The New Wine Shipping Battle

Posted by Tom Wark on Oct 5, 2005

For nearly the last decade, the direct shipping issue has been framed as a consumer issue. And largely it was. Consumers wanted the right to buy wine from whatever source they desired. Indeed, wineries wanted the right to sell them that wine too.

That’s all changed since the Supreme Court’s Heald v Granholm decision in May.

Now the battled has become one focused on industry interests primarily. Like the previous battle, consumers are in the mix, but it’s the industry players that have the most to lose now.

At the center of the newly framed "shipping" battle we have the wholesalers. They are fighting to prevent their greatest fear from being realized: the right of wineries to ship directly to retailers and restaurateurs anywhere in the country.

The Supreme Court said something very basic to the states: Devise whatever regulations regarding the sale of wine you want. But make sure they are not discriminatory. If you let in-state wineries ship to consumers, then you must let out-of-state wineries do the same. If you outlaw this, then all are outlawed from doing it. Just make sure it’s equal. Well, it turns out that in a number of states local wineries have had the privilege to sell directly to in-state restaurants and retailers, while out of state wineries have not had this privilege. For the most part out-of-state wineries really didn’t care about this kind of discrimination. After all, it would take a fairly significant effort for a small or medium sized California winery to develop their own sales team in Michigan or Texas or Virginia who would call on, say, retailers, then arrange the shipping of wine to these accounts. It was always far more economical for them to hire a wholesaler to sell and distribute their wines in another state.

However, these laws do appear to violate the spirit of the Heald v. Granholm Supreme Court decision and this has not been lost on the wine wholesalers. Across the country wholesalers are pressuring state legislatures to disallow in-state wineries from bypassing wholesalers and selling directly to retailers and restaurants to insure that out of state wineries don’t sue on discrimination grounds to have the same privilege.

The upshot of this kind of legislation is truly devastating to small winery in these states where such practices have been allowed often for decades.

Michigan, Virginia, Louisiana, Pennsylvania and Arizona have all taken up this issue on behalf of wholesalers who are insisting if the law isn’t changed to assure they handle all wine sales to restaurants and retailers they will be put out of business sooner or later by big wineries from out of state choosing to sell direct to wine shops and restaurants.

State governments have a choice: protect and cement in place a wholesaler monopoly and put out of business small wineries in their states or really open up wine sales by allowing any entity to sell to any entity. From a taxing perspective, the wholesalers bring in more taxes for the state and employ more people directly than most states’ wineries. From a political perspective the wholesalers deliver far more campaign donations than the the wineries in most states. The wineries, who are fighting for their very existence are up against a lot of political currency which they simply can not match.

But let’s just ask the question that needs asking: Why should wholesalers be given a monopoly on distributing wine to wine shops and restaurants? The only possible reason is that it would make tax collecting somewhat more efficient. Fewer collectors, fewer hassles. But is this enough reason to essentially put small wineries at the mercy of wholesalers who would not necessarily be under any obligation to sell these wineries’ bottlings? Wholesalers have shown themselves to be notoriously bad at promoting and selling the wines of small, low profit brands, and instead placing a focus on the big brands. Add to this that for every case of wine a winery sells to a wholesaler instead of directly to a wine shop the winery loses 33% in revenue.

Interestingly most wineries don’t want the laws to fall under the Commerce Clause-inspired anti-discrimination reasoning set down in Heald v. Granholm because they presume the states will simply outlaw all sales by wineries to retailers and restaurateurs. And they are probably right unless the courts held that the supreme court decision only dealt with shipping of wine to consumers and did not affect sales to restaurants and retailers. This is the interpretation of the Supreme Court decision that California’s Attorney General adopted in suggesting that CA’s wine laws need not be amended where they concern retailers. Interestingly, CA wholesalers also took this position because they knew that CA’s wine industry would go to the wall to keep their privileges to sell direct to retail and restaurant accounts. Better, in the wholesalers mind, to keep things just as they are with regard to retailers in CA and elsewhere and not muddy the waters.

Court cases currently underway in the State of Washington and in Virginia will bring some clarity to this issue. However, in the mean time a number of small, family wineries are going to suffer and suffer badly.

The best solution is for state legislatures to act honestly and to level the playing field by allowing any winery in any state to to sell and ship wine to any retailer and any restaurant in America. If Gallo or KJ or Constellation want to set up their own sales force in those states, well, the wholesalers will just have to figure out how to make a living without those big clients. There is no good philosophical reason for states to favor wholesalers on this issue. However there is a good political reason for them to do this: campaign donations.

A good summary of this battle as it is playing out in Virginia can be found here and here.