Food & Wine Thursdays: In The Spirit of Giving, Please Pay Your Bills

(Note: This article deals with aspects of the wholesale wine business in California. Every state has its own unique laws and regulations regarding alcohol sales. I’d be interested in hearing the experiences of wholesalers in different states regarding this same issue. Leave your comments below.)

I’m going to peel back a small layer of the wholesale wine biz in the interest of shedding light on a problem which, while far from rampant, is still pervasive and affects the bottom line not just for distributors but, ultimately, for consumers as well.

In California, retailers and restaurants are typically given “net 30” terms from distributors. This means they have 30 days from the order date to pay the invoice, so as to have time to sell some or all of the product they’ve purchased before their bill is due. Following the same logic, distributors typically have “net 60” terms with their end suppliers, though it is generally easier for a retailer to sell through three cases of wine in a month than it is for a distributor to sell through a shipping container’s worth of wine in two. In a perfect world, consumers pay retailers, retailers pay distributors, and distributors pay suppliers regularly and on time.

But the world’s not perfect and we get that. Sometimes sales are slower than expected or there are unexpected bills and an invoice has to be paid a few weeks late. I don’t know of a single small wine distributor who, if a retailer or restaurant communicates their difficulties in advance, won’t work with them to split an invoice payment or work out a payment plan. The fact is, few distributors even get worried about a late payment until an account gets to be over 30 days past due (60 days from invoice date).

(Though I should note that in the State of California distributors are mandated by the Alcoholic Beverage Control agency to begin charging interest on invoices which are more than 42 days old at a rate of 1.5% per month [or so it was last time I checked]. Did I cover my base there? Good.)

Nevertheless there exists a particular type of business, almost always an “on-premise” account (meaning a business which serves alcohol on sight like a restaurant or bar), that treats their wine distributors like a bank, ordering wine with no intention of paying for it in a timely manner, often loading up on an order and then waiting only until they need to reorder from that same distributor to pay their bill. Many of these are not unsuccessful businesses. Some are restaurants that have been open for years, helmed by some of the most renowned chefs in the state.

The reason why alcohol distributors are at the bottom of the payment chain is because booze is a relatively non-perishable product. If a restaurant doesn’t pay its rent, it gets evicted, if it doesn’t pay its utilities, the power gets turned off, if it doesn’t make payroll, its employees don’t show up, and a restaurant can’t stockpile meat and vegetables the way it can wine and liquor. So as the bills get paid each week, if there isn’t enough cash to pay everyone, the wine distributors get put off until the next week, and then the next, and the next–I’ve had invoices go over a year without being paid.

This is particularly harmful to the small distributors. Since liquor is distributed almost exclusively by a handful of the largest distributors in the state, when it comes time for a restaurant to pay for their booze, the big guys always get paid first so as to keep the vodka and $2-a-bottle by-the-glass rotgut Chardonnay coming to the bar. The biggest distributors also have the most stringent credit departments so restaurants have the most to lose by not paying Southern or Young’s Market Company on time. Since most of the big guys’ revenue comes from corporate retail accounts and restaurant chains, they can afford to put a mom and pop on COD after a single day-late invoice. Boutique distributors who thrive on working with small businesses recognize the unique challenges of small, family-run operations and are more than willing to make reasonable accommodations.

And in the end, difficulty in collections means difficulty in paying bills on all fronts. It also ultimately results in higher prices for everyone, since so much time and product is wasted on delinquent accounts. In some states (Washington, for example), alcohol purchases must be paid in full before delivery–a so-called COD state–and prices in COD states can be on average marginally less than in a credit state, although other factors are involved. But COD also reduces the agility of businesses, especially new businesses, to manage their invoices in a way that best suits them and, despite all the perceived advantages of a COD system, I’m not yet convinced that it is preferable to a credit-based system.

In the spirit of comity, I’m not going to name any names, but I’m sure the other California wine business folks reading this can name a dozen businesses in their area who have built up a reputation as a delinquent. And if you get a couple drinks in me I might give you my own list privately.

It’s particularly frustrating to see other small distributors keep selling to these accounts, despite similar difficulties collecting. It means that these restaurants can ladder their small distributors like CDs, paying each one off in turn every four or five months. I’d like to discourage all distributors from doing business with chronically delinquent accounts–those which regularly take three months or more to pay every bill–and see how successful and innovative they can be without access to the best wine available in California. But that’s a pipe dream since we all need to sell where we can and I’m as guilty as anyone in pursuing those alluring yet financially manipulative brides.

I wish there was a clearer way for end consumers to know which businesses are upstanding and which are deadbeats so that they could shop accordingly. Any ideas?