Wine Distributors & The Death of the Family Winery
You don’t see it pointed out much, but here’s the fact the of the matter:
The wholesaler-dominated and controlled system of wine distribution in America hurts small business and hurts family businesses.
A new article in Forbes by Dirk Smillie that outlines why it’s likely that 20% of all American wineries will be sold off over the next five years makes this point in a backhanded sort of way, but it’s a point worth taking not of:
"The expected selloff is
driven by aging vineyard owners bedeviled by how drastically difficult
it is to make a buck in the new landscape of winemaking. "The wine
business today is a funnel," says Robert Nicholson, head of
International Wine Associates, a Healdsburg, Calif. corporate finance
outfit specializing in vineyard buyouts. At the top are those 5,000
wineries, which produce 7,000 brands. These labels compete with one
another, plus foreign imports, at the bottom of the funnel, where they
must fit through a bottleneck of 450 distributors who decide which
brands get shelf space. In the past decade the number of brands has
nearly doubled, while the number of distributors has been cut in half.
Result: Family-owned microbrands have seen their pricing power and
ability to demand shelf space trickle away."
Were it not for the direct shipment channel, I suspect that the 20% of wineries that are expected to be sold off would exceed 35% – 40%.
I don’t think anyone would advocate their be regulations prohibiting the severe consolidation that has occurred among wine distributors over the past 20 years. This is simply the way the market and business works. However, policymakers should take a look at the severe impact that the current wholesaler control of wine distribution has on small business and family wineries. Policymakers should ask themselves if it’s good for the economy to allow wholesalers to run family’s out of the wine industry simply so wine wholesalers can continue to control wine distribution and reap enormous state-mandated profits that have no relationship to the actual value of the services that wholesalers provide. This needs to be looked at by policymakers in light of the fact that it is the near nationwide policy of granting distributors unjustified profits at the expense of family and small business that is causing great harm.
The answer to this obscene situation is a simple one: Make wholesalers compete and work for their profits.
1. Allow wineries and retailers to ship wine direct to consumers in order to assure alternatives to the wholesaler channel are open to wineries
2. Allow wineries to bypass wholesalers in bringing their wines to market so that true entrepreneurial efforts are at the heart of the wine industry
At the very least these two changes would give small and family wineries a fighting chance against wholesalers who appear to be doing all they can to run them out of business. We’d also learn whether or not the wholesalers deserve or can actually earn the profits they are currently given by the state.
Good post Tom. I never tire of reading about this topic on your blog, or, anywhere else for that matter.
There is no question small wineries are going under due to this patchwork, franken-system the government has created and continues to blindly support. And let’s not forget about the consumer–the one who also absorbs the inefficiencies inherent in this “market” structure in the form of higher prices for less choice.
It’s time policymakers revoke the “de jure monopoly” status granted to the wholesaler cartel and level the playing field for all parties. Let wineries, wholesalers, and retailers battle on equal footing and let the chips fall where they will. Business that suck will fail, those that don’t will prosper.
And while we are at it let’s purge ourselves of the spineless hacks in our state legislatures that continue to engage in the quid pro quo politics that keeps BS laws on the books and new, free market inspired ones from ever seeing the light of day. These jokers are half the problem!
Keep pushing for these changes, Tom. I fully support doing all we can to preserve the history and passion evident at family-owned wineries, including fighting for a better way for them to direct ship without a pile of forms to fill out.
I think you are overstating the “distributor” problem about as much as Steinbeck did about the existance of big bad corporate California farmers in the 1930’s or the wonders of the New Deal. Yes, distributors are a pain in the ass, they just distribute what they can easily sell, and they are protective of their turf, but it’s a stretch to blame them for a winery failing as a business. Despite state laws, almost every winery cheats (particularly the small winery) or uses a service that allows them to ship compliant. The real problems are:
1)There are too many labels competing for too few customers.
2)Too many lack a realistic business plan or a reason to exist at all.
3)Sell to restaurants and retailers direct all over the country? Completely unrealistic.
4)Collect from retailers and restaurateurs all over the country without the threat to pull a bunch of brands to back up your demand for payment? Completely unrealistic.
5)Efficiently distribute wine by direct shipping a bottle here and a case there versus shipping by the truckload to the distributor? Unrealistic.
If there is another place on the shelf or on the winelist for another wine the distributor will find room for it in its portfolio. Problem is, there isn’t
While I agree that the “big” distributors do exactly what you say they do it has also been my experience that they create opportunities( not that they want to) for new, more wine savvy companies. In my market (Seattle) I buy less and less from the big boys and more and more from small, independent distributors, wine lovers they and local wineries. Just as Starbucks got bigger we got more and more small, independent coffee roasters
And the number of small, family owned wineries in our state has exploded in part because of the ability to sell direct to consumers and accounts alike. If some go under, as I believe some will, it will because of an oversupply of wineries making similar wines and many having a lack of business, especially marketing experience.
So while the big distributors suck at least in the Seattle area the market has responded and created other opportunities for both consumers and retailers like myself.
Now if only it were easier for retailers to ship. I find it ironic that distributors try to block us. Who do they think retailers buy their wine from. I would think they would encourage an expanded wine market but their heads are apparently somewhere else.
There is no simple answer to why small wineries are selling out. What you have look at is who they are selling to. The answer is the Gallos, Constellation,Wine Group. Those are the largest wine companies in the world. Now let’s say you are a wholesaler selling spirits and wine and you have a building which has served you well in the past and you distribute one or more of the above products from the Big Three. Their power to tell you the distributer rands they want will in effect control how much physical space your warehouse can handle. So what happens is the smaller brands are forced to the wayside by the demands of the Big Three. And unless the wholesaler expands his warehouse, adds extra personel, small brands will disappear or be bought up by large corporations. Those demands by the Big Three also include shelf space, display space and cold box space. All of that works to the detriment of small wineries.
Unfortunately thats just the way the food chain operates in today’s market place.
But it has very little to do with the premise of this story. And that folks is the facts of life from someone who has been in the wine business for over 40 years.
