The Wine Institute

Oct 29, 2003

The Wine Institute submitted a statement to the Congressional Subcommittee on Commerce, Trade and Consumer Protection, which is holding a hearing entitled, "E-Commerce: The Case of Online Wine Sales and Direct Shipment." The hearing will be at 9:30 a.m. est on October 30, 2003 at 2123 Rayburn House Office Building in Washington, D.C. The statement is as follows:

Restrictions on interstate direct-to-consumer wine sales limit competition and place constraints on consumer choice. This issue impacts the ability of consumers to have reasonable access to the wines of their choosing and has been a fundamental concern for Wine Institute's member wineries for decades. Wine Institute is the public policy advocacy group representing more than 660 California wineries and affiliated businesses responsible for more than 80 percent of U.S. wine production and 90 percent of the country's wine exports.

The Wine Institute believes that positive change will continue to be achieved within a regulated marketplace that will accommodate the requirements of state regulators and legislators. Several events, favorable to consumers, have occurred to allow for limited, regulated direct access in a manner that regulators, wineries and consumers all find satisfactory.

The Department of Justice Appropriations Authorization Act allows wine, purchased while visiting a winery, to be shipped to another state.
As a result of heightened airline security and restrictions on passengers to ensure safety, President George W. Bush signed this Act into law on November 4, 2002, which contained a limited direct shipping provision. Consumers, who could otherwise hand carry wine on aircraft into their state in accordance with their state law, can now have it direct shipped to their homes. The Act was a formal endorsement of limited direct shipment by the U.S. Congress.

S.577, the "21st Amendment Enforcement Act," signed into law in October 2000, recognizes that state authority for alcohol distribution laws are not absolute and must be balanced with other constitutional rights.
Congress recognized that the powers vested in the states by the 21st Amendment are not absolute. S.577 requires the courts to balance state authority with other constitutional rights, such as the commerce clause, the due process clause, and the First Amendment. State Attorneys General can now gain access to federal courts to pursue litigation for alleged violations of state law regulating alcohol shipping. However, they must demonstrate that state law is a valid exercise of power under the 21st Amendment and not inconsistent with any other provision of the Constitution.

Certain states maintain preferential treatment of local industry.
Despite U.S. Supreme Court decisions in the past that have ruled preferential taxes and treatments of local wine industries to be unconstitutional, a number of states continue to maintain such practices. As an example, Arkansas allows for local wineries to sell their products in grocery stores, while out-of-state wines are only available in package stores. Missouri and Washington both have imposed taxes on all wines (including out-of-state wines) that are used for the marketing and promotion exclusively of in-state wine industries. Eight states, Indiana, Maine, Michigan, New Jersey, New York, Florida, Rhode Island and Ohio, prohibit interstate direct wine sales, but allow intrastate wine sales and direct shipments.

Texas, Virginia, South Carolina and North Carolina have changed their laws this year to bring total limited direct shipping states to 26.
As an indication that momentum is on the side of the consumer, court cases, followed by legislative action, have resulted in new state laws allowing limited direct shipping. Several of the courts ruled that bans on interstate shipping were unconstitutional. The District of Columbia and 26 states now allow legal, limited direct shipments. This is the result of ongoing work by the wine industry, and provides various models for how the issue could be resolved in other states. In all cases, the amounts of wine that can be shipped are limited, and provisions exist to prevent delivery to minors.

Opponents of interstate direct shipping do not oppose in-state direct shipping and online sales, making their underage access argument invalid and the laws discriminatory to out-of-state wineries.
Direct shipping opponents have not targeted in-state online wine sales and delivery. The real reason for direct shipping bans is for protection of in-state businesses and the wholesaler system. In fact, opponents, such as the Wine & Spirits Wholesalers of America (WSWA) which claims that direct shipping provisions exacerbate underage access to alcohol, endorsed in 1999 the e-commerce web site, WineShopper.com. This now defunct website attempted to complete the sales transaction through the use of the three-tier distribution. WSWA is not opposed to the fulfillment method as long as the sale is completed through the wholesaler three-tier system.

