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Wine suppliers are not the new Mafia

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Joshua T. Block and Sharon Silber, two New York residents, and Kahn’s Fine Wines & Spirits, an Indiana liquor store that wanted to send them wine, never thought they had anything in common with Al Capone, until the 2nd U.S. Circruit Court of Appeals, sitting in Manhattan, compared them to “organized crime” figures who, if allowed to get away with their scheme, might illegally “dominate the [wine] industry.”

alcaponemugshotcpd
Notorious wine merchant Capone, c. 1936

That was the language the Court used in striking down the three plaintiffs’ lawsuit against New York State’s Alcoholic Beverage Control Law (ABC Law), which prohibits suppliers from selling wine directly to consumers. The Circuit Court ruled instead in favor of the New York State Liquor Authority, the main defendant, and declared that New York’s law does not violate the Commerce Clause of the U.S. Constitution.

The case was closely watched by all parties in the wine industry, particularly because it was one of the most important test cases following the U.S. Supreme Court’s Granholm v. Heald 2005 decision, which held that States may not prohibit out-of-state suppliers from selling direct to consumers, if they allow in-state suppliers that freedom. The Circuit Court, however, held that the ABC Law does apply equally to both in-state and out-of-state suppliers and hence “these provisions are within the authority granted to New York by the Twenty-first Amendment [to the Constitution, which repealed Prohibition]. Having so ruled, the Court finds it unnecessary to undertake a dormant Commerce Clause analysis. There being no further basis for plaintiffs’ challenge to the constitutionality of the ABC Law, the Complaint is dismissed.”

I guess I can see why the three Circuit Court judges ruled the way they did. Writing for the majority, Judge Richard C. Wesley said New York’s law “treats in-state and out-of-state liquor evenhandedly,” and “thus complies with Granholm’s nondiscrimination principle.” It isn’t up to these non-elected judges to make new laws, but only to interpret existing laws, no matter how loathesome.

What I don’t understand is why Wesley couldn’t leave it at that. Instead, he went on a rant when he called the plaintiffs’ lawsuit “a frontal attack on the constitutionality of three-tier system itself,” which he said the Supreme Court in Granholm found “unquestionably legitimate.” That is true, but the High Court also cast considerable doubt on the underlying merits of the three-tier system, which was not itself at issue. Justice Anthony Kennedy, writing the majority opinion, conceded the three-tier system “substantially limits the direct sale of wine to consumers, an otherwise emerging and significant business.” Noting a decline in the number of wholesalers (and it’s even worse today), Kennedy added: “The increasing winery-to-wholesaler ratio means that many small wineries do not produce enough wine or have sufficient consumer demand for their wine to make it economical for wholesalers to carry their products.” He correctly noted that direct-shipping of wine to consumers (in States where it is permitted) represents a hope for these small family wineries. But, he pointed out, “In many parts of the country, however, state laws that prohibit or severely restrict direct shipments deprive consumers of access to the direct market,” and he quoted the Federal Trade Commission as saying, “[s]tate bans on interstate direct shipping represent the single largest regulatory barrier to expanded e-commerce in wine.”

So it seems to me that the Supreme Court, at least, is aware of the inadequacies and unfairness of the three-tier system. It’s going to take the wine industry years more to topple it, or at least by-pass it, but it’s incredible to me that Mr. Block and Ms. Silber, two New Yorkers who just wanted to buy some wine from a fine wine shop that happened to be located out of their State, are unable to do so, because of an antiquated law that was designed to prevent Al Capone and the Mafia from taking control of the liquor industry. I mean, come on!

I called the owner of Kahn’s Fine Wines & Spirits, Jim Arnold, and asked him what he’ll do next. “We’re re-evaluating that with our attorneys,” he replied. When I asked what specific wines he had tried to send to the New Yorkers, he said, “Collectibles. We’ve had lots of requests from New York residents to send to them, which is why we brought this suit.”


2 new reports paint painful picture for Calif. wine

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Silicon Valley Bank is out with their annual State of the Wine Industry Forecast and Recommendations, and it makes for sobering reading. It begins with an understatement:

“The attitudes and preferences of the U.S. taxpayer and wine consumer are in markedly different places today than they were a year ago.”

Then it cites a veritable witch’s brew of bad news:

- 4th quarter of 2008 was “the worst in memory for the fine wine business.”
- depressed restaurant sales, higher unemployment and foreclosures and lower consumer spending will continue through 2009 “as we seek a bottom.”
- wines between $40-$125 are in a “dead space.”
- winery sales “at bargain prices” are to be expected.
- Most scary of all, “Distribution has all but ended as a viable sales channel for small wineries.” (Which is exactly what I said last week.)
- Meanwhile, “credit markets are nearly frozen.”
- The secondary market for collectible wines has softened. (What?!? You mean you won’t pay me $10,000 for my bottle of 2001 Screaming Eagle?)
- And between the drought and sin taxes, whatever wineries are still standing will get hit with a double whammy.

