CRAIG WOLF: “YOU CAN’T REPLICATE WHAT WE DO.”
In the second part of our two-part interview with WSWA president and chief, Craig Wolf, Craig touches on the Costco case and illustrates just how important wholesalers are. To read Part One, click here.
WSD: Clearly Granholm is causing a lot of interpretation issues.
Craig Wolf: A lot of the lawyers involved in these cases are basically saying ‘we are going to seek deregulation so that alcohol is treated like any other product and you can’t treat it differently.’
And the point is that it’s not just any other product. It should not be treated like any other product and it’s important that we take care of how we deliver it and distribute it. So that is getting a little feel of the litigation. That tells you a little bit about the retail side.
The other litigation of course is the direct-to-retail, the self-distribution. Generally the courts have found that to be comparable to Granholm because it’s product based. So as a result, wholesalers, retailers and even wineries have gone in trying to knock down these laws and have been very successful in doing so. The responses of the states in terms of the legislatures have been a mix. Some of them have said no self-distribution, period. We are not going to open the door to out-of-state self-distribution. We are not going to count on thousands of cases being delivered to a retailer by a supplier and not get our excise taxes. We can’t do that. We can’t worry about the whole regulatory burden that it entails so they simply said no to self-distribution. Others have said case limitations or gallonage limitations. Now of course those are being challenged. So in Massachusetts and Arizona and even in Kentucky, the gallonage limitations are challenged.
WSD: What are the issues surrounding volume caps and the face-to-face sales?
CW: They don’t want any limitation on the type of winery that can do this. Their position is if you allow the small guys to do this, you should allow the big guys to do it. I appreciate the logic there but the fact is that these gallonage or volume caps, however you want to refer to them, are in response to a specific problem that the wineries themselves have brought to the litigation. What’s the problem? They’re saying that small wineries can’t get distribution and therefore you need to allow direct shipping for the small wineries. The same thing goes on the self-distribution side. Small wineries can’t get distribution by these wholesalers therefore we need to self-distribute. So what the states are saying is, ‘ok, if that is true, if a small winery is having trouble getting distribution then we’ll allow small wineries to self-distribute and/or ship direct.’ But there is no need to allow that wholesale, no pun intended, to all the big wineries because they have distribution.
So we’re going to solve a problem and by the way in solving this problem, we know that we are opening up our state’s wineries to huge competition from out-of-state. Consider Arizona. Arizona had laws that allowed for self-distribution and direct-shipping by the wineries, only in-state. They changed the laws and said if you’re at 20,000 gallons or under, you can now self-distribute and you can now sell to consumers in-state or out-of-state. That’s the new law. So what did that do? Those 20 or 30 wineries in Arizona that had previously faced no competition whatsoever on self-distribution or direct-shipping are now facing direct competition on self-distribution and direct-shipping from thousands of wineries from outside the state. So what do the lawsuits say? These laws are protectionist; they’re designed to protect the in-state wineries. To the contrary, these laws open the doors to huge competition from out-of-state wineries that these guys never faced before. And more importantly under Granholm they are evenhanded. The only thing Granholm required was that the way you treat an in-state is the way you treat an out-of-state, and that’s exactly what they do. So ultimately, and I think the Kentucky judge got this one right, he said there is no discrimination here, it’s even handed. In-state and out-of-state gallonage caps are the same. The wineries at that level can do the same thing. So ultimately I think these cases are losers for the plaintiffs. I think ultimately the on-premise cases are losers for the plaintiffs, and I happen to believe the retail-direct cases are ultimately losers for the plaintiffs.
So the hardest ones are the big ones, the big box cases, the direct-to-retail, self-distribution cases. And here’s the rub there that you should understand. Most wineries don’t want to go direct-to-retail. Or rather they want to do it within limitations. None of them want to go to the big box guys directly. The real simple reason for that is this. If you look at every other industry that has gone direct to the big box guys, the places like the Home Depots of the world, if you go in there what do you see? You see two or three products at most, at low prices mind you—which everybody loves low prices—but there is no variety and selection anymore. Costco, Sam’s Club, they will offer 100 or 150 SKU’s that’s it, and they will drive your prices down because they will control you. Once you go directly to a big box retailer, and you have 30%-40% of your volume going to them, they own you; that’s it. Wholesalers offer a shield to that type of what is called monopsonist practices.
