BY John Hinman,
Hinman & Carmichael LLP,
San Francisco, CA
Deborah Steinthal, Scion Advisors
Todays wine industry in the U.S. is at a juncture in history
unlike any it has ever experienced, facing complex challenges that
are regional, national and global in scope. They include legal,
political, and cultural developments. The speed of change is accelerated
by economic drivers, technological innovation, and forces of globalization.
One thing is sure by year 2015, the wine and alcoholic beverage
distribution system will be more efficient, and more unforgiving
of failure, than it is today.
Each tier of the entire drinks industry will be impacted,
including wine, beer, spirits, ready-to-drink (RTD), carbonated
soft drinks (CSD), energy drinks, premium water, and juice. Tomorrows
successful industry participants will be proactive. New business
models will emerge in response to market challenges, and successful
operators will effectively leverage new opportunities.
Five interrelated dynamics are having a cataclysmic impact on all
industry participants a perfect storm is gathering and generating
monumental change in all tiers of the industry as the players position
themselves for growth and profitability. Industry participants will
need to develop essential, focused, and disciplined strategies to
weather this storm and prosper. Ultimately, consumers will benefit
from the innovation created by the forces of competition,
from better access to higher quality wines for the price, and from
increased retail resources available to incentivize customer purchase
What are these five
1. Supply and Demand Pressures The sheer volume
of global wine supply is massive and provisioning a constantly expanding
multibillion-dollar consumer market. The net results of industry
growth are supply-chain pressures, which force producers to continually
improve wine quality and production efficiencies, and demand-chain
pressures, which drive producers and retailers to apply innovative
practices and produce more customer-focused and differentiated products.
2. Producer Consolidation Large producers are getting
larger and are primarily publicly held companies, a status that
provides better access to capital sources for funding growth. With
two notable exceptions (E&J Gallo and Kendall-Jackson, which
are privately held and only in the wine industry), the largest drinks
producers are dominant merchandisers in all three major alcoholic
beverage product markets spirits, wine, and beer.
The inherent motivation behind producer consolidation is to achieve
economies of scale in production and distribution, which equate
to profit opportunities, market power, lower per unit administrative
and delivery costs, and more sales and marketing clout. These billion-dollar,
mass merchandisers are forcing mid-size ($60 million to $500 million)
and small (less than $60 million) producers to become more focused
and specialized and better differentiated. The outcome is a widening
chasm in how wine is sold separating the billion-dollar,
mass drinks merchandisers from all other segments.
3. Distributor Consolidation The strong are getting
stronger. In the U.S., the alcoholic beverage distributor, or wholesaler,
has benefited from a protected business environment, as a result
of the legal and regulatory system created by the repeal of Prohibition.
The mandatory three-tier system, which still exists in most states,
is a complicated weave of restrictive regulations (cash laws, credit
restrictions, primary source laws, at-rest laws, franchise laws,
product registration, price-posting, and prohibitions on direct
retail sourcing from out-of-state). These regulations were designed
to prevent brand movement between distributors and assure comfortable
distributor margins regardless of the economic climate.
Over the last 10 years, wholesale consolidation has been accelerated
by wholesale margins being squeezed with new overhead costs in technology,
retailer-required merchandising, and advertising. Consolidation
is not abating. However, margin squeeze is causing wholesalers of
alcoholic beverages to increasingly focus on doing what they do
best transporting and delivering product and requiring
producers to market, sell, and merchandise themselves if they want
their products to move.
Modernization of the alcoholic beverage distribution system is being
driven more by economic factors than by legal action. This is apparent
in the reduction in the number of wine and spirits wholesalers.
This tier has shrunk, from approximately 2,400 wholesalers in the
mid-1980s, to approximately 250 today. This reduction occurred even
without the spur of current legal decisions adverse to the distribution
The expansion in size of distributor networks is another sign of
the strengthening storm. Southern Wine and Spirits spans the U.S.
from California to Massachusetts. National Distributing Company
(NDC) is expanding its base in the south and southeast. Glaziers
is growing by aggressively acquiring distributors in the midwest.
