Wine Doesn’t Innovate

Straight Jacket
One thing the wine industry can't be accused of is innovation.

In fact, it's fair to say that the wine industry trails most others when it comes to adapting to change and new ways of thinking. And it has been this way as long as I can remember observing it—almost 20 years: the industry plods forward using past-due and antiquated processes, techniques, paradigms and tools to get their product to market while most other industries move forward into new territory with a head of steam and not too far away from the curve.

Many folks will explain that wine is about agriculture and farmers are among the most conservative of business people, meaning change always comes slow. That's not true, at least not where wine is concerned.

The glacial pace at which the wine industry adapts to new worlds of technology, process, logistics, business models, business paradigms, selling tools and communications is due primarily to it being tethered to the 3-Tier System.

When folks talk about the information and communications dislocation and revolution we have been experiencing since the beginning of the 1990s, they forget that it has also been a logistics revolution. We've gone from moving things physically to moving things electronically.

However, the three-tier system largely prevents the wine industry from taking advantage of the great logistical relocation that has produced huge efficiencies in moving things around. Wine, by most laws in most states, must take a very specific path to market. No time saving detours here! No direct communications with buyer and seller! All bow to the middleman's path. Who needs new communication technologies and money saving logistical maneuvers when the very same path from producer to wholesaler to retailer or restaurant and then to consumer is mandated—by 70 year old laws?

The restrictive coil that is the state-mandated 3-tier system not only deters adoption of new ways of doing business—let alone "innovation—but it also deters adopting new ways of thinking. That guarantees a lack of innovation in sales and logistics and even deters new ideas.

I know a winery that would like to sell wine directly to restaurants and retailers in other states, put the wine on a low cost carrier and sell a case or two at a time. But the costs and barriers to doing this have been erected with such strong mortar that they choose not to do it. So, their wines don't get to market in these states in some cases because the state mandated wholesalers won't represent them or because they know they can make more by selling it more slowly direct to consumers in consumer-friendly states and environments. Yet they sell out much faster and develop new markets and customers faster if they could sell directly to restaurants and retailers in these states. They'd even be willing to reap less profit for the trade off of making new customers other states.

But they are stopped by the three tier system. They are deterred by the cost and work it takes to go around the system legally. This simple innovation, this simple and progressive idea of not giving away money to a company that is unnecessary to them, is thwarted.

Why think Big? Why think Different? Why change?

In my estimate, the size and vibrancy of the American wine market is greatly retarded by these institutional barriers to change and innovation. The real excitement and passion that might exist among a far larger number of Americans where wine is concerned is diminished from what it really could be because of the degradation over time of the relationship between reality and the three tier system.

The solution to this real problem is unfortunately blocked by the self rewarding and self empowering results of the three tier system itself. The longer it is in place the more effort it takes to move; the more trouble and hardship and money it costs to right this industry's ship.

The wine industry's farmers are just as smart as the Travel Industries engineers and tour operators. They could move fast. They are capable of understanding the spoils that can come with adopting new ways of thinking, acting and selling. Unfortunately they have the 3-tier system straight jacket wrapped around their mind and movements.


15 Responses

  1. Ned - March 12, 2009

    As you point out the wine biz is effectively straightjacketed by the Byzantine regulations of 50 states. Since the repeal of prohibition
    special interests and those with deep pockets have essentially dominated the making of the rules. Sadly, I have no doubt that there are many ideological free marketeers out there, benefiting and lobbying for the status quo. The time is overdue for a major reform at the Federal level that would standardize regulations in a way that would allow fundamental free market economics to work. A level playing field is all that’s needed and regulations should be about establishing that. Maybe by the 22nd Century…

  2. Bob - March 13, 2009

    One barrier to change is the US Constitution, since the Amendment that repealed Prohibition gave the states tremendous authority over all things alcoholic. Thus, change generally requires state-by-state lobbying. It was only because the US Supreme Court found that the 21st Amendment was overriden by another portion of the Constitution that there was any national movement on that issue. And even that is now the subject of state-by-state fighting.
    Oh how jealous I am when I go to the web sites of French producers and see that if I lived in France I could have wine shipped to my door with a couple of clicks of a mouse.

