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From the front lines in China: The end of the three-tiered system?

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China never developed the complex infrastructure for the distribution of alcoholic beverages that the U.S. has in the three-tiered system, and it might never, because e-commerce is becoming the distribution method of choice.

That’s according to an article in the Taiwan-based China Times, which says that e-commerce is preventing the emergence of “leading brokers or end retailers,” as they’ve arisen in this country. This is also having an impact on the price of wine in China: “the popularity of e-commerce firms have [sic] shrunk the profits of wine companies,” with “most” of them seeing huge revenue falls.

No one should be surprised. “The golden age of wine e-commerce is coming” to China, according to a Chinese businessman who co-founded one of the country’s biggest such firms.

One big wine e-commerce firm, Wangliu—said to be “China’s priciest”—is venturing beyond mere sales; “The fledgling company is also looking to engage wine connoisseurs offline, opening experience stores and private clubs in major cities across China.” It’s as if Southern Wine & Spirits was opening winetasting “experience” venues in New York, San Francisco and L.A.

China does have a handful of private distributors “who are looking to source wines, beers and spirits from suppliers,” and that segment traditionally has sold wine to on-premise and off-premise accounts, as the three-tiered system does here. But “there are not many big wine distributors,” like Southern, in China, with online or e-commerce wine distribution websites instead filling the void. This would seem to make distributing wines from smaller wineries—the kind that have trouble getting picked up by big distributors in America—easier in China, although the challenge for small wineries is the same there as here: for Chinese consumers, “brand name remain[s] today the leading factor that influence[s] purchasing choices…due to the great complexity…that make[s] wine difficult to understand.” The winery that can work the e-commerce market successfully, and also help the e-commerce company to intelligently explain its wine, should reap the benefits of success in China.


On distributors, and the IPOB-ization of wine

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When I first started writing about wine, professionally, it was for Wine Spectator, but they also wanted me to write for their trade magazine, Market Watch, which I was happy to do, because it was more work for an underpaid freelance writer. I quickly learned to like that back end of the business, the intricacies of sales, marketing, P.R. and all the rest. I found it intellectually stimulating, like a chess game—and I still do.

I soon began to be invited to the numerous tastings in and around San Francisco. Among these were events specially designed by and for distributors and their clients. These were trade-heavy events. While there could be some pretty good wines served, most of the distributors didn’t seem particularly interested in them. They just wanted to be told how to sell them (and perhaps they also wanted just to drink wine and eat some good food!).

Those early experiences colored my view of distributors. As far as I could tell, they could just as easily have been selling widgits as wine. They didn’t care about the product itself (although they were willing to work hard), they wanted to maximize their sales. It was a rather demoralizing experience for me to realize that wine was being represented, through this important face to buyers, by such indifferent people.

Over the years, though, my attitude has softened. Every once in a while I complained (especially in this blog) about the inequities built into the distribution system, and I generally supported my friend, Tom Wark, in his American Wine Consumer Coalition efforts to bypass or improve the three-tiered system, which I felt unfairly discriminated against smaller wineries. However, every time I did so, someone I respected—usually a winemaker—would write in and tell me that I was failing to understand all the good that distributors do. So I began to double-check my premises, since some of these winemakers who were taking the time to write were highly respected by me.

So I’ve been open to re-evaluating my views on distributors for some time now, although I have to say my emotional sympathies still lie with Tom. Last Friday, I was invited down to participate in a meeting of Jackson Family Wines’ Southern California distributors. I couldn’t help but be struck by how much more educated—and interested—in wine today’s distributors are compared to their remote ancestors of twenty and more years ago. These people, gathered down in Orange County for a semi-quarterly meeting, struck me as young, really smart, eager and perhaps most of all, passionate about wine. Although I made a few comments, mostly the event was presided over by sommeliers and other wine experts, who led the rather largish group through some fairly serious tastings that everyone seemed to enjoy—and they were blind tastings, at that! The contrast between those widget distributors of the 1990s and these guys could not have been starker, or more welcome to behold.