Youngs Market Company is a force in the west and Hawaii, and
the Charmer group (Charmer, Sunbelt and Premier, among other companies)
is powerful in the northeast, south, and the west.
4. Retail Consolidation When wholesale margins are
squeezed, the opportunity exists for large retailers to capture
a significant portion of wholesale profits, sharing these with producers
and using them to compete for consumer attention. This is happening
The retail wine industry is segmenting into two broad categories
on one side are wines sold in restaurant chains and broad
market off-premise retailers with good price-to-value ratios (including
private and controlled labels). On the other side high-end and scarce
wines from high-profile producers are positioned as luxury
goods. These wines are sold to customers on allocated lists,
and they are located on wine lists in high-end restaurant accounts
and available at specialty alcoholic beverage retailers and in secondary
markets, often at prices above $15 per bottle MSRP.
Implications of this divide are important. Positioning
within one category or the other has a huge impact on the ultimate
potential value of a brand.
Development of on-premise and off-premise, multi-outlet and multi-state
retailers has driven much of the producer and wholesaler consolidation
of the last 20 years. This retail model exists to service a highly
identifiable, targeted, mass customer base and relies on controlled
margins. Participating vendors must play a volume game.
Wine is an attractive product for these retailers, because it both
exerts a pull on customers and provides more profit per unit of
cost than general merchandise or food. These types of retailers
will continue to expand globally and are likely to become even more
focused on targeted customer segments. Some examples include: Chevys
and other Mexican restaurant chains, specialized pasta chains, or
groups of white-tablecloth restaurants that share a common management
and administrative structure. Competition in this arena continues
to intensify, following todays mantra of driving costs
out of the system.
5. U.S. Market Liberalization However it comes
to pass, whether by opening or restricting the flow of goods, in
the wake of the Granholm decision in the Supreme Court, the
states (slowly and one-by-one) will have to repeal illegal laws
that discriminate in favor of local interests to the detriment of
competitors in other states.
It is our view that, by 2015, wholesalers, retailers, and wineries
increasingly will be operating in an environment where they will
have to compete on the merits of their wines, their prices in relation
to the entire market, and customer service.
The May 16, 2005, Supreme Court Granholm decision is the
most important development in the industry in the last 40 years.
This decision is the culmination of a decade-long legal battle over
the right of wine producers to ship out-of-state directly to consumers
in states that permit their wine producers to ship to consumers
within their state.a
The Granholm decision supports the more general conclusion
that no state law can benefit a private in-state interest against
an out-of-state interest in the same line of commerce, absent a
compelling state interest (or when the state itself is the actor,
such as in control states).
The Granholm decision will create a domino effect in the
long term, accelerating the purging of state-level discriminatory
laws that currently prevent direct shipment of wine. First affected
will be laws as they pertain to wineries, and then as they pertain
to other industry members.
The immediate state-level direct shipping disputes will be legislative
and political in nature. They will include attacks against the right
of in-state wineries to ship directly to in-state retailers as a
defensive mechanism on the part of wholesalers concerned about losing
business. These attacks will ostensibly further the goal of equality
on the anti-alcohol theory that everyone should be prohibited from
shipping in order to protect minors and entrenched state interests.
This has already happened in New Jersey, been threatened in Michigan
and Indiana, and has been ordered as a remedy by a Federal District
Court in Virginia in a follow-up case there.
21st Amendment jurisprudence has evolved from the late-1930s cases
that allowed a state to regulate alcohol any way it wanted, without
regard to the rest of the Constitution. A subsequent series of cases
moderated that position: a state cannot affect another states
a state cannot violate anti-trust laws,3
a state cannot impose discriminatory taxes;4
and a state cannot violate the First Amendment.5,
6 This continues
to evolve right up to todays Granholm decision: a state
cannot discriminate against out-of-state interests.
The five essential dynamics described above are catalysts for change,
consequently producing new global opportunities and challenges.
