How wineries classify and track trade spending

When it comes to trade spending for the wine industry, it largely falls on the distributors to handle the details and cost. Wineries, however, aren’t completely off the hook.

Providing a certain level of product support for a sales channel — trade spending — is part of doing business as a food and beverage manufacturer. A lot of the same types of activities apply to the wholesale wine business, but there are differences. The main difference stems from it being a product that follows a three-tier system made up of a winery, distributor, and retailer. This system harks back to when prohibition was repealed in 1933, giving individual states the right to manage the sale of alcohol, after which nearly all states implemented a required system where alcoholic beverages were sold to distributors, that then sold to retail locations.

Trade spending takes on many different forms, such as rebate programs, paying for shelf space (known as slotting), or a buy-one-get-one-half off coupon in the Sunday paper. While a distributor handles the bulk of the sales costs, wineries still need to account for depletion allowances, which are promotional expenses offered to the distributors. These provide an incentive for the distributor to deplete inventory — or sell their inventory through to retailers — and are one of the bigger trade-type expenses that wineries incur.

Here’s how it works: A winery sells products to its distributor (the customer), which takes legal title, and then sells to restaurants and supermarkets. As a sales incentive, a winery will offer the distributor a volume discount or some amount off of each case that’s bought from them when the distributor shows proof they’ve depleted the wine stock.

Netted against revenue

Under current U.S. generally accepted accounting principles, trade spending incentives, including depletion allowances and bill backs, are presumed to be a reduction of revenue. That presumption can be overcome if a company can show it received an identifiable benefit from the expense. To demonstrate that, the benefit must be sufficiently separable in that the company could have entered into a separate transaction with a party other than the product purchaser, which is similar to demonstration costs or advertising.

To that end, here are some items that wineries offer to distributors that typically are presented net against revenue:

• Depletion allowances, including bill backs
• Discounts
• Volume rebates

Wineries are often invoiced, or billed back, by a distributor for certain wineries’ products. These expenses often fall in the netted-against-revenue category.