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03.26.2013  
 

Privatization Bill Makes History in Pennsylvania

State House of Representatives passes legislation to end government liquor store monopoly, but some wineries fear moving too quickly could create more problems

 
by Linda Jones McKee and Hudson Cattell
 
 
pennsylvania liquor sales
 
Privatization "may help smaller or mid-size family-
owned wineries,” according to Jason Reimer, co-owner
of The Vineyard at Hershey in Middletown, Pa. (above).
Harrisburg, Pa.—On the evening of March 21, the Pennsylvania House of Representatives passed a bill that would gradually end Pennsylvania’s monopoly of the sales of wine and liquor. The distribution and sale of beer would also be affected if the legislation passes the Pennsylvania state Senate and is signed into law by Gov. Tom Corbett. This is the first time that privatization legislation has been passed by either legislative body since the Pennsylvania Liquor Control Board was established in 1933.

What would privatization mean for the wineries in Pennsylvania? How did Pennsylvania end up as a monopoly state? What regulations govern how Pennsylvania wineries currently sell wine in the state? How do the wineries feel about the potential changes privatization would bring?

As the saying goes, the devil is in the details, and the impact for wineries will depend on the exact language of any bill that passes the Senate.

What the wineries are saying
The Pennsylvania Wine Association has never taken a position regarding the issue of state store privatization. While some of the state’s wineries favor outright privatization, others raise questions about what it might mean for them.

Judy Nissley, president of Nissley Vineyards in Bainbridge, Pa., says her winery would definitely be affected. She believes that her sweeter wines, which are currently sold at the PLCB stores, would be more difficult to list in private stores—although sales of Nissley’s dry wines might increase. If privatization passes, she says she would have to send someone to contact each store individually, an increase in expense. On the other hand, Nissley wines could be placed in more small stores. “I hope it doesn’t hurt us,” she told Wines & Vines.

According to Dick Naylor, president of Naylor Wine Cellars in Stewartstown, Pa., the winery gave up selling wine through the state store system more than a decade ago because it could not afford to take a 50% discount on their wines. The winery is four miles from the Maryland border, and Naylor now sells more wine in Maryland than in Pennsylvania. He favors privatization because if it passes, he will be able to sell to individual stores at a 25% discount.

Robert Mazza, president of Mazza Vineyards in North East, Pa., told Wines & Vines, “It hasn’t passed the Senate yet. If it does, I question how much business we’ll be able to generate. We’ll be at a tremendous disadvantage because we won’t have the infrastructure that we now have.” In addition, Mazza is concerned that wholesalers will be reluctant to take on small wine producers.

Mazza told Wines & Vines that if privatization passes, in order for Pennsylvania wineries to get a fair shake, they would need three things from the legislature: the ability to self-distribute, guaranteed shelf space for Pennsylvania wines and for all slotting fees to be prohibited.

Richard Carey, co-owner of Tamanend Winery in Lancaster, Pa., had his first winery in California. Not surprisingly he is in favor of privatization. Although he considers the current state monopoly system too restrictive, he points out that care has to be taken in drawing up legislation to avoid new problems. Carey told Wines & Vines, “The current state store system was designed to support large corporate wineries and does little to encourage small, family-owned wineries within the state. Any new system needs to allow Pennsylvania wineries to continue to distribute to all licensees and to do other promotional activities such as wine festivals where wine can be sold directly to consumers. We have to realize that large distributors may not be interested in handling smaller winery accounts.”

According to Jason Reimer, co-owner of The Vineyard at Hershey in Middletown, Pa., his winery is not currently selling in the state stores and has no immediate plans to do so. The winery opened in February 2012, and at its current size can sell its entire production directly to consumers. However, Reimer serves on the legislative committee for the Pennsylvania Winery Association and has followed the progress of the privatization legislation closely. “For larger Pennsylvania wineries currently selling in the state stores, privatization may have an adverse impact on their sales, and selling into big box stores may be a challenge. On the other hand, it may help smaller or mid-size family-owned wineries who could then work with stores close to them as well as more regional chain stores and smaller retailers.”

