We have all been sheltering in place to one degree or another for the last six months. Wine, beer, and spirits have helped us to cope with this new reality. While it may be easy to find large, national-brand wine, beer, and spirits at the local grocery store or liquor store, for most consumers, it’s more difficult to find craft beer, spirits, or wine from small boutique producers.
At VinePair, many of our readers have asked why they can’t get some of their favorite wines and spirits shipped to them. We wanted to explore why that is. The reasons for this are not new, but may be magnified during the time of Covid-19. In response to the unprecedented shutdowns across the country, many states have enacted temporary laws to permit the sale of wine, beer, and spirits in new ways that were not previously permitted under the traditional three-tier system. These temporary laws may be the key to allowing smaller producers to survive and thrive post-Covid.
The Three-Tier System
In the United States, the sale and distribution of wine, beer, and spirits is governed by a complicated system of laws, called the three-tier system. After Prohibition, each state enacted its own laws to control the sale and distribution of alcohol, allowing states to levy taxes on those sales and to protect the public health. Generally, the three tiers are producers (wineries, breweries, and distilleries), wholesale distributors, and retailers.
The basic structure of the system requires producers to sell their products to wholesale distributors, which then sell the products to retail stores, bars, and restaurants, which then sell to consumers. As products pass through each tier, taxes and markups are applied before moving the products along to the next tier. Compliance is challenging, as each state’s laws vary.
Ohio, for example, prohibits wineries that produce more than 250,000 gallons annually from shipping wine directly to Ohio consumers. Minnesota limits any winery from shipping more than two cases of wine in any calendar year to any Minnesota consumer. Arkansas, Mississippi, Alabama, and Utah prohibit all shipments of wines direct from wineries to their residents altogether (but note that Arkansas permits wineries to ship wine purchased by Arkansas residents at the winery). In Washington, retailers may purchase alcohol directly from producers, may negotiate volume discounts, and may warehouse their inventories themselves.
Small Producers Are at a Disadvantage
While this level of complexity is more easily managed by large producers, this can limit the ability of smaller producers to expand their businesses and sell their products. When Theodora Lee of Theopolis Vineyards started selling her award-winning wine, she was told by many distributors “that I was not producing enough wine to warrant them taking me on as a client.” Lee instead relies primarily on direct-to- consumer (DTC) shipping as her primary sales channel.
Small producers like Lee often have difficulty finding distributors for their products, and even when small brands are able to find distributors, they can get lost in a large portfolio, which means their wines are not being widely or effectively distributed. Ultimately, this leads to many wines from boutique producers not being available in retail stores across the country.
Direct-to-Consumer Shipping Helps Small Producers
This lack of access to distribution leaves many smaller wineries to rely on tasting-room sales, while others, like Theopolis Vineyards, focus on DTC sales. There is a significant exception to the general three-tier system that allows wineries to ship wine directly to consumers.
As of August, 46 states and Washington, D.C. permanently permit DTC shipments of wine (Kentucky passed a law permitting direct-to-consumer shipping, but it has not yet taken effect). But DTC shipping from a winery to consumers is still prohibited in Alabama, Mississippi and Utah. Lee says it “has been a blessing to be a small-lot producer of wine,” since she is able to sell directly to her customers, resulting in higher margins than if she had significant distribution relationships, which would add additional fees and reduce her margins.
Small wineries that didn’t have robust online presences prior to the Covid-19 shutdown, and which relied on tasting-room sales to drive profits, have been challenged to pivot to DTC. There is always pressure from consumers for wineries to offer free or discounted shipping. As a result of Covid-19, there are consumers ordering wine from wineries for the first time. These consumers are not accustomed to paying high shipping costs for wine.
There is pressure on wineries to offer free or discounted shipping in order to capture and retain this new business. As an example, Tablas Creek Winery offered $10 flat shipping for more than three months once the Covid-19 shutdown orders began. While the direct sales to consumers offset the loss of restaurant business for Tablas Creek, those sales also came at a cost of hundreds of thousands of dollars to subsidize shipping for the orders. Boutique wineries will have difficulty continuing to provide free or discounted shipping indefinitely.
