.g. and plan on only distributing with Ohio, either east or west coast are, to me, the only viable options.

In any given circumstance, where you warehouse is not necessarily where you personally have most access to the wine. It is easy for samples to ship to you or potential wholesale customers via commercial carriers such as UPS or FedEx Ground. It is far more important to consider either coast as access for your distributors. A common mistake (I made it too) in the early days of your career is to warehouse where you can select, visit and pick up wine. But my first company was established in Atlanta, GA and not only was this an expensive warehousing option it was also completely out of the way for any distributor except the one in Atlanta. Distributors send trucks to pick up various suppliers’ products in warehouses at the same time to make an economical truck load. If they are only picking up 14 cases from you, because no one else warehouses at the same location, this will either deter them from purchasing from you at all or make the wine more expensive when they mark it up. Neither of these is a good starting point for you.

I’ll save other FAQs for another post. If you need clarification on any of these concepts, I’ll be happy to answer short questions. Otherwise, I am available for consulting options.

Filed under: FAQ, new importer

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The 3-Tier system has been explained at length in my books and online by others so I won’t spend more time here with the same thing. But it remains a hard concept to grasp, especially when you’re new to the US alcohol business and perhaps think there are exceptions, such as when an importer is selling to chains.

Take this example. The importer has contacted a national buyer for Sprouts, Lidl, Whole Foods or one of any number of large chains. Even though an importer is headquartered in Ohio, e.g., and the chain is a retail operation with the buying office in Atlanta, your presentation can be made to the chain buyer, who can then decide to place the wines in stores across 40 states. However, most importantly, the importer is not directly selling to the buyer, because the importer is not allowed to break the 3-Tier barrier of (1st tier) importer selling directly to (3rd tier) retailer.

When a chain store has locations in different states, you would think that an exception could be made to allow a purchase to be generated and distributed from a central location. It sounds reasonable, but the 3-Tier system has remained firmly in place since prohibition through vigorous lobbying efforts by influential state wholesalers, effectively preventing any crossover from wholesale to retail. Therefore, as the importer you have the option of:

Using your existing distribution network to distribute to the chain’s stores, if you have distributors in each state in which the stores are located and where the buyer wishes to place your product
Finding and appointing a new distributor in each state, which may be possible if the potential sales are large enough and therefore appealing to the new distributor
Using the chain’s own distributor network relationship to satisfy the sales and 3-tier requirements.

The last option is the most common. The retail chain has presumably done this numerous times and already worked out the payment and logistical details with the distributors to make it a smooth order and delivery process. Plus, the chain is definitely realizing a pricing advantage from this relationship by negotiating a vastly reduced markup by the distributor. The retail chain may mark up the wines to be on a par with other retailers around the country, which allows them a greater profit margin. Or they may sell the wines at a considerable discount and still make a reasonable profit. Discuss the chain’s objective with them beforehand, so you can decide if this dovetails with your national pricing strategy.

To recap and expand on this concept:

All sales from an importer must be made individually to a licensed distributor in each state
No sales shipments can be made from an importer in CA direct to a retailer in any other state
If a chain is involved with stores in multiple states, buying may be a centralized decision, but each one orders product independently
Product is picked up by a state distributor’s trucker at the importer’s warehouse and taken to the wholesaler’s warehouse in their respective states
Some states have a workaround that is called a “bump the dock” state; in other words, the shipment can arrive at the dock of the wholesaler and not actually be unloaded, but receive paperwork showing that it arrived at the wholesaler location before going on to the retailer
Product must be delivered to retailer(s) of each individual state by the wholesaler
Depending upon the state laws (and they all vary) a retailer may have more than one store and the wine is delivered to a central store or depot for delivery to other stores from a centralized location. Again, for emphasis, this applies only to that one state and not multiple state locations.

I have been asked often which price list an importer should use when quoting to a retail chain. That’s a very fair question. After all, the sale is actually to the distributor which will, by the way, be the one to supply you with a purchase order and they’ll be the ones paying for the wine. But up to that point the importer may not have even met the distributor. All proposals and wine selection are conducted with the retailer. Please do not lose sight of the 3-tier system. Make no mistake that this sale is made from importer to appointed, approved, licensed state wholesaler.

