Online Wine Sales Growing Despite Political Roadblocks
By Fred Sandsmark
We take things for granted in California. We assume that we can find a
pretty good selection of wine at the grocery store. We assume that we
can find a great selection from tiny vintners at a specialty shop. And
in the Silicon Valley, we assume we can easily buy just about anything
on the Internet and have it delivered to us.
But we're lucky. In some states, a person who buys a bottle of wine
online is breaking the law. A winery that sells its product online (and
ships it directly to the buyer) may be committing a felony. And as for
boutique wines, in much of the country they’re harder to find
than affordable housing in Palo Alto. The Web may be World Wide, but
laws regulating alcohol sales and shipping vary from state to state,
and even from county to county within some states.
But the hurdles aren't stopping large online wine shops and individual
winery sites. Business is booming—one source estimates online
alcohol sales at a billion dollars a year—but moves are afoot in
Washington, D.C., and in several states to further tighten direct sales
regulations.
A brief history lesson might be in order. When the 21st Amendment to
the Constitution repealed Prohibition in 1933, the power to regulate
alcohol was given to the states. Most established a "three-tier system"
in which alcohol producers sold their product to distributors, who in
turn sold it to retailers. The three tiers were forbidden from having
financial ties to each other. (Some "control" states chose instead to
run their own liquor stores.)
The goal was to keep out organized crime, but a side effect was an
inconsistent hodgepodge of laws and regulations. Direct sales (whether
by Internet, telephone or catalog) from out-of-state wineries are
forbidden in about half the states. Some states have "reciprocity" laws
that allow State A’s residents to buy wines from State B so long
as State B's residents are permitted to buy wines from State A.
Small wineries are the main beneficiaries of direct sales. Because 10
percent of the country's wineries produce 90 percent of the wine, small
vintners who try to work within the system are in a no-win situation:
They don't produce enough to command the attention of large regional
distributors, so their products often aren't well known or widely
available. But every bottle they sell directly to a
consumer—without a distributor and a retailer taking their
cuts—nets them more money. Robert Smiley, dean of the University
of California-Davis Graduate School of Management, says that more than
80 percent of small wineries that set up Web sites want to sell their
products directly to consumers.
A few pioneering wineries and wine merchants, led by Wine.com (then
known as Virtual Vineyard) set up shop on the Internet a few years ago.
Seeing the competition, distributors mobilized to protect their turf,
using their trade group, the Wine and Spirits Wholesalers Association
(WSWA), and their lobbying arm, Americans for Responsible Alcohol
Access (ARAA). They went to legislators and regulators with two
arguments against direct online sales: It costs states millions in lost
tax revenue, and it gives underage drinkers an easy way to get booze.
In Washington, they won the support of Sen. Orrin Hatch (R-Utah) and
Rep. Joe Scarborough (R-Fla.), who sponsored legislation to let state
attorneys general use federal courts to enforce their liquor laws.
Because of the teen drinking argument, the House version was first
attached to a post-Columbine juvenile crime bill. It has since been
split off, renamed the "21st Amendment Enforcement Act" (HR-2031), and
passed the House. The Senate version, SR-577, is being studied.
Wineries (through their own trade group, the Wine Institute) are
fighting back. They have the support of Sen. Dianne Feinstein
(D-Calif.), who told the Senate Judiciary Committee that the bill
wouldn't address underage drinking but would "[do] much to harm
legitimate businesses in the wine industry, stifle the growth of
electronic commerce, and diminish consumer choice."
The e-commerce industry is fighting the change, too. Executives from
Intel, AOL, MCI WorldComm and other groups wrote letters opposing the
legislation. "If they can stop you from selling wine on the Internet,
books and music are next," warned Andy Sernovitz, president of the
Association for Interactive Media.
The distributors insist that the problem is illegal alcohol sales in
general, not Internet wine sales in particular. "I love the Internet; I
use it all the time," says Barry McCahill, executive director of ARAA.
"We just don't think producers should use the Internet to play by a
different rule book."
McCahill says his group supports wine sellers that work within existing
law. "If it's such a bad idea to sell wine on the Internet legally, why
has $100 million in venture capital been pumped into it?" he asks.
He's referring to WineShopper.com, a wine sales Web site that should
launch by the end of 1999. WineShopper hopes to skirt the controversy
by working within the three-tier system. It's signed a five-year
exclusive agreement with the WSWA, with a 20-year option. The deal lets
WineShopper search participating wholesalers' inventories for wines and
offer them for sale online. The system also will use existing
distributors and retailers to complete the sale where necessary. "We're
a re-intermediator, not a disintermediator," explains WineShopper
spokesperson Suzanne Gannon.
WineShopper's funding—more than $46 million to date—has
come from top VC Kleiner Perkins Caufield & Byers and other
sources. Wine Spectator magazine will provide reviews and editorial
content. In spite of these big names, WineShopper may have a tough job
ahead.
"I think it's a terrific idea, but it's going to take a lot of lawyers
to make the plan work," according to Vivienne Nishimura, executive
director of a group called the Coalition for Free Trade. They have a
different strategy.
Nishimura says her group's goal goes beyond the direct-shipping
controversy. "We want to get back our rights to interstate commerce
that the states have taken away," she says. The coalition, which is
funded by wineries, VCs and the e-commerce industry, has a four-year
plan that should result in a Supreme Court case to decide the matter
once and for all.
Court case or not, Dean Smiley of UC-Davis thinks that state laws
prohibiting direct shipping will have to change. "More and more busy,
high-income people will be buying groceries online," he predicts, "and
they'll find that they can't buy wine. They'll protest to their state
legislators—and they're the people the legislators listen to."
This article first appeared in Silicon Valley TechWeek, November 1, 1999
Copyright © 1999, 2006 Fred Sandsmark / Marble Publishing
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