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The International Wine Industry
Supreme Court Threat to a Cosy Arrangement
Tuesday, 5th October, 2004  - Richard Farmer

Australian wine companies should be closely watching the United States Supreme Court as it begins a new session this week. Among the cases to be considered later this year is one that has the potential to completely change the way that wine is sold in Australia’s most important export market. The question to be answered is: Can states bar consumers from buying wine out of state and having it shipped to them, or does the Constitution protect the free flow of all goods, including alcohol? The case will determine, in the words of Clint Bolick of the Washington-based Institute for Justice, whether "consumers or a cartel of billion-dollar distributors will determine what wine is available to consumers in New York or two dozen other states."

Bolick is representing David Lucas, the owner of a small winery near Lodi, California, who, along with Eleanor Heald, a wine critic from Troy, Michigan, is challenging bans imposed by the state governments of Michigan and New York on direct wine shipments to their states. In the case of Granholm vs. Heald, which the Supreme Court has agreed to hear, they argue that the US Constitution calls for a free flow of commerce across state lines, including that of alcohol.

At the moment about half of the states in the US forbid all direct shipments of wine across their borders. Only licensed wholesalers are permitted to import alcohol, and they in turn sell it to retailers. The states rely on the 21st Amendment, which repealed the prohibition on alcohol sales and was approved in 1933, for this authority. The amendment states that the "transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

Although all the states permit the sale of alcohol, they do so only through their own sets of regulations which vary considerably. In Utah and Pennsylvania, for example, government control extends to the point where they have deemed the State as the sole importer, wholesaler, and retailer of alcoholic beverages; in order for its citizens to purchase alcoholic beverages, they must do so through state stores. In other states franchise laws protect a wholesaler from losing accounts. Not only is a wine maker required to appoint a wholesaler in their state, but further to assign that wholesaler with an exclusive sales territory for the sale of the winery's product. And if the wholesaler doesn't perform or meet even reasonable sales expectations, the same winery finds itself virtually unable to terminate its relationship with the wholesaler.

It is indeed a weird and complex system that seems to have little to do with protecting citizens from a harmful product. The California based Wine Institute[1] lobby comments:

"But to say that a product is legitimately in the state because it went through an established state distribution system while the identical product is illegitimate simply because a consumer received it directly from the producer who just so happens to have sent it from another state raises questions. What state interest is being served?"

The answer given by the Supreme Court will determine the future shape of the US wine market. There are potentially considerable threats and considerable opportunities for Australian wineries. The majors like Southcorp, Beringer Blass and Constellation (Hardy’s) are very much part of the existing system with good distribution networks throughout the country. They stand to lose if the market is opened up. Direct selling will put strong downward pressure on prices as Californian wineries begin to sell direct to consumers. Yet there is a chance that the decision will completely smash the country’s three tiered system of wine distribution. American wine writer Robert Parker is one of those predicting that this will happen in the not too far distant future. Parker recently predicted:

"...the total collapse of the convoluted three-tiered system of wine distribution in the United States. The current process, a legacy of Prohibition, mandates that all foreign wines must be brought into the country by an importer, who sells them to a wholesaler, who sells them again to a retailer. Most U.S. wineries sell to a distributor, who in turn sells the wines to a retailer. It is an absurdly inefficient system that costs the consumer big bucks. This narrowly restricted approach (blame all the lobbyists funded by powerful liquor and wine wholesalers) is coming to a dramatic end-hastened in part by the comparative ease of ordering wine over the Internet. Differing federal court opinions over the last decade have insured that eventually the Supreme Court will have to rule on whether wineries can sell directly to whomever they wish, whether it is a wholesaler, retailer or consumer. Imagine, if you can, a great Bordeaux château, a tiny estate in Piedmont or a small, artisanal winery in California selling 100 percent of its production directly to restaurants, retailers and consumers. I believe it will be possible by 2015."

If the whole system is demolished then smaller Australian wineries will find it easier to enter the market. That will put further pressure on the attempts by the major wineries to increase their profit margins.

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