As for all the other factors that may come into play in this transaction such as discounts, volume, promotions, market assistance, or market visits to educate sales staff, ongoing purchases, number of states involved and so on, this is going to depend on the chain. And if you get to the point where a chain is interested, they will advise you on their process and expectations. It is then up to you as to whether this is doable.

Filed under: Wine law regulations

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For my entire importing career my focus was on wine, including sparkling and fortified which have some unique characteristics when it comes to labeling and licensing. But these are basically minor variations on standard wine principles. When I started submitted malt beverage labels to TTB for approval for clients, it opened up a whole new world of US labeling requirements.

Let’s face it, I’m a geek when it comes to this stuff. I really do love knowledge, even when it involves Alcohol Tobacco Tax and Trade Bureau regulations for US compliant labels!  I had no idea that almost all the rules were different and in my nascent malt beverage label submission journey I was on a first name basis with the TTB agents I spoke to on a regular basis.

Here are some of the requirements you won’t find on wine labels:

All net contents must be in US measurements, e.g. “1 pint 9.4 fluid oz”
Non-alcoholic beers do not require label approval but they do require formula approval.
Alcoholic beer requires label approval no matter what ABV (it is not required for wine below 7% ABV)

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Ingredients must be listed. Some of them are approved as additives and some are not. There is an entire list of approved ingredients that include items like huckleberries, kale, grains of paradise, galangal root, Padang cassia and elder flowers. There are other ingredients that are considered by the FDA as GRAS (generally regarded as safe) which doesn’t sound terribly reassuring, nor particularly appetizing. I’m not at all sure what they would add to the beer either, other than roughage. This is only a fragment of that esoteric list:

Oak cork
Maidenhair fern
Blessed thistle
Iceland moss
Buckbean leaves
Simaruba bark
Virginia snakeroot
Angola weed

I discovered recently that TTB will not approve, without a detailed formula, items like Malagueta pepper or just “spices”. They will allow pepper, black or white, but required an explanation of “pink pepper” and honey ale is fine but they recently balked at “honey of Sicilian Black Bee”.  It does allow tea, but not kombucha.

Many beer label issues share a commonality with wine, such as the government warning and a defined class of alcohol, e.g. red wine or Shiraz for wine and ale or Belgian-style ale for beer. But the differences define the procedure. With TTB, there is no “close enough”; it is correct or incorrect, approved or rejected.

The craft beer industry has exploded in the past few years and along with it, pushing the envelope on fermentation processes and innovative ingredients, which is great for the consumer but a bit of a minefield for COLAs (Certificate of Label Approval). In my 25 year importing career I’ve never had to submit a formula for a wine. In the past year, I’ve submitted three for beers. TTB is constantly updating their “approved ingredients and processes” lists as the agency sees what has become mainstream, but it is moving too fast. So for now, formulas, detailed explanations and reworking foreign labels to comply are the norm.

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The steampunk labels in this post are some of my favorites. Used by permission of the brand and the artist.

Malt Beverage Brand: Della Granda | Label Artwork: Fabio Garigliano

Filed under: malt beverage

A client began our consulting session with the news that he’d made his first sale. I had not spoken to him in several months, having helped mainly with label approvals and pre-import advice, so I was glad to know he had moved forward and help him further with his new questions.

This client’s company is licensed as both a US importer and a California distributor. He and his partner had decided to start small, as many importers do, and concentrate on their home state, establishing a foundation that could be used to demonstrate to distributors in other states that their portfolio had traction. So far so good.

The wine had just arrived in the U.S. and the sale was five cases to a discerning buyer at a high profile Los Angeles store. Therefore, most importantly for today’s subject, he had made the sale as a California distributor. Secondly, it was to a discerning buyer at a high profile store. Thirdly, the sale was five cases. All of this would indicate the wine was very good and the pricing was excellent.

