Eataly wined and fined & the three-tier system

Eataly Wine will close for six months and its owners, including celebrity chef Mario Batali, will also pay a $500,000 fine per an agreement with New York state authorities yesterday. No date has been set for the start of the closing. The settlement resulted from the State Liquor Authority’s enforcement of a ban on “interlocking interests.” The SLA also claimed that the shop’s owners suppressed that information.

The turn of events is somewhat puzzling. It was no secret that Joe Bastianich sold wines that he made at his winery in the north of Italy. Indeed, the shop’s web site trumpeted the fact that he “returned to his roots in northeast Italy” where he is “creating wines” in Friuli. (That wording has now been removed.)

Crain’s NY reports that the issue came up at the time of the shop’s license renewal in 2012. At first, the owners disputed the charge but later relented. The penalty also includes the removal of Lidia Bastianich from Eataly Wine’s license.

The issue is what the “three-tier system,” which prevent vertical integration in the wine and spirits industry. This means that producers must sell to licensed wholesalers who, in turn, sell to retailers. (While there may be some gray area around this, the only clearly legal bypassing of this is where a producer can sell directly to retailers in the same state.) Thomas Pinney writes in A History of Wine in America, that this system came into effect after Prohibition because of the “deep suspicion” of the liquor trade at the time; further, states were determined not to allow the producers to control retailers, as they had in the old saloon system.

While societal “suspicion” of the industry may have diminished, for better or for worse, the ban on vertical integration remains, as the penalties on Batali & Bastianich reflect (for their retail operation; it will be interesting to see if Illinois authorities take a similar view of the Eataly Chicago wine shop.). However, methinks they will not become a cause célèbre for the reform of the system.

Photo Credit: thinkretail cc

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9 Responses to “Eataly wined and fined & the three-tier system”

  1. […] “Eataly Wine will close for six months and its owners, including celebrity chef Mario Batali, will also pay a $500,000 fine.” Tyler Colman has the details. […]

  2. Apparently, the NY SLA became aware of the Bastianich wine business in Italy via an article in Wine Spectator:

  3. There is no chance that Illinois does anything about Eataly. Rahm is too in love with their having come to the city to allow the state to enforce the law.

    As for the actions in NYC, it seems as though all that will really result is a few ownership shufflings, and it will be back to business as usual. The same restraint of trade will continue.

  4. As Bill says, nothing will change in ownership, but nothing in ownership has ever been on the up an up; the system guarantees that someone’s monetary interest is shielded somehow, through separate contractual arrangements and so on. The mystery is why any savvy alcohol-licensed group wouldn’t have that figured out in advance–the regulations are quite clear.

  5. Yep, Thomas. How many times, in how many states have I stumbled upon the situation where the husband owns the wholesaler and the wife owns the restaurant/retailer. It’s all on the up and up by the letter of the law but, in practice, is the very definition of a tied-house.

  6. Bill, I lived in Britain during the heyday of the tied house, and my local was notorious for serving beer that tasted like diesel fuel (a visit to the industrial-scale brewery didn’t dispel my impressions). Thankfully, CAMRA got some muscle, and all licensed pubs must serve at least one independent beer.

    Does the distributor system allow a greater variety of wines to be available than a direct-marketing one? Thanks for the food for thought.

  7. Frank, I don’t think the distributor system encourages a greater variety of wine, but I don’t think it’s also the root of all evil as some mouthpieces for the winery industry contend.

    In many ways, certain aspects of the three tier system and alcohol regulation help level the playing field for the small guy. I can point to the tied-house laws, chain prohibitions such as in NY or state minimum pricing such as in Ohio. All of these things work towards giving a small winery, importer and wholesaler, if not purely equal footing, at least a fighting chance against the factory wineries and national distribution houses in the market.

    With regards to the rather simplistic and self-serving view among many in California that distributors are blocking wineries from entering a market, I think it’s a self-serving to the point of being delusional. Take a look at Chicago where the barrier to entry for new wholesalers is so low that there are right now over a 100 small wholesalers and importer-wholesalers all fighting for their place in the market. It’s a hyper-competitive market where everyone is searching for product that will open doors and open up accounts. If you can’t find a distributor in Chicago, it’s because there is no demand for your product. And as an aside direct to trade self-distribution has been available to California wineries for several years now, and they still can’t stop their declining market share. Clearly, the distributors aren’t undermining their place in the market but, rather, are reflecting the diminishing demand for their wines in that particular market.

  8. Bill – well said

  9. As a small, independent retailer in a non-major market (Iowa), I sometimes benefit and am sometimes frustrated by the three tier system. I do know that Batali and Bastianich are not the right poster children for this battle. The tip skimming at their restaurants that went on for years makes them unbelievable as actors playing the innocent victims in this circumstance.


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