First off, I’ll say that I represent a small independent fine wine distributor constantly doing battle with the wholesalers of which you speak. I’ve worked in several states in the same regard, including NYC where the dynamic is much the same if not magnified. Tom, I sort of take offense to the fact that you’ve lumped in the quite prolific small independent distributors with the SWSs and Charmer groups of the world who are heavily invested in the success of future conglomeration. Every state in the union, save the state-controlled ones, have distributors who favor small family vineyards over all else and work closely with these partners to bring their wines to market in a proper way.
What about the three-tier system would dictate this be so? Nothing, it’s not the system, but the mode of operating within that system that’s causing these sell-offs.
You and similarly profiled wine bloggers like to get on the soap-box about direct shipping, and to be honest with you, I totally agree and think that whole system needs to be rethought.
However, the eradication of distributorship would actually mean the demise of small independent retail stores and restaurants. Small owners can not afford to wade into the broad world of wine to decide which ones they will get shipped to them. Nor do they have to keep tallies on dozens of weekly shipments on which they are reliant. In that atmosphere, hand-tailored service would be impossible, leaving only giant retail chains and likewise chain restaurants who can afford to make those decisions en masse.
Likewise, I would like to add that small family wineries in no way have the time to approach hundreds, thousands, if not HUNDREDS OF THOUSANDS of potential clients themselves directly in your proposed “entrepreneurial” spirit. In a world without government mandated distributors, likewise brokers would crop up with interests only in large aggregates. I guarantee the market would install a very similar mechanism if you were to take the government mandate away from the system we have now. Most likely such a change would be drastically for the worse.
Jason:
I can’t tell you how often I hear from folks like you, good people who work for small, quality minded distributors. But every time there is legislation that would allow wineries or retailers to ship direct into your state, you and others like you don’t show up and don’t support the legislation. Until the small wholesalers who claim to be different from the big wholesalers actually come out on the side of the consumer, the retailer and the winery and support all forms of direct shipping then I fear you’ll just have to live with being heaped in with the big guys.
And I’m not sure where anyone gets the idea that anyone is calling for the demise of the distributorship. No one in their right mind is calling for that. What’s being suggested is maybe wineries ought to be able to choose not to use a distributor if they don’t want to. Maybe retailers and restaurants ought to be able to buy direct from the winery if they choose. If wholesalers can provide a legitimate service then certainly they’ll have customers.
Unfortunately, right now the game is rigged and nobody has any idea how much the wholesale tier is needed in this industry be cause everyone is forced, by law, to do business with them. So, let’s not be throwing up red herrings like, “what happens when there is no distributor.”
As for what the wineries can and can’t do Jason, why not give them the means to decide for themselves. Maybe they only want to sell wine to restaurants and retailers in 5 states. Maybe they want to travel to those states. Maybe they want to take orders from those fewer accounts via email? Maybe they want to have a common carrier send off 4 or 5 cases to a restaurant. Even with the increased shipping charges there is still a better profit for the winery and less cost for the restaurant without the wholesaler in the middle.
What we are talking about here is a system that has been rigged in favor of wholesalers now for more the 70 years. Wineries across the country can’t sell their wine into states because distributorships, including yours, won’t represent them. And in many case they have no other avenues. The state mandated 3 tier system is as unethical as it gets because it Guarantees profits and business to a group of companies that have done nothing to earn their state granted monopolies.
Okay, two scenarios here Tom … you tell me which is better. You are a small family owned winery in 2015, making 6000 cases of good but not great wine per year:
1) You pray people will come to your winery or website and pay $20 per bottle for wine. You meet each of them. You have a relationship. But suddenly you have a tough vintage and people stop showing up. Then you don’t have the advertising budget to send out a mailer, so they don’t show up next year. Or the year after that. Meanwhile, you spend a significant portion of your income traveling to different states peddling your wares one shop or restaurant at a time, with no support or distribution. You beg retailers to take your product, and you absorb the shipping costs since there are no distributors to handle that. Meanwhile, you are warehousing your entire vintage rather than shipping it out around the country. To pour salt in the wound, you’re competing with Gallo and YellowTail giving away flat screen TV’s.
2) You distribute your wine to CAREFULLY CHOSEN wholesalers in 12 states that have a good sales force and understand what you’re doing is a a family project. An individual offering. They know the market because they work it everyday and can click into the new restaurants and retailers before they even open. They develop reputations for finding the new, the best, the brightest wines around before anybody. And they sell through their allocation and beg for more wine.
Your pick.
This is a VERY realistic situation for many 3000-15000 case wineries in California!!!!!
Note … the previous post is from a different Jason (there are two in the scrum now) … I’m Jason K. The previous was Jason O.
Jason:
Who would doubt that your scenario isn’t possible. But what does the possible scenario you offer have to do with the idea that wineries should be allowed to market their wine as they like, either through a distributor or not? Why should they be forced to use a distributor? Why should it be difficult for wineries to ship wine to consumers? Why should it be difficult or illegal for wine retailers to ship wine across state lines?
“I can’t tell you how often I hear from folks like you, good people who work for small, quality minded distributors. But every time there is legislation that would allow wineries or retailers to ship direct into your state, you and others like you don’t show up and don’t support the legislation. Until the small wholesalers who claim to be different from the big wholesalers actually come out on the side of the consumer, the retailer and the winery and support all forms of direct shipping then I fear you’ll just have to live with being heaped in with the big guys”
It’s interesting that you hinge the life or death of the independent winery on this notion. It’s as if you would ask us to throw ourselves on the grenade because OUR independent family owned businesses are somehow less honorable or less worthy of making money than the wineries. That being said, given some measure of protection I would support direct shipping to consumers. In fact I do support it. I ESPECIALLY support it in a state where that line is not carried by any of the distributors. But in fact in most states where alcohol shipments are allowed at all, this is legal.
However, what’s most telling about this article is what it isn’t saying. Exactly who is buying all these little wineries? Let me tell you it isn’t small distributors…nor is it big distributors. May I remind you that all distributors are also restricted by the same three tier system from assuming too much supplier ownership.