Supply and Demand Pressures
New customer segments are evolving both in the U.S. and globally.
More than 70 million consumers from the millennial generation will
be the single most significant factor affecting U.S. market demand
in 2015. This generation appears to be wine-savvy at a much earlier
age than their parents were, and early studies predict they are
likely to appreciate quality products and brands.
This phenomenon is equivalent to the post-WWII boomer explosion
and is double the number of the millennials older Gen-X brethren.
Early adopters in this generation also appear to be large consumers
of high-end spirits products, energy drinks, and premium water.
As developing countries are industrializing and acquiring expendable
income, new, untapped regional wine markets are emerging in China,
India, and eastern Europe. Although U.S. wine producers face
global competition in these markets, well-positioned luxury goods
and mass-marketed wines that leverage local cultural differences
and values will encounter growth opportunities as these new wine
consumers expand exponentially in volume.
One countrys mass-produced wine and beer are often another
countrys luxury products, and many multi-national producers
are currently capitalizing on that phenomenon.
Improvements in bulk transportation technology are now supporting
growth in international bulk wine shipments. Bulk wine increasingly
is shipped between eastern Europe and South Africa, between California
and the United Kingdom, between South America and California, and
between Australia and China. This is a trend that will persist and
will play an important role by year 2015, enabling significant growth
in negociant trade and private labeling, and smoothing out price
differentials between regional markets. Most important, large global
wine companies will be able to optimize their cost of goods in every
market they choose to enter.
Global wine supply is perhaps too abundant? Wine is produced
in almost every developed country in the world. India, China, and
several eastern European countries are becoming wine producers.
Countries with excess wine supply, such as Chile, Argentina, Australia,
New Zealand, South Africa, Georgia, Moldavia, and the traditional
European producers (France, Italy, Spain, Germany), are hitting
the world market. In order to compete more successfully, many are
replanting to take advantage of new production technology and soon
will present more competition for California winemakers.
Driven by forces of good and bad, consistent growth in demand may
still be tentative. Population growth, increasing worldwide
income held by the middle and upper classes in developed and developing
countries, higher-quality wine at reasonable prices, and improved
marketing and advertising are fueling growth in consumption. However,
gross demand is slowed by unfriendly legal climates (Russia and
much of eastern Europe), counterfeiting and other illegal trade
practices, decreased consumption by historically high-consuming
nations (Italy and France particularly), the anti-alcohol movement,
and religious and cultural practices in many parts of the world.
Global consumer perception of United States wine quality
is varied, inconsistent, and complicated by politics and currency
fluctuations. Aside from E&J Gallo, very few U.S.-based
wine companies have shown the staying power and commitment to profitably
develop global wine products and markets. Untapped global markets
may be price-constrained and become the domain of globalized mass
merchandisers, such as Diageo, Fortune Brands, and Constellation,
since these large-scale, multi-national business models are largely
impervious to currency fluctuations and have the budgets to establish
and maintain market share. Smaller players export when the value
of the dollar is weak and retire from global markets when the currency
Large wineries can become more profitable through vertical integration
of their distribution systems and aggressively segmenting their
products and services to take advantage of market opportunities.
From a distribution perspective, drinks are all liquid (also heavy,
usually fragile, and must be protected from temperature variations)
and need to be properly stored, delivered on time, and managed in
More and more beer distributors today are multiple-line houses handling
many products, and many are also moving into wine distribution because
its simply another box on the truck. This is a trend that
is inevitable and impacts every drinks market because it makes economic
sense to consolidate as many products as possible on the same truck
for delivery to the same accounts. For this reason, the major consolidated
marketing companies are increasingly focused on producing premium
products in almost every beverage segment. For example, Constellation
has Corona and Diageo has Guinness. These same companies are also
active in the RTD categories.
