Analysis: What the RNDC-Breakthru breakup means for the industry

17th May, 2019 by Nicola Carruthers

The collapse of the merger between Republic National Distributing Company and Breakthru Beverage Group means Southern Glazer’s reigns supreme in the US. The Spirits Business discovers what this means for brands big and small.

*This feature was originally published in the May 2019 issue of The Spirits Business

Consolidation has become a ubiquitous buzzword in the US distribution belt. Just a year after US$17.5 billion giant Southern Glazer’s Wine & Spirits (SGWS) was created, Republic National Distributing Company (RNDC) and Breakthru Beverage Group, the second- and third-largest wine and spirits wholesalers in the US, revealed plans to merge and form a US$12bn company in November 2017.

However, almost 18 months after announcing their intentions, the two firms ended discussions following a “protracted review” by the US Federal Trade Commission (FTC). It seems regulators are acknowledging concerns expressed by industry stakeholders over many years: that America’s distribution tier is being squeezed to the point of suffocation. According to Ian R Conner, deputy director of the FTC’s Bureau of Competition, the government agency was concerned about “likely anticompetitive harm if the transaction were completed”.

There were fears that the deal “likely would have resulted in higher prices and diminished service in the distribution of wine and spirits in several states”. At the time of the announcement, Conner said: “The transaction likely would have adversely impacted suppliers of wine and spirits that depend on these distributors to promote and distribute their products, and retail and foodservice customers that purchase those products from RNDC and Breakthru.”

RNDC was formed in 2007 following the merger of the Republic Beverage Company and National Distributing Company. Breakthru Beverage Group is result of the 2015 merger between Wirtz Beverage Group and Charmer Sunbelt Group. Commenting on the abandoned deal, Greg Baird, president and CEO of Breakthru Beverage Group, said: “While disappointed, we are glad to put the uncertainties and demands of the FTC process behind us, and focus our resources, time and energy toward moving Breakthru’s innovation platform and operating model forward.” Baird added that the merger was an “opportunity to become even more efficient and responsive to evolving trends and demands”. He said the company has not ruled out any future deals and is “constantly evaluating opportunities”.

The proposed merger was intended to compete with SGWS, which became the market leader after the merger of Southern Wine & Spirits and Glazer’s Inc in July 2016. With operations in 44 US states, as well as the District of Columbia, Canada and the Caribbean, Southern Glazer’s has annual sales of US$17.5bn, according to Forbes. The rampant merger and acquisition activity in the US distribution business has been a key challenge in the industry, many claim, especially for smaller brands. Margie Lehrman, CEO of trade body the American Craft Spirits Association, notes: “Anytime there’s any kind of consolidation, it’s one less avenue to get your product to market, and especially for ‘craft’ spirits producers who have limited capacity.”

DISTRIBUTION PARTNERS

However, Simon Ford, co-founder of The 86 Company, producer of the UK’s Ford’s Gin, believes the deal would have enhanced competition by challenging Southern Glazer’s dominance. “When any industry monopolises then you lose competition. Seeing Breakthru and RNDC break up means that it lessens the number of true competitors. If they had merged, they would have become the bigger challenger to Southern Glazer’s.”

He also believes consolidation of big distributors is giving opportunities for younger, smaller companies to represent ‘craft’ spirits. “As a smaller brand, you want more intimacy from your distribution partner, so being with a smaller company and having available smaller companies to represent smaller brands is not a bad thing,” says Ford.

There is a need for more distributors in the US, but Ford predicts the number will grow. “As ‘craft’ spirits grow and there’s less consolidation because there’s more choice, then that’s going to trickle into the distribution network, without a doubt,” he insists. “Two things will happen: the big guys will build new divisions to tackle that need, or nuanced entrepreneurs or new distributors will emerge.”

Chase Distillery: Three-tier system can be limiting for smaller brands

Chase Distillery: Three-tier system can be limiting for smaller brands

More recently, a number of distribution companies have unveiled new units dedicated to artisan spirits. Two years ago Breakthru launched its Trident subsidiary for ‘craft’ and emerging brands, and on 1 April Empire Merchants in New York City launched its Independent Spirits division. For James

Chase, founder of UK-based farm-to-bottle Chase Distillery, the US’s famous three-tier distribution system – in which every bottle passes from distiller or importer to distributor or wholesaler to retailer or bar owner – “can really limit some brands’ efforts to get into the market, compared with the UK”.

Chase adds that the immediate negative is that big distributors rely on huge brands “with a lot of money” and are less likely to focus on their smaller brands. And keeping brands happy is the biggest challenge, according to Ford. He says: “The more brands the distributors take on, the harder it will be to hit everybody’s goals and hit those commitments. That’s the challenge they address on a daily basis.”

But the three-tier system does come with its benefits in the on-trade. “When you have a rep in place and you’re only allowed to be with one rep, it almost regulates it and makes it a bit more structured,” says Chase. But pricing can be a challenge for smaller producers, with more ‘craft’ offerings sold at a higher price. “We need to make sure we keep our high price, otherwise we won’t make any profit on our product,” notes Chase. “There are a lot of brands now, like Tito’s, that are so much cheaper than premium brands like Grey Goose.”

BIGGEST CHALLENGES

For Breakthru, the biggest challenges facing the US distribution belt are “e-commerce, omni-channel integration and shifts at retail and on-premise”.

Baird says: “Today’s on-demand economy increasingly puts purchase decisions outside of traditional channels. A surplus of choice and a diminished loyalty to individual brands all has a trickle-down effect. We see a great opportunity to capitalise on these insights to maximise performance.” Brandy Rand, US president of IWSR Drinks Market Analysis, said a number of factors have “put pressure on the legal and regulatory infrastructure of the three-tier system” and created a “more competitive environment” as innovative offerings and ‘craft’ brands enter the market.

She said: “The US beverage alcohol market has changed rapidly over the past decade due to the rise of e-commerce, growth in direct-to-consumer shipments, recreational legalisation of cannabis, the increase in the number of distilleries, breweries and wineries, changing tastes, and the number of new brands in multiple categories.

“It is much harder to get distribution and, more importantly, consumer pull-through than ever before.”

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