There seems to be a tendency nowadays for the leaders of these guided tastings to provoke the audience to stretch their tasting vocabulary. For instance, when these leaders ask what flavors people are getting and someone says, “Mushrooms,” the leader asks, “What kind of mushroom?” I understand this approach, which gets the audience more intimately involved and stimulates their analytical powers. This isn’t particularly my way, since I tend to be more generalized about flavors, and I feel that structure is anyway more important that individual flavors, “structure” including the way the wine feels in the mouth, which is all-important. But if people want to talk about the differences between shiitake and hen-of-the-woods, that’s fine by me.

How much smarter and more educated everyone in the food chain has become: not just distributors, but bartenders, restaurant staff and, mostly importantly of all, the consumer.

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Finally—last words!—remember some years back when everybody was talking about the “Parkerization” of wine, that term referring to a supposed overripeness, over-oakiness and high alcohol content of wine? Well, whether or not it ever was true, nowadays I perceive another style-driving trend: Let’s call it the IPOB-ization of wine (after the In Pursuit of Balance organization). I will begin with a question: Are we seeing some vintners, particularly those producing Pinot Noir, now deliberately picking their grapes underripe, in order to appeal to that small, but influential, cadre of writers, critics and sommeliers who insist that Pinot Noir must be low in alcohol in order to be balanced? I invite your answers. For myself, I think the answer is “yes.” And, as a certain Mr. Parker recently implied, underripe fruit merely results in underripe wine.

Now, I haven’t really been clear on what “In Pursuit of Balance” means since I went to their last tasting, in San Francisco, and Rajat Parr said (I paraphrase), “Some people think IPOB means we only like wines below 14% but that’s not true.” Well, I suppose, then, that “balance” can be applied to any wine, of any alcoholic strength, so what else is new? I’ve never heard of anyone being in favor of unbalanced wines. Then I was reading, in the new April issue of The Tasting Panel (and what an interesting ‘zine that’s turning out to be) a little article by Randy Caparosa in which he made some salient points, most notably that, at the last World of Pinot Noir (which I attended; I was underwhelmed by Raj’s Domaine de la Côte Pinot Noir), “There is still talk of the ‘high-alcohol problem’ in American Pinot Noirs, but in the vast majority of 200-plus wines tasted [at WOPN], an overweening sense of alcohol or ripeness just wasn’t’ there.”

Indeed. One could, I guess, argue that IPOB has had its intended effect, of driving down alcohol levels. On the other hand I could point out that high alcohol per se hasn’t been a problem in good Pinot Noir for years. Still isn’t.


No on HR 5034!

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I haven’t yet addressed the issue of HR 5034, now going through the U.S. House of Representatives, because it seemed complicated, and I didn’t want to take a position until I understood the details.

I wanted to try and see this from the distributors’ point of view. There may be a case in favor of restrictions on alcohol sales of the kind they’re trying to push through in 5034. After all, alcohol isn’t your average consumer product, it’s a drug. If it gets into the wrong hands, it can cause lots of pain. So I didn’t want to have a kneejerk reaction and just say, “All distributors are jerks,” even though my initial instincts were strongly in favor of direct shipping. Sometimes, instinct needs to be tempered by informatio, and gathering information takes time. In the end, though, I’m coming out against 5034, because the arguments in favor of it are very weak, and they don’t stand up to intellectual scrutiny.

Most of what I knew about 5034 came via Tom Wark, who’s blogged extensively against it at Fermentation. As Tom explained it to me, 5034 was a sort of end run around the Supreme Court’s famous 2005 Granholm v. Heald decision, in which SCOTUS said (I’m paraphrasing) states cannot prohibit wineries from other states from sending in their wines to consumers, if those same states allow their own wineries to disseminate wines. It was a basic issue of fairness, but also seemed to comply with the Commerce Clause (Article I, Section 8, Clause 3) of the U.S. Constitution, which gives the Congress — not the separate states — the power to regulate interstate shipping.

