Putting a cork in Internet wine sales
By Jerry Hirsch
Los Angeles Times Staff Writer
January 7, 2008
Dianna Dapkins thought the Internet would be the perfect place to find a rare Croatian wine that her local merchants in rural Shelburne, Mass., don't stock.
Sure enough, K&L Wine Merchants, an Internet retailer that also has stores in Hollywood and San Francisco, sells the Plenkovic Zlatan Plavac Barrique for $34.99. Dapkins clicked on the wine to buy it but said she was stunned when the website would not let her complete the sale.
"It is really frustrating," she said.
As Dapkins found out, Massachusetts state law blocks out-of-state retailers from shipping wine to its residents. And it's not the only state that puts a cork on interstate wine sales.
In 2005, the U.S. Supreme Court gave wineries more freedom to ship their wares to customers in other states. But the ruling did not apply to retailers -- whether they be digital or bricks and mortar -- and they're crying foul.
A complex system of state laws enables customers in some states to order Cabernet Sauvignon directly from the Ladera Howell Mountain winery in the Napa Valley, but not the identical vintage from the St. Helena Wine Center, a retailer just a few miles down the mountainside.
In its landmark decision, the Supreme Court ruled that states must allow out-of-state wineries to ship directly to residents if they gave their own wineries direct shipping rights.
Now 36 states and the District of Columbia allow wineries to ship directly to residents, although those rights are sometimes limited to just a few cases of wine annually or are accorded only to small wineries, said the Wine Institute, the major trade group for the California wine industry.
But the decision only addressed wineries. Retailers can ship to just 14 states, and that will drop to 13 this summer when an Illinois law takes effect prohibiting the practice, said Tom Wark, executive director of the Sacramento-based Specialty Wine Retailers Assn.
"We have been able to ship wine to Illinois since we started our e-commerce site back in 2000, but because of new state legislation, we are going to lose that privilege," said David Richards, executive vice president of the Concord, Calif.-based Beverages & More chain.
Such restrictions are generally supported by wine wholesalers and distributors, who see any relaxing of the rules as an assault on a distribution system that has served them profitably since the end of Prohibition in 1933.
They argue that the laws make good social policy by reducing access by minors, ensuring state tax collection and providing consumers with a wide selection of products.
Retailers disagree, saying that allowing people to order wine in other states improves consumer choice and often saves money.
"This is a pretty clear-cut argument about economics," said Greg Taylor of Taylor & Norton Wine Merchants in Sonoma. "The wholesalers want to have an iron grip on sales."
What wholesalers charge for wine varies greatly by state, depending on competition and regulatory issues.
BevMo, for example, sells the highly regarded 1999 Dom Perignon champagne for $114.99 in its California stores and through its website. The same bubbly costs $134.99 at its Arizona stores.
"In many states the wholesalers are donating huge sums of political money to ensure that outside players are blocked from the market," said Keith Wollenberg, K&L's spokesman and Burgundy wine buyer.
In California, the nation's largest wine producer and the state with the least wine sales regulation, the Legislature in 2005 passed a law -- supported by distributors -- that prohibited Californians from purchasing wine from out-of-state retailers.
The state attorney general's office has put enforcement of the law on hold until the end of this year to give the Specialty Wine Retailers Assn. a chance to persuade lawmakers to pass legislation that would allow out-of-state retailers to ship into California.
"If we are unsuccessful it is entirely possible that Californians will be prohibited from purchasing wine from out-of-state retailers," said Wark of the retailers' group.
The wholesalers, who fought wineries in the Supreme Court case, want to maintain the "three-tier system" of alcohol distribution. This national patchwork of state legislation arose with the repeal of Prohibition. It dictates that wholesalers provide a legal separation between producers and retailers.
The intent was to prevent distillers and other alcohol beverage producers from owning or controlling bars and to ensure competition.
Such regulation created a middle tier of distributors that would buy alcoholic beverages from the producers and then sell them to bars, restaurants and retailers. That has turned into a multibillion-dollar industry.
For instance, Southern Wine & Spirits of America Inc., the nation's largest distributor, has more than $7 billion in annual sales.
But Craig Wolf, chief executive of Wine & Spirits Wholesalers of America Inc., the main industry trade group, defended the efforts to make all sales of alcoholic beverages move through a middle tier.
"Wholesalers think that direct shipping is a bad public policy choice," Wolf said. "We have never had an economic model for alcohol, it is a social model."
Face-to-face transactions are more likely to keep alcohol out of the hands of minors and alcoholics, he argued.
Shipping rules require an adult to sign for the delivery of alcoholic beverages. But several documented instances of delivery to underage buyers in Massachusetts and Iowa have shown that these rules can be evaded, Wolf said.
Retailers say such incidents are exceptions and constitute only a minor source of underage drinking. "When children get alcohol it is usually from their parents' home or from retailers who are not compliant with the laws," said Richards of BevMo.
The stringent resistance from the wine wholesaler industry to direct shipping sales by retailers is "ironic," considering that they would still play a large role in wine sales and distribution even in states that have less stringent regulation, said Wollenberg of K&L.
"Almost every case we purchase," he said, "comes from a licensed wholesaler."
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