May 30, 2008, 12:00 AM

Patchwork of Laws

While shoppers can find almost any wine online, retailers fight to ensure it can be bought there.

The Internet’s a window on the world when it comes to shopping-no longer are consumers’ choices confined to what’s on the shelves at their local stores. They can instead, with a few clicks of a mouse, call up an enormous array of products in any category for consideration, and they’ve formed the expectation that they will be able to find and purchase whatever they want online.

One of the product categories made much more visible to consumers online is wine. Type a name such as Robert Mondavi Reserve Cabernet Sauvignon into a wine-dedicated search engine such as Wine-Searcher.com, and the search pops up a list of online retailers that carry the product. Over the past five years, it has become possible for consumers to locate virtually any wine online through various online wine merchants and search vehicles.

Finding obscure wines

“It is very easy now to find even the most obscure wines,” says Tom Wark, executive director of the Specialty Wine Retailers Association. “There are thousands of wines available that can be found online. Add to that the fact that wines are being produced in every state in the country now and that the number of wines being imported into this country has increased exponentially, and you have a situation where it’s impossible to find them all in one store or even one state.”

That means that wine lovers wanting to find the broadest selection are looking for it on the Internet. According to Winezap.com, a wine search engine that links searchers to retailers, traffic to wine sites was up 35% in 2007 over the previous year. Those visits generated 46% more orders and the average order was up 11% to $335. Michael Stajes, CEO of Winezap.com parent company The Wine Commune LLC, says the growth stems in part from loosening of state restrictions in the interstate shipment of wines.

But while the Internet has helped raise consumers’ expectation of wider choice in all products, the broader sale of wine online faces constraints specific to the category in the patchwork of state regulations that govern wine and alcohol sales.

States have the power to regulate the sale of alcohol within their borders, including the sale of alcohol shipped directly to consumers. According to the Specialty Wine Retailers Association, which is organized around the issue of an open wine market, only 15 states explicitly allow direct retailer-to-consumer shipment of wine, meaning that language permitting such transactions is specifically written somewhere into state code. For other states without specific provisions, such transactions represent a gray area that leaves wine retailers shipping to those states potentially vulnerable to any changes in state code or interpretations of the law that could clamp down on such shipments.

Challenges

In fact, retailers are challenging laws constraining the sale and shipping of wine in some key states, hoping to pave the way to a more open market across all states. A 2005 Supreme Court ruling has given some fuel to Internet advocates seeking that change. But with the case to be made on a state-by-state basis, changing the status quo has been an uphill climb.

Current regulation on alcohol sales including wine sales have their early roots in efforts to separate the producers of alcohol from retail outlets, chiefly taverns, with the aim of protecting tavern operators from strong-arm tactics on the part of brewery representatives on what brands the tavern would-or would not-carry. The 21st Amendment that repealed Prohibition and made the sale of alcohol legal again gave each state the right to regulate the sale and distribution of alcohol inside its borders.

In most states, that takes the form of a three-tier system that created a new level in the distribution chain-wholesalers-that stands between the restaurant and retail outlets on one side and the alcohol producers on the other. In states where the three-tier system is in operation wholesalers participate in the sale of every bottle of alcohol including every bottle of wine as it passes through them from the producer to the retail outlet. The system, with few exceptions, requires consumers to purchase alcohol from retailers licensed by the state.

In many states the largest share of wine distribution is in the hands of a small number of larger wholesalers, a concentration that’s given them political clout. “It’s a monopoly that was put in place in the ‘30s when there was no Internet, no American wine industry and no consumer demand for wine,” Wark says.

The battle lines are drawn between, on the one hand, retailers and others who advocate for direct-to-consumer wine shipments across all states, and, on the other, wholesalers, some states and some local retailers that oppose that. “Under the guise of promoting ‘consumer choice,’ some wineries and retailers market and ship alcohol on an interstate basis directly to consumers,” says the Wine and Spirits Wholesaler Association in a policy statement. Direct-to-consumer shipping of wine and alcohol facilitates sales to minors and bypasses the collection of sale and excise taxes, depriving states of revenue to which they are entitled, contends the wholesaler association, which points out that in a majority of states, it’s still illegal for retailers under state law to ship wine and spirits directly to consumers.

Overcoming obstacles

“The three-tier system of distribution has served consumers and states well for 70 years. WSWA is committed to preserving the integrity of the state-based alcohol control system that has evolved under the 21st Amendment and which is threatened by illegal direct shipping,” states the group’s policy.

Retailers and others advocating change do say that opening up interstate shipping of wine in a controlled manner would expand consumer choice. They also argue that provisions hindering the online sale of wine to minors, such as requiring an adult signature on delivery, as well as for the collection of state and local taxes on online sales can be put in place.

At stake is a sizeable potential market for wine retailers, if state regulatory constraints could be eased. Wine.com CEO Richard Bergsund estimates U.S. retail wine sales at about $25 billion, with between 1% and 2% of that currently conducted online. “Most categories that don’t have regulatory constraints do about 3% to 5% online, so that is where this seems to be going long-term. If it gets to 5%, that would be over $1 billion,” he says.

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