A Primer on the Wine Wars

In at least four states, politicians are debating whether or not wine distributors are so special that they ought to be favored at the expense of small wineries. In many cases the consequences of the outcome of the debate will determine if small wineries stay in business or are dismantled so that wine distributors might make more money and have complete control over wine distribution.

A Primer on the Wine Wars
…and how to fight them

Wineries have three ways of selling their wine to consumers:

1. Sell to you directly either at a tasting room or shipping the wine to you
2. Selling their wine to retailers and restaurants where consumers buy it
3. Selling their wine to distributors, who then sell to retailers or restaurants where consumers buy it

If the winery’s retail price on a wine is $20 per bottle they make $20 using method #1.
If the winery’s retail price on a wine is $20 per bottle they make $15 using method #2
If the winery’s retail price on a wine is $20 per bottle they make $10 using method #3

The fundamental question that will play out in nearly every State over the next few years is:
Is it in the State’s interest to prohibit wineries from utilizing methods #1 and #2?

Currently there are serious political moves afoot in Kansas, Illinois, Indiana and Virginia to force wineries to only use distributors in selling their wines. And yet, in not one of these cases is anyone advocating this framework for sales other than the wine distributors and the politicians they have purchased via campaign contributions.

The implications for small wineries if these corrupt legislative initiatives succeed are stunning and permanent.

Consider the 5,000 case winery that sells its wines 1/3 via direct to consumer, 1/3 via direct to retail and 1/3 via distributor. If they sell their wines at an average of $20 per bottle the wineries gross revenue would be $891,000. Forced by legislation to change and sell everything via distributor their gross revenue is reduced by nearly $300,000 annually to $600,000. And this doesn’t take into consideration the fact that distributors rarely focus on small wineries in the way that small wineries can focus on themselves. The wineries would still have to hire an outside salespeople to sell the wine for the distributor so the distributor can take the order and deliver. And then of course, there is no guarantee that any distributor will choose to represent the small, 5000 case winery.

Every state will eventually have to deal with the issue of how wineries sell their wine. The U.S Supreme Court said that sales of wine must be equal for in-state and out of -state wineries. In most states wineries are allowed to sell direct to retailers (method 2), yet out of state wineries are prohibited from doing this. Recently a federal judge in Washington State confirmed that the U.S Supreme Court’s 2005 ruling on the need for equality in direct to consumers sales also applies to sales to the trade (retailers and restaurateurs).

Distributors will and have claimed that if wineries in CA are allowed to ship direct to retailers in other states, it will mean the demise of the three tier distribution system and put may distributors out of business. They are only partially correct. What will happen is wholesalers will see their revenues reduced. However, wholesale distribution will remain the most common way wine gets to market because it’s particularly efficient when it comes to large brands. However, they will lose market share to some wineries who choose to sell direct, bypass the wholesaler and find other ways to get their wines to restaurants and retailers.

Distributors feel as though they are fighting for their commercial lives. What’s actually happening is they are reacting in a paranoid fashion that results from years of living under a state-imposed near monopoly framework. Quite simply, they are not thinking straight or creatively. Instead, they are forgoing subtlety and demanding the politicians they’ve paid off over the years introduce and support legislation that will protect them while destroying the wineries they currently make little or no money on. It is cynical, not to mention corrupt.

Consider Virginia. In reaction to a bill that would have leveled the playing field and allow all wineries across the country to sell and ship wine directly to the retailers and restaurants, the wholesalers have helped write and gotten introduced a bill that would completely prohibit Virginia’s and all other wineries in the United states from selling and delivering wine directly to retailers and restaurants.

The legislator who introduced this bill is David B. Albo.   Since 2001, Albo has been one of the leading beneficiaries of campaign contributions by the Virginia Wine Wholesalers Association (VWWA). Between 2001 and 2005 Albo ranked as the VWWA’s…

#2 top top target for campaign contributions in the VA Assembly in 2005
#2 top top target for campaign contributions in the VA Assembly in 2004
#10 top top target for campaign contributions in the VA Assembly in 2003
#4 top top target for campaign contributions in the VA Assembly in 2002
#2 top top target for campaign contributions in the VA Assembly in 2001

In 2005 alone Albo campaign contributions from VA wine and beer distributors was double that of any other industry.

