Alcohol Sales Must Be Reformed Now…The Industry Depends on It

The time for nonsense alcohol regulations is over. It’s done. If the American alcohol industry is going to get back on its feet and flourish after the unprecedented economic downturn caused by the shutdown of commercial activity then things are going to need to change. Flourishing commerce in alcohol must be the aim and deregulation of the alcohol industry is really the only way to achieve that aim quickly.

REMOVE THE STATE-MANDATED MIDDLEMAN
The one regulation that harms the alcohol industry more than any other is the state-mandated use of a wholesaler. Middlemen are useful for large-scale logistics, for moving large quantities of wine, beer and spirits from one part of the country to another then distributing them to various resellers. But when the wholesaler’s use is mandated by the state, a huge swath of producers and retailers who simply don’t need the wholesaler for every movement of goods gets caught up in a nonsensical regulatory snare, costing them money, effort and time.

In too many parts of this country, in too many states, the craft beer and spirits producers and small winery are required to sell their products to wholesalers in order to see those products show up at a store or bar no more than a mile away from the production facility. It’s a costly, wasteful and economically stupid requirement that benefits the middlemen at the expense of the producer, the retailer and the consumer. And yet, this—the stupidest regulation of all—has long been at the heart of alcohol sales and distribution in the United States.

If a whiskey producer in Indiana wants to sell a case of its best product to a niche retailer in Minnesota, it ought to be able to do so without the burden of first looking for a wholesaler in Minnesota who will deliver that product to the retailer and take 25% or more of the retail price for doing so; that’s 25% that could be split between the retailer and the producer who may not need a wholesaler for this particular transaction. That $100 Indiana whiskey could be sold to the Minnesota retailer for $63, equalling $13 more dollars for the producer and a cost of $12 less to the retailer.

Producers can collect and remit excise taxes to the state just as easily as the wholesalers. Producers can track their transactions to retailers and restaurants just as easily as a wholesaler. The purpose of mandating the use of a wholesaler has been lost to history and overcome by technology and new logistics capabilities. Let producers and retailers use the services of a wholesaler if they want to, not because the law requires it. No other change to alcohol regulations would help the alcohol industry than removing the state-mandated use of wholesalers to sell and distribute products.

LET ALL ALCOHOL PRODUCERS SELL DIRECT TO THE CONSUMER IN ANY STATE
There is only one purpose for a state to ban its own and out-of-state alcohol producers from selling and shipping their products directly to the consumer in that state: anti-competitive motives. That’s it. Protectionist motives are the only explanation for bans on direct to consumer shipment of wine, beer and spirits. To give the alcohol industry an edge coming out of this economic shutdown, to modernize the industry to the point that its laws match the technology and logistics of the day and to provide consumers with an honest choice of products, the ban on alcohol shipments must end.

Wineries in particular began shipping directly to consumers across state lines around 2000, with the practice speeding up after the Supreme Court knocked aside the discriminatory bans too many states placed into law for protectionist motives. Since then we have not seen minors use the DTC channel to obtain alcohol. We have not seen widespread tax avoidance. We have not seen direct shipping of alcohol lead to higher rates of alcohol consumption. And we have not seen retailers and wholesalers go out of business as a result.

States allowing their own alcohol producers and out-of-state alcohol producers to ship directly to consumers in their state would result in a much-needed lift to these producers after being pushed to the edge of profitability by the economic shutdown. If states want alcohol producers to fail and go out of business, then they should keep in place the bans on the shipment of beer and spirits. If they want a flourishing craft alcohol industry in their state, they should allow DTC sales and shipment.

END THE BANS ON WINE RETAILER INTERSTATE SHIPPING
In a post-quarantine world, it is not unreasonable for some people to want to avoid shopping in crowded stores and that includes liquor stores. Moreover, it’s not unreasonable to give those consumers access to the products they want, be they available locally via delivery or via interstate shipments. There is nothing inherently different from an out-of-state winery shipping across state lines and a retailer doing the same. It is the same transaction and the same logistics.