The problem is magnified for distilleries and breweries, which have limited ability to ship directly to consumers. Only 10 states and Washington, D.C. allow breweries to ship beer DTC, and only seven states and Washington, D.C. allow distilleries to ship spirits DTC. With restaurants, bars, and tasting rooms being closed and social distancing rules limiting conversations with store employees, craft brand sales have suffered without in-person recommendations.
According to distributor depletion data from Sipsource, and Nielsen and Drizly retail sales data, it’s clear that “consumers [are] pushing back into mainstay brands or comfort brands.” says Michael Bilello, senior vice president of communications and marketing for the Wine and Spirits Wholesalers Association (WSWA). Consumers now enter stores with masks, make quick shopping decisions, and leave. In this environment, consumers are more likely to grab a brand they know instead of exploring brands they are not familiar with.
Temporary Law Changes During Covid-19
As a result of Covid-19, states and local governments have granted temporary waivers of various aspects of the three-tier system that have allowed producers and retailers to survive. Most states have deemed alcohol retailers as “essential” businesses, allowing them to remain open when other stores were closed. Other states, such as California, Maryland, New Jersey, Oregon, and Virginia, have allowed certain producers and retailers to deliver beer, wine, and spirits locally to consumers.
Restaurants and bars have suffered the most from closures and limitations on operations as they reopen. In an effort to help increase their business, many states have enacted temporary laws allowing restaurants and bars to sell wine, beer, spirits, or mixed drinks for pickup or delivery — often in connection with the sale of food. California, Nebraska, New York, Kentucky, Colorado, and Virginia now allow restaurant takeout and delivery orders for alcohol.
The Future of The Three-Tier System
As the economy continues to reopen, producers, restaurants, retailers, and bars are hoping many of these temporary measures are made permanent. “Delivery is a rising tide for the industry,” says Jake Hegeman, WSWA’s assistant general counsel, legal and regulatory. Eleven states have proposed legislation to extend or make permanent their temporary expansions on takeout and delivery of orders by restaurants, bars, retailers, or distilleries. “Our major focus is ensuring that there be well-thought-out, regulated, but robust consumer delivery,” says Hegeman. Consumers love convenience, so the more access they have to new and different brands, the more sales will increase for small producers.
Many craft distilleries would like to see DTC shipping expanded. The American Craft Spirits Association (ACSA) recently called on all governors and state regulators to provide regulatory relief, allowing for electronic, contactless sales, and fulfillment through third-party carriers. Virginia, California, Oregon, Maryland, and Washington now allow distilleries to deliver to their in-state customers. DTC would allow craft spirits businesses to grow and develop by allowing them to connect directly with their customers in the same manner as wineries.
Others in the industry would like to see an expansion of the ability of out-of-state retailers to ship alcohol across state lines. Only 15 states and Washington, D.C. allow out-of-state retailers to ship certain types of alcohol directly to their residents, and fulfill those orders through a common carrier. Nevada, Wyoming, Louisiana, Alaska, Connecticut, Florida, and West Virginia permit the sale of wine only from out-of-state retailers. Nebraska, North Dakota, D.C., and New Hampshire permit the sale of all types of alcohol. Virginia and Oregon (with certain exceptions) permit the sale of beer and wine.
While The National Association of Wine Retailers believes that retailer DTC should be treated the same as winery DTC under the law, it faces opposition from other trade associations like WSWA, which continue to oppose retailer DTC. WSWA’s opposition to DTC spirits sales arises from the potential dangers of underage drinking and counterfeit alcohol. Instead, WSWA advocates for local delivery from licensed retailers, with delivery being made by their employees or licensed third-party delivery services like Drizly. The delivery person can verify that the consumer is of legal drinking age.
There is a series of cases pending in eight states challenging laws that allow in-state retailers to ship alcohol to residents, while prohibiting out-of-state retailers from doing so. It remains to be seen where courts will come out on this issue.
Published: October 11, 2020