Let me also say that the REASON they aren’t being picked up by small distributors (it’s funny also you imply some sort of OBLIGATION for all small wineries to be picked up regardless of quality) is because they (the products and the distributors) can’t compete against the large market forces of the high volume suppliers, NOT the distributors. Distributors do next to nothing to gain media exposure for their products. They do not dictate but are dictated the exact terms and manners in which they are to present the wines in the market. They are often beat around by large aggregate suppliers and given impossible quotas and expectations. So where is the ire for these groups such as Constellation and Diageo? Allowing a small 7500 case production winery to sell directly may help them a great deal. But I’m sorry, once you enter that intermediate zone of production where a winery is still considered small, but above a certain level, direct sales will not help them stay afloat and they will STILL be competing against a virtual lockout by large SUPPLIERS, not distributors.
I live and work in a state in which all of the top 3 national distributors are represented. I’m not sure what your exposure to them is, but let me tell you, they aren’t driving this boat. Despite how inept, corrupt, and devious they are, it is you, I’m afraid, who have misunderstood the situation. To be honest, railing against direct shipping is a tempest in a teacup or fiddling while Rome burns. In all seriousness (and politeness, believe me) this is but a symptom of a much larger problem that will not go away even with the total abolition of the three tier system. I apologize if I find it offensive that you’ve got the finger directly pointed at us, especially virtually on the eve of the death of a man whose life showed us that even the most dedicated efforts can’t keep you from being mongrelized by monopolistic supplier groups.
The consolidation wave in wine distributors drove me to start Rad Grapes in 2005, after working for the dark side for over 15 years. We are a small fine wine house that imports and distributes only for small family wineries. We do it all direct with no middel men. We have been very successful in growing our business in the last three years. Our main problem is financing our growth. We’ve done such a good job on a number of our labels that we are basically inundated with requests from many other small wineries to see if we would be interested in representing them in the NY market. The problem is that Rad Grapes can only grow so fast and add so many newWe basically have a big backlog of wineries looking to join us. Some of them are willing to wait six to nine months, until we can fit them in our portfolio. That tells me that the current state of direct shipping is not working very well for them. They want more…Many small wineries have come to the realization that they cannot subsist in a large portfolio or survive just by shipping direct. Small wineries that want to be in the right stores and right restaurants in markets like NY, have no other choice but to find the right kind of small fine wine house, partner with us and work on a long term business plan for our market. I have nothing against direct shipping, but the problem has become two fold – the price of shipping a case of wine direct from the West Coast to NY is over $80 per case and it is not environmentally friendly. Rad Grapes specializes in those hard to find, high quality, artisanal wines, because we knew there was a need that the large distributors were not full filing. The big guys getting bigger and less responsive has created an opportunity over the last five years or so for many entrepreneurs like me, with the right contacts to try and revolutionize the way wine is sold in our market. We will be flying under the radar for some time to come, but that does not mean that our work is not appreciated by our customers, their customers and our suppliers. I know for a fact, that this is slowly happening in most wine markets accross the US. Change is here, it is just slow to develop at times. Building a wine brand and doing it right, no matter the size of the winery, takes time…just like making good wine takes time. Last but not least, we are best at building relationships for the long haul with our suppliers and customers, something the big distributors have totally forgotten how to do. We slay them with the quality for our wines and our service.I expect this trend to continue to develop over the near future.
So Nick, what about you? In addition to providing outstanding service for the wineries you represent and the accounts you service, are you willing to stand up publicly in New Jersey and call for a change in Direct Shipping laws? Would you be willing to testify in front of the legislature and advocate direct shipping into the state by both wineries and retailers? Or are you content with the laws in New Jersey that force every single bottle of wine sold to go through a wholesaler?
No one including myself doubts the utility of a responsive, knowledgeable distributor. But if you aren’t willing to support direct shipping then in the end you are really no different than the big boys…willing to live off the state to the detriment of wineries, retailers and consumers.
This is an interesting and enlightening thread.
In my view, putting aside the way the general U.S. market works, I would like to see government control over wine lessened (where are all the “let’s get govt out of our lives” people when you need them?).
To the small distributors who have posted, may I ask just one question: do you think that wine distribution should or should not be completely controlled so that wine producers have no freedom to choose their business model, which should include a choice of distribution?
The real problem that Tom is pointing at is control.
“That being said, given some measure of protection I would support direct shipping to consumers. In fact I do support it. I ESPECIALLY support it in a state where that line is not carried by any of the distributors. But in fact in most states where alcohol shipments are allowed at all, this is legal.”
You’ve got to explain to me, Jason, why distributors are owed some sort of protection from competition. The kind of favors you just asked for are usually the kind that are worked out between two businesses in a contract…not imposed by the state. Wholesalers have become so used to being granted state protection from competition that they think they are owed it.
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“Allowing a small 7500 case production winery to sell directly may help them a great deal. But I’m sorry, once you enter that intermediate zone of production where a winery is still considered small, but above a certain level, direct sales will not help them stay afloat and they will STILL be competing against a virtual lockout by large SUPPLIERS, not distributors.”
Jason, shouldn’t the winery AT LEAST have the option to do business as they please, even if you think a particular business strategy won’t work?
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“In all seriousness (and politeness, believe me) this is but a symptom of a much larger problem that will not go away even with the total abolition of the three tier system. I apologize if I find it offensive that you’ve got the finger directly pointed at us, especially virtually on the eve of the death of a man whose life showed us that even the most dedicated efforts can’t keep you from being mongrelized by monopolistic supplier groups.”
Jason I don’t see any connection between the continued increase in size and appetite of international wine businesses and the continuing effort by wholesalers to deny ALL wineries access to markets as well as their attempt to deny consumers access to wines via direct shipping from merchants. Opposing direct shipment by wineries and wine retailers by noting that it’s tough for some wineries to compete against big wineries just doesn’t make any sense to me. The claims of wholesalers who want to appear to be on the side of consumers and wineries will continue to fall on deaf ears as long as they continue to oppose the rights of wineries to compete and as long as the continue to shove consumer interests aside by opposing retailer to consumer shipping.
