Amazon and the Three Tier System of Wine Distribution
When a company of the size, power, influence and lawyering capacity of Amazon.com can't figure out how to get into the wine business, you have to ask yourself, what's wrong with the wine business?
Let me tell you what's wrong: It's the death grip that is the Three Tier System. It's one thing to have each and every state deliver different regulations for the sale of wine. But it's an altogether different thing to have that regulation be in the form of the stifling, archaic, competition dampening, discriminatory, corrupt and barely useful of the Three Tier System.
I have no insight on the deliberations that went on inside Amazon.com that would lead to them scrapping their program, but I'd bet case to bottle that it had everything to do with the over-regulated structure of the three-tier system that serves the purpose of propping up by state mandate the profits of a tired wholesale tier at the expense of entrepreneurship, consumer access to wine, economic development and the entire wine industry in general.
Take for example the case of shipping wine. Only 13 states allow out-of-state wine retailers to ship wine to their residents, making real access to wine for consumers a joke. And why do most states prohibit this activity? There's no policy basis behind the prohibitions. There is only an obstinate, slavish, pandering dedication on the part of politicians to the money that wine distributors give them in order to keep their out-dated place as the bottleneck inside the three tier system from collapsing under the weight of the reality of a modern communication economy.
Had 50 states allowed direct shipment of wine to consumers from retailers, Amazon would have been in business a year ago and states would have been shoveling tax dollars into their coffers. But no. We need to make sure this doesn't happen. You see, wine is a "special product", as America's wholesalers like to call it. We can't just be carding people at their home then give them the wine they ordered and paid for. UPS and FED-EX drivers are just too dumb to read a drivers license. It's too dangerous.
Another example of the absurdity of regulation in the wine business is the determination by the California Alcohol Beverage Commission that a company that takes a "commission" on the sale of a winery's products for having found and delivered the buyer, is committing a crime. Rendering clarity from that bit of interpretive leap frogging demands the services of a sophist.
There is a wine industry in the United States despite the fact that the three tier system still exists in most states. The fact that Amazon appears to have dropped its plans to enter the wine business in the United states likely happened because of the Three Tier System. The fact that many states will and are foregoing significant tax revenue is due to the Three Tier System. The fact that consumers can get some of the wines they want happens despite the three tier system.
I just shared your previous three tier system post with my classes on Thursday: http://fermentation.typepad.com/fermentation/2009/06/the-threetier-system-and-consumer-access-to-wine.html
Students said they had just been given a recruiting presentation by Young’s last week.
I hate to see Amazon abandoning its plans. I enjoy using the Amazon Affiliates program as opposed to other types of ads, and if I reference a book I can link directly to Amazon and get a small commission on any sales. To be able to do that with wine would be absolutely wonderful.
I think a lot of people get frustrated with wine journalism (print, blogs, etc.) because they read about amazing wines that they have no way of purchasing. I know I get frustrated reading Lenndevours, because no Long Island wines are sold here in Tennessee. It’s like reading a movie review and being told, “You can’t buy a ticket for this movie, you can’t buy the DVD, and you will never see it on cable. Your only option is to physically travel to a state that carries this film.”
A one-click purchase option among all 50 states could revolutionize wine blogging, provide a revenue stream for bloggers, and most importantly, get a lot more wine sold. Even the biggest brick-and-mortar store can only hold so many different bottles.
Tom – Amazon was likely to compete against Snooth, yet I’m deeply saddened and frustrated by this news. Its set the industry back years, and for so many companies trying to make things better for consumers, this is a real blow.
Not to derail your thread, but I wrote about how, even as a likely competitor, I’m saddened to see them withdraw: http://blog.snooth.com/2009/10/23/amazon-quite-the-wine-industry/
Tom, kudos on what is perhaps your most cogent piece on the DTC issue. Keep fighting the fight, as a credible voice for family wineries and indy retailers. As Yogi once said, ‘It’s not over till it’s over.”
Thanks John. But the fact is, little will change where consumer access to wine is concerned until CONSUMERS start paying attention.