  3. Thomas Pellechia - March 13, 2009

    Ned,
    As Bob points out: it would take a Constitutional Amendment to change the present system, which was put into place with a Constitutional Amendment.
    The present amendment specifically hands the states the right to regulate alcohol within their borders. The federal govt merely collects revenue from the business of wine and comes up with a bunch of label and land regulations that have nothing to do with commerce, except the promotion end of it.
    Tom hasn’t mentioned this, so i will.
    Right now, the largest wholesaler in the country is suing the state of Indiana claiming that the state’s regulation that allows only residents to hold a distributor’s license is unconstitutional. The wholesaler is using the Dormant Commerce Clause to make its case of unconstitutionality. That is the same Commerce Clause that the national wholesalers association claims has no standing in other matters of constitutional issues connected to shipping wine.
    The amazing hypocrisy behind this whole stupid system scares the crap out of anyone with 1. a brain 2. a sense that we are supposedly living under a something called “liberty.”
    Incidentally, to get back to Tom’s point in this post. In NY State, you cannot own a wine retailer’s license unless you have a standing facility–it’s called a bricks and mortar ruling. In other words, if you want to operate an online wine retail business in New York State, you must first rent a commercial space and stock it with wine to sell to walk-ins at retail.
    How’s that for recognition of 21st century technology!

  4. Phil - March 13, 2009

    I think there’s another factor at play (although I do agree that the 3 tier system plays a role) and that is that winemaking is really not a great business (for the most part) if you look at it from a pure business point of view. It’s very capital intensive, you don’t see returns quickly, your product changes every year, you are at risk of losing your product every year, and you have to deal with a ton of regulations. Oh and you have a fairly expensive product for its category (alcohol). So it’s not surprising that many in this business are pretty conservative when it comes to change.

  5. Jared Brandt - March 13, 2009

    I also think the wine elite are anti change. Innovation is stifled by old school producers who think that change will potentially hurt them.
    Really innovative wine making seems to happen abroad – mainly in Europe. There are a few notable exceptions here but they are often written about as “radicals” etc. In technology, change is embraces. Innovators are labeled as such.
    That said, our silly 3-tier system does stifle innovation. I am fascinated by Domaine Habrard’s (http://www.domainehabrard.com/) efforts to let consumers taste their wines inexpensively. I doubt it could ever happen here because of the system we have. Colas would have to be approved by the TTB, in many cases registered with the states, taxes paid, at different rates, to different states. Shipping would have to be handled by someone other than the USPS and lets not forget the adult signature.

  6. Dave Tong - March 13, 2009

    I don’t see how a problem stifles innovation. Historically, problems give rise to innovation, as people find solutions to those problems.
    As a consumer who lives in California, which as I understand it, has a 3 tier system, I’ve never had any problems ordering wine direct from wineries or retailers, both in state and out of state. And I know several small wineries who are thankful for their east coast distributors because it relieves some of the work load involved.
    So the 3 tier system, while not ideal, isn’t necessarily the problem. The problem is that it’s implemented differently in different states, and that the constitution is utterly flawed on this, to the point that as a private individual I can __violate_the_constitution__ simply by taking alcohol across certain state boundaries.
    If every state had a 3 tier system like California’s, if barriers to trade such as state monopolies, dry areas and crazy shipping restrictions were eliminated, then there wouldn’t be an issue.
    I don’t see much point in rants without suggestions for alternatives, but the simple fact is that without a proper legal challenge (which would be so vigorously resisted by the vested interests that it would put the Prop 8 debate in the shade) not much will change.
    Though it certainly seems like there’s a huge opportunity for innovative distributors to completely rethink how the second tier works.

  7. Bee - March 13, 2009

    It does seem like the wine industry is a bit behind on things. I am amazed at the number of wineries who don’t have websites, or who’s websites are quite outdated! I wonder if it is the mentality of “tradition”, and some technologies and ways of doing things are just going to have to wait! (kind of like a fine wine eh?)

  8. Morton Leslie - March 13, 2009

    After working in the industry for four decades and doing my share of bashing the “system” I have come to the realization that should we have no regulation and anyone could do anything they wanted, we would end up with something not much better than we have today. All the 50 some state laws do is extract taxes and keep certain wholesalers in place. Given no state will give up taxes, the best we can expect are different wholesalers. And probably fewer. Big whoop!
    The reason is the reality of selling wine in thousands of marketplaces to tens of thousands of resellers where no single winery can execute what is required. The differences in cost of shipping by the container versus shipping by the individual bottle or case via UPS are so big, it guarantees we will need distributors. That doesn’t even address the issue of actually getting payment from thousands of restaurants or retailers who want to buy one bottle of wine at a time and have it delivered the same day.
    We would end up with a few powerful national distributors who call all the shots. They would encroach across borders and drive more of the smaller distributors out of business. Not much different than we have today, just exaggerated. It is the nature of free, unabetted competition, a national market, tens of thousands of resellers, and a public that wants the lowest price.
    Be careful what you wish for. You might get it.

