ENTERING THE US MARKET For Canadian Wine, Beer and Spirits Producers September 17, 2018 This is the master slide drawing R. Scott Winters, Ph.D. Presented by: Chelsea Washburn The American Spirits Exchange

American Spirits Exchange This is the master slide drawing As the US alcohol industry’s foremost Representational Importer, ASE bridges international companies and American consumers. The company’s FoundationsTM program provides a turn-key solution for international clients seeking to enter the US market. www.AmericanSpiritsLtd.com

1 2 3 4 Background Requirements Models Resources This is the master slide drawing

1 Background Following the repeal of US Prohibition, the US government adopted two policies which set in motion a body of law that shaped how alcohol beverages could be sold. The key to understanding the US system is to understand the combined effect of these two policies. Everything flows from this. This is the master slide drawing

POLICY 1: The 3-tier system SUPPLIER The US government limited one’s ownership rights to a single role in the supply chain: supplier, wholesaler or retailer. Companies can only conduct business in one of the three tiers, thus promoting competition and commerce. WHOLESALER This is the master slide drawing RETAILER

POLICY 2: state level distribution The middle tier – distribution – is governed at the state level. SUPPLIER WHOLESALER This is the master slide drawing Each state regulates what alcohol can be sold within its borders, how it is distributed and the conditions under which it can be advertised and sold to consumers. RETAILER

Consequently, selling wine and spirits in the US can be complicated. Federal approval is required, but insufficient. State governments have their own evaluation criteria, transportation regulations, advertising limitations and taxation schedules. Since states control distribution, there is no true “national” distributor; distributors can only do business within their state. Therefore, one does not sell into the US; rather, one sells individual state regions. This is the master slide drawing

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The combined effect of a three-tier system and state-level distribution results in a two-stage approval process in the US. Brands must first be approved at the federal level; then they need to be approved by each state in which they are to be sold Companies must first be permitted by the federal government; then they need to be permitted by each state into which they want to sell. This is the master slide drawing

COLA Federal basic permit Out of state shipper Brand Registration Federal Requirement State-level Requirement Federal basic permit Out of state shipper US companies must have a federal basic permit (as importer, distillery or winery) to conduct business. For each state, the holder of a Federal Basic Permit must also have state-specific, out-of-state shippers permits. Company COLA Brand Registration This is the master slide drawing Granted by the federal government and required for each brand to be imported or sold in the US. Each brand must be registered with and approved by the state where it is intended to be sold Brand

2 Getting your brand approved Before your brand can be sold in the US three things are required. Food Facility Registration (FFR) Federal Review and Approval Process (COLA) State Review and Approval Process This is the master slide drawing

Food Facility Registration Getting your brand approved The US Food and Drug Administration (FDA) requires registration of all food manufacturing facilities, including international facilities. http://www.fda.gov/Food/GuidanceRegulation/FoodFacilityRegistration A Food Facility Registration Number (FFR) is required for all imports. Registration is free and immediate. You will need to have a US-based agent. Often this will be your importer, but it does not have to be. Alcohol industry consultants, lawyers and representational-importers frequently fill this role for international companies evaluating their import options. Food Facility Registration Federal Approval This is the master slide drawing State Approval

Food Facility Registration Getting your brand approved The US government evaluates all alcohol beverages to determine if they are safe for sale in the US. They review the method of manufacture and the packaging. The agency that reviews the applications is the TTB and the permit that is issued if approved is a COLA. All alcohol beverages coming into the US must have a COLA. Only US-based companies that have a Federal Basic Permit can apply for a COLA. Food Facility Registration Federal Approval This is the master slide drawing State Approval

Food Facility Registration Getting your brand approved Here are the key points that international companies must consider: Only US-based companies can apply for federal approval of a brand (the COLA). If they do not own the brand, then they must be the exclusive agent in the US. As an international company you will need to provide an authorization letter naming the US company as the exclusive agent. The requirements for these letters are strict and you can not limit or contractually bind the company - they either are, or are not, the exclusive agent in the US. Once the COLA is approved, only the US-company that submitted the application can import the brand and offer it for sale. No other party can do this without their written, explicit permission. Food Facility Registration Federal Approval This is the master slide drawing State Approval

Food Facility Registration Getting your brand approved The implications and consequences: The US-company that filed for and received the COLA (its “holder’) has exclusive and full control of the brand in the US. If you want to sell to a different US company etc., then you need the COLA holder’s explicit permission. If you terminate your relationship, then your new partner will have to apply for a new COLA. Using one company for two distinct roles – COLA holder and customer – can limit your negotiating position and control since they, not you, control the brand in the US. It is possible to separate these roles and use one company as the representative of your interests (the COLA holder) as distinct from your customers. Food Facility Registration Federal Approval This is the master slide drawing State Approval

Food Facility Registration Getting your brand approved Nearly all states require that a brand be reviewed and approved before it can be offered for sale within its boundaries. Each state has its own evaluation criteria, submission forms and fees. State brand registrations are submitted by the COLA holder, or its designee. Food Facility Registration Federal Approval This is the master slide drawing State Approval

