ARTICLE

Originally published in Vineyard & Winery Management, 2004

Counting our chickens too soon?

As we write this column, the wine industry is flush with excitement. In both the US Supreme Court and the court of public opinion, the industry's position on direct shipping appears to be carrying the day. According to the media coverage of the Supreme Court proceedings, the Justices have shown little sympathy to wholesalers' and regulators' arguments that prohibiting direct shipment of wine is necessary to promote temperance and prevent minors from buying alcohol over the internet. The wine industry eagerly anticipates the decision of the Supreme Court, in the hopes it will deregulate interstate wine shipments and open new sales channels.

Meanwhile, the lawsuit brought by the largest wine retailer in the United States, Costco, against the Washington State Liquor Control Board (LCB) offers similar good news. The case has now survived early legal challenges by the LCB and the wholesalers who have associated themselves with the regulators' side in the legal battle. The case is headed for trial next summer. Ultimately, the outcome of the Costco case may actually be even more important than the direct shipping cases, because its approach is much broader. Costco is directly challenging many of the aspects of the three-tier system on wide-reaching anti-trust principles.

Although the early signs are promising, it's too soon to predict a favorable outcome in either case. The industry should remember that not only do the courts decide based on law, precedent, and the brilliance of the parties' arguments, but they also consider the larger social context in which a case occurs.

As the "favorite child" of the alcoholic beverage industry, the wine industry may be a little out of touch with the realities in which we find ourselves. But the courts are not. In fact, one of the Supreme Court Justices interrupted a winery lawyer as he launched into his presentation to ask a pointed question: Did the lawyer understand that the principles espoused by the wineries would undermine the entire three-tier system and apply to all alcoholic beverage products? Indeed, they do. Based on that implication, the industry should face the possibility that the judgment may go against us even if we are deemed to have offered superior arguments. Although the courts may feel safe in releasing wineries from the shackles of the three-tier system, they may decide to keep us hostage rather than give the same freedom to the malt beverage and spirits segments, or to retailers.

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Time for the favorite child to join the family

Of the three segments of the alcoholic beverage industry, wine has always been the favorite child. Wine is a natural agricultural product; it is traditionally associated with sacramental purposes; it is often consumed with meals; it is a sophisticated and cultured accompaniment to fine foods; and its price and image keep it from becoming the drink of choice for minors and street alcoholics.

These factors have affected the way wine is culturally viewed, with the result that in wine has the most liberal privileges in the alcohol industry. For example, wine enjoys reciprocal shipping opportunities, many more tasting and retail sales options, more tied house exceptions, etc. In the direct shipping debates, it has been argued that, of course, minors do not have the resources to order $40 bottles of wine over the internet. Because of distinctions such as these, it has always seemed to winery folk that our highest odds for success in the direct shipping debate, and in other regulatory struggles, has been to distinguish ourselves, rather than unite with, the producers of other types of alcoholic beverages.

That strategy may be temporarily successful, but ultimately short-sighted. The Prohibitionist forces of the early 20th century were successful partly because the various segments of the industry did not work together. Then, divided, we all fell, as the Prohibitionists knocked off each segment of the industry, one at a time. Now, at the beginning of the 21st century, we are trying to do better than simply dodge the neo-Prohibitionist bullet; we are trying to win a much freer marketplace for ourselves than ever. But we may be easy marks for neo-Prohibitionist objections to our goal if we approach our goal too naively.

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Let's get realistic about our social context

Because CSA works not only with industry members in the wine segment, but also with national retail chains that sell and serve all kinds of alcoholic beverages, we don't have to rely on the newspapers to know what's going on out there. We have lots of personal experience with public and regulatory reactions to the current social trends of neo-Prohibition and binge drinking by minors. Here is our fly-on-the-wall report of recent happening:

The regulators feel the pressure. At an alcoholic beverage seminar we attended, a panel of state regulators fielded questions about their regulations prohibiting most kinds of marketing and promotional support by manufacturers to retailers. The regulators gamely defended their intricate and seemingly absurd rules, like the one that allows a winery to give a wine list costing less than $25 to a retailer, but won't let the same winery reimburse the retailer for a wine list he or she already purchased.

As the industry representatives persisted with their questions, the rules just seemed more and more nonsensical. Finally, a thoughtful questioner suggested that these rules were rooted in the regulators' primary mandate - to promote temperance. Indeed, regulators unanimously confirmed that the regulations being discussed are based on the presumption that giving retailers "things of value" may induce them to buy too much of a supplier's product, and as a result, motivate them to promote excessive consumption by consumers.