A July 3, 2003 FTC Report concludes that direct shipping states with delivery safeguards have "few or no problems" with underage access.
The Federal Trade Commission (FTC) issued a July 3, 2003 report, entitled "Possible Anticompetitive Barriers to E-Commerce: Wine." Based on FTC survey responses, the report concludes that the states that allow direct shipping have procedural safeguards against shipments to minors and report "few or no problems" with these shipments.

The FTC report further concludes that many states hold the view that minors are more likely to buy alcohol from local retailers than the Internet because of the high cost of shipping and the fact that minors would have to wait days before learning if a delivery would be made. The FTC "found no evidence suggesting that direct shipping increases underage drinking beyond the levels attributable to sales by brick-and mortar storesÉUnfortunately, the evidence shows that adolescents currently can obtain alcohol without going to the trouble and expense of ordering it over the Internet."

Several reports indicate that most youth obtain alcohol through friends, acquaintances, family members, and other adults who buy or provide alcohol to them. These conclusions are from reports from the Century Council, "Underage Alcohol Access," published May 2003; the NAS "Reducing Underage Drinking" and FTC "Alcohol Marketing and Advertising Report to Congress," both issued September 2003.

Procedural delivery safeguards are in place to prevent underage access.
All states where direct shipping is legal already have regulations that include the three National Academy of Science (NAS) recommendations: calling for alcohol packages to be clearly labeled as such; requiring the alcohol delivery person to verify the recipient's age; requiring that an adult signature be obtained from the recipient of the delivery. Wine Institute has consistently supported the use of these safeguards to help prevent underage access. In addition, common carriers, such as Federal Express and UPS, continuously conduct educational sessions for their delivery staff in those states with legal direct shipments to assure procedural safeguards that will prevent underage deliveries of alcohol packages.

Wineries can service their tasting room customers with direct shipments, especially if they do not have distribution in the customer's state. Most of the 3,000 wineries in the country's 50 states begin their sales and marketing efforts primarily through their on-premise tasting rooms. In California alone, wineries are receiving nearly 11 million visitors annually. While most early visitors usually come from within the state where the winery is located, out-of-state visitors typically come to represent an expanding part of any winery's tasting room sales.

The challenge for wineries is finding a way to allow consumers to buy the wines that they tasted when visiting the winery. In a 2003 survey of Wine Institute members, 54 percent of the wineries indicated that they have been unable to gain access to another's state's market due to an inability to find a wholesaler who was willing to carry their brands. This is so because the number of wineries has dramatically grown, while the number of wholesalers has decreased. According to the October 15, 2002 issue of Wine Spectator, there were 2,188 wineries in the United States as of 2000, up from 579 in 1975. The vast majority of those wineries are small, producing multiple labels that the wholesalers are not able to carry. In contrast, WSWA had 450 members in 1975, down to only 170 today."

The wine media provide wide exposure to wine brands, leading consumers to contact wineries for a direct purchase.
Unlike most consumer goods, wine has generated an entire trade and consumer-based media. Wine-oriented consumers have access to a myriad of publications that discuss, critique, review and rate wines on a regular basis. Unlike most industries where product lines remain constant from year-to-year, wine is an agricultural product that can vary with every harvest. Consumers have come to rely upon the wine media to make recommendations and observations about the various wines that are available. Since most wine media is national in scope, it is inevitable that some consumers are going to find themselves searching for wines that are not readily available to them in their local markets. This exposure to new products often leads consumers to contact a winery directly to make a purchase.

Wine Institute supports the three-tier system, but advocates for augmenting distribution.
A number of state laws and regulations have developed since the repeal of Prohibition that serve to limit consumer choice. Wine Institute has worked carefully with its member wineries to develop solutions to this consumer problem which do not undermine the ongoing role of state regulators and local wholesalers and retailers. It has been Wine Institute's position that "we need to augment the three-tier system, not replace it."

Conclusions
Wine Institute believes that the right path for the future is working with states to craft legislation that is a compromise between consumer demand for choices and the regulatory requirements that create a safe and orderly market. Eighteen years ago no state had passed direct shipment legislation. Today, more than half of the states have some type of curative legislation on the books. Additional states will open up their markets for direct wine shipping. It is the consumer who will benefit. Wine Institute applauds the Congress for taking an interest in this consumer-driven issue.