NCSLA 2019 Louisville, Part II: Understanding 3rd party arrangements

Do I really Understand (How to Get Product to Consumers) APs, Custom Production, Fulfillment Houses, and Brand Building?

Moderator: Carrie Bonnington

Panelists: Laine Adderley; Paul Gatza; and Tom Kirby.

A great panel moderated by Carrie Bonnington who always does an amazing job moderating a panel.

This panel had an interesting perspective, it dealt with issues that a vast number of suppliers are dealing with, and that is we can’t afford high capital outlays that would allow us to get product to customers. Hence, we need help with making the product and getting it into the customer’s hands.

The big question is how does a supplier get their product into customer’s hands without huge capital outlays? And if they can utilize an alternative business model, does it comply with the law?

 

Production Side

First for the production side, how do you get your beer/wine manufactured, when you don’t have the capital to do it?

There are different options available. One is to enter into a relationship with an alternating proprietorship (AP) and another is to enter into a relationship with a contract brewer. For wine you can enter into an AP or a custom crush relationship.

AP- it is a sharing facility between various producer. This is different than a contract brewing arrangement where you pay someone to make the beer, register the product and pay the taxes and then the company can go sell and market the beer on their own. Contract brewing has shrunk significantly in the last twenty year. Companies such as Boston Beer that previously contract brewed, are now brewing in their own facility.

It is important to know the model in which someone is making the beer for you. Because depending on the model, you will face different legal issues.

For example, in Virginia an AP is not legal while contract brewing is legal.

In the wine world in California a person can enter into an AP. However, they must meet all legal and licensing requirements, and the winery should be licensed to the AP facility.

As Laine Adderley stated, even though production is different than the tradition model, it doesn’t change the obligation of license holder to apply for a license.

In the wine world there are two popular models, the AP and the custom crush model.

Under the custom crush model it’s an arrangement involving an agreement or formal contract under which a customer pays a wine producer to produce wine to order, after which the customer markets the wine. Only the wine producer must register as a bonded winery and obtain a Federal basic permit. A customer who intends to sell wine to other dealers must obtain a license.

The key to custom crush arrangements and APs is to get your product manufactured at a lower cost. The custom crush facility is a manufacturing facility and there is no retail tasting room for the product. So although it affords a manufacturing facility at lower cost, it generally does not provide a retail component.

 

Virtual winery vs online only wine retailer

California has allowed developments in their licensing classes, and it remains to be seen whether these developments spread to other states.

The virtual wineries license holds a beer and wine wholesaler license combined with an off-premise license for the sale of wine and beer. These are considered retailers in other states with DTC shipping statutes.

With all these changes in license classifications, where does this retailer fit in the traditional model?

Paul indicated that beer doesn’t really have a DTC model. Maybe some beer of the month clubs, some of it is consolidating. DTC doesn’t make sense for beer, because the vast majority of beer is inexpensive compared to its weight, it doesn’t make sense to ship.

Virginia allows on-line retailers to operate in the state. It has an internet retail license for both beer & wine. The state is thinking about combining these into one license.

 

Fullfilment warehouses

What is it?

There is much confusion about fulfillment houses and exactly what they are.

A fulfillment house stores, packs, and ships wine on behalf of a licensed winery.

Many people believe that because fulfillment houses ship that they are selling the product. That is simply not true, the fulfillment house’s customer is the licensee selling the product and not the consumer. Because the consumer will often times receive an email from the fulfillment house about the order being shipped, this has led many to believe that sales are coming from the fulfillment house.

The wine is never owned by the fulfillment house and even when the product is at a fulfillment house, in no way does it get the winery off the hook for violating the law. The winery must be in compliance with the law at all times.

Fulfillment houses like APs, contract brewing, and custom crush facilities, provide a way to get your product to customers in the most cost-efficient way. By utilizing a fulfillment house instead of direct shipping for each transaction, a small winery saves time and cost and can get their product to consumers all around the country. Fulfillment houses are utilized because a lot of small wineries don’t have the relationship with shipping companies and resources to create shipping system.

Some states misunderstand that a fulfillment house is often times not a licensed entity. It can not make sales or collect tax, at the end of the day, the winery is responsible to the consumer.

Fulfillment really doesn’t happen in the beer industry. The beer is delivered through satellite location or other alternative locations. Shipping beer is just not cost efficient.

As for licensing requirements, most states don’t have licensing requirements for fulfillment houses. A few have notice requirements which require that fulfillment houses be part of the DTC permit and some have licensing procedures for fulfillment houses that prepare DTC shipments.

Further, there may be some licensing requirements related warehousing product. In Illinois a fulfillment house will need to register and obtain a warehouseman’s certificate with the Illinois Department of Revenue.

 

Tennessee Wine effect on fulfillment houses

With the Tennessee Wine decision, the focus on fulfillment houses will become greater. Fulfillment houses are limited to winery DTC shipping, but now we could see an opening up of retail DTC shipping. Fulfillment houses will become larger and become a bigger sphere of influence in the liquor world.

 

Final thoughts

Many companies want to succeed in the alcohol world but sometimes lack the capital and infrastructure to do so. They can alleviate this problem by entering into certain business relationships that allow them to produce product with very low capital.

But the relationship you enter into could impact whether you face additional legal hurdles.

There are great alternatives out there for small producers, but tread careful because the wrong legal decision could have you spinning your wheels!

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