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Small wineries hit the bottleneck

Inside the Grassini Family Winery, bottles of wine chill in cold caves and wait to be boxed for shipment.

The year-old winery on California’s Central Coast sells around 600 cases a year; it’s a minuscule amount compared to the big wineries. 

Sitting in the entryway overlooking the vineyards, Katie Grassini lamented that her East Coast cousin can’t buy the one wine with his family’s name on the label. 

“I have a cousin who lives in New Jersey who loves our wine. He’s a little biased,” the winemaker said with a smile. “I’m not allowed to ship wine directly to him.”

Grassini’s frustration illustrates the predicament of small business players in the big business of alcohol. It’s a business dominated by middlemen, called wholesalers, who control distribution and, ultimately, determine which alcohol people can buy.

“It’s incredibly frustrating because we put so much effort into each bottle,” Grassini said.

 

The Hourglass

Alcohol distribution in the U.S. flows like sand in an hourglass, with the alcohol producers (wineries, breweries and distillers) at the top, wholesalers positioned at the chokepoint in the middle, and stores and consumers at the bottom. 

The wholesalers hold the powerful position in the middle, where the smaller wineries and breweries have trouble getting through, and where the wholesalers take their price markups.

“There’s immense power there,” said Paul Kronenberg, president of Family Winemakers of California, an association of small wineries. “We want market access, particularly the small producers. The wholesalers want to choke that off because then they control what choices consumers have. Not that that is a big motivation. But it’s about maintaining their monopoly on that price markup.”

In most states, a bottle of wine, or any type of alcohol, is required by law to travel from the winery through a middleman to the retailer. This three-tier system was born at the end of Prohibition, after the passage of the 21st Amendment in 1933.

The system was designed so no single tier could dominate the others, and so the major brewers could not monopolize the sale of alcohol.

The federal government also gave states authority over all laws governing alcohol sales, unlike almost any other products, the only other one being insurance.

 

Dampening the Spirits

On the whole, alcohol makers call wholesalers vital partners for getting their products distributed. But one problem for small wineries like Grassini’s is the difficulty of getting wholesalers in other states to even pay attention to their smaller-sized batches.

However, with the advent of the Internet, many small producers now promote their wine on virtual shelves and sell directly to consumers, in addition to their shipments to brick-and-mortar stores.

“You can’t get a wholesaler to find enough space for you in a retail environment. Got to find some way to get to you,” explained Kronenberg.

But direct shipping is banned in 13 states, and the process in the other states is heavily regulated.

Ultimately, the laws affect the choices of consumers, like avid wine drinker Christopher Casey from Utah, a restricted state.

Dressed in a blue polo shirt and sampling red wines, Casey talked about the pitfalls of buying wine as a Utahan. He was sitting inside a wine-tasting room in Los Olivos, located in Central California, on a slow Tuesday afternoon.

The middle-aged president of a software company, Casey can’t have the California wine he tasted shipped to him directly, and he can only drive a quart of wine back across the Utah border.

“The majority of Utahans don’t go through the hassle of bringing wine in from California or wherever they’re coming from,” said Casey. “They’re going through the state liquor store and buy what the state store buys.”

The options are limited. Liquor, wine and “heavy” beer — beer that is over 3 percent alcohol  are sold only in Utah state liquor stores and, according to Utah.com, “some of the finest wines in the world are sold at three wine stores in Salt Lake City.”

The Catch-22, then, for brewers and winemakers is they can be bottled up by both the wholesalers and also outdated shipping laws that haven’t kept pace with the Internet commerce boom. 

And the laws are complicated. Winemakers like Katie Grassini say it’s a full-time job keeping track of the complex patchwork of each state’s direct-shipping laws.

“Before I decided to get into the family business, I went to law school, passed the California Bar and practiced law,” Grassini said. “And I had no idea what I was in for when it came time to learn how to ship the wine that we make here.”


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Under the Influence

Wholesalers say recent lawsuits brought against states by sellers to counter restrictive shipping laws are an attack on the fundamental right of state legislatures to regulate alcohol as an intoxicant.

“It’s not like selling soda,” said Mike Johnson, the vice president of advocacy for the National Beer Wholesalers Association. 

Critics charge that wholesaler lobby groups are guarding the wholesalers’ position of power in the system by making political campaign donations and pushing for laws to restrict direct shipping.

“Those laws are simply there to protect the wholesalers,” said Tom Wark, executive director of the Specialty Wine Retailers Association. “They’re able to pass these laws because they have such complete and total and access to the whole process as a result of their donations.”

Not surprisingly, because alcohol laws are controlled by each state, the industry looks to influence legislation by injecting money into local politics. 

Since 2006, alcohol wholesalers contributed $55 million to state political campaigns, according to the National Institute on Money in State Politics. The alcohol producers combined to spend an additional $24.7 million in the states.

These contributions are credited with fueling legislation favorable to wholesalers, like a bill now before Congress called the CARE Act, which would strengthen the states’ ability to discriminate against out-of-state alcohol sellers. 

 

Last Call

Alcohol producers and retailers say they don’t want to dismantle the three-tier system, just tweak it.

“For us, this is a matter of us taking a system that needs to change — not fundamentally change, but begin to create more flexibility and choice and allow smaller producers a fair shot at getting product to market,” says Cary Greene, chief operating officer of WineAmerica, a national winery association.

The distribution situation for wine drinkers has changed over the past 20 years, as the number of states that allow direct shipping has increased from 13 in the mid-1990s to 38 today.

But many archaic laws created in the 1930s to protect small wholesalers from big brewers remain on the books. Plus, while small breweries and wineries multiplied, wholesalers consolidated and merged, and the balance of power was altered. 

“So they gave wholesalers more power,” said Greg Koch, founder of Stone Brewing Company in Escondido, California. “Now today, some of those small wholesalers, they’re not so small anymore. We have laws that are designed to protect giant wholesalers from tiny little brewers.”

Across the board, no one in the industry says they are looking to tear down the current system, just to make room for specialized products. At the same time, small wineries and breweries are looking for their shot to get their products more broadly distributed throughout the country. 

Back at the Grassini Family Winery, the grapes on the vines were still several weeks from the harvest, the busiest time of year for wine country. Between her duties, winemaker Katie Grassini complained that the wholesalers are overly concerned with catching every cent in the process.

“In reality what they’re doing, it’s against what America is all about and it’s limiting consumers’ choice,” Grassini said. “I don’t think even that people who ship guns have to go through as much as we do.”

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