Monopolies were a problem prior to prohibition, where you had the tied-house problem where the retailers were controlled by the suppliers. Those were the big tied-house evils that you saw prior to prohibition. Wholesalers were put into place to prevent those types of tied-house evils. In other words, wholesalers, believe it or not, were put in place to foster competition, to prevent the suppliers from dominating the retailers and selling only their products in their stores in unreasonable quantities and not caring about the social responsibility.
The world today is different from what it was back then. Now, the big power is not the suppliers anymore, it’s the big box retailers. They’re huge. Let’s take a company like Diageo, the biggest spirits supplier. They may be a $17-$18 billion dollar company or so. Well Wal-Mart is a $300 billion dollar company. The power is quite unbalanced. So wholesalers again serve a purpose in protecting against what is called a monopsony—the ability of a retailer to control the marketplace the way a supplier in the monopoly context does at the expense of variety, at the expense of price. Consumers love the prices but they are not known for selection and variety. When you go there you have a few types of selections. Well the same thing goes for alcohol and the fact is that the wineries know this. They know that if these big box guys are allowed to have direct shipments, and ultimately drive out the local retail competition and they’re the only game in town, then half the shelf space they had before for all their different products and all the different wines that they were growing will be gone. And the big box guys will only take in: 1) private labels first, they love their private labels, and, 2) high-selling brands, volume brands. So the small to medium size wineries are going to get killed in that world that would get created by direct-to-retail. Wholesalers again serve as a bulwark against that type of monopsonist power.
WSD: How is the Costco case looking?
CW: Well we had the oral arguments in the Ninth Circuit and now we’re waiting for the ruling. So the ruling should come down but you just never know with the Ninth Circuit. It could be any time. It’s going to be whenever they decide to get together and get two out of the three judges to agree. My understanding was, I didn’t actually attend that hearing but I know people who did, the judges were much more open to the arguments of the state and wholesalers than the district judge had been.
From my perspective, looking at the case sort of from 10,000 feet, what I found troubling was the judge lumped all of these different provisions in the same basket, and they’re different. They have different rationales, different motivations but she didn’t seem to care or to make findings that differentiated. She said ‘okay, they’re all bad and therefore I’m throwing them all out.’ But the fact is that these practices have been there for a long time for a lot of different reasons. And under the anti-trust law, and again I don’t want to get into the weeds here, but the anti-trust law requires a different type of scrutiny than I think she gave the different provisions. I think because of that she’s probably, at least in part, going to be overturned if not totally remanded to revisit and make better findings. But we’ll see. Ultimately the question is whether this case will spread beyond Washington State, and we’ll just have to wait and see on that one.
WSD: What is going on in Florida? It looks like the legislature ended their term without passing any of the direct-wine-shipping bills.
CW: The judge ruled that the Florida law that allowed only in-state wineries to do home delivery was un-constitutional. The question then becomes, what do you do then, what’s the remedy? It’s a legislative remedy. The legislature has to come in and fix that. Should all wineries be allowed to ship direct or should no wineries be allowed to ship direct. So I’m not sure that the state should be doing what it was doing in the first place, allowing all those wineries from out-of-state to ship direct because there’s no law allowing it. There’s a court order saying the in-state part was unconstitutional, but I think what may happen is the state saying, ‘wait a minute, if there’s no law, we can’t be enforcing or trying to regulate something that technically doesn’t exist.’
So I’m not sure how they’re going to come to a conclusion down there. I think that ultimately the legislature has to act, but right now it’s wide open and I just don’t know exactly what they’re going to do. Obviously the regulators are taking it down from their website, the tax forms, etc that allow direct-shipping to occur. I think that if I were a winery out there outside of Florida, I would be very wary of shipping direct to Florida.
WSD: What does the WSWA see right now as the biggest threat?