I’ll tell you why we’re owed some sort of protection: Distributors are not only benefactors of the windfalls of the three-tier system, but victims as well. How? Sin taxes. It’s debatable whether or not the proponents of direct mail have even considered the states’ stake in the taxes collected on wine, but I guarantee states will make this a sticking point and not out of any protectionist policy towards distributorships, but really to protect their own revenue. It’s also likely that proponents of direct mail don’t even care about taxes and would rather not pay them (something that may prove to be the Achilles Heel in legislatures). That’s all well and good, but distributors will NEVER get away without paying them. And even if sin taxes are applied to direct mail wines, the discrepancies in these taxes from state to state can often exceed (sometimes by a great deal) the margins that distributors charge. So, let’s say you live in NY, which levies a relatively high sin tax on wine. A winery charges $6/bottle for a wine and the state of NY levies an extra $1.50 in taxes and fees. So as a distributor I get the wine for $7.50 and charge $10 a bottle in the marketplace. You live in New Hampshire, let’s say, and you run a small mail-order website. Because direct sales are legal and New Hampshire has no sin tax, you get the wine for $6 and charge $8 for it. You can then enter the NY market and undercut any and all distributors. Once lading and other costs are built into the wine, a $0.50 profit is not a profit at all. So the wine gets dumped and a distributor is pushed out of the market due to an unfair price advantage. Unless you are willing to tackle the entire system, placing blame solely on distributors will accomplish exactly nothing. There is a litany of other issues, and they all come with a certain flavor: federalism. Given the currect federalist fervor of our highest national courts I doubt you’ll get much if any sympathy when trying to tackle the three-tier system that way. Likewise national legislators are bound to be protectionist about their states and would harpoon any attempt to nullify or change the 21st Amendment.
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Of course wineries should have the option to do business as they please. In about 2/3rds of the states in the Union they are totally free to do so. As a representative for a small distributor I don’t feel threatened by direct mailing or increased winery freedom. In fact if direct mailing were to become totally legalized today I don’t think a single relationship with any of our suppliers would change. Nor, however, do I think the relationship of dominance between large aggregates and large distributors change. Again, the terms under which these products enter the market are totally dictated by suppliers, not vendors, but more in that below.
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The connection between increased aggregation on the supplier side and your supposed “denial” by large distributors to carry other alternatives is plain as day, I’m sorry. Again, I’m not sure what your exposure to these large distributors is, but they don’t go around deterring their customers from buying more independently minded projects. Truth is, they barely have the time to breathe, they are being stood on by their large suppliers. I’m not making any excuses for them or condoning their behavior, but they are used and abused on an everyday basis. All sales managers do is analyze quota numbers from large suppliers and try to determine if they can make it or not. They don’t have time for little wineries, simply put. They wouldn’t know what to do with them if they did, anyway. Fact of the matter is, large distributors very often carry small independent wineries not to block these wineries from selling elsewhere, but because they don’t have the talent or the energy to sell them. As an aside, only a minority of states are “franchise”, so in most states wineries need only write a letter to end a relationship with a given distributor.
If you were allow small wineries to direct sell AROUND their distributors (which I actually support) the end result would be exactly the same because direct sales would still not be enough to keep any but the smallest of wineries afloat, essentially punishing wineries that achieve success through honest effort.
To conclude, I would say first to try to get to know these big distributors and follow the chain of command. I think you’ll find that laughably flows right out of these businesses and into the hands of large supplier interests. Even presidents and VPs are hilarious puppet-leaders, long since hollowed out of any of the capabilities to act like a real distributor. In a way this is the inverse Walmart effect. In fact, more and more suppliers view their large distributors partners with disdain, instead going straight to large retailers like Costco or Total Wine and either cutting distributors out entirely or dictating a tiny “clearing fee” upon threat of pulling the whole line.
Again, I’m not opposed to direct-shipping at all. But I honestly think that your idea that it is somehow a panacea to the woes of American wine distributorship is simply dead wrong and ignore some much larger, much more dangerous problems. I would like to remind you people that consider themselves savvy enough to buy directly are among an elite. A gargantuan piece of the pie is driven by people do not and will not take up the effort necessary to get their wines through less sophisticated avenues. And this includes retailers, restaurateurs and consumers.
less = more in the second to last sentence.
I would like to also reiterate that the playing fields are in no way level from state to state in more ways until just sin tax. Unless you are willing to unleash distributors from their state boundaries and allow interstate wine distribution AND level the taxes and fees playing field, no legislation to totally normalize or legalize direct shipping or any abolishment of the three-tier mandate would be possible.
Since I got in the business, the Napa Valley Vintners have grown from seven members to about 180. Over 240 wineries have been built, and there are now at least 400 labels, many are custom crush businesses. I have recently helped several unknown, small, 1000 case, custom crush wineries decide on which distributors to use. Not find a distributor…decide which to use. Why are we all selling wine locally thru wholesalers? We always have been able to ship direct in California, yet for some reason we choose wholesalers or brokers.
Maybe if you are a small Southern Oregon Cab producer looking for a California distributor you find it tough going. That might be because not many retailers or restaurateurs or customers are really interested in Southern Oregon Cabernet. But why be so intent on a distributor? You can ship directly.
I suggest to anyone who thinks shipping direct is a godsend, walk in alone without a distributor rep to Sherry-Lehmann or Park Avenue Liquors or Aster Wines or Daniel … no not Daniel…any Manhattan restaurant and see how much time you will be given to talk about your new Mom and Pop California winery. First you will be in a long line behind wholesale reps who are taking orders, and when it is your turn you will most likely be told, sorry I’m doing business here…next? (you will be given that look..”I really don’t care who you are”)
Who thinks a busy restaurateur really cares about talking to 5,000 different winemakers who might want to pop in and taste them on their wines and tell them about their unique terroir? Retailers and restaurants have businesses to run and wholesalers provide them with quick, efficient, and professional service. A retailer might carry 500 wines, but they only have to deal with a dozen suppliers who dependably deliver daily.
We simply don’t sell a great deal of wine direct to customers because the customer wants to do it a different way.
Jason,
As much as I hate the reality, I agree with you that the 21st Amendment is safe as it is, at least with the present Supreme Court. Therefore, all of Tom’s (and my and other’s) arguments about control remain moot.