The worst! I have given up to explain this system to anyone from Europe as they just don’t believe what I tell them. The system makes sense for mass-produced wines but it completely surpresses the sales of hand-crafted, small production wines. It is absolutely insane that we are forced – by law – to turn down business over and over again because we can’t ship to an out-of-state restaurant or an ADULT. Insane!
Tom, this is officially a travesty. Yet while Amazon is simply the latest casualty of our antiquated system, it is certainly the biggest. It seems to me that it would be difficult for this slap-in-the-face of one of this country’s greatest retailers to go unnoticed by legislators.
Could this finally be the reality check for what is wrong with the system? Could legislators actually recognize how embarassing this is that one of our largest and savvy-est companies has thrown in the towel on weaving through the ridiculously complicated quagmire of interstate alcohol commerce…and if the behemoth that is Amazon is unable to navigate those waters and is prevented from expanding their business than HOW IN THE FRIGGIN’ WORLD are the tens of thousands of small producers and retailers supposed to be able to?
Could Amazon indeed be the 800 pound gorilla in the room?
I was never actually sold on the Amazon wine program. It seemed surprisingly ill conceived and with little consideration/interest for small-to-medium wine producers.
Case in point– they wanted to buy all wine from wineries at 45% of retail… That was an extreme that most artisan California wineries weren’t will to go. When we talk about a 3-tier system, keep in mind that that middle tier (middle men) takes many forms. “Wine brokers” take a 10%-20% commission for helping sell the wine. Distributes buy the wines out-right at 50%-55% of retail.. These distributors are willing to buy sometimes hundreds of cases (Amazon was willing to take 3 cases at a time)
As much as i love amazon, the program they had envisioned looked fairly boring. And from everyone in the industry I’ve talked to about it.. the program didn’t actually have much support.
Despite the “glass half full” writing over at the ShipCompliant blog, I think this is a real downer for the industry. I believe that Amazon originally wanted to do it in house, decided they couldn’t, discussed outsourcing with New Vine Logistics, and finally realized that there’s no efficiency to be wrung from the supply chain. And this is so far down the list of legislative priorities (and there are so many vested interests), that I am pessimistic on the long-term outcome.
This is not THAT difficult a problem to fix as long as you decide to play by the rules of the game.
The three tier system as it currently exists is clearly an inefficient, archaic relic of the early 20th century that remains in place not because politicians and regulators think it’s necessary to properly regulate the sale of alcohol. The three tier system is in place because it pays for election campaigns. Wholesalers are given profits that are mandated by law, not earned, that they divide between their coffers and politicians’ election campaigns.
With $10mm you could play by the rules of the game. You’d buy access to politicians offices, tell your story, and all of a sudden they’d realize that they didn’t have to support a system that is an embarrassment, inefficient, costing their states tax revenue and more akin to the model of the old soviet economic system than it is to even the current Chinese communist/capitalist hybrid model of economic activity.
If every retailer decide to pony up $5000, this battle would be won. In a year. Better yet, they’d find themselves free to recoup that investment quicker than you can say “real regulatory progress”.
I like it when you say “sophist.”
The Demise of Amazon Wine
It appears to be official that Amazon isn’t going to be adding wine to the long list of things you can buy from them. There will be lots of speculation as to why, but it all boils down to this:…
Yeah, Ann but sophists were talking about the meaning of life not the meaning of money…
Tom,
My bet is that you are dead on: Amazon’s deals with book publishers are so one-sided that it’s easy to see how trying to make deals like that in alcohol would have stymied the company.
Amazon was supposed to give a presentation to producers in Santiago Chile on Monday, 21st. They called Wines of Chile on Thursday afternoon to cancel and never offered up a reason OR an alternative. (I was already on the agenda to do a presentation on social media, and volunteered to pick up the slack and fill in with a pres. on ecomm in the U.S. to about 60 different Chilean wineries. ) The point here is that it was a pretty lousy way to treat erstwhile prospective customers. Amazon had appts set up with about 20 of these wineries and left it to WoC to alert them that Amazon bailed.
Tom:
How does the three tier system limit tax revenues to the state?
