"WSJ Revisits Wine Shipping Controversy" by Megan Haverkorn

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One might argue that state regulations concerning direct wine shipments are no more organized today than they were 3 years ago when the landmark 2005 Granholm v. Heald Supreme Court ruling was made, which requires states to apply the same regulations to in-state and out-of-state wineries when shipping directly to consumers. Many states are still struggling to come to terms with Granholm as wineries, wholesalers and law enforcement battle it out over the touchy subject.

VOLUME CAPS AND FACE-TO-FACE SALES. WSJ reporter David Kesmodel published an interesting article yesterday that discusses the tug-of-war scenario between wholesalers and wineries, in which he reviews some of the biggest grievances wineries have with state legislation: volume caps and face-to-face transaction requirements. Volume caps basically put a limit on which wineries can ship direct based on the number of gallons of wine they produce each year. Face to face transactions, on the other hand, require consumers to visit vineyards before ordering shipments from them direct.

As Kesmodel put it: “A handful of states in recent years have enacted laws that, while permitting direct shipments, include requirements that bar or discourage many out-of-state wineries from participating.”

Many in the wine industry believe these requirements are passed to protect small state wineries and wholesalers. As David points out, Mass., AZ, Kentucky and Ohio have all passed laws that ban direct shipments from larger wineries, which hurt producers in states like California, Oregon and Washington where 90% of the nation’s wine production is made.

Kansas and Indiana, for example, require residents ordering out-of-state wine to first visit that vineyard and show identification proving they're of legal drinking age. Kansas takes it a step further by requiring consumers to re-visit the winery each time they order from the same vintner. Organizations like Free the Grapes and Family Winemakers of California have sprung up to combat such laws.

However, Craig Wolf, ceo of the Wine & Spirits Wholesalers of America, told WSD last May in an interview that volume caps address a specific problem that wineries brought to the table, which is: small wineries can’t get distribution.

“So what the states are saying is, ‘ok, if that is true, if a small winery is having trouble getting distribution then we’ll allow small wineries to self-distribute and/or ship direct.’ But there is no need to allow that wholesale, no pun intended, to all the big wineries because they have distribution,” he said.

When Granholm was passed in 2005, it was only the beginning of a series of ongoing legislation for the industry. States have gone their separate ways in passing different rules, making it difficult for wineries to know all the requirements when shipping to various states. Today, 37 states permit direct shipping with various stipulations. Others, such as New Jersey and Maryland, comply with the high court ruling by barring both in-state and out-of-state wineries from such sales.

A judge is expected to rule on a challenge to the Massachusetts law this fall that bars direct shipping from both in-state and out-of-state wineries that produce more than 30,000 gallons of wine annually (unless they have no distributor in the state). All of the state's in-state wineries fall under the cap, while hundreds of out-of-state wineries are disqualified.

In 2006, a Kentucky court upheld the state’s production cap of 50,000 gallons, claiming it "simply does not give Kentucky wineries a competitive advantage over" out-of-state vintners of similar size. However, the court struck down a face-to-face law, ruling it discriminated against out-of-state wineries. The decision is currently being appealed by the Wine and Spirits Wholesalers of Kentucky.

Meanwhile, Arizona’s production cap of 20,000 gallons also survived a challenge in federal district court earlier this year. An appeal is pending.

Last month, the U.S. Court of Appeals for the Seventh Circuit in Chicago upheld the part of Indiana’s law that requires residents to visit a winery at least once before being allowed to place direct shipment orders.

OUT-OF-STATE RETAILERS. The legislation in Illinois was especially contentious for out-of-state retailers. When passed, HB 429 allows small in-state and out-of-state wineries to ship to consumers, as well as in-state retailers. However, the state ruled that Granholm does not apply to retailers, and therefore in-state and out-of-state retailers do not have to be treated the same. Needless to say, out-of-state retailers are not allowed to ship to Illinois residents.

In speaking with Jerry Rosen, executive director of the Beverage Retailer’s Alliance, over a year ago while HB 429 was still being hammered out, he told us: “If you read Granholm vs. Heald it said several things, one of which is that everything refers to wineries. There is no mention and no discussion of retailers. They are not covered under Granholm. Granholm also reiterates the 21st amendment that gives states the right to make alcohol laws for their particular state.”

Nonetheless, retailers vying to ship directly to consumers are gaining traction nationwide. Groups such as the Specialty Wine Retailers Association (SWRA) say Granholm applies to retailers in addition to wineries. In that case, they believe out-of-state retailers should be allowed to ship wine to residents if it is legal for in-state retailers to do so. Some states agree with the SWRA, while others rule the 2005 Supreme Court decision only applied to wineries.

On their website, the SWRA states the following: “Specialty Wine Retailers Association stands for a free market in wine, unencumbered by protectionist state laws that prevent consumers from legally obtaining the wines they want. SWRA stands for a true national wine market in which consumers and retailers can transact business in an appropriately regulated milieu. This means that any adult consumer in any state should be allowed to legally purchase and have shipped to them any wine from any retailer in America.”

