How the Supreme Court decision could upend the US wine market

The US wine market has been fragmented and difficult to navigate thanks to its three-tier sales system. A recent Supreme Court ruling may make life easier for US wine retailers - but could make life harder for wineries that rely on DtC sales. Liza B. Zimmerman reports.

Photo by Mike Benna on Unsplash
Photo by Mike Benna on Unsplash

 

The US Supreme Court has opened the door to interstate wine shipping, in a move that could upend the US wine market.

“The era of protectionist wine shipping laws is crumbling,” says Tom Wark, the Napa-based executive director the National Wine Retailers Association (NAWR).  

The US wine market has been fragmented since the 1933 Repeal of Prohibition implemented a three-tier sales system, to ensure that no one group (producer, wholesaler or retailer) could control alcohol sales. It also gave each of the 50 states the right to regulate the sale of alcohol within its own borders. This has led to different laws in each state.

In the past 86 years, two Supreme Court cases have attempted to untangle this maze. The first, 2005’s Granholm vs. Heald, gave US wineries the right to ship their products into the majority of other states. The second, passed on 26 June, is likely bestow the same right on US retailers.

This move could fundamentally change how the US wine market operates, as it will give retailers room to grow their businesses across state lines. This means that single stores will be able to sell in multiple states without opening other locations.

It’s a win for consumers in the most tightly regulated markets, who will no longer have to content themselves with the commercial wines found in local shops. It also means that wineries will now face more direct competition from retailers for the business out-of-state customers.

A closer look at the ruling

The current decision was based on challenging a residency requirement for retailers in the state of Tennessee, brought by mega-retailer Total Wine & More. In a seven-to-two ruling the Supreme Court struck down the residency requirement as economically protectionist and also deemed that retailers should be entitled to the same sales rights as wineries.

“This is good for wine lovers throughout the country and it should have happened years ago,” says Jeff Zacharia, president of the one-location, Scarsdale, New York retailer Zachys.

Most wholesalers, and their lobbying association the Wine & Spirits Wholesalers of America (WSWA), on the other hand, have long opposed retailers’ rights to ship product into different states. Michelle Korsmo, WSWA’s president and CEO, says the organisation disagrees with the Supreme Court ruling. “America’s system of beverage alcohol regulation continues to be a global standard …. [and] The decision of the Supreme Court to strike down Tennessee’s right to enforce durational residency laws for licensees erodes the twenty-first Amendment and primary state authority.”

It will take time

Retailers across the country are thrilled with the decision, but caution that it will take time to come to fruition, as retailers need to iron out kinks in billing and shipping on a state-by-state basis.

“We have laid the groundwork for retailers to do interstate commerce and shipping,” notes Paul Mabray, the CEO of the Napa-based emetry.io, a consumer insight service for the wine industry. However, he notes, that “permitting will take a while.”

Small retailers may not stand to benefit, notes Craig Perman, the owner of the one location Perman Wine Selections in Chicago. There is only one pie, he cautions, “and if it continues to get carved up into smaller pieces, which this certainly will do, then ultimately it changes the profitability of a business like mine.”

Sean O’Leary, the Chicago-based Irish Liquor Lawyer, says that there is distinct possibly that, as a result of this decision, “Amazon and Total Wine will rule the market.”

Another possibly is that retailers will become specialised in certain regions of the world, says Mabray. “West Coast retailers will have a cost and value advantage with West Coast and New World wines while those on the East Coast will have the advantage with imports,” he adds. In addition, “smaller producers will face more challenges in getting to market.”

The middle of the country will “face the biggest challenges while this new structure will disrupt the wholesaler power balance.” Mabray adds that wineries—many of which rely on direct-to-consumer sales—will now have to compete with highly efficient retailers, who may now move into direct-to-consumer sales in their own right.

Liza B. Zimmerman

 

 

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