CW: The direct-to-retail, the big box threat is very important, very real. That’s something we have always feared that these cases were going. But we love our big box clients; we love doing business with them. We just want them to remain our clients. I think a lot of the big box guys, by the way I don’t want to paint them all with the same brush, appreciate what the wholesalers do and the value we bring as well as the marketing expertise we bring, and it helps them. They can’t replicate what we do. They’re not capable of replicating our marketing expertise and our knowledge or our distribution efficiencies. But there are some out there that think they can. I think they are wrong about that and so that is a big threat that we are dealing with. On the direct-to-consumer side people have said that we are concerned about the sales issue, and obviously it’s growing, but it’s never about money to wholesalers. It’s always been about where it would lead legally in further deregulation and we think the policy is a bad one. It’s an unsafe practice. So we’re going to continue to fight in the courts, we’re going to keep intervening in these cases and make sure the courts are educated as to the purpose and history of the 21st amendment and the history and purpose of the regulated systems.
I think Justice Stevens in the Supreme Court decision got it right. He was around when prohibition ended. A lot of the judges today were not around and don’t understand the system very well and it’s our job to educate them. So we have a very hard burden there. We have to educate people to make them understand how important wholesalers are and how much value we bring. We bring tremendous value and efficiencies to the on-premise and off-premise marketplace. You can’t replicate what we do.
They (wholesalers) are experts at wine selections, finding brands, marketing new brands. The vibrancy of the market, and you can see how vibrant it is with all the selection and all the variety out there despite complaints in some quarters, is because wholesalers have made it that way. There has never been more variety and selection out there than there is today despite the complaints about consolidation.
CW: I think it’s important to understand that we want to get along with all the tiers and all the categories. It’s important that we work together as much as possible. And while we may have differences in opinion we are not out to vilify people, we’re only trying to do what is in the best interest of the industry as a whole. It’s important to emphasize that whatever our disagreements with wine retailers, like direct shipping, they are great customers for us and we love working with them. We just have a disagreement on this policy. The same thing goes for wineries. We love our wineries and the vibrancy of the wine world. We sell wine and spirits and we like the fact that it is a very evolving and dynamic marketplace and we don’t want to vilify them either. We think they are great entrepreneurs and great businessmen. We just disagree with direct shipping because we think it is a dangerous practice.
WSD: Thank for your time Craig.
WSD: Clearly Granholm is causing a lot of interpretation issues.
Craig Wolf: A lot of the lawyers involved in these cases are basically saying ‘we are going to seek deregulation so that alcohol is treated like any other product and you can’t treat it differently.’
And the point is that it’s not just any other product. It should not be treated like any other product and it’s important that we take care of how we deliver it and distribute it. So that is getting a little feel of the litigation. That tells you a little bit about the retail side.
The other litigation of course is the direct-to-retail, the self-distribution. Generally the courts have found that to be comparable to Granholm because it’s product based. So as a result, wholesalers, retailers and even wineries have gone in trying to knock down these laws and have been very successful in doing so. The responses of the states in terms of the legislatures have been a mix. Some of them have said no self-distribution, period. We are not going to open the door to out-of-state self-distribution. We are not going to count on thousands of cases being delivered to a retailer by a supplier and not get our excise taxes. We can’t do that. We can’t worry about the whole regulatory burden that it entails so they simply said no to self-distribution. Others have said case limitations or gallonage limitations. Now of course those are being challenged. So in Massachusetts and Arizona and even in Kentucky, the gallonage limitations are challenged.
WSD: What are the issues surrounding volume caps and the face-to-face sales?
CW: They don’t want any limitation on the type of winery that can do this. Their position is if you allow the small guys to do this, you should allow the big guys to do it. I appreciate the logic there but the fact is that these gallonage or volume caps, however you want to refer to them, are in response to a specific problem that the wineries themselves have brought to the litigation. What’s the problem? They’re saying that small wineries can’t get distribution and therefore you need to allow direct shipping for the small wineries. The same thing goes on the self-distribution side. Small wineries can’t get distribution by these wholesalers therefore we need to self-distribute. So what the states are saying is, ‘ok, if that is true, if a small winery is having trouble getting distribution then we’ll allow small wineries to self-distribute and/or ship direct.’ But there is no need to allow that wholesale, no pun intended, to all the big wineries because they have distribution.
