A Word from the Specialty Wine Retailers

FILED AUGUST 3, 2010

Dear Client:

We've heard from the supplier tier and the wholesaler tier regarding HR 5034. Now here's a word from the Specialty Wine Retailers Association's director Tom Wark. The SWRA represents brick and mortar and online wine retailers, which are in a unique position because they are left out of the bill entirely. So the big question is: if HR 5034 was passed, would states be allowed to discriminate against online wine retailers? Tom says yes. "The bill doesn't say that there can be no non-facial discrimination against retailers, just producers," he told us. Here's what else he had to say as you, dear reader, are a fly on the wall.

WINE & SPIRITS DAILY: So what is SWRA's position on HR 5034?

TOM WARK: Well, you've heard all the complaints and problems with HR 5034. But let me repeat the most important point: It's a straight out, straight forward power grab by wholesalers who got tired of courts that found the discriminatory and protectionist legislation they push in the states to be unconstitutional. I think it's also significant when you look at who's sponsoring this bill, you only find wholesalers. I'm not thinking about the fact right now that you don't see producers of beers, wines or spirits who are not supporting this bill, but rather the that you haven't see the National Conference of State Legislators sponsor this bill. You haven't seen the vast majority of state alcohol regulators support this bill. You haven't seen any members of law enforcement ask Congress to pass this bill. You haven't seen the National Conference of State Legislators ask this bill to be passed. You've only see it supported by wholesalers. This should tell everyone something important.

WSD: Why do you think they're not getting the support from the regulators and law enforcement?

TOM: They've gotten a little bit of support from the control states. But most state alcohol regulators understand that their role is not a political one. They're appointed for the most part and their job is to carry out the laws enacted by the legislature. Their job is not political reform, and I think they understand that. As a result, for example, NCSLA hasn't come out in favor of this bill and I hope they won't. Once they do that, they identify themselves as supporting one tier of the industry over another.

WSD: Do your members understand the implications of HR 5034?

TOM: The retailers understand that it's not in their interest to give complete political power to wholesalers, and that's what 5034 does. The members of the Specialty Wine Retailers have been educated about this bill and very involved individually in opposing it. They understand that in the bill, non-facial discrimination is given lip service. The bill says there can be no facial discrimination against out-of-state producers without justification. What the retailers understand is that it's only producers that are even mentioned in that lip service. The bill doesn't say that there can be no non-facial discrimination against retailers, just producers. Even thought the wording concerning facial discrimination against producers is toothless, retailers aren't even protected in a toothless way in this bill. So they understand perfectly what's going on. They are being attacked politically by wholesalers.

WSD: Is there a fear that if the bill were to pass, that wholesalers would overturn state laws that allow retailers to ship direct?

TOM: There is no question in my mind that if this bill passes, we will see a number of states that allow retailer-to-consumer shipping and producer-to-consumer shipping entertain bills that discriminate against out of state interests. For years now, wholesalers have made it their business to ensure that consumers can't buy wine from out-of-state retailers and are forced to buy wine that wholesalers provide to their markets. State wholesalers associations have made it their business to make producer-to-consumer sales as difficult as possible. We have no doubt that one of the first things that will happen is state wholesaler associations will try to push regulation that bans out of state retailers and producers from shipping to consumers.
5034 won't end direct shipping. But if this passes, it will allow states to pass discriminatory legislation that cannot be appealed in the courts. I think if there's any disingenuous discussion happening around this bill, it's by the wholesalers who are carrying that torch. They're simply not telling the whole story. For example, they're telling that the state's ability to regulate alcohol is being destroyed and that's absolutely false. And they cannot point to anything that demonstrates that states are losing their rights to regulate the sale and distribution of alcohol. The fact of the matter is, there are far more regulations today after Granholm than there were before Granholm. The states are in a perfect position to regulate alcohol.

WSD: How so?

TOM: Prior to Granholm we had a lot of reciprocity agreements between states that basically said: 'If you allow our wineries to ship into your state, we'll allow your wineries to ship into our state'. And that was it. There was shipping between the states but there was no collection of taxes, there was no submission to a state's legal authority, there were no issuance of reports. Today, in order to ship wine into states, wineries and retailers have to buy a permit, they have to renew that permit annually, they have to submit reports to the state on a regular basis, they have to submit taxes to the states they are shipping into, and they have to submit themselves to the legal and regulatory jurisdiction of the state in which they're shipping. And all this has been a result of states regulating alcohol sales-rights that wholesalers say states are in jeopardy of losing. Yet, all this direct shipping legislation and regulation is post-Granholm.

WSD: Do you think the bill will pass sometime down the road?

