A WHOLESALE STITCH-UP
by David White
If there's one thing American lawmakers love, it's a banal acronym. Earlier this year, William Delahunt, a representative from Massachusetts, introduced HR 5034 , the "Comprehensive Alcohol Regulatory Effectiveness Act." Supporters call it the CARE Act, as if alcohol wholesalers care about consumers any more than wolves care about sheep.
America's liquor market is still suffering from the effects of prohibition, the period from 1920 to 1933 when the sale and production of alcohol was banned across the country. When prohibition was repealed in 1933 by the 21st Amendment, states were given the power to regulate alcohol within their borders. Many decided to assume complete control over the sale and distribution of alcohol. Just about every other state created a "wholesale tier" to sit between producers and retailers.
This structure—which is, in essence, nothing more than an artificial, state-mandated middleman—was at direct odds with the Commerce Clause, an enumerated power in America's Constitution which placed interstate trade in the hands of Congress and essentially made the United States a free-trade zone. But for decades, only policy wonks noticed that tension. So America's wholesaling industry grew unabated. Today, wholesaling is big business: Southern Wine & Spirits, America's largest distributor of alcohol, had revenues exceeding $8 billion in 2008.
About 20 years ago, Americans started developing a taste for high-end, small-production wines—and they could find them, thanks to the Internet and Northern California's bustling tourism industry. Wholesalers, understandably, grew concerned. Direct sales cut them out of the deal. So they responded exactly as one would expect—by cozying up with politicians. Between 2000 and 2006 alone, wholesalers contributed nearly $50 million to statewide political campaigns, according to an analysis by the Specialty Wine Retailers Association.
These donations were understandable. Politicians kept wholesalers in business by protecting the state-mandated middle tier. The wholesaling industry's very survival depended on lawmakers' willingness to keep the current regulatory structure in place. (Incidentally, if you want to understand the history of America's three-tier system-and the political influence of wholesalers, you might like to see my article on the subject in the latest issue of WFW.)
With the help of politicians, the wholesaling industry also spearheaded a massive campaign to prohibit winery-to-consumer shipping.
In the 1990s, the campaign was relatively successful. In 1998, just 17 states allowed direct shipping. By the turn of the century, though, groups started sprouting up to tackle the influence of the wholesalers, and the tables started to turn.
Some of these groups lobbied state lawmakers—by 2005, 27 states allowed some form of direct-to-consumer wine sales. Others sued. This culminated with Granholm v. Heald, the Supreme Court case that sought to reconcile the Commerce Clause with the Twenty-First Amendment. The Justices ruled that states could only limit direct shipping if such laws were applied consistently. In other words, states could only prohibit direct shipping from out-of-state wineries if lawmakers were willing to block in-state wineries from sending wine to consumers.
In the five years since that decision, ten more states have opened up their wine markets. Because the Courts' decision was so narrow, though, all sorts of silly regulations have remained. In Montana, for example, citizens can only order wine directly if they obtain a $50 "connoisseur's license." In New Mexico, citizens can receive two cases, per winery, per month-but only from states that welcome the shipment of New Mexico's wines.
Enter HR 5034.
Recognizing that the Supreme Court's Granholm decision posed an existential threat to their industry—after all, it's easy to envision consumers ordering beer and even hard liquor directly from producers—America's wholesalers convinced Rep. Delahunt (D - MA) to introduce the CARE Act. A Wine Spectator investigation found that this bill was literally written by the National Beer Wholesalers Association (NBWA), America's fifth-largest political action committee.
In a nutshell, the proposed legislation rolls back Granholm by putting the 21st Amendment above the Commerce Clause. This would give states total control over alcohol. Some analysts have concluded that the bill would even exempt liquor producers from anti-trust regulations and Food and Drug Administration rules. It would also make it much harder to challenge a state's liquor laws in court.
If the legislation passes, consumer choice would be crushed—mainly because it could severely restrict Internet wine sales. (The New York Times' Eric Asimov highlighted this in a column last week, where he looked at popular Internet retailer Garagiste.) The wholesaling industry claims, unsurprisingly, that its intentions are good. It only supports the bill because, as the legislation states, "alcohol is different from other consumer products." If it weren't for wholesalers, they argue, tainted booze could enter the supply chain. Even better, according to the wholesalers, this bill will help prevent underage drinking. As Rep. Gary Miller (R - CA) explained at a congressional hearing, "Minors on the Internet can order wine with the click of a mouse." Now, I concede that kids are certainly creative when it comes to securing booze. But how many teenagers do you know that would be willing to shell out several hundred dollars for a 2007 Napa Cabernet Sauvignon crafted by Thomas Rivers Brown, regardless of James Laube's praise?
Thankfully, Congress adjourned for the upcoming election before voting on HR 5034. Many oenophiles worry, though, that the bill will return next year. After all, the wholesaling industry is well organized, and the political donations will undoubtedly continue. Plus, some alcohol wholesalers view this fight as their last stand. Success could ensure their long-term survival.
What consumers deserve is a true free market in wine, where any adult, anywhere, can purchase wine from wherever he or she wants. Consumers who want to fight the political influence of wholesalers can join the battle by supporting Stop HR 5034 and the American Wine Consumer Coalition on Facebook.
David White is a writer in Washington DC. He is a member of the Society of Wine Educators and pursuing his advanced certification with the Wine and Spirits Education Trust.