A new case of wine before the courts
The Supreme Court cracked open a cellar door for wine to flow directly to consumers with its ruling on May 16. Although the media attention has been great, the effects of the ruling have been limited because the high price of shipping makes it only cost-effective for consumers to purchase expensive wines. Further, with reforms only on the books now in Connecticut and New York, the actual change thus far has been a trickle. But the change could turn into a flood with another case before the courts.
The July issue of Wine Business Monthly reports that the case of Costco Wholesale Corp. vs. Hoen, pending before the federal district court in Seattle, could “put US retailers within self-distribution reach of all wineries.”
The May 16 Supreme Court decision on the consumer cases (known as Granholm vs. Heald and Swedenburg vs Kelly) will impact the Costco case. The Court supported the interstate commerce clause and ruled that states could not states discriminate between in-state and out-of-state wineries, as was the case in both Michigan and New York. Similarly, states maintain different standards for in-state and out-of-state distribution, which the Costco case may erode.
It’s technical and doesn’t have the sex appeal of allowing consumers to deal with the wineries directly, but Costco could have an impact that affects wines at all price points, not just the high-end collectible bottles.
Consider my favorite example of the celebrated “Two Buck Chuck,” aka Charles Shaw. The producer, Bronco Wine Co. arranged an exclusive retail agreement with Trader Joe’s grocery stores with a retail price of $2 within California where no distributor is needed. But every other state requires distributor intervention even though this arrangement is between a large producer and a large retailer. The result for consumers is often Three Buck Chuck. Or three-and-a-half buck chuck. A distributor gets a near 50% mark-up (allowing something for transport) for simply having a license. That is a disservice to the consumer.
R. Corbin Houchins writes in WBM that the second of four counts in the Costco case relies on interstate commerce (the other three counts pertain to Sherman anti-trust provisions and thus are not directly affected by the May 16 Supreme Court decision). Washington state wineries and breweries are allowed to self-distribute to retailers while out-of-state wineries and breweries are not: they must pass through mandatory distributor intervention.
If the Supreme Court’s recent decision acts as a precedent for the Costco case, the change for wine could be wholesale (excuse the pun). The only rub is the 21st Amendment, which devolved the power to regulate the production, distribution and sale of alcohol to the states. But how long can alcohol beg different status from other goods in interstate commerce when it is so clearly anti-competitive?
The changes would be manifold. Effectively, it would be the end of the three-tier system, at least in states that decided to permit self-distribution. A big winery could self-distribute and Two Buck Chuck would cost $2 for consumers outside of California as well as inside California. From the business side, more consolidation of retailers with each other would probably occur and they might even acquire distribution for more vertical integration.
Does that scenario sound like a doomsday, Mondovino-style horror film? Well, it could be. But it could also result in greater efficiencies, which could mean lower prices to the consumer. The United States is the only advanced industrial democracy to mandate distributor intervention in alcohol (even in Sweden, where the retailer is state owned, a thriving private market of distributors exists). Who knows, per capita wine consumption in America might even go vertical. Wine and Nascar anyone?