  9. Morton Leslie - March 13, 2009

    “Really innovative wine making seems to happen abroad – mainly in Europe.”
    I’m sorry after I posted I read that comment. Excuse me, but which planet are we on? The only place abroad that is remotely innovative compared to the U.S. is Australia. And there it is only for producing the best everyday table wine in the world.
    One of the things the customer likes about wine is tradition. That is why we are so innovative about seeming traditional. I’m glad some people actually buy our PR. Yes, we make wine just like they did in the nineteenth century. We pay close attention to the moon, rot manure in cow horns, and burn witches.

  10. Thomas Pellechia - March 14, 2009

    “The only place abroad that is remotely innovative compared to the U.S. is Australia. And there it is only for producing the best everyday table wine in the world.”
    Morton,
    For a start, take a trip to Italy, where tradition and innovation live side-by-side, and sometimes in the same bottle.
    But I agree with you, if by innovation you mean top of the line hucksterism… 😉
    In any event, I further agree with you that the present distribution system likely wouldn’t be any better if the restrictions were lifted–but that doesn’t mean the present turbidity doesn’t need fining and filtering.

  11. Morton Leslie - March 14, 2009

    Thomas – I took a trip to Italy in the mid-1970’s. Was hosted by Piero Antinori, spent days in Tuscany and Orvieto. Some of the time my tour guide was Dr. Tachis. Tuscany was incredibly backward in wine making. Ancient oak tanks, minimal temperature controls, bad grape varieties, silly viticultural techniques that promoted quantity over quality, and an industry that was oblivious to the revolution going on in California.
    Later I hosted Tachis over here, though he spent a lot of time at Mondavi and others. Antinori as well as his winemaker spent a lot of time here. From where do you think the inspiration for planting Cabernet, ageing in new oak, and competing with the Napa Valley came? Bordeaux? Funny it took California’s success to get them to copy Bordeaux.
    Reluctantly and out of total necessity, Italian innovation (Sassicaia, e.g.) came from California. To their (and the world’s) detriment they have tended to copy us too much.
    Is innovation the purchase of shiny equipment or putting a screwcap on a bottle? (We had screw caps and shiny equipment in 1960.) Or having a website where no one goes to buy wine or read someone’s self promotion? (We used to do press releases.) Or having a “fruit forward” 16% alcohol wine? (We already made Muscatel.)
    Some innovation we can do without.

  12. Thomas Pellechia - March 14, 2009

    Morton,
    Unfortunately, the word “innovative” is over used and needs defining each time it is used.
    Quite often, innovative is confused with good marketing.
    Now, if you are talking about advanced technology–I think it was once true that CA was ahead–but most have caught up by now.
    Is adding back water to lower alcohol strikingly innovative? 😉

  13. d - March 15, 2009

    it’s true, is it innovative the way we talk about it or is it innovative what’s actually in the bottle? or is it innovative the way it’s labeled?
    insomnioveritas.blogspot.com

  14. Tom Wark - March 16, 2009

    Morton said:
    “After working in the industry for four decades and doing my share of bashing the “system” I have come to the realization that should we have no regulation and anyone could do anything they wanted, we would end up with something not much better than we have today. All the 50 some state laws do is extract taxes and keep certain wholesalers in place. Given no state will give up taxes, the best we can expect are different wholesalers. And probably fewer. Big whoop!”
    MORTON:
    Neither you nor anyone else ought to make the mistake of thinking or suggesting that I or other critics of the three tier system have in mind NO regulation at all. It is not an either/Or issue. It is an issue or reforming the regulations that govern the sale and distribution of alcohol to bring the sale and distribution of alcohol to a place that matches the technological, logistical, business and consumer realities of 2009 and beyond.

  15. Terry Christiani - March 16, 2009

    It is unrealistic to expect that small wineries can play in a national market and small wineries don’t expect to (or necessarily want to). That said, I think the one thing that should be struck down is every state restriction on direct ship to consumers. If that were to happen in conjunction with a simplification of tax reporting and filing, you would see a whole lot of winery websites updated and ready for online retail.
    While I am no fan of the 3-tier system, I do see where the ability to put a palette on a train/truck for warehousing within a local region is a benefit to wineries who produce enough volume and can sustain a price point to make it feasible. There are services that are better left to distributors big and small. I would rather that they had to compete for their clients rather than enjoy the monopoly on business that some states afford them.
    Yes, winemaking is a capital intensive and low margin business. If government would simplify the processes for delivery to the consumer, more wineries could anticipate full margin on a higher percentage of their production and employ the profits to innovate in their operations, marketing and product.


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