But it does become a chore having to swallow the nonsense that WSWA puts out as “information.” As if they are the protectors of our liberty and our children. If they were even close to that, they’d have to drop half the 20/20 inventory and other products like it.
As you and I know, WSWA uses the 3 tier system as a means to maintain a grip, and that is what Tom has a right to scream about every chance he gets.
As for the bogus tax argument: is wine the only product sold on the Internet that skirts sales taxes? No state would ever lose wine excise taxes, because it can and does collect that tax from the winery.
Morten,
None of what you say addresses the legislative control over wine.
I’ve heard two points of view here. Those that think direct shipping is good for a winery, and those that dont. In either case the winery should be able to decide, and I think that was Tom’s original point.
How come the types that think direct shipping will lead to an apocalyptic world where 12 year olds are getting drunk on Fedex boxes full of Joseph Phelps Insignia dont voice their arguments here?
“I’ll tell you why we’re owed some sort of protection: Distributors are not only benefactors of the windfalls of the three-tier system, but victims as well. How? Sin taxes. It’s debatable whether or not the proponents of direct mail have even considered the states’ stake in the taxes collected on wine, but I guarantee states will make this a sticking point and not out of any protectionist policy towards distributorships, but really to protect their own revenue.”
You’ve got to be kidding? Since when is an out of state retailer or out of state winery unable to pay sales and excise taxes. They’ve been doing it in a number of states and have been begging to do it in general. Believe me, wineries and retailers are quite capable of putting pen to paper and writing a check. As for politicians, they’ve made direct shipping legal for wineries in 37 states. However, most of them had to be forced to do so by the Supreme Court. Taxes have never been the sticking issue for legislators. The issue has been how they can protect wholesalers who have given them millions of dollars in campaign contributions.
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As for the courts, they have ruled quite explicitely that a state may not bar wineries or retailers from shipping into a state if they allow instate wineries or retailers to ship. The courts are the most sympathetic hear that consumers who want real selection and freedom have on their side. It’s the legislatures who kowtow to wholesaler money that are the problem.
Finally, I’ve heard this argument that the playing field is not level from state to state made by both retailers and distributors. Yet while they make this argument they are calling for a complete shut down of direct to consumer shipping from both out of state retailers and wineries. How absurd is that?
I got to say again, Jason, unless you are actually willing to break with your brethren at Southern, Charmers, Republic, Glazers, etc, then you them. Until you are willing to actually stand up publicly and call for a change in the laws that allow consumers to purchase wine from out of state retailers and wineries then you need to get used to being lumped in with the rest of them.
I’ve met one wholesaler in 20 years willing to stand up and say direct shipping should be allowed. A single wholesaler. Why not make it 2, Jason, and be ready to write a letter to the editor, join with organizations that promote direct shipping or call your state representative and ask for change?
Thomas, I’m sorry but I’m not talking about sales tax. That has nothing to do with this argument. I’m talking about sin taxes, which are in most states levied at distributor’s back doors, which says nothing of licensing costs which in many states can become huge. NO product except for maybe cigarettes “enjoys” such free and frequent taxation. Does my state collect taxes from Californian wineries? Of course not, how absurd. They collect these sin taxes from us, the distributors. If you want free market forces to watch out for consumers then make wine taxed more loosely as with any other non-alcoholic products.
I’m not sure you understand how taxation on alcoholic beverages works, but I can prove my point simply by pointing out the large discrepancies in price on the same wine from state to state, oftentimes flowing through the same large distributor. Go to New Hampshire, for example, and buy a bottle of Smirnoff vodka, then buy the same bottle in New Jersey. The price difference is generally what distributors pay in sin tax. To suggest that suppliers pay these sin taxes is absurd. How does New Jersey, or New York, or any other state levy a tax on a winery in California or France even?
And don’t construe my arguments as implying that I WANT a mandated three-tier system. It is my belief that if the mandate is taken away, the system will more or less remain. My point is if you want it to be driven by free market mechanics, then you must similarly unchain distributors from these sin taxes and silly restrictions that only apply to purveyors of alcoholic beverages. By allowing a free market free for all, you’re basically asking distributors to compete against agents who abide by a totally different set of rules and that is the antithesis of a free market mechanic.
Tom,
If you ask me to look out for YOUR interest and increased consumer freedom, why do you ignore distributor freedoms? I do think that market enrichment via direct shipping would benefit small distributors but ONLY IF you remove the shackles that keep us from competing against our much large competitors on equal ground. Again, you want your cake and you want nothing for us. That is absurd. It’s especially absurd because, to be honest, small distributors like us are THE ONLY ONES doing any boots on the ground efforts to raise awareness among the public of smaller more hand-crafted wines and wineries. Unlike big distributors for whom all the marketing and media work is done for them, we go out on an everyday basis and work markets from the ground up, contacting as many end consumers as we can.
You want me to support YOUR cause but you’re asking me to slit my own throat for it. What are you doing to keep independent distributors in business? Where is the rallying cry for that cause? Because I guarantee without us (and even with totally unrestricted direct mailing) the world of wine in the US will be a very dim place indeed.
Gah comment spam, sorry. One more thing:
It really doesn’t matter who pays the taxes (though it’s usually us), the cost gets built into the wine no matter what. Why would you allow me to compete against an agent that could potentially pay far less than half what I pay in taxes? How is that considered fair? Fight for a level playing field (which is, to my mind, MUCH more important that direct shipping) and we’d fight for you.
“The price difference is generally what distributors pay in sin tax. To suggest that suppliers pay these sin taxes is absurd. How does New Jersey, or New York, or any other state levy a tax on a winery in California or France even?”
Jason,
The answer is that they do this just fine. Go talk to the ABC in New Hampshire. They levy excise and sales taxes on out of state wineries and retailers. They they report no problems at all collecting these taxes. In fact, most states that allow wineries to ship direct into their state impose both the sales and excise tax. The same for those states that allow retailers to ship. Furthermore, the wines that are shipped to consumers have shipping costs attached to them. If anything, the wholesalers still hold the advantage where costs are concerned.
