The wine is poured, you should drink it." 

Thomas Campbell, 1777-1844, Scottish poet. 

Winery Insight Featured Article - February 2006 by Timothy O. Rice

As so often happens with things in life, success is threatening the future of small wineries.

Less than a year ago, a decision by the Supreme Court was viewed as breaking down the barriers that had hindered the interstate shipment of wine to consumers.  Lofty statements told of how this was a blow for freedom, the triumph of the little man over the system, and the coming of a new day for wine consumers.

In some ways, it was.  In others, it merely took the battle off onto more convoluted paths.  Some of the routes chosen may threaten the very diversity and access the battle was supposed to bring about.

From the time of  Prohibition’s end in 1933, the regulation of wine sales in the nation has been largely in the hands of the states.  Over the years, this settled into what was called the “three-tier” system for alcoholic beverage sales.  The three tiers were the producer (the winery in this case), the distributor or wholesaler, and retailers (stores, restaurants, etc.).  Consumers could buy only from the licensed distributors.  Wineries could only sell to retailers through licensed distributors.  Distributors … well, they were in a pretty good spot.  The system functioned fairly well for many years.

The advantages of this for regulation and collection of taxes are pretty obvious.  Control and auditing is simple, because there is a single well-defined path for goods to travel along.  What is a little less obvious perhaps is the effect it has on diversity and choice.  Substantial barriers will be raised to anyone trying to start a new enterprise (a winery) because they will have to fight their way into an already crowded distribution channel.

That was not so bad when this system started in the 1930s.  Everyone and their brother saw a chance to make money selling liquor, beer, and wine.  Well over 1,000 distributors existed in this chain as recently as the 1980s.  But consolidation swept through the alcohol distribution business just as in so many others.  Nowadays, there are approximately 400 nationally.

With so few distributors, competition for attention is intense.  Most of the wine sold comes from the 100 largest winery companies in the country, names we have all heard.  Small wineries have to scratch and claw to be noticed, and many of them do not have the name recognition, advertising budgets, or the volume of production to be viable to the big distributors.

At the same time, wineries have been springing up everywhere.  Well over 3000 exist in the United States today, helped along by the wave of  Farm Winery legislation that swept through the states in the 1970s and 1980s.  As it became more and more difficult to make a living as a small farmer, numbers turned to what looked like the coming cash crop.  They started vineyards, and learned to make wine of their own; their state legislators saw this as a way to help them do it.  Those who cannot find a way into the distribution system must sell enough wine to stay in business themselves (“hand selling” or “hand sold” as it is called).

Farm Wineries generally have a more limited license than commercial wineries, but they are also offered encouragements to help them build their business.  Among them is often the ability to sell wine off their own premises, at a limited number of restaurants and liquor stores or other spots such as farm markets.  The income from those sales can be crucial to the survival of the small wineries.

Along comes the Supreme Court decision – one I am in complete agreement with – to both brighten and darken the picture.  Faced with a patchwork of conflicting laws from one jurisdiction to another that prevented, in many cases, wineries from one state from selling their wine to customers in another by shipping it to them, the Court applied the Interstate Commerce clause of the Constitution.  The states are not allowed to favor businesses within their borders at the expense of businesses outside them.  The concept of a level playing field must apply.

So far, so good.  What could be wrong with telling everyone to play fair?  Unfortunately, we are talking about the tangled coils of the law here, with a healthy dose of cash at stake.  People who saw themselves as possibly losing something reacted.  People who saw a chance to grab something lunged for it.  While in some places the decision resulted in the opening of  borders as hoped for (New York, for example), in others it resulted in the penalizing of in-state wineries to keep the out-of-staters out.

The Court’s decision only required the states to treat both classes of wineries the same.  Nowhere did it say what that meant in practical terms.  So you could allow both to ship to consumers directly, or you could ban both.  Either would put you in compliance with the law.  A few states chose the more restrictive route.

Maryland, a state with very restrictive regulations on this matter, was sued by the owners of a Pennsylvania winery and a Maryland resident.  Maryland wineries were permitted to ship directly to restaurants, liquor stores, and consumers.  An out of state winery was not, and so Maryland was obviously in violation of the Court’s decree.

Maryland reacted by announcing that as of March 31, 2006 Maryland wineries could no longer make these direct shipments.  Many Maryland winery owners believe this is the death-knell for them.  They need this income to survive, they say.

That is how it stands now, and similar events are occurring in other states.  The other two tiers often see their position as being threatened by these changes, and are prepared to fight hard to prevent that.  The small wineries see openness and free access to markets as a key to their growth and survival, but in an irony of life the very efforts of some small wineries to achieve that free trade threatens other small wineries who have been benefiting from a little protectionism.

There has to be a better way.  Throwing the small wineries of one place out with the bathwater of change cannot be the best method here.  I may not be smart enough to solve this one, but I do know that the destruction of small wineries is not what we were aiming for.