By Cheryl Durzy, Founder & CEO, LibDib -At LibDib, we often get questions on how a three-tier distribution system differs from the fourth-tier in our industry. The naming convention is similar, which leads many people to assume the models are also similar, but that is not the case.
LibDib is a part of the three-tier system, which has obvious and immediate benefits. We use our proprietary, custom technology to connect buyers and sellers to do business compliantly and efficiently. One case at a time or one pallet at a time (yes we do both!).
Wine and spirits suppliers have options for new routes to market through licensed distributors. They can sell into accounts and own their relationships (that’s exactly how the LibDib model works). They’ve been doing it with LibDib and they’re being successful. And when the brand is ready to go big time, they can graduate to large, national alcohol distribution companies such as RNDC or Young’s Market Company if they are ready to.
One of my earliest messages and mantras: There is no better salesperson than the Maker themselves. LibDib Makers are out there making connections, developing relationships and selling wine and spirits directly into new accounts. They own their contacts. We provide the technology to make it affordable, compliant and, of course, easy to scale when it comes to building a brand. We encourage Makers to be out there working the market directly with trade buyers. And we have great tools to assist with the process.
Unlike the three-three tier system, fourth tier solutions don’t handle distribution. They’re a fourth tier— operating as a broker between you and the distributor— and they’re effectively operating on a patchwork model. These companies also use a third-party clearinghouse to make payment arrangements. It drags more parties into the process which means, at best, slowing down times to order, delivery and receivables. And with more overhead and people to pay, costs inevitably go up.
Makers lose the ability to build direct relationships and control messaging. We don’t believe that giving up autonomy is helpful to the growth of an emerging craft product.
When evaluating who is the best distribution partner for your business, ask the following questions:
- Are you dealing with a distributor or a “fourth-tier” platform (i.e. someone in between you and the distributor?) A fourth-tier will cost more. Period. The distributor and the fourth-tier company both have to get paid somehow. And unless the “fourth-tier” is a non-profit, they need to have revenue which comes out of YOUR pocket.
- Beware of extra mark-ups and fees. Working directly with a distributor, the product is marked up to the customer (with LibDib it starts around 15%). Why pay a fourth-tier?
- Are you working with a business that is licensed? Compliance in this industry is very important. A non-licensee doesn’t have anything to lose and could “skirt” the rules (taxes, at rest, gallonage reporting, invoicing, credit terms, consignment to name a few things to ask about). And guess who ends up responsible for any audits or fines? The winery or distillery. Don’t trust ANYONE with your federal or state license. Please, just don’t.
- Who is going to pay you? When are you going to get paid? Is the clearing house distributor collecting from the account? Is the distributor paying you or paying the fourth-tier? All of these things are very important. What if the account doesn’t pay the distributor? What if the distributor doesn’t pay the fourth-tier? Do you still get paid?
- Can you ship small quantities? Fourth-tiers and clearing house distributors typically offer closeouts and large quantities of low-cost booze. While that’s great for certain makers, it might not be the best fit for a bespoke, small-batch brand. In addition, the customer base is limited to accounts that can take in large shipments all at once. A clearing house distributor is not going to sit on inventory. How many retailers can take multiple pallets at a time and have a place to store it? How many retailers want to take on that credit risk if the quantities don’t sell through? Is the winery or distillery making money on this shipment? Often it is so discounted due to higher quantities, sales like these are taken at a loss.
Understanding how these systems work, and how they’re so drastically different, is critical. Make sure you’re choosing a model that will work best for your brand in the long-term. If you have any other questions on what’s best for you, please reach out to firstname.lastname@example.org.
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