How are you slitting your own throat by supporting the consumer’s ability to buy wines that aren’t even in the market? The out winery or retailer is paying sales and excise taxes. What shackles are you wearing?
Then there is the constitutional issues. Are you willing to support a complete shutting down of direct shipping by retailers and wineries in your state to consumers in your state? Because if not, then the constitution demands that out of state wineries and retailers be allowed to sell through the same channel.
So what exactly are you asking for…Even more protections from competition?
“It really doesn’t matter who pays the taxes (though it’s usually us), the cost gets built into the wine no matter what. Why would you allow me to compete against an agent that could potentially pay far less than half what I pay in taxes? How is that considered fair? Fight for a level playing field (which is, to my mind, MUCH more important that direct shipping) and we’d fight for you.”
Exactly what changes in the law that governs wholesalers are you asking for, Jason?
“I’m not sure you understand how taxation on alcoholic beverages works…”
I think it’s the other way around, Jason.
I owned a winery and I paid excise taxes to the state.
In any event, dismantling the government controls may not change the three tier system, then again, it just might change the system. I’d love to see the experiment. Government controls should be lifted so that the free market can work its own way (which is the present-day legislative mantra for every other business).
Hey Tom, in that weak and narrow 2005 Supreme Court ruling, Justice Kennedy spoke about the 21st Amendment. His statement clearly shows that the present court believes alcohol is a special product and as such, it should be tightly controlled. The narrow issue was about commerce crossing state lines–in the eyes of the justices, it had nothing whatsoever to do with the fact that the product is alcohol, which is why they screwed consumers and wineries up and gave the states yet another method to raise revenue.
Jason, Let me be clear: the reason a distributor pays excise taxes to the state is because from winery to distributor a wine shipment is bonded warehouse to bonded warehouse.
Whenever a winery moves wine from its warehouse direct to retailer or consumer, the winery pays the excise tax, and that would include direct shipping to consumers.
You see, the WSWA argument on taxes is complete BS.
“The narrow issue was about commerce crossing state lines–in the eyes of the justices, it had nothing whatsoever to do with the fact that the product is alcohol, which is why they screwed consumers and wineries up and gave the states yet another method to raise revenue.”
Thomas,
I’m not so sure. In fact the only reason there was a case was because it was alcohol. If it was beenie babies there would have been no conflict. The interesting part of the Granholm case is how it addresses a circumstance where two parts of the constitution collide: Commerce clause and the 21st amendment. Also, I’m not sure the court thinks that alcohol should be closely controlled, but rather that it can be closely controlled. A small, but important point.
Thomas, I totally agree with you that less government control is what I’d really like to see. Tom seems to think that distributors sit underneath an umbrella of protection and can operate with impunity, but that is not so, despite histrionics. If you remove the restrictions applied to consumers and third-tier vendors, then so too must you do for distributors. Allow me to enumerate just a few restrictions I would want lifted on distributors. I’m not sure if it’s willful on your part, but I assumed most of these restrictions were well known.
1.) Excise taxes should be normalized from state to state (even writing that makes me laugh thinking about how improbable such an idea is), if not totally abolished. That way no one can get undercut from outside states simply because of a tax discrepancy.
2.) Distributors should be able to cross state lines with their goods and not have to go through byzantine licensing processes that some of the states put them through. The alternative is that every direct seller would have to obtain a similar license in every state in which they sold. The choice is pretty clear on that one, but I just want to stress that I’m asking for equality and consistency. If wineries can cross state lines to sell directly then so too should distributors.
3.) If suppliers are allowed to sell directly to consumers (and they pretty much are right now) then so should distributors. This is in line with non-alcoholic beverages where the market has caused manufacturers to either not sell their products directly or sell them at a pretty high margin in order to give their wholesaler partners more room to work and sell. The freedom to undercut your distributors would still be there, but for obvious reasons it would probably not be prudent.
4.) Distributors and suppliers should be able to bleed into one another’s realm. While still adhering to normal anti-trust legislation, distributors should be able to get more involved financially and operationally in their suppliers and vice versa for suppliers.
The short answer is that if you want to be able to sell directly from winery to third-tier or end users, then wine should no longer be treated as a “controlled” substance and all agents should be able to act accordingly without impingement. Again I would like to point out how myopic and small of scope the topic of your article is. You would simply create a new playing field and allow wineries to sell directly to third-tier and end consumers while keeping all the old, antiquated regulations and restrictions on distributorship. And you ask, no demand us to help when you say nothing about those restrictions. I agree with Thomas that large distributors have used the three-tier system as a shelter to make money that they probably don’t deserve, but you would strip away that privilege and keep the shackles and essentially leave small independent distributors in a cage with them?
Your disdain for distributors is apparent, but perhaps a return to egalitarian logic would reveal that we are more than a necessary part of the health and well being of independent suppliers who do not have the resources to market themselves nor the production power to boss anyone around. No one will champion these wineries without independent sales forces. And this time when they get bought up you won’t have any broken down legislation to blame it on.
“Your disdain for distributors is apparent, but perhaps a return to egalitarian logic would reveal that we are more than a necessary part of the health and well being of independent suppliers who do not have the resources to market themselves nor the production power to boss anyone around.”
Jason,
I have a disdain for those who lie and BS. And while you refuse to see it, the only reason I can think of that WSWA would be so ravenous about its position is to protect the position, not to dismantle it.
If all those restrictions are such a burden on distributors, why don’t they spend some their powerful lobbying effort and money on getting them removed instead of lobbying to maintain and strengthen them.
Your argument is filled with holes.
Still, you will find in me complete agreement with your points about removing government controls on wine distributors–on everyone.
“Still, you will find in me complete agreement with your points about removing government controls on wine distributors–on everyone.”
Then stop putting the words of the WSWA in our mouths. Just because there is an organization of wine wholesalers somewhere out there in the world does not mean they speak for us.
Jason,
Whether or not you are members of WSWA, they are speaking for the industry as a whole, especially since they spend a ton of dollars to get their message out and the small guys can’t come up with that kind of clout. Their press releases alone are expensive enough to produce–BS can be more expensive than the truth, because you have to do a lot of work to make sure you don’t stumble on your own lies.
