Why the November Election Matters to the Wine Industry

Ballot The upcoming November 2nd election is among the most important for the American wine industry in a very long time. Two issues should be watched closely by the wine, beer and spirits industry: 1) the outcome of the race for control of the House of Representatives and 2) the outcome of Initiative 1100 in Washington State.

Despite the 137 Co-sponsors of the Wholesaler Protection Bill known as H.R. 5034, the beer and wine wholesalers who support the legislation that would give state the legal and Constitutional ability to discriminate against out of state commerce have a difficult road to travel to get their bill passed. Standing in their way is House Speaker Nancy Pelosi who has reportedly said she does not support the legislation and would work to keep it from passing.

The Speaker of the House has great influence over what legislation moves to the floor of the House for a vote, despite what happens in committee. Were the wholesalers able to get the bill out of committee, they still would have to deal with the power of the Speaker's office.

However, if after the November 2nd election Republicans take control of the House of Representative, we are likely to be introduced to Speaker of the House John Boehner. Currently the House Minority Leader, Boehner has delivered the keynote address at the Beer Wholesalers of America's Annual Legislative Conference as well as accepted many 1000s of dollars from the very same wholesalers. There is little doubt that if elected Speaker of the House under a Republican controlled House that H.R. 5034 would move to the floor for a vote.

All you have to know about this initiative is that that if passed by the citizens of Washington State it would allow producers of spirits to sell directly to restaurants and retailers and not have to go through a wholesaler. In addition, Initiative 1100 would take the state of Washington out of the business of selling spirits at retail and put that job in the hands of the private sector.

As you can imagine, wholesalers are against such a change. It removes their unnecessary monopoly and with it some of their political power. Wholesalers across the country have contributed millions of dollars to defeat the bill, including $1,000,000 from the National Beer Wholesalers Association.

While wholesalers argue that getting rid of the archaic, prohibition-era, state-mandated three tier system is bad public policy, what they are truly afraid of is that Initiative 1100 will be a movement that will spread to other states. To quote from a recent Associated Press piece on the initiative:

"National wholesaler and liquor distributor groups are closely
watching the outcome of the campaign, with some saying that it could be
the first step for Costco to try and change the system in other states.

"They'll try to replicate the rules in Washington state across the country," [Craig] Wolf [president of the Wine & Spirit Wholesalers of America] said."

One can only hope his fear is validated. The single most insidious thing that is preventing the development of artisan beer, wine and spirits industry from growing in the United States is the requirement in most states that producers of these small production brands are required to sell to a wholesaler to get their products on store shelves and into the hands of consumers. When wholesalers are the state-mandated choke point for the products that get into a state, you always have a severely diminished selection of goods since wholesalers are not required to carry brands. It means they have the final say on what products are available to consumers in a state. And the majority of wholesales, the most powerful ones, have no interest in seeing small production goods make it to market.

Under a system by which producers in any state may choose to sell their products either through wholesalers or directly to restaurants, retailers or consumers you get a distribution system that is fair and consumer friendly.

Every producer of artisan wine, beer and spirits ought to know this is their dream scenario.

22 Responses

  1. Nick Perdiew - August 30, 2010

    Amen Tom, Amen. This is the elephant in the room isn’t it. The monopoly qualities of the wholesale tier are being dismantled, inevitably. The other parts, not as much. The forces of progress and competitiveness will prove invincible against enemies even as well dug-in as the middle tier.

  2. Marcia - August 30, 2010

    Key words: “choke point”! Indeed.

  3. James McCann - August 30, 2010

    While I agree that the November elections are very important to our industry, I am shocked that you boiled it down to vote Democratic? How about vote against the sponsors of the bill, be they Republicans or Democrats? And why is it still only that Nancy Pelosi “reportedly” says she is against it? The fact that she’s not spoken out against HR5034 has got to at least give you some pause.
    In Pennsylvania, Republicans have consistently tried to reform and potentially privatize the state monopoly, while Democrats are united with the unions to oppose. With a Governor’s race this Fall, this local election has even more significance to PA wine lovers than HR5034. This is just not a Red or Blue issue.

  4. Tom Wark - August 30, 2010

    Good points all. I mention the Pelosi issue because having an enemy of the bill controlling what legislation comes to the floor of the house is critical. I mean CRITICAL. It’s not a way for me to get folks to vote democratic. And I too would like to have had the Speaker come out publicly on this issue, but her opposition comes on extremely good authority.
    You are also right that alcohol policy is NOT a red/blue issue and H.R. 5034 is a perfect example. That said, I would love to see the partisan breakdown of support for Initiative 1100 in Washington.