Examples of well-managed, large entities include E&J Gallo
with over 70 million cases shipped in 2004, the industry leader
in wine depletions and Anheuser Busch (AB) the industry
leader in beer with more than a 50% market share. E&J Gallo
and AB are category leaders, function as category managers
for many major off-premise chains, and are expanding product offerings
to capitalize on the premium is better marketing climate.
E&J Gallo has segmented its products more than any other company
in the wine industry and is capitalizing on the current popularity
of low-priced brands from other countries (such as Yellow-Tail from
Australia) with its launch of Red Bicyclette from France. E&J
Gallo owns its distributors wherever possible, for example, G-3
in California, and is an assertive partner in other U.S. markets.
AB owns distributors wherever it is permitted to own them, rewards
loyal managers with franchises, and has adopted a distribution agreement
that provides an additional margin on sales to compensate distributors
that focus on AB products to the exclusion of competitive products.
A two-and-a-half tier system could eliminate between
$1 and $5 billion per year in distribution inefficiencies by year
producers and large retailers increasingly work directly with each
other on pricing, market positioning, advertising, and merchandising.
They do not rely on distributors for these functions. Rather, they
inform the distributor what the terms are and then pay for services
they actually receive (transportation, storage, billing, timely
delivery of product, and local market information).
If distributors provide extra services, such as merchandising support,
they are paid for those services. This leaves more money in the
hands of retailers and producers, to apply to developing consumer
awareness and loyalty and fewer profits in the hands of wholesalers.
The Diageo distribution agreement institutionalized these practices
more than two years ago, and it is now being emulated by other very
large producers through special promotional programming to encourage
product movement at the retail level.
At the same time, large retailers are increasingly embarking on
selling their own private, proprietary, and controlled-label brands,
which afford them larger margins. Sales of the Charles Shaw brand
at Trader Joes is a perfect example. This new dynamic provides
distributors no effectual role other than to deliver product.
Beer industry analysts have coined the phrase two-and-a-half
tiers to describe this trend and ascribe a billion dollars per year
to the expected annual efficiencies extracted from the distribution
tier. These cost savings are split between producers and retailers
as additional margins.
We believe that similar cost savings exist within the wine industry
because individual unit values in wine are much higher than in the
beer industry. Therefore, higher cost savings per unit are more
likely to occur when the real value of services provided is substituted
for a distributor margin. Our preliminary calculations leads us
to believe the wine industry stands to earn $1 billion to $5 billion
per year in cost savings once the wine market becomes fully liberalized.
In response to market dynamics, the modern distributor is certain
to provide more cost-effective local services, such as merchandising
and product servicing, in an attempt to recoup lost profits.
Smaller and mid-size wineries that survive consolidation will
grow in value and observable brand equity by becoming specialists.
Concentrating on what they do best, these producers are investing
in transforming their businesses through more professional and disciplined
product portfolio and customer-based management practices. Many
wine consumers are looking for unique experiences or luxury goods
that do not fit the mass merchandisers business models; they
get that unique experience from feeling that they are part of a
winery family, and that only comes from personal relationships
built-up over time and maintained.
By 2015, most successful small wineries will be 100% customer-focused
with consumers and retailers being the customers. To the
extent that traditional distributors are relied upon, it will be
for the purpose of servicing high-profile or important accounts
in regions or areas where there is a large base of existing customers.
High-profile account relationships provide a venue for obtaining
and tasting wine, and thereby drive winery direct sales and build
small winery brands in the marketplace.
The next 10 years will be marked by a trend toward large wine
producers collecting smaller, more specialized brands. The market
is rewarding significant mergers of specialized mid-size wineries,
such as RH Phillips and Hogue Cellars, under the management of Vincor
from Canada; the Icon Estates portfolio of brands, under the management
of Constellation; and significant internal growth through the development
of multiple stand-alone brands, such as the brands produced by E&J
Gallo (both in Healdsburg and Modesto, CA).
The business models that will win are those that allow each specialized
brand to maintain its separate, but strong and consistent relationship
with its consumers. Kendall-Jacksons Artisans & Estates
are a good illustration of this strategy.