That was a good development, especially for smaller wineries, who had found themselves locked out of the distribution system. The smaller wineries wanted to be able to ship their wines directly to customers anywhere in the country, especially in the age of the Internet; and Granholm v. Heald seemed to give them that right (although when I interviewed Ken Starr, who successfully argued the case, he told me it would be many years before there was unfettered wine shipping across U.S. states, and boy, was he right).

Tom also explained to me that 5034, if enacted, “would give states the ability to enact discriminatory bans on wine shipping,” reasons too complicated to get into. Bottom line, according to Tom: “The law encourages and will result in states… passing bans on direct shipping that cannot be challenged in court.” (Disclosure: Tom is the paid executive director of the Specialty Wine Retailers Association, which is very anti-5034, and so he’s not exactly unbiased. But I am.)

I always operate on the theory that you can figure out what’s up with an issue by seeing who’s for it and who’s against. So who’s in favor of 5034? Let’s start with the Wine & Spirits Wholesalers of America. In a press release last April, they “encouraged members of Congress to support state-based regulation of alcohol and look beyond the mischaracterizations and misinformation being circulated” by its opponents, like Wark and SWRA. They took a states-rights position — the kind that conservative red states always take when they want to be discriminatory — and said 5034 would “place the burden in litigation where it should be: on the plaintiff challenging a state alcohol law.” That’s pretty much the same flimsy argument that opponents of Brown v. Board of Education used in the 1950s: the Federal government doesn’t have the right to desegregate public schools, and if a black family doesn’t like a school’s admission policy, they can sue that school board in court. If not for Brown v. Board, we’d still have segregated schools today.

WSWA also argued that 5034 doesn’t violate the Commerce Clause because it “does not expand state legislative or regulatory authority into what is currently and appropriately federal jurisdiction.” This seems to me to be disingenuous, an Alice-through-the-looking-glass playing with words. WSWA says that the Federal government, through agencies like TTB, FTC and FDA, remains free to regulate alcohol “in such areas as labeling, advertising and food safety.” Okay, but if the Feds can regulate in those areas, why can’t they regulate interstate shipping? Totally bogus argument.

Finally, WSWA asserts 5034 “does not favor any segment or tier of the industry.” Puh-leeze! Everybody knows 5034 favors wholesalers. Who’s kidding whom?

Who else is in favor of 5034? Well, there’s the National Beer Wholesalers Association (NBWA), whose position is a carbon copy of WSWA’s (and for similar reasons). Then there are 5034’s backers in the Congress, about 100 of them. There’s ample evidence that WSWA and NBWA have contributed boatloads of money to their supporters, as for instance here and here and, especially, here, where you can draw direct lines between WSWA’s main contributors (all the big distributors) and individual congressmen who are beneficiaries of its largesse (and by the way, this isn’t a partisan issue: Democrats and Republicans alike take campaign donations from WSWA and NBWA).

So what we have is a collection of odd bedfellows lined up in favor of 5034: wholesalers, distributors, and the politicians who take their money to run for election or re-election.

Now, who’s against 5034? Like I said, there’s Tom Wark and his Specialty Wine Retailers Association. No surprise there, since their members are smaller wineries and merchants, and their slogan is “wine without borders.” Also against the bill is Free the Grapes!, which is a leading group in favor of direct interstate shipping of wine; various state legislatures (including the New Jersey Senate, where my cousin, Sen. Loretta Weinberg, voted to open up interstate wine shipping); the Wine Institute; Family Winemakers of California, and many congressmen from wine-producing districts, including Rep. Mike Thompson, who represents the North Coast.

For me, the good guys are against 5034 and are in favor of the free, unfettered shipment of alcohol, to and from adults, throughout the 50 states. Isn’t that as it should be in America — isn’t that as Thomas Jefferson intended? I don’t want to say those in favor of 5034 are bad guys, because I’m sure they’re good people who are simply trying to protect their economic interests, same as all of us do. But I’m siding with those trying to defeat 5034. It’s a bad bill. Please call your Congressional representative and urge him or her to oppose it.


How can we get distributors and other wine buyers to get beyond their 90-point obsession?

