New York State In-depth

Cut costs for split cases?

Independent wine sellers could be in for a break as the New York State Liquor Authority debates lessening fees for split cases.

| Making mixed or split cases more budget-friendly could make it easier for retailers and restaurants alike.

Split case fees – an additional charge historically levied by US wholesalers to supply less than a case of wine or spirits – have long been legal and costly for small retailers. The Albany, New York-based State Liquor Authority (NYSLA) is now debating decreasing that cost, ideally, in order to help retailers save money. The proposal was put on the table last month and will be voted on in September.

The big wholesalers, not surprisingly, aren’t enthused and Sothern Glazer’s (SG) – the country’s largest wholesaler – reportedly donated $25,000 to New York State governor Cathy Hochul’s office to gain her ear in the matter. The governor’s office, SG, Empire and the Washington DC-based Wine & Spirits Wholesalers of America would not confirm the donation amount or if it actually took place.

“Concerns about split case fee regulations, which the SLA has not examined in over 40 years, were brought to the attention of the authority as part of our ongoing communications with the industry,” shared William Crowley, the public information officer for the NYSLA.

He continued that, “as a result the SLA has proposed to update the regulations in order to continue to ensure a level playing field in the alcoholic-beverage industry, to provide greater transparency and to clarify any ambiguities in the current regulation.”

“The proposal would cap the fees for split case fees at no more than $7.39 per case; which corresponds to the price in the current regulation as adjusted for the consumer price index,” he continues. “Additionally, the proposal requires wholesalers to include the split case fee in their monthly price postings, increasing transparency.”

Retailer reaction

Many retailers think the measure is way overdue, “The whole reason they have gotten away with charging excessive split-bottle charges and turning it into a huge profit center is because they do not have to compete against each other or anyone for that matter due to ‘Exclusive’ arrangements which is no more than a true monopoly. This is truly anti-competitive,” notes Bob Battipaglia, the owner of the Queens-based, single-location retail store Grand Liquors. He adds that retailers have little choice but to purchase from the two behemoths of SG and Empire, as they represent 80 percent of the market share in NY State.

To shine a light on the overall picture, the charges levied by the big wholesalers go beyond just split case fees. They also include various other delivery fees, according to Brian Robinson, the owner of the Brooklyn-based, single-location, Gnarly Vines retail store. If an order “falls below the minimum, they’ll charge us a $35 delivery fee. Other times, we’ll get an allocated item and they’ll just ship it with the $35 fee instead of holding it to combine with another order. “

In addition, he goes on to clarify how quickly the split case fees can add up. “Empire charges $22.50 on all deliveries under $1K and $3 on those over [that price point]. Southern charges $35 on all deliveries under $1250 and nothing over $1250.” Robinson said the best long-term workaround might be letting bars and restaurants buy from retailers.

He concludes with a piece of advice for wineries hoping to deal more proactively with retailers. “The suppliers need to get together and request more leeway for retailers and restaurants. Collectively, you have much more power and influence than we do,” he notes. He shares two simple steps that wholesalers could take to reduce cash pressure on store owners: not forcing retailers to pay cash on delivery unless they are a month late with multiple suppliers and researching past-due invoices before store owners are asked to pay for them.

Heavy delivery charges have been a bone of contention for some.

© iStock
| Heavy delivery charges have been a bone of contention for some.

A look at the charges

John Hinman, a partner in the San Francisco-based law firm of Hinman & Carmichael, notes that retailers have “been chafing over split case surcharges for decades,” confirming that the only one who benefits from them is wholesalers.

The short response received from the WSWA noted that, “splitting cases is often a request from retailers looking to cut costs on orders. It is an efficient way for retailers to pull through craft brands without having to commit to a full case,” shares Michael Bilello, the organization’s executive vice president of strategic communications and marketing.

He adds that, “It also helps retailers with inventory management as many do not have a lot of storage space. Opening cases, extracting individual bottles and filling custom orders is a labor- and time-intensive process.”

A handful of market analysts have a balanced view on this potential measure. Obviously, “the distributors won’t be happy,” shares Stephen Rannekleiv of Rabobank’s New York City office, making a counterpoint in defense of the services that distributors have long provided the retail and restaurant business.

“There is a genuine cost involved in having warehouse workers break up cases, and adds another layer of complexity to the process [a process that already has some complexities]. I’m sure they will push back on the measure. However, from what I can see, everyone recognizes there is a cost to doing this and that wholesalers have a right to charge a reasonable fee [no one is asking them to do this pro bono].”

However, not all the wine market analysts think the split case charges are merited – despite the extra work in breaking down cases – for smaller retailers. Hence the current measure might well be welcomed, if passed, by many smaller operators.

“The measure should benefit smaller retailers more so than larger establishments. In light of their experience with business shutdowns during the pandemic, smaller restaurants and retailers desire to maintain smaller wine inventories,” notes Mario Zepponi, a wine merger and acquisition advisor at the Santa Rosa-based Zepponi Company.

“Normally a free-market system should dictate the economic terms in which parties conduct business … this measure offers independent and smaller retailers an opportunity [to] purchase their wine inventories in a more financially responsible and manageable manner.”

“In smaller shop we can bring in more skews, try new products we think are good,” shares the owner of the New York retail store ONA wines who just goes by John Jr. “We want to bring in more skews but price point for cases makes it harder on us.”

How this affects small producers and distributors

Some have argued that the measure might actually hurt smaller distributors, who are generally working on smaller margins. However, Zepponi notes that despite how appealing the measure might look to smaller distributors, they “will still have to deal with the higher cost and inefficiencies of selling wine in less than 12-unit packs as larger wholesalers.”

John Jr adds that even smaller wholesalers other distributors – if the proposal passes – might hurt as they have to cover more ground for the sales – more costs for them – and this could hurt them faster as they make less.

Zepponi notes that many producers “are struggling to gain access into on- and off-premise retail accounts. The measure will encourage these types of retailers to purchase more diverse wine selections because they can do so in smaller quantities without a significant financial disincentive to do so.”

What the future holds

Some retailers expressed concern that if the proposal passes, the wholesalers will only add additional costs to the bottom line – in other ways – for buyers down the road. “They want simply raise their ‘front line’ prices accordingly to make up the difference. They will not miss a beat. They will continue to load their additional costs of doing business down to the retail tier because they can,” says Battipagia.

On the brighter side, as a result, smaller restaurants should have more diverse wine lists that will have greater appeal to their customers, notes Zepponi. Rannekleiv concurs that “the big winners would be the smaller bars/restaurants/retailers that can focus on carrying the right mix of brands. Having that right mix of brands is a critical means for all bars and restaurants to differentiate themselves.”

However, in the long term, he noted that he was “not quite clear yet on how [if passed] it will impact the dynamics between large and small wholesalers.

Oddly enough, it could increase sales revenues of whichever group [larger or smaller wholesalers] that had been charging the higher split case fee; they would certainly lose some fee income, but could see an increase in sales,” shares Rannekleiv.

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