Except for the few top (A) brands, most smaller and mid-size wineries
are being locked out of the current three-tier distribution system.
The cost of marketing and sales has escalated for most wineries
to upwards of 25% to 30% of sales; consequently, many brands are
not realizing their goals.
Many expect that relief is on the horizon from the three-tier system
itself, because the Granholm Supreme Court decision is expected
to liberalize state shipping laws and potentially open new consumer-direct
channels. This is false hope for many, because it will take a long
time for changes to be fully processed through each state legislature,
and it will still be necessary to penetrate local markets to create
Timing is important because the winners will be the first to market
with the right wine, story, communications structure, and
customer service. The window of opportunity is now, because successful
brand building takes years, requiring a serious commitment of time
and focused resources.
In order to survive and grow, small- and mid-size wineries must
already be building the infrastructure capable of capitalizing on
these opportunities. Brand building over the long term will become
more and more difficult, as large producers segment their brands
to fill available niches and well-positioned small wineries use
their agility to capture the consumers share of mind.
In most of the world, the middle tier of the drinks industry
exists as a service provider or as an adjunct of large producers.
The distribution tier has always performed a valuable function in
assuring proper product storage, delivery, and merchandising where
and when required by producers and customers. An essential component
of these relationships is the mid-tier investment in vehicles, warehouses,
and transportation technology offset by a concomitant return
on the investment. This is understood by beer, RTD, CSD, juice,
and energy drink segments of the U.S. market. Participants in these
segments, seeking improved efficiencies in their distribution systems,
are consolidating products for storage, shipment, and delivery on
a common base of trucks, warehouses, and personnel.
As the wine industry follows in these footsteps and our laws continue
to change, the large U.S. distribution houses should evolve from
sales management to fleet management, leaving more money in the
hands of the wine retailer and producer to build brands with consumers
and less profit in the hands of wholesalers. In doing so, the industry
becomes a two and one-half tier system, and the projected elimination
of in excess of $1 to $5 billion per year in inefficiencies becomes
Investment in more efficient delivery technology is supported
by large suppliers and retailers. Examples of functional, vertical
integration are commonplace in the non-alcoholic beverage drinks
segment, primarily achieved through shared investment, brand equity,
and regional distribution networks. Driven by technology and economics
as much as by legal challenges, the development of large producer
networks and large retailer networks inevitably will spur the development
of large, coordinated delivery networks.
U.S. distributors are being forced to invest in new technology
and systems necessary to serve todays customers, especially
large multi-state retail chains. Without the scale necessary
to efficiently compete, many old-line distributors are selling to
larger competitors rather than invest in the requisite technology
and systems. Regardless of these economic developments, as long
as the current wholesale tier is able to profit from the protectionist
legal system it created, change will be slower and more incremental
than it would be in a non-regulated product market.
With considerably more wine being sold through fewer distributors,
only mass merchandisers and a few top (A) brands are getting properly
serviced in exchange for a large share of their profits. New,
specialized distributors and brokers are emerging to support smaller
brands. As laws continue to change, new specialized shipping companies
will emerge to fill the gap and facilitate direct shipping from
producers to their retail customers and their consumers in return
for a market-based service fee rather than a margin.
Large consolidated producers and wholesalers are becoming category
managers for certain large retailers. The large national retailers
share a common growth strategy. Examples of these include: grocery
store chains (Safeway, Albertsons), the super-premium grocers
(Andronicos, Whole Foods), the specialty food and beverage
chains (Trader Joes, Cost Plus World Market), the super retailers
and warehouse stores (Costco, Wal-Mart, Target, K-Mart,), the chain
restaurants (Olive Garden, Red Lobster, Chevys), and the convenience
store operators (7-11).
These retailers are centrally managed and are committed to vigorous
competition (which means low-margins) and good pricing to consumers,
efficient and cost-effective customer service, and limited SKUs
(Stock Keeping Units or brands), which are easier to manage and
have a high turn-ratio usually better than 10 times to 12
times per year. They are also expanding into every geographic market
that they can reach.