As an industry, alcohol wholesalers have dominated the campaign contribution game in Virginia since 2001 and beyond. Since 2001, the alcohol distribution industry has donated more than $2.55 million to political candidates. This figure dwarfs even the second leading industry.

In 2005 the VWWA donated $165,000 to political candidates and pacs in Virginia. By contrast, the winery supported PAC, VA Vines & Wines Pac, donated a total of $8650 to political candidates and Pacs, including $250 to David Albo. VWWA gave $6,500 to Albo in 2005.

(All figures from the Virginia Public Access Project)

The formula here is clear. Wineries around the country cannot compete with distributors when it comes to buying politicians. They simply do not have the the coin.

The only weapon in their arsenal to fight the largess of the wholesale tier is the moral high ground and the sympathy of nearly every person who reads or hears about how they are being treated both by the political system and wholesalers. Without utilizing this one advantage it is likely that within five years the majority of states will have followed the money and enacted legislation that puts wineries at the mercy of the distributors’ whims, prejudice, money and incompetence.

How to Beat Back The Wholesalers
If wineries and their supporters are to beat back the wholesalers’ assault on their ability to make and sell wine for a profit they must marshall public opinion against the the wholesalers and the corrupting nature of campaign contributions.

Step One: Develop An Organizational Structure
In Michigan wineries and consumers created "Wine CAM, an organization that was designed to fight anti-winery legislation and act as the agent for relations with citizens and the press. They were very successful for a number of reasons. Most important was WINE CAM gave media a central place to go for information on the battle and to find spokespeople. In many states such a task might fall to the wineries’ own association. Either way, a central clearinghouse for information and media relations is critical. It is important that however this organization is run that consumers be brought in and given a voice too.

Step 2: Gather Information
In nearly every state, campaign contribution information is publicly accessible on-line. It is critical to be able to demonstrate the money trail between distributors and politicians who are doing their bidding. Gathering campaign contribution information on sponsors of anti-winery legislation is the first step. The information must then be culled, sorted and organized to show in stark fashion the connection between distributor money and anti-winery legislative activities.

Along the lines of gathering information, it is key to develop a profile of the states’ wineries. In nearly every state outside CA wineries are family-owned. They tend to be small. They tend to be owned by people who work hard in the dirt, in the winery and in the market. And few are making a fortune. In short, a profile of the state’s wine industry should be created that allows the media and residents of the state to both sympathize and relate to the winery owners while at the same time contrasting the winery to the hulking behemoth that is the state’s wine distribution industry.

3. Carefully Craft Your Message & Argument
It’s not enough to simply have gathered and arranged information. It must be packaged into a compelling and simple message. This means being able to combat the distributor’s message machine also. Thankfully, the distributors are generally very bad at delivering a coherent, compelling message that the media and consumer can sympathize with . Nevertheless, their message needs to be combatted.

Wholesalers generally offer only two arguments to support their desire for legislation that would prohibit wineries from selling directly to retailers and restaurants: 1) tax collection is more orderly when a wholesaler monopoly is instituted, 2) the three tier system is what the state had in mind when it re-regulated sales after the end of Prohibition. Both these arguments can be easily addressed by demonstrating that wineries already collect and remit taxes and by simply explaining that the three tier system of wine distribution is not being dismantled when wineries sell directly to the trade.

More important than combatting the distributors crude message is pro-actively delivering the pro-farmer, pro-business message of the wineries. This has to be done by pointing out the devastation that would be done to the state’s small family wineries if self-distribution to retailers and restaurants is denied. Concrete examples of how wineries will fail must be crafted.

Finally, the "David v.Corrupt Goliath" message should be crafted that demonstrates how an unfair, money-driven favoritism is the only thing that has led to the proposed legislation that would put wineries out of business.