Cheers Tom,
What a wonderful world it would be, order wine and have it delivered to my door. Yet control is the issue and it will take something on the scale of a small revolution to change this accross the U.S.
It is sad but funny to know I can’t get my wine delivered to me but I can have my drugs delivered to me from anywhere in the world at half price in some cases, and I don’t have to be carded at the door.
My UPS driver gets a sticker that says the recipient has to be at least 21 years of age. Granted I’m a gray dog, but I doubt kids trying to get drunk are ordering wine shipped. Easier ways to accomplish the objective for kids.
I don’t know that I’m in love with the idea of Amazon being in the wine storage business. I would hope that they were doing something like they do with other retailers where they don’t store product and they’re just the web based portal for the product. Some smaller wineries could really benefit from that practice.
I’m a big supporter of freeing the grapes. I know NY’s problem is the stranglehold organized crime has on the liquor distribution business. The rest really are archaic puritanistic relics from days long gone. Jesus wouldn’t have turned water into wine if the wine wasn’t interesting to the people. 😉
PA:
When state prohibit out-of-state retailers from shipping wine into the state, they lose tax revenue that would have accrued from the sale of the wine. Retailers are happy to pay taxes to the state on the sale of wine they ship into those states. They are happy to pay for permits to have the right to ship into those states.
They most often prohibit the practice not because they fear minors getting their hands on wine, but because they fear the consequences to their campaign coffers by not doing the bidding of wholesalers who contribute to their campaigns in large amounts and oppose retailer to consumer shipping.
Thomas:
I don’t think it was the tough deal that Amazon was pushing that forced them to drop the idea. It was the difficulty of navigating a system jerryrigged by corruption to favor the middle tier and make it difficult for the third tier to embrace “regulated innovation”.
Tom,
I didn’t say it was the tough deal that forced Amazon to drop the deal. I said that their kind of deals are anathema under alcohol regulations and it is likely they realized they could not do business the way they were being told that they must.
For instance, someone above posted that Amazon doesn’t store product–it’s just a portal. In many states, that would likely be against alcohol regulations known as unlicensed solicitation.
That kind of intricate licensing requirements is even more difficult to navigate than mere shipping restrictions. It took the first online wine seller in NY State more than a year before he got his license, and only after he established a “bricks and mortar” location, which he was forced to do in New York.
We were all watching to see the outcome of Amazon getting into the wine biz… waiting to see how it might benefit us all, especially the smaller producers. Now we will never know… sad…
Speaking as someone who got into the process of signing up with Amazon from the beginning… while the realities of the 3-tier system created the envirnment in which this failure ultimately occurred, I think that Amazon simply didn’t have their heart in it, and weren’t willing to accept an iota of risk to achieve it. At one point I was told there were over 20 lawyers working on this – that’s a sure formula for getting nothing done!
Also, the fact they were taking 55% of the sale I didn’t see as a problem at all. For the price they were willing to handle most of the dirty work (re-permitting in many of the states we would be shipping to), pick up the wine from us (that means something when you are 3 hours from anywhere), and we would get access to the biggest retail marketing machine in the world. That seemed like a heckuva good deal!
“That seemed like a heckuva good deal!”
Which may be what the lawyers found out–too good to be true or workable.
Very disappointing about Amazon Wine. I agree with Tom that consumers will have to drive this revolution.
They have to take it to their legislators and tell them it won’t do…just like they have with our broken health care system.
Keep fighting the good fight.
Cheers, Amy
Where I work, we hand sell. We create markets for wines nobody’s heard of. So we’re not worried about Amazon or Total Wine or any of their ilk. They can’t do what we do.
And we do it IN SPITE of the three-tier system. I have no problem with your crusade against the system, but I wish somebody out there would talk about the most immediate needs of retailers like us. Just one example: Nobody should be able to get a wine distribution license unless they can demonstrate that they have door-to-door climate control. Either that, or we should be able to order products from more than one source. As it stands–because we are nothing if not devoted to selling quality products–there are wines we are effectively denied access to because the only source for them has substandard (strike that!–NO standard) climate control.
Somebody wants to fight the good fight, how about this one?