All of the wineries are aware that the exact wording of the final legislation will be critical in determining the impact on the state’s wineries. At this point, it is uncertain whether the bill will pass in the Senate or what amendments will be added before it comes to a vote. During the debate in the House, some of the opponents to the measure expressed an interest in a more moderate approach, which would keep the present system largely in place but allow greater pricing flexibility by the PLCB, the authorization of direct shipments of wine, permit more stores to be open Sundays and add seven hours of sales on Sundays.

Other factors affecting the Senate debate will include the continued opposition by the state’s more than 4,000 employees, most of whom are now making more than $20 per hour. The state’s beer distributors also oppose privatization because they think they will face what they consider devastating competition if beer is allowed to be sold in grocery stores and convenience stores. Party line politics will continue to be a factor, and at this moment favors the Republicans, who hold a slim margin in the Senate.

How did Pennsylvania become a control state?
When Prohibition was ended by the passage of the 21st Amendment, the governor of Pennsylvania, Gifford Pinchot, was an ardent prohibitionist who had served for nearly a decade as a trustee on the State Board of Trustees for the Anti-Saloon League. Gov. Pinchot was responsible for getting the legislation passed that created the Pennsylvania Liquor Control Board and established Pennsylvania as a strict control state for the sale of wine, beer and liquor.

The state monopoly system was not challenged for 35 years, and the first crack in the system did not occur until 1968. While it was legal to grow grapes and make wine commercially after the end of Prohibition, all wine produced had to be sold through the state store system or out of state. Pennsylvania had many thousands of acres of grapes growing in the Lake Erie region in the northwestern corner of the state and, in the 1960s, grapegrowers there realized that Erie County was becoming a one-crop area dependent on the Concord grape. Growing wine grapes would offer diversification by offering a new market independent from the Concord market, while utilizing the same farm equipment. But in order to be successful in this endeavor, growers needed to have a local wine industry develop that would use their crops.

In 1968 the legislature passed the Limited Winery Act that permitted wine to be made and sold directly to consumers and to other state licensees such as restaurants. The first two wineries, Presque Isle Wine Cellars and Penn Shore Vineyards, received their licenses on the same day and opened in 1970. At first the wine industry grew slowly in the state, and by 1980 there were 22 wineries. Today, however, there are more than 150.

Selling wine through the PLCB
The Pennsylvania Liquor Control Board does not make it easy for the wineries in Pennsylvania to sell their wines in the state store system. First of all, wine can only be submitted for placement in the stores twice per year, and each winery is permitted to enter a maximum of 10 wines. Prior to the Granholm v. Heald decision by the Supreme Court in 2005, limited wineries were not charged a fee to submit their wines, but since that date, the PLCB collects $150 per label that is to be considered for sale in the state stores.

When a wine is accepted by the PLCB system for sale, the winery has no say in the location where the wine will be sold. Once the wine is placed in a state store, the store manager is not permitted to taste the wine while on duty, so many have no understanding of the varieties and styles of wine being sold by Pennsylvania wineries. While the PLCB allows special tastings for consumers to be held at state stores, there are limited time slots available and arrangements must be made 60 days ahead of time. In addition, the winery must buy their own product for the tasting from the PLCB and either pour it all during the two-hour long tasting or dump it out at the end of the event.

The Pennsylvania Winery Association recently announced a new option that may encourage limited wineries to seek access to sales in the PLCB stores. Pennsylvania wineries participating in the Department of Agriculture’s “Pennsylvania Preferred” program will now be permitted to sell directly to 10 state stores of their choice. Each winery will still be limited to only 10 wines, and they must pay the $150 submission fee, but they will be able to bypass the PLCB warehouse system and deliver to their chosen stores as needed.

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Posted on 03.27.2013 - 08:34:12 PST
 
Good riddance to the current system. One time, when I was introducing a new brand, I took samples to PLCB headquarters. Met with head of PLCB and he wouldn't let me open the wines to talk about them. I eventually left the samples, which I bet he took home. In the end, PLCB did list the wines I was trying to sell but what a nightmare.
 
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