During the corresponding time, Castle Brands Inc saw a revenue deteriorated by -2.03 % year on year, sequentially revenue fell by -15.83 %. While revenue at the Castle Brands Inc's corporate clients
Castle Brands Inc's Comment on Sales, Marketing and Customers
We believe that the distribution network that we have developed with our sales
team and our independent distributors and brokers is one of our strengths. We
currently have distribution and brokerage relationships with third-party distributors
in all 50 U.S. states, as well as distribution arrangements in approximately 20
other countries.
U.S. distribution
Background. Importers of beverage alcohol in the U.S. must sell their products
through a three-tier distribution system. Typically, an imported brand is first
sold to a U.S. importer, who then sells it to a network of distributors, or wholesalers,
covering the U.S., in either “open” states or “control”
states. In the 33 open states, the distributors are generally large, privately-held
companies. In the 17 control states, the states themselves function as the distributor,
and regulate suppliers such as us. The distributors and wholesalers in turn sell
to individual retailers, such as liquor stores, restaurants, bars, supermarkets
and other outlets licensed to sell beverage alcohol. In larger states such as
New York, more than one distributor may handle a brand in separate geographical
areas. In control states, importers sell their products directly to state liquor
authorities, which distribute the products and either operate retail outlets or
license the retail sales function to private companies, while maintaining strict
control over pricing and profit.
The U.S. spirits industry has consolidated dramatically over the last ten years
due to merger and acquisition activity. There are currently eight major spirits
companies, each of which own and operate their own importing businesses. All companies,
including these large companies, are required by law to sell their products through
wholesale distributors in the U.S. The major companies are exerting increasing
influence over the regional distributors and as a result, it has become more difficult
for smaller companies to get their products recognized by the distributors. We
believe our established distribution network in all 50 states allows us to overcome
a significant barrier to entry in the U.S. beverage alcohol market and enhances
our attractiveness as a strategic partner for smaller companies lacking comparable
distribution.
For fiscal 2016, our U.S. sales represented approximately 87.1% of our revenues,
and we expect them to remain relatively consistent as a percentage of our total
sales in the near future. See note 16 to our accompanying consolidated financial
statements.
Importation. We currently hold the federal importer and wholesaler license required
by the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department,
and the requisite state license in all 50 states and the District of Columbia.
Our inventory is strategically maintained in large bonded warehouses and shipped
nationally by an extensive network of licensed and bonded carriers.
Wholesalers and distributors. In the U.S., we are required by law to use state-licensed
distributors or, in the control states, state-owned agencies performing this function,
to sell our brands to retail outlets. As a result, we depend on distributors for
sales, for product placement and for retail store penetration. We currently have
no distribution agreements or minimum sales requirements with any of our U.S.
alcohol distributors, and they are under no obligation to place our products or
market our brands. All of the distributors also distribute our competitors’
products and brands. As a result, we must foster and maintain our relationships
with our distributors. Through our internal sales team, we have established relationships
for our brands with wholesale distributors in each state, and our products are
currently sold in the U.S. by approximately 80 wholesale distributors, as well
as by various state beverage alcohol control agencies.
International distribution
In our foreign markets, most countries permit sales directly from the brand owner
to retail establishments, including liquor stores, chain stores, restaurants and
pubs, without requiring that sales go through a wholesaler tier. In our international
markets, we rely primarily on established spirits distributors in much the same
way as we do in the U.S. We have contracted with an international beverage alcohol
broker to represent our brands in approximately twenty international markets.
We use Terra and other bonded warehouses and logistic providers to handle the
billing, inventory and shipping for us for some products in certain of our non-U.S.
markets.
As in the U.S., the beverage alcohol industry has undergone consolidation internationally,
with considerable realignment of brands and brand ownership. The number of major
spirits companies internationally has been reduced significantly due to mergers
and brand ownership consolidation. While there are still a substantial number
of companies owning one or more brands, most business is now done by the eight
major companies, each of which owns and operates its own distribution company
that distributes in the major international markets. These captive distribution
companies focus primarily on the brands of the companies that own them.
Even though we do not utilize the direct route to market in our international
operations, we do not believe that we are at a significant disadvantage, because
the local importers/distributors typically have established relationships with
the retail accounts and are able to provide extensive customer service, in store
merchandising and on premise promotions. Also, even though we must compensate
our wholesalers and distributors in each market in which we sell our brands, we
are, as a result of using these distributors, still able to benefit from substantially
lower infrastructure costs and centralized billing and collection.
Our primary international markets are Ireland, Great Britain, Northern Ireland,
Germany, Canada, Israel, France, Finland, Norway, Sweden, Denmark, China and the
Duty Free markets. We also have sales in other countries in continental Europe,
Latin America, the Caribbean and Asia.
Significant customers
Sales to one distributor, Southern Wine and Spirits and related entities, accounted
for approximately 31.4% of our consolidated revenues.
