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Wineries, Wholesalers Spar Over Direct-to-Buyer Sales

Bush is expected to sign bill allowing shipments to tourists

October 21, 2002|Melinda Fulmer | Times Staff Writer

California winemaker Douglass Scott resents that some of the out-of-state tourists who stream through Koehler Winery's tasting room in Santa Barbara County can mail home a Yosemite T-shirt or just about any other memento of their trip to California, but can't ship a bottle of his wine.

"It's just ridiculous," said Scott, because most of the wine Koehler produces is sold to winery visitors.

Direct shipments of wine are outlawed in 26 states, but new legislation expected to be signed by President Bush in the coming days would chip away at these restrictions by allowing visitors to wineries who would have carried wine purchases home to have them shipped instead, even if their home state doesn't allow direct shipping of alcohol.

(Consumers still won't be able to ship to states such as New York, which forbid residents from even carrying wine home with them from out-of-state trips.)

The wine industry concedes that the legislation, which was inserted at the eleventh hour into a Justice Department appropriations bill by Sen. Dianne Feinstein (D-Calif.) and Rep. Elton Gallegly (R-Simi Valley), is largely a symbolic victory. There is no way to estimate how much additional business will result, and it doesn't address direct-to-consumer sales of wine over the Internet.

But the new rules put Congress on record as supporting direct shipping, at least in small amounts, which is at the heart of the industry's battle to strike down state control of alcohol sales.

For the same reason, the new legislation is troubling to the nation's liquor wholesalers, which benefit greatly from states' three-tier system of distributing wine to consumers, which typically requires producers to work with state wholesalers, which then sell to retailers.

"This was inserted into the bill without any debate on the matter. [The wine industry] is trying to use any means it can to override states' rights," said Craig Wolf, general counsel for the Wine and Spirits Wholesalers of America.

States control direct-to-consumer alcohol sales for several reasons: to protect local alcohol interests, discourage sales to minors and encourage residents to buy locally to boost state tax receipts.

But the complicated state-by-state system is under fire on several fronts. Seven lawsuits are pending, and this month the Federal Trade Commission opened hearings to determine whether state regulations that require consumers to buy various goods and services, including wine, from licensed retailers or wholesalers are necessary or restrict Internet sales.

Small winemakers, analysts say, rely on direct sales of wine because they don't produce enough by volume or have enough brands to make it lucrative for major wholesalers to distribute their goods, especially now that the distribution side of the liquor business has been consolidated, leaving only a few large companies.

Winemakers also contend that direct-to-consumer restrictions impede Internet-based wine merchants that are trying to tap middle-class consumers' desire for specialty products.

"It's about access to unique wines," said Karen Roche, chief operating officer of Napa Valley-based Winetasting.com, which sells wine online to the two dozen states that accept shipments. "We're spoiled in California. But you don't have to go too far outside a major city to see selection of wine get limited."

Indeed, intense lobbying by wine aficionados and retailers in recent months prompted auction giant EBay Inc. to set up an online auction area for wine. The section works within state regulations, shipping directly to customers where it is legal and requiring sellers to use special logistics companies that work with in-state wholesalers where it is not.

States' regulation of alcohol sales ultimately could be settled by the U.S. Supreme Court. A federal judge in Indiana has upheld state laws restricting direct shipments, but district courts in Texas, North Carolina and Virginia recently struck down state laws that restrict direct shipping of wine; those cases are on appeal. Four other cases are pending in New York, Michigan, Florida and Washington.

Meanwhile, wine merchants say many wineries already are taking to the Internet, trying to cut out the middleman and reach customers who want their wines.

"It cuts me out completely and I resent that," said Ron Loutherback, co-owner of Wine Club, which last year sold $47 million worth of wine across the country through its retail stores, catalog and Web site.

"But do I think wineries should be able to do it? You bet. When you create monopolies, you do the industry a disservice."

To Koehler, which makes only 7,000 cases of wine each year, the new law will be more than symbolic.

"I work in the tasting room on Tuesdays and Thursdays and see a lot of out-of-state people that like us and would like to have some shipped back or join our wine club, but they can't," Scott said.

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