  5. Audiovore - August 30, 2010

    Washington also has I-1105, which is the wholesaler version of privatization that really just closes the state stores and keeps the tier system. In all likelihood, if 1100 is to pass 1105 will probably pass with it, and it will have to go to the courts to be decided as WA doesn’t have rules on the books for such a scenario. Ideally 1100 will get more votes and the courts will have it take precedence over 1105.

  6. Tom Wark - August 30, 2010

    You are correct. One thing that is critical is that 1100 get more votes than 1105. Currently, polls show more support for 1100 than 1105, as you are surely aware.

  7. James McCann - August 30, 2010

    How about the breakdown for HR 5034? The last count I saw, which was when the sponsors were only at 121, was 79 Democrats and 42 Republicans.
    Luckily in WA this is a ballot initiative, and I imagine that support from anti-tax, small government, libertarian minded conservatives will push it over the top. This gets very tricky, just like in PA, because union money flows to Democrats, and you’ve got the union employees whose jobs are at stake with the 1105 companion initiative.

  8. James McCann - August 30, 2010

    Sorry, forgot to agree with you that having someone in the majority leadership opposed can be a bill-killer, but it would be nice for the Majority leader to publicly side with all of her wine making friends.

  9. Kimberly - August 30, 2010

    When I try to explain to my friends on the wholesale side of wine sales (I work on the retail and restaurant side) why the three-tier system is so bad for the end consumer, they stare at me blankly. And I have said exactly what you mention above, that wholesalers thus “have the final say on what products are available to consumers in a state.” How is that fair?
    But what I really believe is that more end consumers should be made aware of this. If consumers knew that wholesalers keep many limited production wines out of their hands, and that they control what IS available, they might make a fuss.
    Having worked in politics(before I decided to work in a wine store and live like a pauper!), and knowing how s-l-o-w-l-y these things move,I don’t know how much hope I have that the three tier system will go away anytime soon, but here’s hoping.

  10. jack - August 30, 2010

    this is terrible for small business…the current system we buy beer and wine at the same price new system if passed will tilt the playing field to winco and costco…and we might have to drive to costco and winco to buy our beer then resell…. cmon this isnt right….

  11. bed frames - August 31, 2010

    This is just one of the main reasons why I fell in love in this blog. Every time I visit this blog, I always find a very interesting and informative post.

  12. Steve - August 31, 2010

    Pelosi, who has received over $80k from the NBWA, has not taken a stand on the issue and to assume, much less state, she would oppose it is wildy partisan. If she did oppose it, it would be mostly due to her need of political expediency in her home state of California than to oppose the ability to heavily regulate another once-private industry.
    The bill was introduced by a Democrat and has equal support amongst both parties, mostly because they are corrupt and can see how this can be exploited to assist their friends directly and therefore themselves indirectly.
    Please don’t use HR5034 for political purposes, we are going to need all the opposition we can muster as our government is the true opposition of our right to chose our economic destiny. Whether dems or reps like it or not, the most probable opponent of HR5034 would be a tea-party candidate.
    Owner of a small 1,000 case winery

  13. Tom Wark - August 31, 2010

    Let me assure you that I’m not using H.R. 5034 for partisan electioneering. With regard to Speaker Pelosi, what follows is a direct quote from Representative Mike Thompson:
    “I’ve met with the Speaker and she’s assured me she’s in opposition to [H.R. 5034] and that House leadership will do everything they can to make sure it doesn’t pass.”
    I take him on his word regarding his understanding of the Speaker’s disposition on this issue. What I know is that a Speaker Boehner will not have a similar disposition.

  14. Geoff Cornish (Sommelier) - August 31, 2010

    Whatever happened to our belief in free markets, good farmers, American ingenuity, common sense, good people.. etc etc and since when did any of these get helped by legislative intervention and taking positions when friends, money, and taxation revenues get involved. Big Business will win, but lets hope its the right big business and not the biggest business that wins… aka not the legislatures, distributors or lobbyists…

  15. [email protected] - August 31, 2010

    Does Pelosi or her family own a vineyard or winery in Napa? I believe she does or at least her family. In that case, supporting her is supporting corruption. How about wine colleagues, your interests or the nations?