Tom,
You are making a pretty big leap with your tax argument. Losing tax revenue assumes that if consumers can’t buy wine from an out of state retailer, then they don’t buy an alternate wine in-state.
Does that make any sense?
PA,
You live in a state where it’s difficult to find the wines one wants. How do Pennsylvanians handle that situation?
Do they just not buy any wine?
Do they buy something else?
Do they find ways to get what they want without PA benefiting from the tax revenue?
According to the PA Liquor Board’s site, of 51 out-of-state Licensed Direct Wine Shippers in PA, 2 are from the Finger Lakes. But I know that PA is the second largest supplier of tourists to the Finger Lakes wine business, because finding the wines in PA is not an option–even when it is shipped by a licensed shipper, the wine must go to a state store and be picked up there.
A Direct Wine Shipper will have a shipping charge, and MUST add a $4.50 handling fee, Pennsylvania’s 18% liquor tax, 6% sales tax (and 1% sales tax in Philadelphia & Allegheny counties).
Is PA getting that tax revenue from the tourists who come to this region?
I think this may be part of Tom’s point.
Thomas,
PA is actually a great example, as anyone can get product to a consumer, by simply registering for SLO. Yes, it does have to go to a local store of the purchaser’s choosing, but isn’t the local store closer than driving to NY? So why don’t more wineries sign up? And then wouldn’t NY be losing tax revenue?
The only way that PA is losing revenue is if the tourists to NY are filling their cars with enough wine to carry them over until their next visit. Otherwise, when they return to PA they are simply buying wine locally for their own consumption.
I’m getting out of the wine business and into something less regulated like International Arms Dealing. Better margins and less corruption.
Until wineries are able to ship legally and efficiently (consolidated cross-country shipping) direct to the trade nationally, this will continue to be one of the main reason small wineries will fail. Without efficient reach beyond the tasting room, the cost of trial (tasting new customers on your wine)is too high. Thankfully, there are innovators are coming out with great new options. In the meantime, industrial producers will continue to do all they can to shut out the competition in spite of knowing that competition is “good for business”.
Tom,
Great piece on this topic. It’s ridiculous the way wine is treated and your points are well made. Maybe, someday, this will all be sorted out, but I doubt it.
Glenn
P.S. What do you REALLY think?
PA guy,
The reason wineries don’t sign up is because it is a hurdle and a hassle. Small wineries don’t have the time or patience to deal with obvious bureaucratic control, and they certainly don’t need 50 separate licenses in their library.
You posted:
“The only way that PA is losing revenue is if the tourists to NY are filling their cars with enough wine to carry them over until their next visit. Otherwise, when they return to PA they are simply buying wine locally for their own consumption.”
Perhaps they are. But if they don’t, when they get home they cannot find the wines in PA, which is the original intent of wanting it shipped direct rather than through an already derided state store system.
So PA wants it both ways: the state stores won’t go after what customers want, but would rather deal with Southern or whichever, but when they do allow customers to receive what they want, it will be at their stores and under their control.
If you keep up the conversation, you may find yourself arguing for more rather than fewer laws to control wine.
“Retailers are happy to pay taxes to the state on the sale of wine they ship into those states. They are happy to pay for permits to have the right to ship into those states.”
We are not “happy” to have to file taxes in the 20-odd states in which we must file taxes. We do because we want to sell wine – but it’s a mammoth pain to file all of the forms, and in some case bundle up paper copies of all invoices to send with the forms. It’s an additional travesty that the taxes some states are collecting thru permitted sales are probably not even covering the cost of processing the forms and invoices….
Thomas,
I actually do want all states opened up to wine shipment. I do think; however, that the argument gets hijacked when people start talking about tax revenue losses or the “inefficiency” of the three tier system.
The way the states would maximize their tax revenue now would be to close the borders and ensure that ALL wine went through their applicable three tier system, thereby efficiently collecting from in-state wholesalers. Imagine a state collecting tens or hundreds of millions in taxes from only a few payees? Or in the case of PA, only 1? That is the ideal for the state.