Today only 16 states explicitly allow shipments from out-of-state retailers. Eighteen states discriminate by allowing their own wine retailers to ship to consumers in the state but unconstitutionally baning out-of-state retailers from doing the same. The result is that the vast majority of the states restrict their consumers from accessing the vast majority of products available in the U.S. marketplace. It is primarily wholesalers who make the absurd case that retailer to consumer interstate shipment is problematic. And they do so with no evidence. They make their case with campaign contributions. This needs to end for the sake of consumers who want what they want and for consumers who want to practice the safest way to procure the products they want.

The expansion of the craft alcohol sector has been driven by producer innovations and improved logistics capability. But the grand diversity of producers that Americans enjoy and support are threatened today just like so many other industries. The producers must be given the leeway and tools to ramp up their business after the COVID-19 disaster wanes. Retailers and restaurants must be given the regulatory tools that allow them to innovate. And wholesalers must be told to live or die on their own, not with the crutch of government subside via protectionist regulations of old.

Some folks will argue that a call to deregulate the alcohol industry while in the midst of global health emergency is simply self-serving and crass. The people who try to make this argument don’t matter. They don’t care about what matters and that’s people’s livelihood. They are the ones that would use the COVID-19 disaster to keep lining their pockets at the expense of consumers and the vast majority of folks who do honest work in the alcohol industry. There is no more important and obvious time than right now to call for reform in the alcohol industry. The industry depends on it.

 

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  1. VVP - April 20, 2020

    Hollow!

  2. Jeremiah S. - April 20, 2020

    Only totally incompetent person can say that there is nothing inherently different from an out-of-state winery shipping across state lines and a retailer doing the same. These are absolutely different transactions where one must all pay federal excise and state liquor taxes, and report whom he sold the goods because wholesaler link who does all this job is missing, but the other prepays all these taxes and only required to keep record from whom he obtained that liquor.

    The law that mandates U.S. citizens to shop for liquor only in their local stores is not known in U.S. Constitution.

    Both laws of 16 states that explicitly allow shipments from out-of-state retailers and laws of 18 states that allegedly discriminate against something are unconstitutional, because exceeded the authority given them bu that Constitution.

    I totally agree, hollow!

  3. Pete - April 20, 2020

    I disagree:
    As a producer who wants to grow to the national market with help from wholesalers.
    As wholesaler who exclusively owned the brands not available to national monsters of distribution.
    As a reatailer who physically cannot maintain so many sypplier contacts.
    As a consumer who doesn’t want to be reported what he drinks.

    I agree, hollow. Wark don’t bark!

  4. Kathy - April 20, 2020

    I would also allow importers to sell direct. Importers already have to keep track of every bottle sold and to pay all the requisite taxes. Why not let us sell direct to retail or to consumers as well?

  5. Jose Conde - April 21, 2020

    Thank you for this insightful post. I tend to agree with your general thinking that a domestic winery should have more freedom to explore different sales channels. However, as an owner of a winery selling to more than 30 countries around the world, I would caution the US wine trade to be careful what you wish for. I have seen how the different legislative systems around the world actually play out. I think the UK is a good case in point where the market is basically 100% open. Over the last 20 years there has been increasing consolidation both in retailing and distribution and it has not been in the interests of either producers or consumers. I don’t see how the US would not suffer a similar fate.

  6. Ben - April 21, 2020

    Poor Tom can’t understand that in long term his model will bring alcohol market to couple giant national produceroretailers. There will be no importer Kathy or winemaker Jose and many many others. His most hated WSWA sponsors just can’t wait to be allowed to retail.

  7. Tom Wark - April 21, 2020

    Ben,

    Please then, enlighten me.

    Tom…

  8. Tom Natan - April 21, 2020

    Nothing would preclude producers from working with wholesalers if the producers find that it’s the best route for them. There has already been huge consolidation in distribution and retailing here, it’s difficult to see how it would increase much.