So we’re going to solve a problem and by the way in solving this problem, we know that we are opening up our state’s wineries to huge competition from out-of-state. Consider Arizona. Arizona had laws that allowed for self-distribution and direct-shipping by the wineries, only in-state. They changed the laws and said if you’re at 20,000 gallons or under, you can now self-distribute and you can now sell to consumers in-state or out-of-state. That’s the new law. So what did that do? Those 20 or 30 wineries in Arizona that had previously faced no competition whatsoever on self-distribution or direct-shipping are now facing direct competition on self-distribution and direct-shipping from thousands of wineries from outside the state. So what do the lawsuits say? These laws are protectionist; they’re designed to protect the in-state wineries. To the contrary, these laws open the doors to huge competition from out-of-state wineries that these guys never faced before. And more importantly under Granholm they are evenhanded. The only thing Granholm required was that the way you treat an in-state is the way you treat an out-of-state, and that’s exactly what they do. So ultimately, and I think the Kentucky judge got this one right, he said there is no discrimination here, it’s even handed. In-state and out-of-state gallonage caps are the same. The wineries at that level can do the same thing. So ultimately I think these cases are losers for the plaintiffs. I think ultimately the on-premise cases are losers for the plaintiffs, and I happen to believe the retail-direct cases are ultimately losers for the plaintiffs.
So the hardest ones are the big ones, the big box cases, the direct-to-retail, self-distribution cases. And here’s the rub there that you should understand. Most wineries don’t want to go direct-to-retail. Or rather they want to do it within limitations. None of them want to go to the big box guys directly. The real simple reason for that is this. If you look at every other industry that has gone direct to the big box guys, the places like the Home Depots of the world, if you go in there what do you see? You see two or three products at most, at low prices mind you—which everybody loves low prices—but there is no variety and selection anymore. Costco, Sam’s Club, they will offer 100 or 150 SKU’s that’s it, and they will drive your prices down because they will control you. Once you go directly to a big box retailer, and you have 30%-40% of your volume going to them, they own you; that’s it. Wholesalers offer a shield to that type of what is called monopsonist practices.
Monopolies were a problem prior to prohibition, where you had the tied-house problem where the retailers were controlled by the suppliers. Those were the big tied-house evils that you saw prior to prohibition. Wholesalers were put into place to prevent those types of tied-house evils. In other words, wholesalers, believe it or not, were put in place to foster competition, to prevent the suppliers from dominating the retailers and selling only their products in their stores in unreasonable quantities and not caring about the social responsibility.
The world today is different from what it was back then. Now, the big power is not the suppliers anymore, it’s the big box retailers. They’re huge. Let’s take a company like Diageo, the biggest spirits supplier. They may be a $17-$18 billion dollar company or so. Well Wal-Mart is a $300 billion dollar company. The power is quite unbalanced. So wholesalers again serve a purpose in protecting against what is called a monopsony—the ability of a retailer to control the marketplace the way a supplier in the monopoly context does at the expense of variety, at the expense of price. Consumers love the prices but they are not known for selection and variety. When you go there you have a few types of selections. Well the same thing goes for alcohol and the fact is that the wineries know this. They know that if these big box guys are allowed to have direct shipments, and ultimately drive out the local retail competition and they’re the only game in town, then half the shelf space they had before for all their different products and all the different wines that they were growing will be gone. And the big box guys will only take in: 1) private labels first, they love their private labels, and, 2) high-selling brands, volume brands. So the small to medium size wineries are going to get killed in that world that would get created by direct-to-retail. Wholesalers again serve as a bulwark against that type of monopsonist power.
WSD: How is the Costco case looking?
CW: Well we had the oral arguments in the Ninth Circuit and now we’re waiting for the ruling. So the ruling should come down but you just never know with the Ninth Circuit. It could be any time. It’s going to be whenever they decide to get together and get two out of the three judges to agree. My understanding was, I didn’t actually attend that hearing but I know people who did, the judges were much more open to the arguments of the state and wholesalers than the district judge had been.