It sounded like a promising start for a new importer’s unknown brands and as a result of this news, I asked about his pricing structure and what discounts he was giving for volume. He revealed that he had not considered discounts, nor had the retailer asked for a one.  This really surprised me. As a rule of thumb, in California there is a “front line” price for one case and then varying reductions are given at, e.g., three and five cases or five and ten. Further discounts are usually available with even greater volume. Variations on this would generally be the norm in all states. I would have expected the retailer to at least ask about discounts unless the wine price had been expressly indicated as “net” (no discount).

Through further examination of his pricing I discovered that they were only taking one margin. In other words, they had marked up the wine only at the importer level, instead of taking it further to the wholesaler pricing needed to sell to retailers. Their rationale was that they were both importer and wholesaler and okay with the profit at that price. After all, they had made a good sale, hadn’t they? No, this was catastrophic! I had to break the news to him that no wonder the buyer was so happy with the pricing, didn’t question it and bought five cases. The only good news in all of this was actually that the wine must be good quality for the buyer to have made the purchase at all. After all, he wasn’t going to buy bad wine at any price. Unfortunately, with that pricing strategy they would not have a long-term profitability model, or would eke out very limited distribution in their immediate area, and only if they were delivering the wines themselves and continue to make all the sales. They would never be able to:

sell to a distributor in California, should they choose down the road; after all it’s a big state and they can’t cover it all on their own
hire or pay for salespeople or brokers to provide more sales
sell to a distributor in any other state; with the transparency of the internet, any distributor could see that the retail price for the wines made by the importer in California would be much lower than they would have to charge to sustain the business model in their respective states
build their California distributor infrastructure, because there was no room in this limited margin

An importer margin is generally 30-35% and designed to cover marketing, travel to the various markets, samples, incentives, warehousing, licenses, brand registrations, out-of-state brokers (if necessary) and other expenses accruing to an importer selling to and supporting distribution in a few states or nationally.

A wholesaler/distributor margin, when licensed to sell within your home state, is generally 45-50% and must fund warehousing and delivery, state excise taxes, local taxes (if applicable), salespeople or independent brokers, state licenses, lots of samples, discounts on pricing, promotion and in-state travel.

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It is evident that the new importers who take this one margin approach are doing so in a well-intentioned effort to be competitive and with the assumption that they will still have a profitable business without gouging and being greedy. This is commendable but misguided. As an importer, the incentive to distribute within your own state is that sales can often be made faster and more directly to a retail account than to a distributor outside the state. For a new importer that has spent months working through licensing, compliance and logistics, immediate gratification feels very good. But by taking on the responsibility and jeopardy of two different levels of the business, those two margins will allow you to cover all the expenses of two businesses, both built-in and unforeseen. With one margin expected to do double duty there’s no way this will be profitable.  As an importer and distributor:

You are entitled to both margins. You need both margins.

But further, and perhaps most importantly of all for the future of the portfolio, you are preserving a retail price that enables any distributor to buy from you at FOB and sell at Wholesale to their customer, maintaining a retail price within their state that comes close to the retail figure in your state. With only one margin, a retail store in California could be charging $9.99 for a wine that will sell for $15.99 elsewhere. This is untenable and no distributor will carry wines with that disparity.

It’s not the first time that someone has come to me and told me that they were starting out their wholesale business on one margin, but I hope it will be the last. Not all new importers will succeed, mostly through insufficient groundwork or lack of sustained effort. I would hate to see anyone, my client or not, to fail on the basis of something so rudimentary and fixable.

Filed under: margins

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Using long-range planning to price your wines is paramount to your business model, no matter what the political climate, and yet I have found that new importers often neglect this aspect. Most are very aware of getting the importer markup and margins right in the beginning, of course, but neglect to think long-term. It’s understandable. Those early days of logistics, compliance and business setup can be overwhelming.