  9. Veronica - April 21, 2020

    Tom, I couldn’t agree with you more. Wholesalers should be optional, NOT a requirement.

    I’ll add to that. As a small producer, wholesalers don’t have to take me on. If they don’t think you’ll do enough for them financially (or in one case the bedroom – true story, by the distributor owner and the dumb SOB put it in writing in a text) by x number of market visits and “sample” bottles they will not take you on. … or they’ll tell you their book is full even if you are willing to oblige their demands. I went to a distributor in WI with guaranteed sale in hand to a small (4) steakhouse group by way of introduction through a mutual friend. The distributor asked how many market visits I was willing to do and samples, etc. I would have lost money with everything they wanted me to do. The system is rigged against small producers.

    Distributors should be OPTIONAL not required

    Clearly there are a lot of wholesalers hating on your thread because their takeaway from your message is so skewed that they are either haters or idiots with no comprehension skills.

  10. Tom Wari - April 21, 2020

    Veronica,

    Thanks for commenting.

    The argument that allowing producers to sell to retailers will lead to devastating consolidation doesn’t take into account that massive consolidation has occurred already, particularly among wholesalers. Today we learn of wholesalers buying wholesalers in both CA and MD.

    The question is what can the states do to prop up the alcohol industry in the wake of the COVID 19 outbreak. My three measures would have the most important impact.

    Tom…

  11. Ben - April 21, 2020

    So, how do you want to eliminate the middlemen? Just bring behind a toilet shoot them all?

    You are inconsistent with yourself, and any enlightenment doesn’t work for you. Today you learn of wholesalers buying wholesalers. Tomorrow, with your proposed deregulation same wholesalers will buy producers and retailers.

  12. Liz Holtzclaw - April 21, 2020

    Tom, I’m sure that you heard that there was an opinion in the 6th today in favor of Michigan. I’m stunned. Are you working on digesting it enough for a post?

  13. Tom Wark - April 21, 2020

    Liz,

    We all assumed that a circuit court would be bound by the holdings of the Supreme Court. Clearly that was naive.

    Tom…

  14. VVP - April 21, 2020

    Michigan case was predictable because neither Tom nor his unexperienced lawyers wanted to listen good advise. That’s all they deserved. If you don’t believe, then read our 3 years old comments on this right on this blog.

  15. Jeremiah S. - April 21, 2020

    FUCKING JUDGES OF ANY KIND MUST RETIRE AT 65, NO EXCEPTION!

  16. Bill St. Croix - April 22, 2020

    Arguments from the Defendant/State of Michigan (article dated 3/12/20):

    1) Attorney Mark Sands argued on behalf of the state Thursday, and told the Sixth Circuit panel the three-tier system of alcohol distribution in Michigan has the “predominant effect of protecting health and public safety.”

    2) The attorney (Sands) said the three-tier system is also designed in a way that the state doesn’t “overstimulate consumption” of alcohol.

    The ‘but what about the children’ and ‘what about the drunks’ arguments, again. I thought we have gotten past these fallacies finally. Alas, I am mistaken.

    Argument by the Plantiff/Lebanoff Enterprises:

    1) Attorney James Tanford argued on behalf of Lebamoff Enterprises. He said the case boils down to the “frustration of consumers” who see the products they want advertised online but not available for purchase in their home state.

    To that, I say a big, YES. In a nutshell that is the reason. I cannot get the brand/version/vintage I want. I can get some Nickel & Nickel Cabs, but not the vineyard I want or I want an older vintage that I enjoyed and it’s not on the shelves any more. Or it’s a wine club/wine list only wine, that I can’t get in the state.

    I’d venture a guess that the vast majority of people wouldn’t consider mail ordering a wine from an out of state retailer, if it was a current vintage available at their local stores. The rare exception might be if their retailer was grossly over-pricing the wine, but even at a couple bucks a bottle more, most people aren’t going to order it from out of state, any more than they might decide to drive 10 or 15 miles to another store to say that same buck or two.

    I know, but what about the KIDS…..


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