More Screwage In Michigan

Something interesting has happened in Michigan.

The wholesalers there, who had been pushing most ardently for complete  restrictions on any direct shipping of wine to consumers changed their tune. Since the Supreme Court decision in May they had been arguing for the complete ban on shipping, and doing so in a clumsy but loud manner. They were able to get a legislator (Chris Ward) to offer legislation that would have banned the shipment of wine to consumers.

That backfired when consumer and press outrage revealed the hypocrisy behind their claim that they wanted the ban to protect children. Right!

Well, now the wholesalers have changed gears and decided they need to get legislation passed that gets to the heart of what wholesalers around the country really fear: the possibility that wineries will have the right to ship direct to restaurateurs and retailers.

The new legislation in Michigan, which recently passed one house of the legislature and will go to the other, completely bans any shipment and sales of wine from a Michigan winery to a Michigan retailer or restaurant. This seems rather vindictive as it would hurt Michigan wineries even more than a ban on direct sales to consumers. But what the wholesalers are afraid of is the idea that if it’s ok for a Michigan winery to ship and sell direct to retailers and restaurants, then perhaps it’s ok for out of state wineries to do the same.

Let me break down this fear for you. The wholesalers imagine the likes of Beringer, Gallo, Mondavi, etc. (the big boys) setting up their own distribution system and bypassing the wholesalers. It’s a legitimate business fear. It’s unlikely the small CA wineries would do this, but it is imaginable that the big wineries could. It’s also imaginable that large retailers like Costco, Sams Club, etc. would love to buy direct from wineries and arrange for shipment from CA.

This new legislation would allow wineries in or out of Michigan to sell up to 500 cases a year direct to consumers. This is a partial victory for consumers and Michigan wineries, as well as out of state wineries. And it resulted from the stupid way by which the wholesalers chose to focus on the non-existent problem of minors obtaining wine via the Internet in their attempt to sell their ban on direct shipping.

This new ban they are pushing however is an even greater burden on Michigan wineries. Wholesalers in that state, which would be in complete control of the distribution of Michigan wines rather than the wineries being in control of their distribution, are very unlikely to put any effort behind a Michigan brand. They’ll focus on Gallo, Beringer, Mondavi, Yellowtail and a variety of other larger brands. The Michigan brands will be left in the cold and Michigan wineries will be able to do very little about it.

A Michigan winery could hire its own sales force, have it travel around to restaurateurs and retailers, sell their wine, then pass the sale off to the wholesalers. But this is unlikely due to the expense of maintaining a sales force. What this new ban does is it forces Michigan wineries to sell their $20 bottle of wine to a wholesaler for $10 a bottle (FOB Pricing) rather than sell the wine to a retailer at $14 a bottle (wholesale pricing). That’s a pretty big financial hit.

While it is nice to see that the word got out about the wholesalers "Minors" canard and stopped them from getting a direct shipping ban passed, it is disheartening that they have been able to convince the legislature to pass a special interest law that sets further in stone the monopoly on wine sales. This should be a lesson, or at least a reminder, of the power of campaign contributions. Votes flow toward the contributions. Ever wonder how it is that more and more small, family-owned business seem to be replaced on a regular basis by big chains and corporate concerns? Follow the money.

Posted In: Shipping Wine


3 Responses

  1. Laura - September 7, 2005

    It is just funny when you read the version of the bill that got passed in the House.
    All kinds of rules for the wineries to ship but limited rules for retailers that ship.
    They also make a big point about collecting the excise tax even though today the wine excise tax is paid by the winery even if the wine goes to a wholesaler. So the excise tax would work the same way with or without direct shipping!
    As I learn more about the whole setup – I do truely wonder what the purpose of the wholesaler is in the distribution of wine and how does it benefit anyone other than the wholesaler.

  2. Paul Mabray - September 7, 2005

    The red herring is being exposed. It will be interesting to see how wineries start to view this new channel of direct to on/off premise accounts. We think it will be one of the most powerful sales channels for small wineries over the next 5 years.

  3. Joel - September 8, 2005

    After a week of digesting the House-passed bill, one thing is crystal clear: this is NOT a partial victory for consumers. It’s a de facto shipping ban via regulation, rather than legislation. For Michigan wineries, it’s a total loss.
    And for Michigan retailers who currently ship or deliver wine in-state — there’s a BIG surprise buried in the bill’s wording that few people yet know about.
    First things first: in theory, the bill lets wineries direct-ship a grand total of 500 cases to Michigan consumers annually. In other words, a winery with a case-every-other-month wine club reach its annual quota at 83 people — and could not ship any additional wine to anyone in the state.
    Wineries would need to both get a faxed ID AND use IDology or IDresponse or similar. They need to put not just an age label on the carton, but a pre-purchased MICHIGAN TAX STAMP. They need to report each individual sale, not just cumulative totals, to the state LCC. (In other words, the state will have records of just how much — and what — all individual wine consumers are shipping to their homes.)
    Now here’s the real kick — unlike every other license issued by the state, the Direct Shipper License has NO FEE specified in the legislation. (Chris Ward originally put a $1000 fee in the bill — but pulled it at the last minute; I guess it couldn’t pass even HIS laugh test…).
    Instead — the license fee would be set at a later date by the Michigan LCC, headed by Nida Samona. Yup, the same Nida Samona who publicly expressed strong support for a total shipping ban — and is an appointed bureaucrat, unaccountable to the public. Any guesses what sort of fee we’re looking at — for the right to sell and ship 500 cases of wine?
    In other words, it’s likely that a few Michigan wineries would be desperate enough to jump through all the hoops because they would need those sales. It’s highly unlikely that any out of state wineries would bother, or any Michigan wineries that could possibly avoid the hassle.
    The bill would also ban Michigan wineries from wholesaling to retailers and restaurants, which they have had unlimited rights to do for the past 35 years. The repercussions from this section alone are likely to do in a number of marginally-profitable wineries, or those whose business models rely heavily on self-distribution.
    I mentioned up-front that the bill also had a hidden kicker for retailers — and here it is: this wholesaler-drafted bill BANS MICHIGAN RETAILERS FROM SHIPPING OR DELIVERING ANY WINE ORDERS, EXCEPT THOSE PLACED IN PERSON, AT THEIR STORES. If this becomes law, no Michigan consumer could legally telephone a local store for a delivery that includes wine. No consumer could go to a Michigan wine store’s web site and order a case to be sent anywhere in Michigan.
    The bill accomplishes this by a definitional sleight-of-hand: it defines a Direct Shipper as the entity that actually MAKES the wine, and then says that only a licensed Direct Shipper can accept orders for shipment or delivery to consumers by means of fax, phone, computer, etc. Voila — the retailer delivery business is out of business.
    This fact has not hit the press yet, nor are most retailers aware of it. Consider it their early Christmas present from the wholesalers!
    So now we’re off to the Senate, where prospects appear much brighter. The leadership there is pro-shipping, and unlikely to pass the self-distribution ban; the challenge is crafting a bill that reasonably satisfies the consumers and wineries without creating a stalemate with the wholesaler-dominated House. We shall see…

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