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Bulletin: Just in (8:05 a.m. California time, Oct. 8): “TTB ANNOUNCES ESTABLISHMENT OF HAPPY CANYON OF SANTA BARBARA VITICULTURAL AREA.” We knew that was coming. I blogged about it more than a year ago.
* * *

I got an email the other day from a winery representative who complained about some of my scores. “The last 4 months of reviews have been in the low 80′s and we have been getting much higher scores from wine competitions and other publications for the same vintages of wines,” the person wrote, asking, “The reason for my email is concern that our wines are somehow getting cooked, or something, from here to there.  Can I give you a call to see what we can do differently to insure the wines arrive fresh?”

I want to blog on this, because so many important issues are at stake. To begin with, I double-checked my scores for the wines since June 1 and discovered I’d given 87 points to a Cab, 86 points to a Chardonnay, a pair of 84s to a Zin and Syrah, and a couple of 83s. One or two of the wines did indeed score in the low 80s, but I emailed the P.R. person back that 87, 86, 84 and even 83 are not “low 80s” but mid- to high 80s. To this, the person responded, “Our distributors and many of the wine buyers look at anything below an 86 as a ‘low score.’”

What can I say. I can’t teach remedial arithmetic to distributors. All I can do is point out that 87 and 86 are not low scores and neither is 85 or even 84 points. All are “very good” and “good” scores by Wine Enthusiast’s definition. Of course, if a wine scores 85 points and retails for $50, then there is a problem, but it’s not my problem, it’s the problem of the people at the winery who establish the price.

Another issue that really gets my goat is when a winery rep tells me, “Parker (or ____, fill in the blank) really liked this wine, and it got a double bronze at the Cleveland International Wine Fair, so how come you only gave it 87 points?” Well, at the risk of being obvious, let me point out that my name is not Parker or Cleveland or anybody or anything else. It’s Heimoff. I don’t check in with other critics before I make a review. Just sayin’…

The final issue involved in this situation is shipping or, to be more precise, wines getting cooked in the back of a UPS or FedEx truck during a heat wave. For many years, I’ve urged wineries to check the 7-day forecast before sending samples out for review, and I’m glad to say they’re listening. This September, the quantity of incoming wines was at a near-record low, because September is our hottest month and we did in fact have several heat waves. I was happy to see my storage closet actually empty out at one point.

What am I supposed to do if a wine suffers from heat damage? Obviously, if I know for sure it’s cooked, I can call the winery and request a resend, and I’ve done that. But I can’t always tell. Many California wines, especially red ones, are so overripe and soft anyway that they might as well be heat-treated — are the raisins from shriveled clusters or a hot truck? I also reason to myself that, if I started asking wineries to resubmit wines that just might have suffered from one problem or another, I’d basically be increasing the number of wines I taste by a huge percentage, and even then, how could I justify leaving a score at “83” unless I’d tasted the wine at least half a dozen times, so I could swear that I’d done my best to be absolutely, positively sure that it was really the wine, and not something external to it? But obviously, I’m not going to do that. I think for the most part that wineries need to take the responsibility for getting me (and all reviewers) their wines in the best shape they can. That’s their job.

But back to those pesky distributors. It’s a cliche to say that anything below 90 is dead on arrival. I’m not sure where that came from, historically, but it’s a horrible development. I don’t think that’s why Parker invented the 100-point scale and I know for sure that at Wine Enthusiast, we don’t turn our noses up at an 86 point wine. Wines that score in the 90s tend to be bigger, riper and probably oakier than those in the 80s. That’s the way the system works. But that doesn’t mean that a 95 point Pinot Noir is better for drinking tonight with lamb than an 87 point Pinot Noir. That’s what the distributors don’t understand. And what I don’t understand is how to get the word out that the 90 point threshold is not some magical, absolute event horizon, the dividing line between Heaven and Hell. It’s just a number. If you have any ideas of how to de-criminalize scores in the 80s, let me know, but please, don’t suggest doing away with the 100-point system altogether. That’s a non-starter. I think it has to do with educating distributors and point-of-sale people, both on-premise and off-premise. It’s a simple message to deliver to the customer: “Dear Sir or Madame, this wine is better for drinking tonight. I assure you.” If the customer doesn’t trust the seller, then that’s where work is needed, not in the scoring system.