As they expand into these markets, the natural inclination is to
implement centralized, regional product fulfillment at the lowest
cost for every product they carry, including beverage products.
This model emulates a two-and-a-half tier system, because
the retailer hires the distributor to provide a delivery service
for a fee rather than to be paid a margin for product.
Retailers are already favoring selected (large) wine producers that
demonstrate the ability to analyze profit opportunities and assist
the retailer in making difficult decisions among an ample supply
of products competing for scarce shelf and wine list space. These
(large) mass merchandisers also have the scale to provide advertising
support, another critical component to category management.
A growing number of luxury wine producers are tapping into other
large, more specialized, retailers. Specialty alcoholic beverage
retailers service a more specialized domestic retail wine market.
Examples include multi-outlet retail chains, such as Beverages &
More in California and ABC Liquors in Florida, and smaller but high-volume
specialty retailers, such as Zachys in New York, Sams
in Chicago, Wallys in Los Angeles, and K&L Wines and the
Wine Club in California. These retailers are heavily invested in
inventory at higher price points and multiple SKUs and are increasingly
managing a multi-market customer base with state of the art customer-relationship
management systems. The hallmark of these retailers is customer-handholding,
education, and service, particularly in the above $15 wine categories.
Wine.com may be most technologically sophisticated of these retailers,
serving 35 states through a legally compliant combination of owned
licenses and marketing partnerships with other retailers. These
retailers use the three-tier system where possible but do not wholly
depend on it for product relationships. Rather, they build relationships
with high-end producers and importers and sophisticated customers.
Subsets of these retailers are also investing in collector,
luxury wines, purchased on the secondary market and sold through
to high-end users. This would include the auction houses (WineBid.com,
Christies, Acker Merrill and Condit, Butterfields and Bonhams,
etc.) and a host of smaller internet-based retailers. These channels
are becoming increasingly important for the luxury wine segment,
because they provide both a source of mature, investment-quality
wines and an outlet for selling those same wines.
Wine two markets: The widening chasm between large mass
merchandisers and small to mid-size producers is most obvious at
the retail level. Mid-size producers are either merging or being
acquired and getting larger or specializing and getting smaller.
More than ever before, small- and mid-size producers are carefully
developing key retail relationships based on the value they are
able to provide to these relationships, in terms of merchandising
support and profit dollars.
Small producers are becoming even more specialized, selling to specialized
wine shops and restaurants. Specialization requires improved communications;
more effectively differentiated brands through packaging,
quality distinctions, and more focused product portfolios; and a
commitment to working more closely with a smaller number of important
The reality is that all wine producers are seeking to become stronger
at positioning their brands and are learning from each other in
the process. Jug and the emerging box wine segments
are now using varietal identifiers and upscale packaging. Through
specialization and niche marketing, many winery and retail
operated, proprietary wine clubs are growing in the U.S.
and elsewhere in the world.
Larger retailers are not only looking to manage fewer SKUs, they
are also launching their own, more profitable private labels in
all price tiers. Retailers are attempting to build value by
creating their own brands, to help build their reputation and generate
stronger return on brand equity. Private, proprietary, and controlled-label
brands are each strategies for achieving higher retail profits where
the margin is essentially spilt, after transportation and delivery
expenses, between producer and retailer.
Typically focused on wines in the low- to mid-range price tiers,
this fast growing, global market is now moving into the luxury tier.
Costco carries a $60/bottle Kirkland (private label) brand. In the
last two years, multi-state wine distribution projects have been
initiated out of California to service the western states,
out of Illinois to service the midwest, and out of Florida to service
These projects involve private and controlled labels or mid- to
low-price national brands that are centrally priced and managed.
Many wineries are actively specializing in supplying wine under
these special labels, and they are an important outlet for excess
production. Others, selling their own brands, compete with retail
private labels directly for floor space.