TOM: I don't think it'll pass in its current form. It is such a swing for the fences and it's so blatantly a matter of the wholesalers trying to protect their own turf. There's so much opposition from all sectors of the industry that I don't see how any legislator can support it in its current form without ignoring the will of the industry. Now that said, I honestly don't see how any members of the alcohol beverage industry can support this kind of legislation in any form, no matter how the wholesalers might try to alter the bill. And I suspect they're thinking about that right now. My guess is right now they're looking at ways to re-write the legislation to make it more palatable to members of the Judiciary Committee and to Senators who haven't come on board yet with a companion bill.

One constituency that really doesn't have a voice in this whole debate are consumers, and that's important. Again, it's going to be consumers who are most affected by this legislation. In my view, someone needs to find out a way to bring consumers into this issue and understand how they feel about this. Not addressing what consumers want would be akin to not listening to what retailers want or wineries want or spirit producers want. We would have an incomplete understanding of this issue without consumer input.

WSD: What does this do to the relationship between tiers?

TOM: It certainly has a negative affect on the relationship between retailers and producers on the one hand and wholesalers on the other. Everyone is aware of what the wholesalers are trying to do with HR 5034. I think more than anything else, retailers and producers will have lost a little bit of trust in the wholesalers. The wholesalers have said they want to work closely with the producers and of course with the retailers they serve. They have worked closely with them, but in this case they're attempting to pass legislation that does nothing but harm their partners. We knew that the different tiers in the industry look out for themselves, but I can't remember such a blatant disregard for the other members of the industry and the other tiers of the industry.

WSD: Turning the page, does SWRA have any sort of position on the privatization efforts in Washington, Virginia and other states?

TOM: SWRA's main concern with the three-tier system is that there be as much well-regulated access to the market as possible. So SWRA has usually looked positively at efforts to allow self-distribution. We think retailers need to be able to reach out directly to suppliers in order for them to be able to differentiate themselves from their competitors in the market. When all retailers have to purchase from the same supply of product, there's a certain amount of homogeneity that results in the market. But, when a restaurant or a retailer reaches out to purchase wine directly from a producer or a brewer or spirit producer, that gives them an opportunity to hone their inventory to their customer base and we think that's a good thing. The sale and distribution system in any state has to be well regulated. It has to be what consumers want. But we think the system can be well regulated and serve consumers and the industry alike.

WSD: So I guess Costco's initiative in Washington, which is in favor of self-distribution, is something that you guys think would be positive for the industry?

TOM: We're not actively taking part in supporting or opposing that initiative. But in general, what we really like with what's happening up in Washington is the way the citizens of Washington, the trade in Washington, and the way the regulatory system in Washington is taking a fresh look at the three-tier system and taking a fresh look at the sale and distribution of wine to try to modernize it.

We think that an un-mandated three-tier system could certainly serve to make sure that alcohol is well regulated. We think de-mandating the three tier system can still prevent tied houses quite easily. We think that what's happening up in Washington is regulators and the marketplace and consumers are starting to take a fresh look at a system that's obviously very old and very tired and too often corrupted by one tier of the system that controls the regulatory process. We hope more discussions of reform to the system reach other states.

WSD: So how is the organization doing overall?

TOM: Right now, SWRA is building its organization, retaining new members and still pushing forward with trying to open up more states for retail-to-consumer shipping. That's our main focus because it best serves consumers, producers, retailers and wholesalers in the long run. Obviously, our focus right now is on HR 5034. We think it's a disaster for the industry. We'll remain focused on that and are watching it pretty closely.

WSD: Thank you for your time.

CALIFORNIA ASSEMBLY PASSES ANTI-HR 5034 SENATE RESOLUTION

Speaking of HR 5034 (and yes, it seems we won't be done talking about it anytime soon), the California Assembly approved Senate Joint Resolution 34. The bill, authored by Senators Alex Padilla and Patricia Wiggins, urges Congress not to pass HR 5034. It was sponsored by the Family Winemakers of California and other California and regional wine groups. SJR 34 will now be sent to the President, Vice President, United States Senate President Pro Tempore, Speaker of the House of Representatives, and Senators and Representatives from California. In a statement, Senator Padilla said: "SJR 34 sends a clear message to Congress that California wants to protect and preserve the ability of wineries to ship wine directly to consumers without discrimination between in-state and out-of-state wine producers."

WSD BRIEFS:

ENCORE BRANDS SIGNS WITH PELICAN. Encore Brands says it has entered a long-term agreement with Pelican Brands to launch the company's flagship Ecstasy Liqueur in key markets in the US in September. A national expansion is planned "soon thereafter."

IOWA SPIRITS AND WINE SALES GROW. According to the Iowa ABC, sales of spirits grew 3% in fiscal 2010, ended June 30. Wine sales grew 5%, while beer sales declined -2%.


Until tomorrow, Megan

"One of the most obvious facts about grownups to a child is that they have forgotten what it is like to be a child."
Randall Jarrell

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