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| Should consumers who can buy wine directly from suppliers in their state be allowed to by it from suppliers in other states as well? |
| That's the embittering question the Supreme Court will rule on this spring. |
| It's a battle of dicotomanies - money and turf - a David and Goliath contest, as one national newspaper has labeled it, between mom and pop wineries and connoisseurs of the grape against the states of New York, Michigan and the other powerful wine interests. |
| The Supreme Court in 2004 heard three cases challenging the Michigan and New York laws that make it a crime to buy wine directly from wineries in another state. |
| At issue is whether the 21st Amendment, which lets states regulate their own sale of alcohol, is more important than a federal doctrine, known as the dormant Commerce Clause, which prohibits states from restricting interstate commerce or discriminating against out-of-state businesses. |
| Michigan and New York laws allow in-state wineries to ship to state residents, but bar out-of-state wineries from doing so. The Coalition for Free Trade, a non-profit, like-minded group of winemakers, consumers and interested parties, says these laws prohibiting such sales are unconstitutional and should be changed. |
| Altogether, 24 states, including New York and Florida, the second and third largest wine consuming states, after California, ban direct shipping out of state. In fact, it's a felony in five states. |
| The 21st Amendment repealed prohibition in 1933, but left states with broad latitude to regular liquor. Since then, a so-called three-tier system has developed requiring different companies to produce, distribute and sell alcohol, giving rise to a wholesale business dominated by a few companies controlling producers' access to the liquor store shelves. |
| Still, most wineries have been able to sell their products directly (at least in-state), and by the late 90s, smaller winemakers began selling over the Internet. For wineries too small to crack the wholesalers' distribution networks, the Internet became a way to curry favor with customers who wanted particular wines, especially because of vineyard and wine tasting tours. |
| Various reports have wines sales ranging between $20 and 21.5 billion a year and the number of wineries, according to the Federal Trade Commission, has risen from between 500 and 800 in the late 1970s to something over 3,000 today. There's been a proliferation of smaller, family-operated wineries, although according to the MKF Group, an economic consulting firm in St. Helena, California, the top three producers account for approximately 60 per cent of wine sold. |
| "Forget Bordeaux 2000, this wine case has become the most essential case for wine consumers in decades," reports Dr. Vino, an on-line wine pick and politics newsletter. "At stake is whether consumers living in a long list of states that limit direct wines sales can start to purchase wines directly from wineries out of state. Yes, America may be one big market when it comes to buying books and DVDs, but when it comes to wine, it is more like 50 sovereign states, each with its own rules." |
| The newsletter reporting on the Supreme Court cases suggests the present system of distribution…"means that the range of choices given the consumer may be limited to only those wineries with large productions and diverse portfolios. Wines of niche producers may not appear at all in many states. |
| "Hence buying directly from the producer is important. For consumers residing in the three dozen states where shipments are not legal, it means a greater range and perhaps lower prices for wine." |
| Even with restrictions, creativity sometimes wins out. Witness this account from another Internet on-line commentary, Knowledge Problem. |
| "Say I live in Maryland, one of the most egregious states for the interdiction of interstate wine shipments (in Maryland it's a felony), but say I love all of those funky, small winery cabs and zins that I can't get at home (because my local wine store is also pretty much an arm of the state, although in Maryland at least private citizens can legally operate stores to sell wine). The winery is not allowed to sell and ship me wine, but it can sell me wine that I then store, say, at a climate-controlled facility in St. Helena. Then when I want to bring some of the wine home to consume or to put in my own cellar, I ship it to myself. |
| "Just makes me love life to hear stories like this about how wonderfully creative we can be." |
| Stories abound of people across the country who go to extreme to get their favorite vino, and as opponents of the legislation insist, the more draconian the law becomes, the more an underground economy develops, well outside the regulatory and taxation systems themselves. Otherwise upstanding, law-abiding citizens flaunt the law so they can have their favorite wines. |
| Winemakers are equally frustrated, as reported in this story from Lexus, MSN, Luxury Living newsletter. "Earl Jones, owner of Abacela Vineyards and Winery, in Roseburg, Ore., recalls the young woman who wandered into his tasting room, tried six wines, then ordered a case of each. He balked when she gave her address. |
| "I said, 'Oh, that's a felony state.' She said, 'Don't worry about it.' I said, 'I have to worry about it,'" Jones recalls. |
| The woman instructed him to use her name in both the shipping and return addresses, and then offered a word of reassurance. "She said, 'I know the attorney general in my state; I'm his physician, and if there's a fine, I'll ensure it gets paid and I'll send him a bottle of wine.' Jones shipped the wine." |
| Still, the states and the wholesaler argue the laws keep alcohol away from minors and help collect tax revenue. Michigan, for example, collected $168.3 million from liquor taxes, license fees, fine and penalties in 2003. The argument really is that it's about state control of a regulatory system…not about access to wine. |
| However, what is, or will be the effect on the private club industry? |
| Not surprisingly, people connected with, or wineries that service the private club industry are pushing for change, even though most wineries will continue to support the three-tier system. Direct sales to private clubs or consumers, the argument goes, gives people more choice, and wineries another selling option. |
| "We sell wine to the club industry in two ways," says John Komes, president of Flora Springs, a Napa, CA-based specialty winery. "The three-tier system, used in all states allows the wine to go from the winery to the distributor, then to the retailer/restaurant and finally to the consumer. There are three layers of profit, the costs of which are ultimately passed on to the consumer. |