Step 4: Deliver Your Message

Very simply, this amounts to putting the well-crafted message in front of the media and consumer. Websites need to be created and materials that make the wineries case need to be printed. Press releases highlighting various aspects of the wineries’ messaging should be delivered to reporters, wine writers, editorial boards and managing editors on a regular basis as the legislative battle progresses. Letter writing campaigns aimed at both the legislators and the media should be created utilizing the mailing list of the wineries. Demonstrations on the capital steps need to organized. Alliances between other organizations of small business should be developed. Letters to the editor should be sent on a regular basis from both winery owners and consumers. Whenever a ridiculous statement by a wholesaler representative or legislator is made, a press release should be issued that disputes the statement and reiterates the wineries’ own messaging. Finally, the paramount message, in every communication, must be the ownership of the legislator by the wholesalers and the resulting demise of small, family-owned wineries.

Many wineries looking at this plan will respond with, "how much time do you think we have on our hands? We are just two or three people at each winery running a small business."

I sympathize with that. However, if you these small wineries do not prepare to fight this battle smartly they will find they have lots of time on their hands.

Posted In: Uncategorized


9 Responses

  1. Terry Hughes - January 27, 2006

    Tom, this is an impressive manifesto. But aren’t you giving your services, strategies, etc, away??

  2. Mary Baker - January 27, 2006

    Here’s my Message #1:
    If a distributor can’t offer a service that wineries want and need, they SHOULD be put out of business!
    Message #2:
    If we are FORCED to use distributors and sell our wine at 50% OFF RETAIL, will the distributors be REQUIRED BY LAW to pay for all their own samples, pay for all their own promotions, pay travel and expenses for winemaker promotions at their accounts, place our wines in the types of accounts we require, and provide us with allocation reports? Or will they continue to extort premiums from small and midsize wineries who are competing for placement with distributors?
    Message #3:
    There’s a secret battle going on here that I don’t think anyone has brought up. Big distributors–the ones with the money to fund these political battles–fear the smaller, boutique-focused distributors that are cropping up everywhere. All the firms we are currently talking with specialize in tiny wineries, and provide superior service both up and down the chain. The big distributors are losing ground to hot new companies and they fear the prospect of direct sales because that would double their well-deserved losses.

  3. tom - January 27, 2006

    Your message #3 is an interesting one. Let me say this about distributors. I’ve seen them build brands in markets for wines with impressive skill. From very small numbers brands have been turned into market leaders when the distributor puts its assets and talents behind a brand. I think the sales people have it tough too. At the larger distribuutors that represent a multitude of brands, street sales people are continually asked to do more for more and more brands. That’s not easy.
    The new boutiques are taking advantage of this burden and offering wineries more service. That’s a huge selling point for a small winery that might only need to move, say, 40 cases in a particular market. The only problem with the small boutique shops is that they are small. They often don’t have enough sales people to realy cover the market and investment in good sales people is an expensive proposition.

  4. Mary Baker - January 27, 2006

    Tom, you’re right that some large distributors have been devoted agents for their wineries. I am writing strictly from the standpoint of a small winery that plans to stay small. Not everyone wants to become the next J-Lo of the wine world. Some of us want to be Susan Warner. Or Mavis Staples.
    And we are definitely not alone!
    Small wineries are here to stay. With growing US interest in small, family-owned, and organic producers, these businesses are multiplying, as are the service industries to support them–boutique bottling lines that specialize in small runs and multiple style changes, boutique filtering companies, boutique (and highly accurate) wine labs, and boutique distributors.
    Your point about the hard lot of salespeople is very true. It’s a hard job whether they’re working for Gallo or Neighborhood Wines. There’s a lot of turnover in sales reps, and that can be even harder on small distributors who have limited staff and budget for recruiting and training new reps.
    In addition, boutique distributors face a unified wall on the streets, placed there by the big boys. It’s cutthroat. Smart sales reps go into restaurants and offer to “write” the wine list–with wines entirely from their portfolio of course. They offer special discounts on monthly sales from an entire portfolio–things that small distributors cannot comfortably do.
    Reps and “checkers” with the large wineries and distributors go into grocery chains, check the wine displays, then take the smaller wineries off the shelf, plunk the bottles in a mismatched case, carry it in the back and bury it.
    In some states, like Tennessee, there are long moratoriums on finding new distributors. Say ‘La Merde Vineyard’ attracts the interest of a TN distributor . . . the distributor orders half a pallet of wine, does a few promotions, and then loses interest or forgets about the winery. The winery must wait TWO YEARS before contacting another TN distributor. And TN is not the only state with these laws.
    So I have to ask . . .
    What is the purpose of forcing wineries to use distributors? Is it to protect the state’s alcohol tax revenues? Is this the most fair and equitable way to collect those revenues?
    Is the need to collect revenues an adequate argument for taking away our right to self-represent? Is the need to collect revenues an adequate argument for taking away consumer choice? Is tax collection an adequate argument for discriminating against an industry of small farmers and producers? Will all authors now be required to have a literary agent and publisher? How many wonderful self-published novels will we lose? The most successful book in 2002, and the only book to sell more than 1 million copies, was a spiral bound crockpot cookbook self-published by an Amish couple who got their book into Sam’s and Walmart. And what about my warm pink ‘Life is Good’ snuggle socks? Will fashion innovators only succeed if they can shill attention from clothing distributors first? No Ben and Jerry’s? No local goat cheese? I see my entire domestic life eroding into a sterile futuristic environment of ‘distributor-approved’ products.
    If there are not enough distributors and sales representatives to accept all wineries and cover all markets, how can distributors support their argument that free trade will put them out of business?
    And where is the logic in destroying the revenue options and businesses of the people creating the product upon which the distributors rely?

