Distillers…It’s Time To Go Big…It’s Time for Systemic Change

In one way or another, nearly every sector of the alcohol biz has requested some level of government aid in their effort to survive the economic impact of the COVID 19 pandemic. In nearly every instance the specific aid request seems to shoot too low, particularly given the opportunity that this moment presents.

A good example is the current effort by craft distillers and their various national and state trade associations to convince Congress to make permanent the federal excise tax relief that was granted by Congress last year as a temporary measure. An article at WHNT-Alabama explains:

“Pre-COVID distilleries in the state were poised to get bigger and better.

“We would have a line outside the distillery. Basically around this corner and down the hall. Sometimes over 170 people in line.” said Jeff Irons, the owner if Irons Distillery.

Irons said offering online sales has worked out well. Now he sells out in 90 seconds.

“We sell online and people pay for it there,” Irons said. “They’ll know if they got the product or not. Then they come to the distillery and pick it up.”

Irons admits he’s lucky his business model is working. Other distilleries that rely on tasting rooms and bar-type settings may not be so fortunate.

“I don’t think it’s going very well at all. In fact, I think a number of small distilleries will not survive this,” said Irons.

Distillers are calling on Congress to provide permanent federal tax relief, centered on their production taxes, which happened about a year ago and helped. Now they want the move to be permanent. Irons added Alabama legislators could have a bigger impact on the tax situation compared to leaders in D.C.”

While making permanent the reduced federal excise tax would prevent a future increase in the tax distillers pay and save them money at this challenging moment, this action doesn’t compare to the benefits distillers would reap if two different reforms and government action were undertaken:

  1. Direct-to-Consumer Shipping Rights
  2. Self-Distribution Rights (not having to sell through a wholesaler

The long-term impact of enacting these two types of reforms would be profound and do more for the long-term health of the American distilling industry than any form of tax reform. By allowing distilleries to ship direct to consumers across the country the marketplace for individual distillers increases exponentially. Meanwhile, the ability to sell directly to retailers, restaurants and bars without having to hand off a significant chunk of revenue to wholesalers not only provides greater revenue to distillers but also allows them to go around the bottleneck that is the increasingly small number of wholesalers whose incentive to work hard on behalf of small distillers is limited at most.

Recently, Erica Duecy, Zack Gaballe and Adam Teeter of VinePair produced a podcast that looked at the question of direct to consumer sales for distillers, its benefits as well as the political difficulty in pursuing the policy changes that would bring about this kind of regulatory reform. It’s worth listening to. The three layout the dynamics at play in this sort of proposed effort and identify the pitfalls and the enemies of this kind of necessary reforms. I recommend it.

Of course, granting distillers DTC shipping rights as well as self-distribution rights is something that must happen at the state level, not in Congress. It would be a state by state effort. More importantly, due to the way by which America governs interstate commerce, any state that gives their own distillers the right to ship directly to their residents as well as the right to sell directly to retailers rather than going through a local wholesalers means those same rights must be given to out-of-state distillers.

While we know that wholesalers in every state would oppose these kinds of reforms on the grounds it would end their monopoly on spirits distribution and take the wholesalers’ boots off the neck of distillers, the first question is whether a state’s distillers and their trade associations would support the necessity of also giving these rights to their out-of-state competitors?

On the direct shipping front, craft distillers across the country should look at the wine industry and note that the opening of interstate direct shipments has lifted all boats, as opposed to only giving an advantage to California wineries as some wineries off the West Coast once feared. Moreover, state governments have seen sales tax revenue from direct shipping augment their coffers, while at the same time not diminishing sales and sales tax revenue from in-state distiller and retail sales of spirits.

Self Distribution is a heavier lift. The institutionalization of the three-tier system in state after state is strong and a legacy that nearly every lawmaker at the state level sees as a necessity. Of course, it isn’t. Self Distribution rights for distillers do not mean that craft distillers would not use wholesalers to distribute their goods. It only means they would have a choice. A choice!

As some of you know, beyond public and media relations via Wark Communications, I also am involved in wine association management. I help manage the National Association of Wine Retailers as its executive director. I understand perfectly the attraction of pursuing the low-hanging fruit, the easy fix. That’s what asking for a permanent reduction in the federal excise tax is. Now is the time, however, to go big.

Lawmakers are, at the moment, amenable to making changes to their alcohol regulatory systems. They see the outsized impact that the pandemic has had on the alcohol and hospitality industries. Witness the numerous states that have allowed bars and restaurants to deliver premade drinks to consumers’ homes. Try to imagine this kind of reform happening outside the context of a pandemic-devastated economy. Distillers asking for the right to widen the size of their marketplace via direct shipments and keeping a larger portion of their sales revenue via self-distribution doesn’t seem nearly as significant a change.

Go big, distillers. Now is the moment to go big.


No Responses

  1. Jim Bernau - August 18, 2020

    Completely agree. The wine industry is a great example of the benefits to the consumer, communities, those seeking professional, well compensated careers and small business entrepreneurs.

  2. Tom Wark - August 18, 2020

    Jim,

    One thing the spirits industry doesn’t have going for it is that, unlike the wine industry, spirit producers are not geographically concentrated. That winery concentration in CA allowed the Wine Institute to outsized influenced when it went lobbying in different states.

    However, the distilleries do have a hometown advantage. They can convincingly argue that the benefit to them of being able to ship direct to consumers in their state is far more beneficial than any competition that might result from having to also allow out of state distillers to ship in. Also, there is an argument to be made that a state that allows out-of-state retailers to ship in encourages other states to do the same.

    No matter….the benefits to the spirits industry are huge.

  3. Jim Bernau - August 18, 2020

    The wine industry achieved its favorable regulatory environment through effective regulatory and legislative action. Years ago, we actually drafted the bills that gave us self distribution and direct ship privileges and operated a targeted political action effort in key races. You are right that wineries benefited by being located in many diverse legislative districts just as small distillers are now. Oregon could become a Mecca for consumers of distilled spirits. Let’s do this.


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