The role of retailers

Sovos | April 10, 2006

Pending court cases in Washington and Texas will set precedent throughout the country for determining the role of retailers in the world of wine shipping. Before digging in, let’s start with a terminology summary:

Direct Shipment: The direct shipment of wine from wineries (suppliers) to end consumers. Wineries may ship via common carrier (UPS and FedEx) directly or through a third party logistics company (3PL) that ships on behalf of the winery.

Self Distribution: Shipment of wine from winery directly to retailers without passing through a distributor.

Three-tier: Three tier shipments are generally picked up at the winery by a distributor, who then delivers to retailers (liquor stores, restaurants, etc.).

Retail to Consumer: The shipment of wine from a retailer directly to end consumers.

In Washington, the Costco will likely set a precedent for self distribution. Costco challenged the three tier system for distributing wine and beer in Washington. The trial ended two weeks ago and U.S. District Judge Marsha Pechman is expected to rule on the case this week or next.

Costco argues that the three-tier system is effectively a state-mandated monopoly that restricts competition and thus consumer choice and artificially inflates prices via mandatory markups. They would like to cut out the “middle man” and allow wineries to self distribute directly to Washington retailers.

In Texas, the Specialty Wine Retailers Association is suing the Texas ABC for retail to consumer shipping rights. A powerful legal team that includes the infamous Ken Starr will argue that the Graholm decision that requires that states treat in-state and out-of-state wineries evenhandedly also applies to retail to consumer shipments. Here is a quote from the press release:

“A great state has done a real wrong, by engaging in an archaic form of economic protectionism that plainly violates the constitutional rights of citizens. As the U.S. Supreme Court made clear in its recent Granholm v Heald decision, the Commerce Clause requires that out-of-state wine retailers be treated the same as in-state wine retailers,” said James Shannon, partner of Kirkland & Ellis. “Rather than abide by the U.S. Constitution, however, Texas apparently has decided to favor the interests of its powerful liquor lobby, by seeking to prevent out-of-state wine retailers from delivering wines directly to Texas consumers. That unconstitutional decision also punishes Texas consumers, who are made to pay more for wine and have a lesser selection of it,” he added.

These two cases will set landmark precedents that will likely spur another flurry of legislative and judicial activity and further complicate the wine shipping landscape. We’ll be sure to keep a close eye on both cases and their potential impacts.