I understand that everyone is out to protect his or her interest, and that speaking out against the giant can hurt your interest, but if you disagree with WSWA, why make their case for them instead of making the case for yourself, for the wine industry, and for the consumer?
Jason O:
I agree with many of your comments about restrictions on distributors. It’s very tough on the small companies, and we appreciate our boutique distributor.
However, your sweeping statements that wineries would not pay excise/alcohol/sin tax is just WRONG. We do. And we pay the exorbitant state registration fees, and we do the onerous, complicated paperwork, for far fewer orders and income than you do.
As a 3,000 case operation we do not NEED distributors to sell our wine, because like many small wineries, we have a solid business model, good marketing and an excellent product.
Nevertheless, we have accounts (retail and restaurant) in NY that would LIKE TO GET our wines, but we have to constantly refuse them because we have not found a reputable NY distributor that is willing to deal with such small lots.
Ironically, if we were allowed to get these placements OURSELVES, we could demonstrate to distributors that our wines will move in their market. They would be happy to pick us up, and we would be happy to acquire distribution. Everyone would be happy.
It would actually be a boon to BOUTIQUE DIST’S to allow direct distribution from the winery because small dist’s would be able to vie for products that have a proven track record, winery participation in marketing, and commited purchases.
“I understand that everyone is out to protect his or her interest, and that speaking out against the giant can hurt your interest, but if you disagree with WSWA, why make their case for them instead of making the case for yourself, for the wine industry, and for the consumer?”
Are you actually reading what I’m saying or just copy-pasting previous comments? You’re mad because I won’t support meek legislation to allow non-distributor entities to compete with distributors on an unlevel playing field. So I want a total released from the three tier system and somehow now I’m sympathetic with the WSWA?
“Whether or not you are members of WSWA, they are speaking for the industry as a whole, especially since they spend a ton of dollars to get their message out and the small guys can’t come up with that kind of clout. Their press releases alone are expensive enough to produce–BS can be more expensive than the truth, because you have to do a lot of work to make sure you don’t stumble on your own lies.”
This is really absurd and represents several fallacies. First, what is the WSWA? It’s just a PRIVATE organization that pretends to speak for all of us. Does the KKK speak for all white people? They claim they do. Does that make it so? Is it your responsibility to somehow silence them or correct their message if you happen to be white?
What’s especially interesting about this statement is that you point out that we have no clout to put our message out there, but then tell us that we are somehow responsible for putting YOUR message out there.
Mary:
I never said that wineries don’t or won’t pay excise taxes. It hardly matters if they do or if distributors do, ultimately it’ll get built into the cost of wine and represent an unfair price discrepancy from state to state, unless for some reason wineries build in one set price raise for all states based on the excise taxes of the worst state, which in and of itself would be questionable ethically. And don’t think wineries are alone paying absurd and exorbitant fees that are unique to alcoholic beverages. My point isn’t that one part or the other bears more burden, just that from state to state all of that would have to be normalized to obtain the free market delivery of wine–which, for the tenth time, I fully endorse.
As for your 3000 case winery, I can see how with such a small operation you can probably sell all your wine directly. And you should be free to do so. However, if distribution were to leave the picture then you would be punished for succeeding or increasing your production as your sales needs exceeded what you had the energy and time to sell yourself. I think it’s everyone’s inability to see in anything but two colors that makes all these people respond to me as if I opposed direct-shipping, but I agree that more market diversification is a good thing for all independents, although I think direct shipping is only a small part of that overall goal.
“It’s also likely that proponents of direct mail don’t even care about taxes and would rather not pay them” –YOUR WORDS
“However, if distribution were to leave the picture . . . ” What a befuddling statement. Are you under the impression that the distributors that exist today will suddenly go “poof” if state mandates went away? Maybe I AM missing something. How, exactly, will removing state mandates affect, say, your family business?
You pulled both of those out of context Mary.
The first was not aimed at wineries (and nowhere does it say so) but at people who are proponents of direct mail. What could maybe make that sentence clearer is making it: “It’s also likely that proponents of direct mail don’t even care about THE ISSUE OF taxes and would rather not pay them.” Notice how after that I go on to talk about how people don’t realize how complex taxation is and how much it varies from state to state, but that that issue must be tackled long BEFORE direct mailing can be accomplished with any fairness.
The second is in response to your “we don’t need distributors” statement.
“However, if distribution were to leave the picture then you would be punished for succeeding or increasing your production as your sales needs exceeded what you had the energy and time to sell yourself.”
Jason,
There are no circumstances underwhich wholesalers would ever go away, even if your monopoly were taken away.
As for excise taxes, Your state’s excise tax is $0.10/gallon above the national average for all states. This hardly puts you at a disadvantage. But when you consider that the shipper from out of state pays your state the same excise tax that you pay, I don’t see how we have a problem of imbalance.
Here’s the bottom line: There is nothing that warrants keeping consumers from accessing wines that wholesalers will not make available. And that’s the problem. Wholesalers, whether big or small, completely control what wines consumers have access to when there is no direct shipping from both out-of-state retailers and wineries. This kind of control of the market, the kind of control that guarantees profits to a specific sector of the market, is entirely unethical and benefits nobody.
And I have to reiterate, if a small wholesaler like you is even unwilling to stand up and call for legalized direct shipment of wine then you are indeed part of the problem that consumers in nearly every state have due nearly entirely to the immense profits that the wholesale tier is granted and the use they put those profits to in paying off legislators to keep the sweetheart, unethical system in place to the detriment of the market.
Jason,
I am reading what you post and am sorry to say that you are going in all directions and you have not responded to one question, other than to attack. That kind of debate doesn’t interest me.
Interesting tread here… Perhaps there is too much bashing and defending with Jason O…
Tom,
I believe your main point is a valid one. Wine sales should be freer. I support making wines more accessible and believe this will not take away from state distributor profits. But the issue is more involved than just shipping wine. There are far too many labels competing for consumers’, distributors’ wine critics’ and the trade’s attention. Is it really an issue of consolidation? Or is it an issue of expansionism run wild?
