- The Washington Times - Tuesday, February 28, 2006

Wine has been sold in most of the United States through a legally mandated system of wholesale distribution for over 70 years. That system is now being challenged — by consumers, producers and at least one powerful corporate interest.

Its defenders, themselves powerful and politically influential, are fighting back. When the dust settles, both how you shop for wine and which wines you can buy may well have changed.

Although the issues here certainly prove contentious, they are not especially complicated. At heart, the fight concerns a set of successful companies maintaining power or being compelled to give up power. All the other topics — consumer rights, states’ rights, protecting minors, collecting taxes and the like — are tangential.

Trying to predict what will happen in this dispute is difficult. As Bob Dylan once sang, “the wheel’s still in spin,” so writers and critics shouldn’t prophesy too much. Still, the intensity of the controversy, coupled with the fact that the disputants keep ending up in court, suggests that the status quo is unlikely to survive. Mr. Dylan’s lyrics get to the heart of the matter. “The loser now,” he wrote, “will be later to win / For the times they are a-changin’.”

In order to understand what the hullabaloo is all about, begin with a little history. In 1933, when Prohibition ended, Congress gave the states, and, by extension, local municipalities, the authority to regulate the sale and distribution of alcohol.

Different states did different things. Some ran the booze business themselves, while others licensed private companies to do so. Some permitted wine sales in specialized liquor stores, while others allowed food markets to carry the product. Some states imposed high taxes as others levied no fees at all.

The result was what historian Thomas Pinney calls “a crazy, ramshackle structure of state and local regulations,” a structure that “impeded, obstructed, and diverted” the flow of wine “in a thousand unpredictable and arbitrary ways.” Although things have calmed down a bit during subsequent decades, wine availability is still affected.

Few states now monopolize the sale of alcohol. Pennsylvania remains the most prominent holdout. Consumers there still must buy wine from a store owned and run by the state, and, so, managed and staffed by state employees whose union politicians feel the need to court. Much the same is true in select local municipalities throughout the country, Montgomery County in Maryland being a prime example.

In other jurisdictions, however, local and state governments license (usually for a hefty fee) private entities to sell wine. They usually do so twice. First come establishments where consumers can buy wine — retail stores, restaurants, bars and such. Second come the companies that can sell wine to those establishments. These are the wine (and liquor) wholesalers or distributors, and this licensing structure is what is often called the “three-tier system.”

This system is what is now being challenged in courtrooms and legislatures throughout the country. The challenges come from three separate parties — individual consumers, small wineries and, most recently, one powerful mega-retailer.

For consumers, the question concerns why one has to purchase wine from a retailer who buys it from a wholesaler who in turn buys it from a producer (the three tiers). Why can’t one order it directly from the person who made it? That question is being asked more often these days, especially with the increased popularity of online shopping and wine tourism.

For small wineries, the question is much the same. Why should a family-run operation in California that produces only a few hundred cases a year have to sell to a wholesaler in Virginia in order to get wine to a customer living in Alexandria? Why shouldn’t that winery be able to sell directly to the consumer?

The answer most often given to those questions is that the three-tier system protects government interests — first by ensuring revenue and second by enforcing law. Without the system, could government collect the taxes and fees it does now? And if direct sales were permitted, what would prevent minors from placing orders and making purchases?

Many states, however, have had one set of regulations for in-state producers and another for those out-of-state. Laws in Michigan and New York, for example, permitted in-state wineries to sell wine directly while forcing out-of-state producers to sell to wholesalers. Over the years, neither state failed to collect the revenue it was due, and neither experienced any significant increase in under-age drinking.

In May, the United States Supreme Court ruled the laws in those two states unconstitutional. Although their decision was split, the justices had little patience for the arguments about protecting government interests. Writing for the majority, Justice Anthony Kennedy declared: “States have broad power to regulate liquor. … This power, however, does not allow states to ban, or severely limit, the direct shipment of out-of-state wine while simultaneously allowing direct shipment by in-state producers. If a state chooses to allow direct shipping of wine, it must do so on evenhanded terms.”

Since then, states have responded in a variety of ways. Some have moved to even the playing field by allowing direct shipping for all wineries, but others are trying to ban direct sales altogether.

In Maryland and Virginia, where in-state wineries have been permitted to sell directly to restaurants and wine shops, new rules are scheduled to go into effect that would force them to sell only to wholesalers. Small winery owners in both states fear that these regulations could put them out of business, as large wholesale companies have little interest in carrying, let alone promoting, their products.

The potentially most important challenge to the three-tier system comes from neither consumers nor wineries. It instead is being issued by a corporate entity with the political muscle to match the wholesale lobby — the biggest wine retailer of all, Costco Wholesale Corp.

If you shop at Costco in the Washington area, you might not know that this huge discounter sells more wine than any other retailer in the United States.

Neither Maryland nor Virginia has licensed the company to sell wine, but many other states have, and Costco now wants to buy and sell wine in much the same way it buys and sells other products — in bulk, directly from the producers or manufacturers. To enable it to do so, the mega-retailer has filed suit in federal court in its home state of Washington. The trial is scheduled to begin later this month.

The Costco challenge, even more than the lawsuits brought on behalf of individual consumers or small wineries, has the potential to bring down the current distribution structure.

If this Fortune 500 company can persuade the court that the three-tier system is inherently anti-competitive (because it leads to higher consumer prices and limited consumer choice), the rationale for the status quo will collapse.

Should that happen, how will the changes affect you? Probably not all that significantly — at least not right away. Most wines, particularly high-volume, mass-market brands, will continue to be sold through wholesalers, simply because those companies have the equipment and facilities to store and transport them.

Other wines, though, might well be purchased in other ways — by individual consumers, but even more to the point, by retailers and restaurateurs. No matter what happens, as Justice Kennedy indicated, states surely will continue to regulate — meaning license and tax — all sales.

Finally, why is this happening now? For over 70 years, the three tiers have functioned with the wholesalers as a powerful linchpin, keeping the system running profitably if not always efficiently. Why are the challenges coming so forcefully today?

The answer is simple. According to a recent Gallup poll, wine has become America’s favorite alcoholic beverage. A product that until recently was viewed widely as either effete and snobbish or low-class and declasse is increasingly becoming part of mainstream American life.

That’s why Costco is selling it, why more and more small-volume wineries are opening for business, and why consumers increasingly are expressing dissatisfaction with the status quo. Bob Dylan got that right, too: “The order is / Rapidly fadin’ … For the times they are a-changin’.”

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