Currently, the US Dollar has been getting weaker in the past few months, notably against the AUD and the Euro, after several years of favorable rates for imports into the U.S. This is what prompts me to address the subject of margins. In the U.S. there is a new administration and a president who says he wants a weak dollar to help US exports. However, a weak USD is exactly the opposite of what an importer wants. In addition to the state of affairs in the U.S., globally, Australia has a strong economy and instability within certain European Union member countries has created some fluctuation in the Euro. A looming Brexit has also taken its toll.

During the recession, imports of many wines slowed, especially those in the mid to upper tier, as disposable income became less available and importing of all wines became more expensive and therefore less viable. A significant factor was the very weak USD. During that time, the AUD was on a par with the USD, i.e. $1 AUD to $1 USD, and the Euro was in the 1.4-1.6 range. Are we heading into that realm again? I have no idea, but we appear to be on an upward trajectory and this could spell trouble for your imports if you haven’t planned accordingly. By that I mean built a cushion into your FX rate so that if you’re currently buying wines at 4 Euros a bottle, e.g., and the FX rate is 1.2, convert the wine to USD using a slightly higher ratio, such as 1.3 or 1.35 so that if rates go into that territory you’ll still have a reasonable markup and profit margin. In other words:

Purchase at 4 Euros = $4.80 at 1.2

This FX rate prices the wine on the shelf at approximately $16.99*

Purchase at 4 Euros = $5.20 at 1.3

This FX rate prices the wine on the shelf at approximately $18.99*

You have to decide whether your particular wine can sustain this type of increase in retail on the shelf and what the “sweet spot” price should be. Does it take it from a different category, for instance from < $10 to mid-tier pricing? Is it in line for that style, region, and quality and against your competition? Regardless of the FX rates and your normal markup, this is always a juggling act in the marketplace. The bottom line is that while it is optimal to offer wines that “over-deliver”, especially against such a crowded field, you can’t afford not to make a profit based on an unsustainable margin.

It is also important to note, that while you can and often should offer volume discounts and incentive programming to your distributor, once you set your wines at a standard lower price point it is much harder to increase them later, except as a natural cost-of-living adjustment or in instances where it is warranted and with notice. If you are able to build in a cushion, use that for early marketing. Later, if the foreign currency goes up you’ll still make a profit and if it stays the same or goes down, the money can again be used for promotion.

Can your supplier support a lower price to you in the event of an increasingly squeezed margin? This might be built into your initial contract or agreement with them. Before I transitioned into full-time consulting, teaching and writing and away from importing my own wines, we were deep into the worst of the recession and one of my wineries gave me a discount on each invoice of an additional 5% to offset the exchange rate as long as it maintained above a certain level. This was always noted on the purchase order.

The point is that nothing can eat away at margins and erode profits for your imported wine and spell disaster for your business than a strengthening foreign currency or a weakening U.S. dollar if you don’t factor this in from the beginning and keep your eye on the ball.

 

*retail around the country will differ for a variety of reasons, none of which are in your control, but this is used as an illustration of realistic examples of differences in FX rate.

Filed under: Uncategorized

Tied-House rules are the foundation of the U.S. wine industry regulations, at both federal and state level. They permeate every activity that involves the commercial making, importing, distribution, sale and consumption of wine. As antiquated as they are, the federal and state licensing bodies still oversee their adherence as rigidly as a feudal lord once managed his fiefdom.

Despite that, Tied-House violations that relate to “providing something of benefit”, from a wholesaler to a retailer, seem to occur frequently, judging by the number of issues I observe or have brought to my attention by questioning clients. It’s not surprising, really. With the proliferation of social media in general, and wineries and importers who are using social media to promote their wines, in particular, this very public arena is fraught with risk. Additionally, the law isn’t all that clear until you run afoul of it. And then it’s often too late.

Although this is a confusing subject for most, I thought the media attention given last year to a rash of offenses relating to a wine tasting event in Sacramento, CA, sufficiently addressed it. News outlets reported on it, as did several blogs. But I’m still seeing clear Tied-House violations in tweets, Facebook posts and, at least in theory, in the questions from clients. So, perhaps another explanation won’t go amiss.

Before we get into that, let’s run through a brief refresher of the Tied-House definition and the restrictions that apply to the U.S. wine industry. I think it will help relate it to ways in which it can be breached.