I am a veteran of the industry, first working in NYC, back in a time when there were few NVVA wineries (as noted above) and in NY, few CA wines on the shelf. There was also a much smaller audience drinking wine. We have come along way.
My original employer grew to become one of the large suppliers that contributed to the consolidation of the distributor network, so I left. I have started a new company to focus on the small wineries mentioned in the blog & thread. It’s fun to be back building brands. We sell direct. We also sell direct to the trade and through both distributors and brokers in CA and we sell through a distributor network to other states. It varies by winery and their stage of brand development. A successful business model often has a balance and tight channel management.
But, It is a very complex issue & industry. Each state has their own laws. We compete with way too many labels when sending e-mails or direct mail communication to our direct list. Same is true competing for the trade’s attention and for distributor share of mind. Nothing replaces a relationship; whether with the consumer or someone in a tier along the way. Nothing replaces the service a distributor provides, their sales reps’ relationships with the trade.
I have also been exposed to shallow, flawed business models. There is nothing wrong with better made wines with a better story and more colorful, creative, passionate personality behind the wines succeeding and being rewarded for their effort. I believe in the “invisible hand”… As distributors get bigger, smaller more entrepreneurial ones will rise up—not to replace them but help new brands come to market. As large suppliers try to take costs out of the system and strip their successful brands of their character, the consumer will be able to recognize the difference and move on. Hence, there is a movement away from the top 20 brands often widely available in Costco or chains. Consumers (and the tiers trying to service them), are seeking the new discoveries. So, if wineries come to market with less superior wines, then their road should be tougher, whether they are large or small… After all, it is the American way!
David,
I agree with just about everything you say, but none of it tackles the issue of control, which is what gives giant distributors a great deal of their clout.
The fact that state laws vary greatly is an issue that needs to be dismantled before anything else can be done, and that can only happen when the Supreme Court clearly–instead of narrowly and in a wimpy fashion, as it did in 2005–rules that the section of the 21st Amendment that gives states the right to rampantly apply a variety of stringent rules, taxes, and fees is in violation of the Dormant Commerce Clause (Section 8?) in the Constitution, which deals with trade barriers across state lines.
I believe that Tom’s organization and Free the Grapes, and any other organization, will hardly ever dismantle the system without such a Supreme Court ruling. Consolidation is a fact of life, but it is an insidious fact when the consolidators have the govt protecting their success by way of restrictive regulations that control and limit trade.
Thomas,
Doesn’t Congress write the laws and courts interpret them? I’m not sure the target should be the courts anymore. Perhaps, the poorly written law, needs to be re-written. That “takes an act of Congress”… The commerce clause you mention is what gives Congress authority to manage commerce between the states.
As for consolidation and regulation, i’m not sure totally freeing the grapes eliminates the “funnel” Nicholson mentions. There are still endless labels funneling down to too few consumers. As a veteran of the industry for over 20yrs, i have never been to a store in the last 10 years where I recognize every label. Same is true for the expanding number of sommeliers writing wine lists with many obscure & new labels. To me, that makes it exciting. But it also makes it very difficult for the “aging vineyard owners” (in the Forbes article).
Again, it comes down to smart & flexible business plans. You don’t see Kistler complaining about shipping laws or making plans to be 1 million cases to be successful and gain leverage.
Plenty of people are already selling wine online. If I was a small winery, I’d let the guy who sweeps my floor take home a case and pawn it off. It’s already happening. Is this a free country or not?
David,
Congress does not write alcohol control laws. That is left to each individual state to do. Congress gave the states that right with Repeal of Prohibition–21st Amendment–in 1933.
States have been controlling alcohol with protectionist measures, which is against the Commerce Clause. That’s why the shipping ruling had to come down from the Supreme Court?
If you are in the business, you really ought to know how alcohol control works, because it will have an effect on you.
Thomas,
Be nice, I am very well aware of how alcohol control works (or doesn’t). Congress (legislatures) writes law–period, alcohol laws or otherwise. I am well aware of the fact that Congress, who wrote the 21st Amendment, passed it down to the state level. You are correct. States were controlling alcohol with protectionist measures, which is what lead us to the Supreme Court ruling.
The Supreme Court basically said that per the 21st Amendment, states can “regulate”, they just can’t “discriminate”. This meant legislatures needed to re-write their state laws. States are not violating the commerce clause if they do not discriminate. My original point was that if you don’t like the law, it needs to be re-written. This is done in the legislature branch, either on the state level or with Congress. The Supreme Court cannot re-write law, only interpret it. The fight should be with your state Senator, not the courts.
Perhaps in 1933, there was a valid reason to believe alcohol needed to be regulated (especially, if you lived in Chicago). The 3-tier system exists because of the fear for organized crime’s relation to alcohol. But that is a long time ago, and perhaps an unwarranted fear. If you really want to free the grapes, aim high! And in the right direction.
However, returning attention to the distributors; consolidation has not occurred because of protectionist laws. Consolidation is economic. Distributors favor established brands because they require less work and are more profitable. Similarly, the Wine Spectator favors more established brands in their reviews because they need to service their readers with what is in distribution, using only a fraction of their reviews for the many small, up & coming wineries. In the end, there are far too many labels for distributors, wine critics retail shelves to handle. While “freeing the grapes” may help some wineries to market, the sheer number of brands available (with many more on the way) and the highly competitive nature of the industry will not go away. The industry is way too fractured. If small wineries want to create leverage in their route to market, they would be wise to band together.
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” The fight should be with your state Senator, not the courts.”
This is not always possible, particularly when the legislature 1) appears owned by the distributors and 2) the state is out of compliance with the constitution.
David,
The 21st Amendment is in stark contrast to an earlier Constitutional clause. Before Congress would ever act to change it, the Supreme Court will have to rule on its constitutionality.
Yes, consolidation is a fact of life in all businesses. But in the alcohol trade it’s more sinister because:
1. in itself, consolidation is a violation of the spirit (no pun intended) of the 21st Amendment, which was to allow states, not private companies, to control how alcohol flows within their borders.
2. the controls that do exist make it easier for large distribution companies to dictate terms.
3. the more money involved, the more corruption flourishes.