Well, it could be worse. California hasn’t fallen into the sea following a 9.7 earthquake on the San Andreas Fault. Yet.

In this toxic atmosphere, it comes as no surprise when the report states that “Central Valley suppliers [are] the most optimistic and Napa and Sonoma suppliers [are] the most pessimistic.” That’s because all anyone can afford anymore are jug and box wines — fortunately, for the economies of San Joaquin and Madera counties.

But wait, there’s even more bad news. Small and mid-sized family wineries are facing “capitalistic Darwinism,” a dog-eat-dog fight to the death from which the weak will not emerge. The report’s recommendations are not surprising; they’ll be familiar to regular denizens of the wine blogosphere. Wineries must

- keep prices moderate
- get better at Internet direct-to-consumer selling and e-marketing. In other words, develop a “digital plan.”
- contain costs

Meanwhile, the Sonoma County Economic Development Board has a new 2009 Wine Industry Insider report that echoes the Silicon Valley Bank’s gloomy forecast. Among its findings:

“The spread of economic weakness around the world creates a
disadvantage for Sonoma County wine exports to top international
markets and will expand import competition here in the U.S.”

“Consumers are shifting away from high-priced wine purchases; high margin on-premise sales, such as those at restaurants, fell sharply… Wine drinkers and retailers are shifting to value, putting downward pressure on wholesale wine prices for local wineries. Some wineries are adapting to the shift by upping production of lower-priced wines.”

“The outlook for the Sonoma County wine industry in 2009 is for limited unit sales growth and the continuation of consumers’ shift toward value from high-priced wine purchases.”

Tough times, but good for wine consumers — if they have any money to spend.

P.S. I’m taking a few days off. I may be able to blog from the road — not sure. Check in, just in case. If not, I’ll be back on Monday.


Texas is an idiot

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I didn’t much like Kenneth Starr when he was the special prosecutor dogging President Clinton into impeachment. But he won his place back into my good graces when he and others successfully argued the 2005 Granholm v. Heald case before the U.S. Supreme Court. The Court ruled it is unconstitutional for a state to prohibit out-of-state retailers from shipping wine directly to consumers, if in fact the state allows in-state retailers to do so. It was a simple matter of fairness.

I interviewed Starr after the victory (it was eerie talking to a man I’d earlier reviled) and I remember something he said that has become prophetically true. When I asked him how long it would be before all 50 states allowed legal shipping of wine from retailers to consumers, he said, “At least ten years.” I was surprised. Hadn’t the Supreme Court — the highest in the land — spoken?

Well, it had. But apparently, not loudly enough, with enough loopholes to drive a Hummer through. Anyone who follows the continuing hassles that some states are putting on interstate shipping knows that the people who do not want the free flow of wine in America simply will not allow it to happen, no matter what. And who are these people?

“Primarily wholesalers,” explains Tom Wark. As the executive director of the Specialty Wine Retailers Association, he’s been at the forefront of this ridiculous effort by wholesalers to jam up the free flow of wine. What’s their beef? “They’ve been against direct shipping for quite some time, on principle, because every time a bottle of wine comes into the state direct to the consumer, it’s a bottle they don’t make a profit on,” Tom said. “They’re staunch defenders of the 3-tiered system, so any crack in the system is a threat to them.”

The latest case, which Tom undoubtedly will report about on his Fermentations blog far better than I ever could, comes from Texas, where the state government allied itself with the wholesalers to prevent the spirit of Granholm from being applied. To make a long story short, a District Court judge ruled, as he had to, that Texas was wrong to prohibit out-of-state retailers from shipping wine to Texas consumers. That would seem to be a victory for the out-of-state retailers (not to mention the people of Texas), but then the judge pooped on his own decision by placing a restriction so arbitrarily difficult on the out-of-state retailers that it will effectively stymie them from sending anything to Texas. He said they would first have to purchase the wines from the very Texas wholesalers who are trying to prevent free trade in the first place.

I’m no businessman, but that sounds insane to me. Retailer X in California wants to send wine directly to Mr. and Mrs. Y in Dallas. The Judge says, Fine, that’s perfectly legal under Granholm, but first Retailer X must send the wine to Texas wholesaler Z, then buy the wine back from the wholesaler, at which point the wholesaler will re-send the wine to Retailer X, who can then re-re-send it to the customer who ordered it in the first place.

Did I get it right? I get dizzy just thinking about it. All that hassle, all that wasted time, all that extra carbon footprinting, because the Texas wholesalers want to prohibit their own citizens from having free choice in what to drink.

Stupid and shameful. But Starr and his team have appealed that dumb decision to the 5th Circuit Court of Appeals, in New Orleans, and while I’m still miffed at Starr for what he did to Clinton, I’m hoping that his legendary skills as a lawyer will prevail.


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