Then Jerry Jolly, the Director of the California ABC, related how he had spent almost the entire previous week in meetings with social policy advocates, public health organizations, and law enforcement representatives - all of whom had come to express their strong opinions that his agency should be trying to reduce alcohol consumption. The lawyer for another ABC supported Jolly's point by chiding the industry for not taking the bigger picture into account. He suggested that the rules were intentionally complicated, because vaguer or more lenient rules would permit the industry to go too far in promoting high sales. Another regulator chimed in that while the appearance of the Jagermeister girls in his local bar would not cause him to over-consume, apparently they are successfully influencing the young men who are currently driving the phenomenal growth of that brand.

As you can see, regulatory concerns about alcohol consumption are not simply outdated relics from the aftermath of Prohibition. These concerns have a current vocal constituency. And public awareness of the societal issues raised by the direct shipping of alcohol is currently on the increase.

Repercussions of the students buying on-line incident. In a widely publicized story, underage students at a university ordered wine, beer, and spirits on-line and actually received delivery of their orders, on campus. The students then issued a press release about how easy it was. While many in our industry wrote the event off as a publicity stunt orchestrated by wholesalers to support their vehement arguments about the dangers of direct shipping to minors, others took it quite seriously. The same university recently built a new arena, and applied for a liquor license there in order to serve drinks in the luxury suites and private clubroom. Even though the proposed use had nothing to do with direct shipping, both the local police department and state regulators mentioned the direct shipping incident in justifying their reservations about granting the license request. The license was ultimately issued, but the experience showed that in pushing for freer trade and easier access to consumers, the wine industry is inadvertently raising social policy issues around alcohol consumption in general.

Anti-alcohol activists strike again. A major quick-serve restaurant chain is testing a new "fast causal" restaurant concept, in which it wants to serve beer and wine. At its first location of this new concept, located in a liberal, non-control state, its beer and wine license application has been formally protested by anti-alcohol activists. The protestants are opposing issuance of the license, citing fears that beer and wine will be too readily available in communities all over America if this large chain rolls out beer and wine service at all of its restaurants.

Wine no longer served. The State of Colorado has convened a high level panel to review alcohol policies at its universities and public venues due to the recent deaths of two students from alcohol poisoning. While of course wine was not involved in these deaths, the wine industry is not immune to the public and governmental reactions to the incident. For example, one of the Colorado universities had recently upgraded its license at a large venue to allow service of wine and standard malt beverages at events. Following the students' death, the institution surrendered the upgraded license, and in the future will only allow 3.2% beer to be served at this venue.

Wineries tend to assume that our segment is immune to fears of over-consumption and accusations about overly aggressive promotions, but the above experiences clearly show that anti-alcohol backlash isn't particularly selective about its targets. The entire alcoholic beverage industry is caught in the crossfire when societal concerns are sparked. The moral is, wine's favorite child status cannot be counted upon to adequately protect us if sweeping protections are instituted as a backlash response to an eroding three-tier system. We need to maintain awareness and understanding of the big picture. Otherwise, we can be blindsided by forces we don't understand and fail to anticipate - and we will bring other industry members down with us at the same time.

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The greater responsibilities of greater freedom

As we enter the 21st century, it appears that the three-tier system and the laws and policies that uphold it are ripe for a major change. But, while the wine industry has been in the forefront of both the legal and public relations battles pushing for liberalization, we are lagging behind in understanding that these new freedoms will bring new responsibilities. It feels like the moment when a teenager just turned sixteen and is about to get a driver's license. Now everybody needs to know: can they be trusted with the family car?

The wine industry has not been insensitive to societal concerns over alcoholic beverage use. We acted responsibly in adopting the direct shipping code of ethics. Our trade organizations support general alcohol awareness programs. Indeed, the alcoholic beverage industry as a whole has a number of initiatives that promote responsible consumption and attempt to curtail access by minors to alcohol. But as wineries begin to pry open the door to freer trade and less regulation, we would be wise to be even more proactive in addressing the forces we are unleashing, and in minimizing the negative effects they could have on us and other alcohol producers.

The entire alcoholic beverage industry has a common interest in preserving society's tolerance of the responsible use of alcoholic beverages, and its faith in our effectiveness at balancing profit motive with social conscience. Especially since the wine segment has done much to bring things to a head by pressing on the direct shipping issue, it is only right that we start to take a larger part in this important effort. In fact, since wine is not associated with many of alcohol's perceived abuses, the wine segment may be in the best position, not only to participate, but to lead the rest of the industry into a freer, more responsible future. Please think about it.