  5. allan - January 27, 2006

    Great analysis. Since a lot of this stuff is happening in my backyard, I have been collecting information and have compiled it all in a post about what is going on in Virginia:
    You might find it interesting.

  6. Iris - January 28, 2006

    Tom, I read your article with ever growing astonishment: did I understand it right? Does it really mean, that in the States, as a small winemaker, I would not be allowed to sell my bottles to whom I want? That I couldn’t choose my customers the same way as every costumer has the choice to go to a supermarket, a specialised wine-shop (caviste) or directly to the winemaker himself and order or buy whatever he wants?
    And my personal liberty, base of a democratic system, free market, base of – as far as I was told – your economic system in all that? Seen from as far away as the South of France, it seems to me incredible!
    With our ongoing crisis of “wine-business” around here (you’ve propably read a lot about it – last time at Alders Vinography), we are constantly told, that we have to create brands, work with distributors big and cunning enough to blockbust on internal and external markets, that we are to old-fashioned, not enough consumer orientated etc. I understand all these arguments for big structures, which have millions of hl to sell to anonymous clients, who have yet to be found. But a small producer, who tries to make his “vin de terroir” – the “mother bear type” you quoted in an earlier article, needs direct contact with wine-lovers, as passionate as himself, were they private people or small cavistes (wine-shop owners). It is essential for him, and not only from a business point of view – it’s a live-style, a philosophy… and a fundamental liberty.
    If I had to work with anonymous distributors, very often imposing “exclusivity” on their partners, it would make me much to dependant. I’m quite sure, that for these structures, if they ever choose to work with small producers, it would be just another marketing strategy of finding a “newcomer” every year, which they make “discover” to their clients – and they would have to discover a “brand-new”, more authentic, more exotic next year. What we need as small creators, is a client, who wants to know all about us, who appreciates our special way of considering wine and becomes and stays loyal, by taste and choice.
    I totally agree with Mary Baker: If you’re living and earning your living by following the principle “small is beautiful”, you can never accept such a system of stupid and undemocratic laws.
    And I don’t comment about the money and corruption business – I’m to far away to judge and its sounds so incredible…

  7. weekendwino - January 28, 2006

    Tom, Wow. What a great post. You have given wineries a solid framework to do battle with. Tom, I applaud you for keeping this issue front and center. You have a powerful presence and your leadership on this issue is certainly needed. I also applaud Free The Grapes for their work on this issue.All of us wine bloggers should be posting more about this issue since it greatly impacts our readers- The Wine Consumer.

  8. Dave - January 28, 2006

    Right on time, Tom, I live in Virginia.

  9. Udi Barone - June 2, 2008

    Small wineries should get ready to fight back and develop their own brand identity. Just look at MySpace and the hundreds of small wineries who already took initiative and made relations with hundreds of thousands of members.

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