3 MODELS of Market Entry There are only three ways to enter the US market; the differences come down to whether your customer controls your brand in the US. One Party – do everything yourself One Party – customer as COLA holder Two Party – customer distinct from COLA holder Across the models are varying degrees of brand control, cost and profit. There is no one, correct model – it depends on what you want to achieve. This is the master slide drawing

MODELS of Market Entry MODEL1: MODEL 2: MODEL 3: YOU control Brand You sell to State Distributors Expensive / high margin You sell to “importer” Importer sells to state distributors MODEL 2: Customer controls Brand Inexpensive / low margin This is the master slide drawing MODEL 3: YOU control Brand You sell to State Distributors Inexpensive / high margin

MODELS of Market Entry MODEL 1: MODEL 2: MODEL 3: COLA PURCHASE YOU State Distributors Purchaser who resells to State Distributors MODEL 2: Purchaser This is the master slide drawing MODEL 3: Your Agent State Distributors

MODEL 1: Do everything yourself State Distributors Set up your own US presence and act as your own importer. PROS High per-case margin and profit Complete control of the brand identity Protection of the brand by holding the COLA Direct relationships with state-level distributors who will be purchasing the product for sale to consumers CONS High up-front, fixed costs Lead time of many months to years to obtain all of the necessary permits, bonds and company registrations You have to establish and staff a US-based company This is the master slide drawing

MODEL 2: Customer as COLA holder Purchaser who resells to State Distributors Purchaser The most obvious model to international clients is have their customer be the importer and COLA holder. Since they hold the COLA they have complete control over the brand in the US. Since distribution is regulated at the state level, they still need to sell to state-level distributors, thus adding another margin to the end consumer’s cost. These transactions amount to you – the brand owner – accepting a lower margin in return for the importer having the responsibility of selling to state-level distributors. This is the master slide drawing

MODEL 2: Customer as COLA holder Your disadvantage is that because of US system you have granted them full control over the brand, limiting your negotiation power. PROS Low capital investment Straight forward sale of product (no worries about what occurs to brand in the US). CONS Lower margin and profitability No control over the brand identity, sales and marketing No market connections with buyers (state-level distributors) or customers All control of brand is relinquished to your customer You may be subject to sales and agreements following the termination of your customer This is the master slide drawing

MODEL 3: separate sales and control Your Agent State Distributors Use a party to represent your interests in the US such as holding the COLA as distinct from your customers. Representational Importers hold a federal basic permit, are licensed importers and hold state-level permits for sales. They act as your agent in the US representing your interests. Finding state-level distributors remains your responsibility. Therefore, it does require you to play a part in the sales process, visiting the US, as opposed to being passive. This is the master slide drawing

MODEL 3: separate sales and control This model is appropriate for international clients that seek to build their brand identity in the US, protect how their brand is positioned and sold, and who want to develop their own relationships with state-level distributors. PROS High per-case margin and profit Complete control of the brand identity Protection of the brand by holding the COLA Direct relationships with state-level distributors who will be purchasing the product for sale to consumers Lower investment of capital Immediate access to market CONS Need to take responsibility for one’s own sales Low fixed case fee for service Limited number of reliable, national representational-importers This is the master slide drawing

MODELS of Market Entry TO REVIEW… This is the master slide drawing

MODELS of Market Entry MODEL 1: State Distributors YOU This is the master slide drawing

MODELS of Market Entry MODEL 1: YOU control Brand You sell to State Distributors Expensive This is the master slide drawing

MODELS of Market Entry MODEL 1: MODEL 2: YOU control Brand You sell to State Distributors Expensive Purchaser who resells to State Distributors MODEL 2: Purchaser This is the master slide drawing

MODELS of Market Entry MODEL 1: MODEL 2: YOU control Brand You sell to State Distributors Expensive / high margin You sell to “importer” Importer sells to state distributors MODEL 2: Customer controls Brand Inexpensive / low margin This is the master slide drawing

MODELS of Market Entry MODEL 1: MODEL 2: MODEL 3: YOU control Brand You sell to State Distributors Expensive / high margin You sell to “importer” Importer sells to state distributors MODEL 2: Customer controls Brand Inexpensive / low margin This is the master slide drawing MODEL 3: Your Agent State Distributors

MODELS of Market Entry MODEL 1: MODEL 2: MODEL 3: YOU control Brand You sell to State Distributors Expensive / high margin You sell to “importer” Importer sells to state distributors MODEL 2: Customer controls Brand Inexpensive / low margin This is the master slide drawing MODEL 3: YOU control Brand You sell to State Distributors Inexpensive / high margin

resources This is the master slide drawing …that are useful.

4 American Spirits Exchange White Papers Calculators Case Studies The US Alcohol Beverage Industry Structure US Alcohol Industry Permits for Suppliers Understanding Pricing in the US Calculators Calculating Importation Costs Calculating Price to Distributors and Consumers Case Studies Impact Study: $377,000 in realized savings for international wine company Information about American Spirits Exchange Foundations Program Overview of Services Provided by American Spirits Exchange Warehousing Capital Solutions This is the master slide drawing

4 Contact Email us for an abridged copy of this presentation: Chelsea@AmericanSpiritsLtd.com Grow@AmericanSpiritsLtd.com This is the master slide drawing

Thank You! American Spirits Exchange This is the master slide drawing