| "The second way is direct sales to consumers, which is restricted in most states. The individual buys directly from the winery, where they are able to obtain more exclusive and rare products at a fair price." |
| Komes says, "because of the day-to-day volume usage of the wines in the private club, it is not advantageous to service the club through the direct sales. We will continue to use the three-tier system to supply the retailer and restaurants, regardless of changes in the law. |
| "The disadvantage of using the three-tier system," Komes contends, "is that it impairs the availability and pricing of the most sought-after wine. Because of the cost of producing rare, world-class wines, it is cost-prohibitive to the club to buy and sell these wines in their establishments. |
| "We feel the private club can facilitate and sponsor the education of its members through winery participation functions and with the actual buying power given to its members to deal directly with wineries. |
| "By creating a wine culture within the club and giving members access to these wines directly, it enhances the appreciation of wine in club activities and adds value to the membership…and increases the availability of fine and rare products to the individual club members." |
| Kerry Manahan-Ehlow, KMH Solutions Group and Amusant Wines of Napa, CA, favors a change in the law because "as a small producer, we are constantly shut out by the larger wholesalers who don't have the time to build our brands or work with our products with their customers. |
| Change, she suggests, will allow "wineries to market in numerous ways instead of just one option that is very dated. So far as Manahan-Ehlow is concerned, any changes in the law won't affect the three-tier system. She predicts "it will make them (the wholesalers) better businesses and more profitable in the long run…and more accountable." |
| Mitch Marron, general manager, Reading Country Club, Reading, PA, and wine connoisseur, believes "states should be able to govern on an individual basis," but the law should be changed allowing consumers to buy directly from wineries. |
| Marron, however, doesn't think any change in the laws will have much effect on the private club industry. He feels wineries will have increased flexibility to market directly to consumers who will be able to purchase directly from wineries, and believes changes will affect the three-tier system "since wineries will be able to side-step the middle man and go directly to the consumer, with price implications for both consumers and hospitality applications." |
| If there are changes in the law, the focus in the private club industry may well be on wine dinners and specialty events featuring winery representatives. "If the law is changed we would be able to work directly through the winery in acquiring wine for members' tastings and dinners where certain wines are featured," says Bill Crusselle, regional manager with Club Corp, and general manager, Tampa Palms Golf and Country Club, Tampa Palms, Fla. |
| Crusselle, who spent 18 years in the wine industry, feels there may be a breakthrough "in some retail markets with larger chains, which might buy in very large quantities. But the tiered system will stay healthy simply because it will allows orders to stay small, keep inventories low and pricing will be adjusted accordingly." |
| Komes, for sure, favors a change in the law, so wineries such as Flora Springs can directly approach the consumer and order wine without restrictions. That, he maintains, will be to the benefit of private clubs. "Because most clubs are non-profit clubs, it doesn't hurt their bottom line to have their members buy directly. Most clubs may not have the budget to bring in some of the exclusive, rare wines that their members may want. By offering alternative purchasing methods, the club is servicing its member and adding value to their services without stretching their own budgets," Komes contends. |
| Change might be all good and well for wineries, but what about the legal implications of the Supreme Court musings. |
| "A possible outcome is that the Supreme Court will strike only the statutory preference for in-state wineries, but leave intact the statutory prohibition against out-of-state direct distribution. That result would essentially leave in place the current three-tier structure," says Robyn Nordin Stowell, a partner in the law firm of Jennings, Strouss & Salmon in Phoenix, Arizona. |
| "Regarding timing, the Supreme Court will most likely address the narrow issue of whether Michigan's and New York's laws are constitutional, but not the question of a remedy. Therefore, if the court strikes down out-of-state preferences and remands to the district court, you can expect litigation there on the question of a remedy (the district court's decision that has been appealed in the New York case includes the remedy of opening direct shipping to out-of-state wineries on the same terms and conditions as in-state wineries)" she commented. |
| States without a New York-type law could implement a regulatory scheme consistent with the Supreme Court's ruling, Stowell added. "In the past, the Supreme Court has upheld state laws that require out-of-state liquor manufacturers to maintain a licensee within the state. That is an important feature of the three-tiered system." |
| There are numerous reasons why a state has an interest in regulating the distribution of alcohol within its borders. "Requiring a licensee within the state arguably helps that state enforce appropriate laws, such as limitations on business hours and prohibitions on sales to minors or house-to-house. It also helps the state collect taxes. |
| "If the three-tier system were struck down by the Supreme Court, which I don't think anyone expects, one implication is that numerous aspects of states' regulatory scheme would be subject to challenge," Stowell suggested. |
| And there's another possible scenario. "Imagine the implications if the three-tier system is struck down and unfettered direct shipping is allowed. Could the next step be the sale of all liquor through the mail? " Stowell questioned. |
| "At some point, practical issues such as the sale of liquor to minors will take center stage. Certainly, the existing regulation of alcohol in this country makes clear that the law does not protect any liquor manufacturer's right to make their product available as cheaply and widely as possible." |
| Much hangs in the balance for this multi-billion dollar industry and whether or not the Supreme Court uncorks the bottle on a new era with its decision this spring, 70-plus years after Prohibition ended. |
| At least that's the way I see it! |
| What's your opinion. If you wish to respond to the Publisher's Perspective, or other BoardRoom articles, contact Publisher John G. Fornaro by email at johnf@apcd.com. |
| John Fornaro Publisher |