However, wholesalers disagrees. They argue that the 21st amendment gave states the right to draft their own alcohol policy. They also claim Granholm focuses on product-based discrimination. In other words, states can’t discriminate against a producer based on where the product is coming from; however, geography alone cannot create discrimination, such as in the case of out-of-state retailers.

“Now, they [the Supreme Court] didn’t say that you can’t have disparate treatment – there’s a distinction between the two...you can require that alcohol be sold through your three tier system. As long as it doesn’t discriminate against out-of-state products you’re okay.”

“But the Supreme Court has never said that you have to offer remote retailers the same opportunities as in-state retailers,” Wolf said.

The retailer-to-consumer shipping cause is getting more national attention. As we reported yesterday, ShipCompliant is now offering their compliance software not just for wineries, but for retailers as well.

THE ISSUE OF MINORS ACCESSING WINE ONLINE. Most wineries and winery advocates echo the sentiment that wholesalers are only interested in protecting their businesses. They say it’s hard for small wineries to gain distribution, particularly with out-of-state wholesalers, so they depend on direct-to-consumer wine sales. According to the article, wineries’ direct sales, including shipments ordered in tasting rooms, accounted for about $2.8 billion of the industry's more than $30 billion in revenue last year in the U.S., says Barbara Insel, head of Stonebridge Research, a Napa, Calif., market-research firm.

However, wholesalers argue they want to protect consumers and prevent minors from easily obtaining alcohol online.

“We in the industry need to be careful,” Craig Wolf told WSD last year. “We try to be very responsible practitioners...if and when a kid buys online, gets drunk and goes and kills somebody, it’s not just that one direct shipper that is going to be tarred, it’s the entire industry that’s going to be tarred. We’ve worked so hard to show how responsible and caring we are that we don’t think that is a risk worth taking.”

Tom Wark rebutted Craig’s assessment. “Direct shipping will increase minors’ consumption of alcohol? Come on. The Supreme Court and the Federal Trade commission as well as nearly every alcohol regulator in America know that's absurd,” Wark told us exclusively in an interview in January.

RECALL THAT AMAZON AND WSJ have both jumped on the bandwagon of shipping wine. In the next month or so, Amazon.com is expected to enter the scene when it begins selling wines from 26 states. Earlier this month The Wall Street Journal's marketing department also announced the launch of a direct-to-home wine service.

BRITISH RETAILERS INVESTIGATED FOR PRICE FIXING

We’ve all heard the problems suppliers, namely wineries, have had with British retailers, and now an industry watchdog is posing allegations of price fixing. According to the Financial Times, leading British supermarkets are facing heavy fines after the competition watchdog confirmed it had found evidence of companies sharing pricing plans. Sources claim the Office of Fair Trading said it had "reasonable grounds to suspect" pricing data were passed among supermarkets via suppliers.

The OFT raided Tesco, J Sainsbury, Wm Morrison, Asda and Procter & Gamble, the world's biggest consumer goods maker, and asked for information from other businesses including Unilever, Nestlé, Cadbury, Mars, Coca-Cola Enterprises and GlaxosmithKline. No company has been accused of any breach of the law.

As you’ll recall, alcohol suppliers have had a tough time with British retailers aggressively marketing down prices and offering steep promotions, resulting in an extremely competitive environment and notable margin losses. Constellation had an especially difficult time competing against private label wines that are sourced from cheap Australian bulk imports and sold for next to nothing. The spirits industry has also faced problems with retailers offering heavily discounted spirits and promotions during the holiday seasons, although they’d agreed to halt those practices in effort to curb binge drinking.

WSD BRIEFS:
BROWN-FORMAN HAS ELECTED John D. Cook, director emeritus of management consulting firm McKinsey & Co., to the board of directors. Cook also served as executive vice president of The Kellogg Co. and president of Kellogg North America. B-F also announced that Barry D. Bramley, who has served on the company’s board since 1996, will retire from the board on Sept. 28, after reaching the customary retirement age of 71. The Brown-Forman board now has 13 directors.

CANADIAN CLUB CELEBRATES 150th ANNIVERSARY. In honor of its 150th anniversary, Canadian Club is launching a 30 year old, limited edition whisky. Hitting shelves in the fall, Canadian Club 30 year old marks the introduction of the oldest Canadian whisky on the market. The 40-proof collector's edition Canadian whisky is available in a 750ml bottle at a suggested retail price of $175-$199, which will vary by market. It will be available October through December in the United States.

THE GEORGE WASHINGTON SPIRITS SOCIETY inducted five new members at an industry heritage celebration last night at Historic Mount Vernon, accounted Discus. The 2008 inductees are: U.S. Senator Tom Harkin (D-Iowa); the Honorable Frank Keating, former Governor of Oklahoma; Patrick Ricard, Chairman and CEO of Pernod Ricard; Esther H. Vassar, former Chair and present Commissioner of the Virginia Alcohol Beverage Control Board; and Bennett Glazer, Chairman and CEO of Glazer’s Family of Companies.

A SINGLE BOTTLE OF MARTHA WASHINGTON COLONIAL RUM FETCHED $20K at the Discus event last night, with the winning bid coming from Diageo.

Until tomorrow, Megan

“You're never too old to become younger.”
Mae West (1892 - 1980)