Updating the Supply Chain

May 2009
by Tom Wark
If the current economic downturn has demonstrated any one key point, it is that good economic times mask the shackling effect that archaic regulations have on commercial activity.

This point has been driven home in particular for the wineries and specialty wine retailers who have been hurt worst by the current economy. If the artisan wineries and specialist retailers have anything to learn from their current economic exposure, it is that they will need to work together to restructure the wine distribution system in order to avoid a crippling blow to their long-term viability.

The problem that artisan wineries and specialty retailers face is the necessity of trying to sell and distribute wine within a regulatory system born of an industrial era, while working in a post-industrial, information age.

Nothing remains the same between these two eras. Communication across great distances doesn't take a week--it takes a moment. Products and brands are no longer largely regional. They are national the minute they are conceived. America is not a nation of beer and spirits drinkers. We are a wine-drinking people now. And we no longer possess only a handful of wineries nationwide. We support more than 5,000.

The laws and regulations that govern alcohol distribution assume for the most part that nothing has changed between 1919 and 2009.

But of course it has. Everything has.

Today, fewer and fewer wineries can find a distributor to carry their products in markets outside their states. When they do find one of the dwindling number of distributors to take them on, many discover they can't afford to lose money on every case of wine they sell.

It would be different, of course, if this were 1940. There were fewer producers and more distributors--but the production tier has evolved. In fact, the wine-producing tier has been forced to experience its remarkable evolution from immature to mature from inside a distribution system that has not matured at all.

This remarkable disconnection and failure of the American wine distribution system, however, has been papered over by good times. While the economy was booming, the number of wineries practically doubled as it became clear that Americans were willing to spend increasing amounts of their disposable incomes on wine. Our powerful and expanding economic engine made the three-tier system's commercial restraints, protectionist regulations and empowerment of wholesalers bearable.

Meanwhile specialty retailers also took advantage of the booming economy. Shops were filled with hard-to-find wines, retailers used the Internet to fulfill the growing demand for cult and not-so-cult wines, and they stocked exotic imports from New World producers for the increasing number of wine lovers.

Today, the commercial restraints of the three-tier system's industrial era regulations are catching up with retailers. They don't have the kind of flexibility that would allow them to better weather this storm. For the most part they can't ship over state lines legally, and in most states they can't negotiate a better price for wine directly with the producer, because they are forced to operate in a regulatory system born of the Prohibition era--when nothing was the same.

There is only one solution: Producers and retailers must join forces to effect a modernization of wine distribution, because the second tier certainly isn't going to help.

Two changes to the three-tier system are most critical. The first is assuring that both specialty retailers and wineries are able to ship over state lines. Wineries now can ship to 36 states, retailers to 13. The first and third tiers have largely fought their direct shipping battles alone. They have even worked against each other on occasion. Wineries must understand that every state open to retailer shipping is one more channel through which their wines can get to the consumer. Retailers must participate eagerly in the winery shipping battles out of principle.

Second, retailers and wineries must work together to open more states to self-distribution, so that they can transact business directly with each other. Self-distribution lowers prices, gives retailers access to more products and helps producers extract themselves from the stranglehold distributors have on them today.

We live and work in a new world that requires new wine regulations. Yet without a cooperative political effort by retailers and wineries, needed change won't come. And if it doesn't, the next economic downturn won't hurt nearly as many businesses--because there won't be nearly as many around.

Tom Wark has worked in wine marketing and communications for 20 years, starting his own firm, Wark Communications, in 1994. In 2007 he was appointed executive director of the Specialty Wine Retailers Association. Tom is an outspoken advocate of three-tier reform and consumer rights, and blogs daily at Contact him through
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