From my perspective, looking at the case sort of from 10,000 feet, what I found troubling was the judge lumped all of these different provisions in the same basket, and they’re different. They have different rationales, different motivations but she didn’t seem to care or to make findings that differentiated. She said ‘okay, they’re all bad and therefore I’m throwing them all out.’ But the fact is that these practices have been there for a long time for a lot of different reasons. And under the anti-trust law, and again I don’t want to get into the weeds here, but the anti-trust law requires a different type of scrutiny than I think she gave the different provisions. I think because of that she’s probably, at least in part, going to be overturned if not totally remanded to revisit and make better findings. But we’ll see. Ultimately the question is whether this case will spread beyond Washington State, and we’ll just have to wait and see on that one.
WSD: What is going on in Florida? It looks like the legislature ended their term without passing any of the direct-wine-shipping bills.
CW: The judge ruled that the Florida law that allowed only in-state wineries to do home delivery was un-constitutional. The question then becomes, what do you do then, what’s the remedy? It’s a legislative remedy. The legislature has to come in and fix that. Should all wineries be allowed to ship direct or should no wineries be allowed to ship direct. So I’m not sure that the state should be doing what it was doing in the first place, allowing all those wineries from out-of-state to ship direct because there’s no law allowing it. There’s a court order saying the in-state part was unconstitutional, but I think what may happen is the state saying, ‘wait a minute, if there’s no law, we can’t be enforcing or trying to regulate something that technically doesn’t exist.’
So I’m not sure how they’re going to come to a conclusion down there. I think that ultimately the legislature has to act, but right now it’s wide open and I just don’t know exactly what they’re going to do. Obviously the regulators are taking it down from their website, the tax forms, etc that allow direct-shipping to occur. I think that if I were a winery out there outside of Florida, I would be very wary of shipping direct to Florida.
WSD: What does the WSWA see right now as the biggest threat?
CW: The direct-to-retail, the big box threat is very important, very real. That’s something we have always feared that these cases were going. But we love our big box clients; we love doing business with them. We just want them to remain our clients. I think a lot of the big box guys, by the way I don’t want to paint them all with the same brush, appreciate what the wholesalers do and the value we bring as well as the marketing expertise we bring, and it helps them. They can’t replicate what we do. They’re not capable of replicating our marketing expertise and our knowledge or our distribution efficiencies. But there are some out there that think they can. I think they are wrong about that and so that is a big threat that we are dealing with. On the direct-to-consumer side people have said that we are concerned about the sales issue, and obviously it’s growing, but it’s never about money to wholesalers. It’s always been about where it would lead legally in further deregulation and we think the policy is a bad one. It’s an unsafe practice. So we’re going to continue to fight in the courts, we’re going to keep intervening in these cases and make sure the courts are educated as to the purpose and history of the 21st amendment and the history and purpose of the regulated systems.
I think Justice Stevens in the Supreme Court decision got it right. He was around when prohibition ended. A lot of the judges today were not around and don’t understand the system very well and it’s our job to educate them. So we have a very hard burden there. We have to educate people to make them understand how important wholesalers are and how much value we bring. We bring tremendous value and efficiencies to the on-premise and off-premise marketplace. You can’t replicate what we do.
They (wholesalers) are experts at wine selections, finding brands, marketing new brands. The vibrancy of the market, and you can see how vibrant it is with all the selection and all the variety out there despite complaints in some quarters, is because wholesalers have made it that way. There has never been more variety and selection out there than there is today despite the complaints about consolidation.
CW: I think it’s important to understand that we want to get along with all the tiers and all the categories. It’s important that we work together as much as possible. And while we may have differences in opinion we are not out to vilify people, we’re only trying to do what is in the best interest of the industry as a whole. It’s important to emphasize that whatever our disagreements with wine retailers, like direct shipping, they are great customers for us and we love working with them. We just have a disagreement on this policy. The same thing goes for wineries. We love our wineries and the vibrancy of the wine world. We sell wine and spirits and we like the fact that it is a very evolving and dynamic marketplace and we don’t want to vilify them either. We think they are great entrepreneurs and great businessmen. We just disagree with direct shipping because we think it is a dangerous practice.
WSD: Thank for your time Craig.
posted at 10:47 AM
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