For most wineries, including small ones, by far the most efficient way to market is through the three tier system. Yes, the big boys will ignore them, but in most states there are smaller, specialty wholesalers popping up all the time. If a winery’s quality/pricing/backstory do not get anyone to pick them up, they need to re-evaluate what they are doing. (Many have pointed out on this blog and others that most industries work on a three tier system, mandated or not.)
If the grapes are going to be freed, better arguments need to be made that will be tougher for local wholesalers to rebut.
PA, I agree with your last sentence. I also agree that the three tier system is quite efficient, but that isn’t the argument; the argument is that it is that as a mandate it is oppressive.
The only argument necessary is that the 21st Amendment contradicts the Dormant Commerce Clause; either repeal it, excise a section of it, or denounce it as unconstitutional and the states will have lost a bludgeon. But that argument is already lost with this Supreme Court, which considers alcohol special and constitutionally to be treated with disdain.
What the industry is left with, and what Tom’s organization is left with, is the patchwork and the excuses–that’s the reality. Sometimes, all that they have with which to make their case are counterattacks to cases that have been made by those invested in the present system–loss of taxes is one of the arguments of the entrenched, and as Tom (and you) point out, it is not even a valid argument. But the wine industry remains left with the arguments, as state legislators almost across the board show little inclination to give up the cozy relationship they have with both money and faux-morals.
What better arguments have you than the one that says wine should be treated like all other food commodities or commercial endeavors?
In my view, that is the argument and that is exactly what the Supreme Court says isn’t true. Without clarity on that issue, there will be only the fringe issues.
Thomas,
I think we’ve finally found some common ground. That is why I think that at the end of the day, while people like Tom put up a good fight, most wineries and retailers should be putting more of their efforts into improving their product / marketing, and spend less time fighting windmills.
Imagine Tom’s clients being able to ship to anywhere in the country starting tomorrow… that would also mean Amazon could jump back in with both feet, Sam’s, Costco, etc… would this be good or bad for the specialty retailer? Be careful what you wish for…
PA Wine Guy said” Tom’s clients being able to ship to anywhere in the country starting tomorrow… that would also mean Amazon could jump back in with both feet, Sam’s, Costco, etc… would this be good or bad for the specialty retailer? Be careful what you wish for…”
Its bad news for bad retailers, they’d have to compete. Its good news for good retailers who know how to compete. Nothing different THAN any OTHER PRODUCT….
YES, the rules don’t change because politicians are not serving the public but other interests. There is NO public policy that justifies a mandatory distribution (3-tier system) NONE.
Perhaps you should contact retailers in states such as NY and CT who continue to fight to keep wine from supermarkets. I assume that is good public policy?
whats constellation up to? shares going inot trading halt
What Tom Wark seems to be overlooking is the fact that his issue is not with the three-tier system itself; the concept of having manufacturers, wholesalers, and retailers being distinct entities. This happens in almost every consumer products industry! Pop, potato chips, autoparts, etc. are all in three-tiers systems! Does that make them inherently evil as well? Mr. Wark, like many people outside the industry, fails to address the real issue; states have the Constitutionally protected right to control alcohol sales as they see fit. Every state sees things a bit differently. In order to get some sort of national system in place you would have to change the Constitution of the United States.
“Nothing different THAN any OTHER PRODUCT….”
Except that alcohol is a controlled substance. In that regard it is no different from tobacco or prescription medications.
Martin:
I’d never overlook the fact that numerous industries operate with a three tier system. However, the difference with the wine industry is that it is a STATE MANDATED three tier system. A producer of potato chips, if they want, may sell directly to a consumer or a retailer in another state. Or they can choose to sell to a distributor in another state or region. In addition, retailers may choose to make a business out of selling gourmet chips over the internet and shipping them across the country to consumers. Not so in the wine business.
Secondarily, Martin, while states do have broad authority as to how they regulate the sale and distribution of alcohol, court rulings in a number of jurisdictions, not to mention the U.S. Supreme Court, have said states many not discriminate against out of state entities.
Finally, “Mr. Wark” has been worked IN the wine industry for 20 years. He has been directly involved in or reported on or written commentary on direct shipping and constitutional issues affecting the wine industry for at least 10 of those years.