U.S. market liberalization
Wholesalers will most likely NOT be successful in maintaining the
status quo. The depth of the wholesalers anxiety is demonstrated
by Wine and Spirits Wholesalers of America joining forces with the
conservative, religious right (Ralph Reed and his Christian Coalition
filed an Amicus brief in support of the wholesalers in the Granholm
case) and the traditional anti-alcohol forces.
At least four dynamics are preventing wholesalers from holding back
the storm: 1) wholesaler consolidation reduced the number of wholesalers
diluting their historic power. They will become even weaker
over the next decade as they join consolidated systems.; 2) winery
trade associations are more effective than in previous eras; 3)
the Granholm decision truly exposes the vulnerability of traditional
special-interest legislation; and 4) special-interest legislation
is an enormous political risk that benefits one tier at the expense
of putting another tier out of business. Wineries can generate votes,
the real currency of politics.
A victory by Costco will reverberate through other states and
lead to direct shipment from producers to retailers. The Costco
case is the 800-pound gorilla behind the door of the direct shipping
lawsuit, and Wal-Mart is right behind Costco. Costco filed suit
in federal district court in Seattle, WA, in September 2003, seeking
to invalidate the following Washington state laws: 1) distributor
price posting; 2) minimum wholesale markups; 3) credit law (Washington
is a cash state, requiring retailers to pay cash on delivery for
alcoholic beverages); 4) prohibition on quantity discounts and cumulative
quantity discounts; 5) prohibition on direct delivery from out-of-state
wineries to Costco warehouses.b
Given that Costco is fighting so shipments can be sent directly
from out-of-state producers to its Washington warehouse,c
the interests of both wineries and Costco should be aligned. The
wholesalers legislative response to a Costco victory is certain
to be an attempted repeal of in-state privileges held by local wineries.
The Washington wine industry is also certain to resist encroachments
upon the privileges for which it has battled so long. We predict
that Costco will prevail in the courts and the Washington wine industry
will prevail in the legislature.
If Costco establishes that it legally possesses the privilege of
receiving direct shipments from out-of-state producers, then any
retailer in any state where in-state wineries have a right to ship
directly to retail accounts in their own states should possess the
California has the same restrictions as Washington state and the
same privileges for its domestic wineries. If challenged, California
restrictions on out-of-state shipments to California retailers will
also fall. This is certain to be a contentious and heavily litigated
issue that will be battled first in the large coastal consumer market
states, such as California, Florida, Texas, and New York. State
by state, legal action will eventually move to smaller markets as
consumer and business pressures rise over unjustifiable price disparities
that become transparent because of better consumer and retailer
access to market information.
CHALLENGES (or OPPORTUNITY?)
The most significant court cases will come from the retail tier.
Change will be slow, since regulators are disinclined to enforce
laws that they believe may be discriminatory and subject to challenge.
However, it is highly likely that the retail tier will build its
case and win it dramatically accelerating liberalization
of the national wine market.
If an in-state retailer can ship through commercial delivery services
to a customer, we believe that there is no valid basis for denying
that right to an out-of-state retailer. Many states permit their
own retailers to ship directly within the state, clearly discriminating
against retailers out-of-state.
Judging from the momentum of the last several years and driven by
retail legal action, major legal hurdles will be overcome by 2015.
While the economic and technological factors are the most predictable
drivers of change, definite wild cards exist , including the potential
impact of the anti-alcohol movement (which is currently focused
on youth advertising and reduction in the availability
of product through retail outlet control), positive or negative
developments in health research, and the consequences of religious-based
legislation prohibiting alcohol consumption in many parts of the
U.S. and the world.
The Perfect Storm is already brewing with a two-and-a-half
tier system operating with controlled-label or private brands that
are delivered through distributors at rates that are essentially
transportation and administration costs. As technological and regulatory
breakthroughs occur, this two-and-a-half tier system will expand
to broadly sold national brands over the next 10 years.