Tied-House originally referred historically to England’s public houses – pubs, as they’re more commonly known – and their tied relationships with breweries, requiring them to buy a significant percentage of their beer from a particular brewery. This could be because the brewery owned the pub, rented the business to the pub or had invested in some way that gave them an advantage in this relationship – the crux of this problem. In some cases, this resulted in a disproportionate number of pubs in an area restricting their beer options to the consumer and became an opportunity to control pricing. In other words, the breweries with the greatest financial clout could control what the customer drank and at what price.

In the U.S. the familiar practice in England was transferred to the new world as they established saloons, and continued until Prohibition (1920-1933). In Europe, tied-house relationships weren’t a good idea, but tradition and convention served to keep the peace. In the new world, it was a really bad idea. It was virtually an unregulated free-for-all, with rampant violence and corruption.  Upon Prohibition’s repeal, when alcohol consumption was legal again, the U.S. government decided to learn from past mistakes and enact laws that prohibited “tied houses” and prevent the vertical integration of wholesale and retail business.

The result of all this is that wholesale entities – wineries, distributors, importers – cannot own retail entities – restaurants, bars or retail alcohol shops. There are loopholes in California these days, particularly to allow for online sales, but essentially this is the law.

Tied-House laws exist in almost every state in some form or another. In the case of California, where I reside and the recent cases occurred, the California Alcoholic Beverage Control, the regulating and licensing body, told me it has limited resources and actually don’t actively seek out violators. They don’t have to; according to the CA ABC, a large distributor or two is doing the job for them by calling their attention to infractions from their competitors. Whatever the case, it is certainly considered a serious offence by the CA ABC and dealt with accordingly through either fines, probation, suspension or revocation of license.

Instead of becoming mired in quotes from statutes and codes, which are available at state alcohol regulation websites, I’d rather distill the essentials into something a lot simpler. Here’s what to keep in mind:

The phrase “nothing of value” can be given to a retailer from a wholesaler is the bedrock of Tied-House rules.
This means no mention of a retailer by a wholesaler in a tweet of a retail event promoted by the event itself or another party. An example, “come and try our wines at XXX wine bar on May 16th”.
No photo of an event on Facebook, or on a blog or a website, either before or after the event, if the name of the place is mentioned or any signage is visible. Even if nothing is said, if the retail establishment can be identified in your photo it is a violation.
No mention of any retail account in a tweet (e.g.) to indicate that you’ve sold to the account, plan on selling to them, or that the wines can be found at this account now or in the future. For example, you cannot say, “We’re proud to have our wines in XXX store” or “If you’ve been having trouble finding our wines, they will soon be available at XXX store”.
No mention of XXX store loving the wine. For example, “Joe, at XXX store, said this is the best NZ Sauvignon Blanc he’s tasted all year” or “Cheryl, at XXX wine bar, loves the new vintage of our Syrah”.
No mention of a tasting you’ve done, or a photo of a tasting, if it’s at a retail location. The retailer may not even be carrying your wine, but if the event is a retail location, which is now tweeted or posted to potential followers, it is considered providing something of value to the retailer, thereby establishing a de facto favorable relationship between wholesaler and retailer.
No retweet by the wholesaler of a tweet by another party to promote an event at which the wholesaler’s wines will be poured or sold.

To round this out, many states do allow something “of value” to be given to the retailer in the form of product displays, samples and signage, but TTB (Alcohol Tobacco Tax Bureau) defines these as items that are specifically for the promotion of alcohol that is bought by the store. It is not intended as an inducement to favor placement for the wholesaler and cannot be greater than $300 in value.

Today, promotion of wine is ubiquitous on the internet and every wholesaler must be familiar with Tied-House regulations to understand how they can do so legally. If you are engaged in social media for your winery, wholesale distribution or importing business, before you post that photo, tweet that tweet or comment on your website, consider whether you are in fact promoting a retailer in the process, even seemingly innocuously and tangentially.

Filed under: Wine law regulations