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Consolidation Accelerates At The Middle Tier

May 1, 2018

Amid ongoing consolidation across the second tier, the U.S. market’s leading wine and spirits wholesalers are projecting steady growth for 2018. Fresh challenges certainly abound—including the rise of e-commerce, an increase in private label activity, and the logistics obstacles of merging and restructuring increasingly larger organizations. But most wholesalers say the U.S. drinks market still provides plenty of opportunity. With unemployment low and GDP growth expected to register between 2%-3% this year, distributors predict that trading-up trends will continue. Meanwhile, a continued influx of new products—while at times showing signs of saturation—is drawing new consumers into wine and spirits.

Overall, the U.S. market’s wine and spirits wholesale revenues are projected to climb 3.5% to $57.4 billion this year. The top 10 players are expected to outpace the overall market with an aggregate advance of 4.5%. This year, the top 10 distributors will account for about 73% of the wholesale market, up from 59% in 2010.

While value continues to be on the rise, with total consumption relatively flat in both spirits and wine, growth certainly hasn’t been without its struggles. “The market is a dogfight,” says Wayne Chaplin, CEO of market leader Southern Glazer’s Wine & Spirits, which is projecting revenues of $18.2 billion this year. “There is very low single-digit volume growth, so you really have to fight to grow your brands.”

Still, ongoing premiumization, especially on the spirits side, continues to boost revenues. “The on-premise is doing very well,” Chaplin notes. “There’s some great growth in a number of categories including Tequila, Irish whiskey, and Bourbon. Vodka obviously isn’t growing as fast as it once was, and it’s more of a struggle.” In wine, he adds, “a huge segment of the business is still below $10, and that’s a share fight as well. But wines above $15 are doing nicely, and boxed wines are performing extremely well.”

By far the biggest development at the wholesale tier lately has been the proposed merger of the market’s second- and third-largest wholesalers, Republic National Distributing Co. (RNDC) and Breakthru Beverage Group, expected to close late in the second quarter. The combined RNDC-Breakthru will have annual sales of nearly $13 billion, with operations in 30 markets and a market share of just over 22%. RNDC president and CEO Tom Cole and COO Bob Hendrickson will have those same titles at the newly merged company. Danny Wirtz, currently vice chairman of Breakthru, will become chief growth and strategy officer, and Breakthru president and CEO Greg Baird has been named chief integration officer. Breakthru COO Lloyd Sobel will also hold a senior role that has yet to be determined.

“We recognized that we needed to have greater scale,” Cole said recently of the rationale for the blockbuster deal. “We’re doing the merger to better serve our customers, our suppliers, and to provide opportunities for driving continued growth. The industry is a zero-sum game now. We’ve got more outlets and flat consumption.”

Prior to the RNDC-Breakthru deal, Breakthru merged its New Jersey operations with those of the state’s leading player, Allied Beverage Group, to create a wholesale force with annual revenues of more than $1.2 billion. Other key distributors are also making moves to expand their reach. Johnson Brothers, which will approach $2 billion in revenue this year, entered the New York and West Virginia markets in recent years and has also augmented its business in North Carolina by acquiring wine and beer wholesaler Mutual Distributing. Meanwhile, ambitious middle-tier players like The Winebow Group, Opici Family Distributing, and Young’s Holdings’ Wilson Daniels Wholesale have also been entering new markets. Shanken’s Impact Newsletter has a full report on the state of the distribution tier in its April 1&15 issue.

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