On the global scene, major super-retailers have been expanding worldwide
for several years. These include Target, Costco, and Wal-Mart. It
is likely that the major super-retailers from Europe Tesco
for example may expand into the U.S. or may acquire (or be
acquired by) their U.S. counterparts.
Because of globalization, we believe that the world in 2015 will
comprise a dozen super-retailers operating throughout the developed
world, who will be working primarily with their world-wide producer
counterparts and less so with smaller, national producers. In 2015,
the average retail wine buyer program will most likely consist of
a limited number of well-segmented SKUs purchased from the top 20
The big will get bigger. However, highly specialized retailers and
producers will continue to grow through niche marketing, because
of the adventurous nature of the high-end wine consumer, who constantly
seeks new experiences and education; many consumers will persist
in their quest for undiscovered, still higher-quality wines.
New wineries will continue to emerge; but the strong that survive
will go about marketing and selling their wines in a more focused,
segmented, and disciplined manner over the next decade than they
have over the last. The consumer will get more: more
brands to chose from, more innovative products and packaging,
more specialized experiences with smaller wineries, and more
quality for the price.
a. The Supreme Court in
Granholm v. Heald, 544 125 S. Ct. 1885, May 16, 2005 found that
the 21st Amendment did not authorize discrimination between in-state
products and products from out-of state. Justice Kennedy held for
the Court, The Amendment did not give States the authority
to pass nonuniform laws in order to discriminate against out-of-state
goods, a privilege they had not enjoyed at any earlier time.
This is the key holding in the opinion and represents the beginning
of a clear line of authority (Authors).
b. The Costco action survived 2004 cross-motions
for summary judgment and was stayed pending the U.S. Supreme Court
decision in Granholm. The case is now going back for trial in March,
2006. Of note is the fact that in 2003, the Washington Supreme Court
itself expressed hostility to the state regulatory scheme when it
invalidated the Washington franchise laws on the basis that they
were discriminatory because Washington wineries were excluded. Mt.
Hood Beverage Co. v Constellation Brands, Inc., (Supreme Court of
the State of Washington, No. 72882-8, Feb. 20, 2003).
c. Equal treatment with in-state wineries
that can ship direct to retail accounts, or with consumers in Washington
who are also defined as people for legal purposes and
who can receive goods directly from out-of-state.
Deborah Steinthal is the founding partner in Scion Advisors,
a professional advisory firm focused on finding creative solutions
to the toughest problems of family wine businesses. Scion helps wine
family leaders transform their companies into more profitable organizations
with obvious brand equity. Seasoned executives, Scions three
partners combine a unique perspective of the wine business with general
management know-how from across several industries.
For more information visit www.scionadvisors.com; or call or email
Steinthal at 707/258-9130, Deborah
John Hinmans experience spans the modern history of the
wine industry and includes regulatory defense before state and federal
government agencies, distribution litigation throughout the U.S.,
arbitration and mediation of relations between grapegrowers and wineries,
and deep involvement in the direct shipping battles from the very
beginning. Hinman & Carmichael LLP provides expert corporate,
administrative, and regulatory legal services exclusively to the alcoholic
beverage and hospitality industries and assists other law firms and
in-house counsel as special counsel on alcoholic beverage issues.
For more information visit www.beveragelaw.com; or call or email Hinman
at 415.362.1215 x101, firstname.lastname@example.org.
- Brown-Forman Distillers Corp. v. New York
State Liquor Authority, 476 U.S. 573 (1986 and United States
Brewers Association v. Healy, 692 F.2d 275 (1982)
- Hostetter v. Idlewild Bon Voyage Liquor
Corp., 377 U.S. 324 (1964)]
- California Retail Liquor Dealers Association
v. Midcal Aluminum, Inc., 445 U.S. 97 (1980)
- Bacchus Imports, Ltd. v. Dias, 468 U.S.
- 44 Liquormart, Inc. v. Rhode Island,
517 U.S. 484 (1996)
- Cooper v. McBeath, 11 F.3d 547 (5th Cir.
- Prudential (Kantar) January 11, 2005
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