  16. Tom Wark - August 31, 2010

    If I’m not mistaken, Speaker Pelosi sold her Napa Valley Vineyard. However, I do think she has interest in a hotel and restaurant in Napa. But I could be wrong.

  17. Rich - September 1, 2010

    While I’m not an expert, I believe, and caveat this with I believe, think, speculate, that Speaker Pelosi owns part of Auberge Du Soleil, the Piatti Restaurant group and still owns at least one, if not two vineyards – one on Zinfandel Lane in St. Helena which may or may not be on the market or have sold recently…

  18. PaulG - September 1, 2010

    Tom, with all due respect, you are wrong when you say “All you have to know about this initiative is that that if passed by the citizens of Washington State it would allow producers of spirits to sell directly to restaurants and retailers and not have to go through a wholesaler.”
    In fact, that is only a small percentage of what you have to know. I’ve had many conversations with small wineries who are fearful of this legislation. It would end C.O.D. which means they would have to be banks to their customers. It would bring in case discounts which would hurt the smaller retailers while helping Costco. It would institute split case charges – another setback for the little guy. Many people believe that it would radically reduce inventory diversity throughout the state. I’m no fan of the WSLCB, but neither of these bills is a clearly positive alternative to Washington’s current laws, as far as I can tell. Please take a closer look and give it some more thought.

  19. Tom Wark - September 1, 2010

    Wineries don’t HAVE TO offer 30 days. They CAN. It is also significant, Paul that Family Wineries of Washington State completely supports Initiative 1100. They represent many small wineries in Washington.

  20. Steve - September 1, 2010

    In the end, regardless of some of the above details of which I disagree with, I immensely appreciate all that you are doing to halt this affront on our livelihood and consumer right of choice. Thank you for rallying the troops and fight on!

  21. Mark's Wine Clubs - September 1, 2010

    Million bucks huh? A couple more donations like that and we’ll be talking about real money lol.
    Glad to see some thought being given to the range of monopolies in place in regard to distribution.

  22. winesls - September 2, 2010

    There are two points that need clarification. Number one. Wineries in Washington State now have a level playing field. Wine laws have been changing over the last ten years, where we now have some of the most progressive environments for wine in the country. In the 1990’s there were 200 wineries in the state. Now there are 700. Would that have come about if we were so restrictive? Wineries now have their dream situation. They can sell to retailers, distributors and the general public through not one, but up to three tasting rooms. The law requires that when a winery sells to a retailer,the winery must be paid on the spot, or through electronic transfer of funds. For a small business, suddenly thrown into the credit business having to carry receivables for sixty to ninety days could hurt small wineries in disastrous ways. The two underlying things that Costco wants in this legislation is quantity discounts and central warehousing. They didn’t win these rights in the earlier lawsuit, so they spent more than $350,000 to gather signatures. Here is what central warehousing will do. Large box stores buy wines by the pallet. They are brought to the store where the cases are put out on the shelves. Shelf space is a fixed commodity. Some of it would be devoted to liquor. Hence some wine would go away. Go to your local Safeway and notice that facings are one bottle wide and four deep. This is because distributors are willing to sell split cases, exactly what the customer needs. Under central warehousing, facings would have to be 3 bottles wide and four deep. Stores do not store wine in the back, only on the shelves or end displays. Hence the possibility that the number of different SKUs would decline by two thirds (one bottle facing versus three bottle facings). The end result is that consumers would be severely limited in their choice of brands.
    Large box retailers want to buy direct from producers with the requirement that the producer provide quantity discounts. If the producer gives a discount to Costco or Walmart, he or she must raise prices elsewhere to maintain enough profit to stay in business.
    Under Initiative 1100, all of the benefits that we, as a nearly five billion dollar industry will go away. We have built this industry piece by piece to where it flourishes today. This initiative would set us back twenty years. This has nothing to do with free market principles that we all strive for. The fact of the matter remains that 95% of all wineries in the state of Washington are small businesses. 1100 would put many of them out of business at worst, and severely limit consumer choice at best.
    Point No.2 Family Winemakers does not represent the majority of small family wineries in Washington. The organization has no membership dues. I have talked to wineries that either showed up at a meeting or sent the founder an email, only to find themselves listed as “members”. I have talked to one winery owner that is furious to have his name used in such a way, especially when he discovered his name being used for a political agenda. As best I can tell, there are only about ten wineries that are truly active, espousing some libertarian viewpoint that is entirely counter to everything this industry has achieved. How big would this organization be if they actually required members to pay dues?
    1100 is bad law. Please read the fine details.

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