The Maryland Report On Direct Shipping—Half Bad

Posted by Tom Wark on Dec 23, 2010

There is a limited audience for a 250+ page state government report on the history, success, problems, legality and politics of the direct shipment of wine to consumers. Turns out I'm part of that fairly small audience. So, I read with great interests Maryland Comptroller Peter Franchot's report on this subject released on Tuesday.

Following my tradition of reading these sorts of things so you don't have to, allow me to summarize the results of the report:

The claims of economic disruption, drunk children and destruction of the three tier system that have been claimed by opponents of direct shipping have not come to pass where direct shipping is allowed and will not come to pass if direct shipping is allowed in Maryland. Recommendation: Pass direct shipping law that bans Marylanders from buying wine from out of state retailers, but let wineries ship into the state.

Retailers across the country should be accustomed to watching laws be passed that see them shut out of states while wineries are allowed to ship. But what rarely happens as this kind of blatant discrimination occurs or is suggested is the presentation of an official document that provides no basis in fact for the reasons given for the discriminatory ban on out-of-state retailer shipping into a state.

The Maryland Comptroller's Report on Direct Shipping does just this.

"A determination is made that direct wine shipment by out-of-state retailers to Maryland consumers would have a negative effect on in-state licensees, because purchases from retailers are primarily motivated by “price.”

Let's be clear, nothing in this report actually supports this conclusion. Nothing. Let me repeat, Nothing. It is a conclusion drawn out of thin air. Consumer respondents to a survey by the Comptroller's office indicated that the primary reasons for buying wine online were, in order of importance: 1) Not available at a local retailer, 2) Wanting to buy directly from a winery, 3) Convenience of Delivery and finally, 4) Price.

There is nothing in this report that demonstrates or explains why those that buy from online retailers are motivated primarily by price. Nothing. In fact, the report properly uncovers the fact that those consumers that buy online tend to be "connoisseurs" who are driven by issues beyond price, who value the availability of and access to wine that online sales provide and how tend to spend much more on a bottle of wine than the average wine buyer. There is no evidence in this report or any other report that those that have wine shipped to them from out of state wineries or out of state retailers have motivations for their actions that differ any any way.

I like how Peter Jensen, editor of the Baltimore Sun's Opinion Page, put it in an online editorial today:

"While the report is fact-based, some of its conclusions are not. The most glaring of which is an observation that legalizing direct shipment from out-of-state retailers would do damage to Maryland-based retailers and wholesalers.

That’s absurd. If the ban on out-of-state retail shipment is maintained, that means a Maryland resident who wants to order a gift wine basket or join a wine-of-the-month club or order an imported wine could well be out of luck. Those services are commonly provided by retailers based in places like California or New York.

Consumers can’t very well order wine from a vineyard in Italy or France. The shipping costs would be astronomical. But they might order an imported bottle not available on Maryland store shelves through an out-of-state specialty retailer."

So, how does this happen? How does a completely bogus conclusion find its way into an otherwise impressive report that has to be described as prudent, thoughtful, and thorough? The answer is lobbying, money and influence.

Among the strongest statements that Comptroller Peter Franchot made about the issue of direct shipping upon announcing it to the press was this:

"It's crucial to the passage of this bill that we not open up all of our wonderful Maryland retail establishments to just incredibly aggressive marketing by out-of-state retailers that are undercutting them on price. That is not a good component."

This is the exact same position taken by the Maryland Licensed Beverage Association, a collection of Maryland retailers, whose lobbyist, J. Steven Wise, who, according to a Baltimore Sun Report, "appreciated that the report frowned on the idea of letting out-of-state retailers — as opposed to wineries — ship wine directly to consumers."

It should be noted that this report will pave the way for successful legislation in Maryland in 2011 that will finally allow direct shipment of wine for residents of that state. The report dispels many of the concerns that have been voiced over the years when the issue has been debated, such as direct shipping allowing minors to obtain wine and the notion that direct shipping will hurt the in-state beverage alcohol industry. These and other claims are debunked in the report.

When I testified earlier this year in Annapolis on behalf of Specialty Wine Retailers Association I saw legislators sit quietly, for the most part, as members of the Maryland retailer and wholesaler community threw out bogus claims of how direct shipping will harm children and put Maryland retailers and wholesalers out of business. Those two arguments won't carry so much weight when the next bill is introduced in January and the hearings occur all over again.

This year, the Comptroller's office will be grilled extensively on the claim that out-of-state retailers need to be shut out of the state while out-of-state wineries are allowed to retail their wines into the state. The Comptroller's representatives will have to explain upon what basis Maryland consumers should be shut out from ordering imported wines, collectible wines, rare wines, auctioned wines and wine-of-the-month-club wines—all of which only originate from retailers. They will have to explain why in the survey they took that underlies their study Maryland consumers, Maryland retailers, Maryland wineries, Maryland Wholesalers, Maryland regulators, out-of-state wineries, and out-of-state regulators were invited to take the survey, but out-of-state retailers were not.

The Comptroller's Office will have no factual foundation for it's conclusion that those that buy from out-of-state retailers and out of state auction houses and out of state wine-of-the-month clubs are somehow motivated by price, while those that buy from out-of-state wineries are not. They'll have to explain why retailers across the country that ship outside their state find that the average price of the wines they ship across state lines are higher than those that are bought on their premises (something the Comptroller would have discovered had he surveyed out of state retailers and which would debunk the notion that consumers buy from out-of-state retailers based on price, not lack of availability from in-state retailers.)

The Comptrollers representative will have nothing more than "absurd" inferences to explain all this. Still, Maryland lawmakers are most likely to pass a law that bars Maryland consumers from access a huge swath of wines in the American marketplace based on…..Nothing.

Disputing the bogus and nearly incomprehensible claims about retailers and retail buyers in the report will be consumers guided by the Marylanders for Better Bear and Wine Laws who have pushed forward the direct shipping issue in Maryland. Also, enlightened Maryland retailers such as Gary Zorechak of Frederick Wine House will argue in favor of retailer shipping because, as he says, "As an owner, I don't really see it hurting any of us." Finally, I suspect that no wineries, either in Maryland or outside, will come to the defense of the Comptroller's recommendation that Marylanders only be given access wineries and not retailers.

As I mentioned earlier, specialty wine retailers across the country are accustomed to being treated like second class citizens where direct shipping is concerned. Since the Granholm v. Heald Supreme Court decision in 2005 that taught state-based discrimination against wine shippers is unconstitutional, the number of states where retailers may ship legally has decreased significantly. This has been a result primarily of the bogus conclusion that the Granholm case's reasoning not applying to retailers but only wineries and the fact that out-of-state retailers have little influence at the state legislative level where wholesalers have convinced lawmakers to ban retailer shipping, while at the same time out of state wineries have been given the right to ship so as to assure that in-state wineries may ship wine to state residents.

I believe despite the unfounded conclusions in the Comptroller's report and depsite Maryland consumers desire to have the right to buy wine from both out-of-state wineries and retailers, the coming Maryland wine shipping law will exclude out-of-state retailers.

I'm hoping again for the opportunity to testify in Annapolis again next year when this issue arises if only to assure that the record reflects the reality of the situation.