Why can’t we do something like this?

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It’s France’s annual foire aux vins (wine fair), the late summer-early fall event when the nation’s supermarkets offer heavy discounts on wine, sending consumers on “a shopping spree…through crates of Bordeaux and Bourgognes in search of the best vintage at a good price,” says the article in Agence France-Presse.

It is, simply, “time to stock up,” even — or especially — in bad economic times. Sales from the foire aux vins amount to an astounding “25 percent of the total annual turnover for wines in big supermarkets.” It’s not only a great deal for wine consumers, but also for producers, providing them with “a major boost at a time when they are struggling with falling demand.”

I did a little research. Prices seem to be cut up to 30-40% on many bottles, with, for instance, Chateau Tour Simard 2004, the second wine of Chateau Pavie, selling for 11.49 Euros instead of the usual 35 Euros.

Imagine if we did something like that here in California. Vons, Ralph’s, Cost Plus, Albertson’s, Safeway, BevMo, Andronico’s, Wal-Mart, Whole Foods and everybody else slash prices by an average 25% for two weeks. I predict the result would be historic. At the end of the two weeks, shelves would be empty, forcing the supermarkets to reorder from wineries, who then would be able to deplete stocks that, in many cases, have been sitting idle in warehouses. Laid-off employees would be rehired.

Let’s not stop there. Who’s to say that this would not only stimulate an immediate rush on wine, but that thousands, even tens of thousands of consumers would then decide they wanted wine to stay in their lives?

Okay, I can hear the objections. “Sure it would be good for two weeks. But what then? When prices bounced back up, people would simply stop buying again, and we’d be back to Square One.” Well, yes…and no. Wineries would raise their prices back up, but not to the full amount they fetched before. Maybe 5-10%. Some consumers would hardly notice. Those who did would understand that the foire aux vins (which would have been announced in advance) was only for two weeks, so they wouldn’t be surprised or offended when the deals stopped. Producers and distributors then could carefully watch the market for signs of recovery, boosting prices modestly if things look good, holding them steady otherwise.

I do admit that small wine shops might be hurt. That’s a tough one, and I don’t know the answer, except that small wine shops will always have their admirers, who don’t like buying wine in supermarkets.

Of course, we couldn’t call it the foire aux vins. The Freedom Fries wingnuts would crawl out from under their Fox News rocks and accuse us of being (gasp) — socialists! We could call it California Wine Fair Days, or something like that. Do you think the media wouldn’t give it massive coverage? Of course they would. It would be on all the news shows like white on rice. Wineries would participate, opening their doors and offering the same 25% discounts. Other States would notice, too. It would be another case of California leading the nation. We might even have an American Wine Fair Days, especially with this President who, thankfully, likes a nice glass of wine.

Maybe food purveyors would hop onboard. The supermarkets could offer recipe cards for the major wines. Excited consumers would be tempted to try that short ribs dish to pair with the Petite Sirah, or those crab cakes to go with the Chardonnay. Probably the best time of the year to do this is during the warm months when tourism peaks in California wine country.

I think it’s a great idea and I hope the industry picks up on it.

Added later (i.e. earlier published additions of this post will not contain this addendum):

I asked my friend and colleague, Roger Voss, who covers France and much of Europe for Wine Enthusiast, about the foire aux vins, and he emailed: It’s held by French supermarkets every autumn. They buy in parcels of wine from merchants, from producers, from wherever and sell them at discounted prices. The wines can be classed growth Bordeaux or top Burgundy, Champagne etc. Often they are wines from less sought after vintages which the suppliers want to destock. It was created by supermarket group Leclerc several years ago (around 10 at a guess, but maybe longer). And now every supermarket does it. Because French supermarkets are mainly franchised, the quality of the range can vary from store to store and depends on the parcel size. And, of course, if you want to get Bordeaux bargains, go to a Bordeaux region store, for Burgundy go to Burgundy, etc.


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.”


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