Spirits wholesalers are being taken to the woodshed by the beer wholesalers. The recent news that RNDC lost key accounts in California was shocking and influenced RNDC’s decision to leave the largest consumer market in the country. Significantly, Reyes Beverage Group (Reyes), the largest beer wholesaler benefited by landing many of these key accounts formerly with RNDC. Reyes is the largest beer distributor in the United States.

Reyes entering the spirits market has had an immediate impact on the marketplace. But what also should send chills down the spine of the spirits distributors is if a parade of beer wholesalers follow the same playbook of Reyes.

Spirits behind the 8 ball

Unlike many other industries liquor does not enjoy a free market, but operates under archaic and protectionist laws that often times operate to serve entrenched interest.

In many states laws are written to benefit the wholesalers, and are especially written favorably for beer wholesalers. The beer wholesalers enjoy benefits that many spirits wholesalers don’t enjoy, which include being shielded from competition and enhanced market access.

To illustrate, in many states beer wholesalers enjoy franchise protection. Under these laws, only one wholesaler can serve a specific territory. So, if you have the distribution contract for a city like Chicago or New York, you are basically printing money. With the money comes influence to build a strong political apparatus and the results are showing.

The big fight between the liquor and beer wholesalers has played out over ready-to-drink (RTD) cocktails in state legislatures. RTDs which are officially considered a spirit by the TTB, were mandated to be solely distributed by spirits wholesalers in many states. In states like Indiana and Michigan laws were changed that allowed beer wholesalers to distribute RTDs.

This became a crucial development as RTDs are the hottest growing segment of the liquor industry, while the beer industry is facing headwinds and declining sales. The beer wholesalers through political might grabbed market share at the expense of the liquor wholesalers. Try as they might, the liquor wholesalers often times cannot stop the momentum of beer wholesalers from invading their fastest growing space.

What also hurts spirits wholesalers is market access is more restrictive than for beer wholesalers and hurts their ability to enhance revenue. There are numerous control states where the state is the distributor of spirits and spirits wholesalers do not have market access. Beer wholesalers do not face these restrictions to market access.

What is the future?

Beer distributors will hold the power and Reyes will be on the move further. The system is geared towards the beer wholesalers gaining more resources than the spirits wholesalers. The impact is becoming serious in the playing field.

Beer distributors are going for the liquor wholesalers new holy grail, RTDs, and attacking their best vehicle for economic growth. Beer invading the fastest growing segment for the spirits wholesaler and taking their market share will lead to economic loss for spirits distributors and the presence of less spirits wholesalers in the marketplace.

The second largest spirits wholesaler in the country, RNDC, leaving California, the largest consumer marketplace, was a surprise to many. But if you read the tea leaves this was a long time coming. Beer has an inherent built in power advantage over spirits and will continue to play the strong hand that the regulatory system affords it!

Some may say this is unfair, but that is the system. When you pick winners and losers in the marketplace instead of an open market there are consequences. Artificial benefits are created where the favored law and not economics runs the marketplace. Beer wholesalers privileges have allowed them to have negotiating leverage over their suppliers and even has allowed them to overrun the spirits wholesaler tier.

Time will tell the impact of Reyes moves, but don’t count on them stopping and some may execute the same plan, why not the regulatory framework is on their side.