Sunday, May 29, 2005
Small wineries are feeling boxed in
Growers say a ruling that wineries cannot act as their own distributors will cut profit margins and cause their brands to get lost in the shuffle.
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Owners of small vineyards and wineries are in danger of losing their privilege of selling their vintages directly to grocery stories, restaurants and wine shops.
If they lose, some say small wineries will go out of business, which could signal an economic disaster for small wineries in Virginia, said the Virginia Wineries Association. Of the 90 plus wineries in the state, maybe a half-dozen work through distributors.
The wine industry produces, on an annual basis, $75.7 million for the state's economy and draws in about a half-million tourists.
Judge Richard Williams of the U.S. District Court in Richmond recently said small farm wineries cannot act as their own wholesalers and distributors. His ruling is part of a larger lawsuit that covers several issues, including interstate shipping and the exclusive sale of Virginia wines in state-run ABC stores.
The state's attorney general has filed a petition for a stay, pending an appeal. During the appeals process, state legislators could find a solution.
Until then, small farm wineries can still go about their daily business.
Here's why one winemaker does not want to be at the mercy of distributors.
Since there are so many different brands, distributors may not push a small grower's wine and, as a result, it won't sell, said Steve Bolleter, winemaker at AmRhein Wine Cellars.
The distributor goes to a store; the owner scans the list of wines and, typically, picks the ones he or she is familiar with.
"The distributor's objective is to sell wine, period," Bolleter said.
Logistically, it's impossible to supply wines everywhere when you have several hundred customers, but when the small grower's wine is lumped with wines from California and Europe, it can easily get lost in the shuffle.
Also, small growers say the distributors will cut into their already-slim profit margins.
Typically, a grower sells his wine directly to a wholesaler and discounts it about 30 percent. If the grower sells to the distributor, he's discounting about 50 percent. The distributor marks it up about 20 percent or more; the retailer marks it up, again, so consumers end up paying more.
For his part, Bolleter said it's important to strike a balance.
On one hand the distributors introduce the small grower's wine to different stores, different markets and they take away those expenses from the growers.
"But here's the stranglehold. If they don't push your product it will get lost."
The small growers have been their own distributors for 25 years.
"A lot of times a distributor won't take you; maybe the wine doesn't fit into his portfolio," said Russ Amrhein, winery owner and viticulturist. Or "maybe the distributors have too much wine."
Amrhein lasted about eight months with a distributor. It didn't come close to what it said it would sell, Amrhein said.
The three tier system - sale of wine from producer to distributor to retailer - was established in 1933 on the heels of lifting prohibition.
Then, only a few hundred producers made wine. Now, there are thousands.
Small mom-and-pop wineries proliferated and only the big guys went to the distributors, said Gordon Murchie, executive director of the Virginia Wineries Association.
Virginia legislators passed the Farm Wineries Act in 1980. Farm wineries in Virginia had the right to act as wholesalers and distributors. They pay tax on their wine. They transfer their wine from production to their tasting rooms, which is the retail side. They can put their wine on a truck and sell it to restaurants, supermarkets and wine shops.
Or, if they want, they can use a distributor. Since then, however, myriad lawsuits have sprung up across the country, challenging laws that govern interstate shipping of wine.
In 2001 a handful of wine drinkers and three out-of-state wineries filed a lawsuit in federal court in Richmond. They disputed the exclusive sales of Virginia wines in ABC stores and the ban on the shipments of wine across state lines.
In 2002 Judge Williams ruled that those two laws were unconstitutional.
While that case wound itself through the appeals process, the Virginia General Assembly repealed the ban on interstate shipping.
The appeals court sent the case back to district court in light of the new law.
That's when the plaintiffs went to the District Court in Virginia, asking the judge, among other things, to also allow out-of-state wineries to directly sell and deliver their vintages to restaurants, wine shops and grocery stores.
"We think self-distribution is wonderful; we just don't think it should be limited to Virginia wineries," said Dan Ortiz, a professor of law at University of Virginia Law School. He's also representing the plaintiffs.
The Farm Wineries Act helped each winery develop relationships with local wine shops and restaurants and, as a result, the Virginia wine industry has seen success well beyond that in other states, said Terri Cofer Beirne, a Richmond lawyer representing the Virginia Wineries Association. She said self-distribution should be limited to small wineries in any state.
The association plans to ask state legislators to protect rights they have enjoyed for decades - the right to self-distribute their products and the right to sell their products in ABC stores.
"To pass constitutional scrutiny, the legislature must propose legislative solutions that do not treat in- and out-of-state wineries differently by benefiting the former and burdening the latter," Cofer Beirne said, referring to a recent U.S. Supreme Court decision on interstate shipping.
If states allow local wineries to ship directly to their residents, then out-of-state wineries must have the same privilege.
Murchie said this bi-partisan issue should not fall short in a Republican-controlled General Assembly. "The wine industry in Virginia is the fastest growing agricultural commodity in Virginia ... and provides a little more than 1,000 jobs."
Alcoholic beverage wholesale interests, however, donated $492,557 to state campaigns in Virginia in 2003, the last year available, according to the Institute on Money in State Politics in Helena, Mont.
"The wine industry can't produce the big bucks, but they are the voters," Murchie said. "We have limited financial resources and the state benefits from this [wine] industry."
If small wineries are forced to go through a distributor, that will kill the mom-and-pop wineries, said Judy Furrow, co-owner of Hickory Hill Vineyard in Moneta. "We won't be able to make it."
Big wineries benefit
Some larger wineries, including Chateau Morrisette, however, need distributors.
"I couldn't afford to drive from Floyd to Roanoke to deliver six bottles of wine," said Bob Burgin, vice president. Distributors have the economic and logistic resources to deliver wine to all retailers in their coverage area. Also, distributors pay the state taxes on the wholesale level. The only group that doesn't pay is the state-run ABC warehouse, which acts as the distributor of wines to all its stores.
Having said that, Burgin supports the smaller wineries who prefer to act as self-distributors.
Wines are available from all over the world and distributors do not have the time to represent the small winery, Burgin said. Wineries have to have enough brand equity to make it worthwhile for the wholesalers to handle their product.
Bill Philips, on-premise manager at Blue Ridge Beverage Co. in Salem, said the distributor removes distribution expenses, including delivery costs and wholesale taxes from the wineries. However small wineries can be best served by selling the wine, themselves. He said some small wineries that go through distributors have high expectations of what will sell. "It can take time to build a brand. Sometimes, it's a slow and gradual process," Philips said.