Regulating Wine by Mail: What Really Motivates States to Change Their Alcohol Distribution Laws?

By Riekhof, Gina M.; Sykuta, Michael E. | Regulation, Fall 2004 | Go to article overview
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Regulating Wine by Mail: What Really Motivates States to Change Their Alcohol Distribution Laws?


Riekhof, Gina M., Sykuta, Michael E., Regulation


IN 1986, CALIFORNIA PASSED LEGISLATION prohibiting the direct shipment of wine to its residents from another state unless the originating state allows California wineries to ship directly to that state's residents. This "reciprocity" restriction marked a change from California's previously unfettered direct shipment regime.

The legislation's obvious intent was to break down other states' barriers to the direct shipment of California wine. Prior to 1986, direct shipment was a misdemeanor crime in 47 states; only California, Alaska, and Rhode Island allowed the practice. In effect, California attempted to leverage its large wine-consuming population to open access to the rest of the country for the state's wine industry. A less charitable interpretation is that small California wine producers held California wine consumers hostage until other states would cede to the producers' direct shipment demands.

That effort has met with general, but mixed, success. In the past 18 years, 43 states have considered more than 160 bills proposing changes to their direct shipment laws. Twenty-three of those states have adopted some form of direct shipment allowance, ranging from reciprocity regulations to permitting systems to special handling provisions. But four states went the opposite direction and made the receipt of direct-shipped wine a felony.

Legislative battles triggered a series of court cases testing the legality of state-level restrictions on interstate shipping. Advocates for direct shipping claim such restrictions violate the Commerce Clause of the U.S. Constitution; opponents of direct shipping argue that states have a 21st Amendment right to regulate the distribution of alcohol within their borders. Split decisions among several federal appellate courts have led the U.S. Supreme Court to take up the matter in its next term.

Putting aside the legal questions, the fact that some states have relaxed their direct shipping laws while others have maintained or tightened theirs raises an interesting question: Are the direct shipment restrictions primarily based on public welfare interests or on protectionist economic interests? We will attempt to answer that question after first discussing recent trends in the wine industry that have engendered a growing direct shipment wine market.

THE U.S. WINE INDUSTRY

The U.S. wine industry has undergone tremendous structural change in the past 25 years, resulting in tensions between a growing wine production segment and an increasingly concentrated distribution and retail system. The convergence of those forces has put immense pressure on the traditional three-tier alcoholic beverage distribution network.

WINE PRODUCTION U.S. wine consumption was fairly stable through the 1980s. But demand increased rapidly through the 1990s, going from 106.8 million cases in 1991 to 145.1 million cases in 2001. Most of that growth occurred in the premium-priced wine segments.

The number of U.S. wine producers has also grown considerably in recent decades. The 1974 issue of Wines & Vines Annual Buyer's Guide listed 800 wineries operating in 34 states; the 2002 issue listed more than 3,180 wineries operating in all 50 states.

Although the total number of wineries has increased, market concentration in distribution and retail has led to tremendous consolidation in wine production over the past decade. The February 2004 issue of Wine Business Monthly reports that the top 30 U.S. wine companies produced over 90 percent of U.S. wine (by case sales) in 2003. Thus, the industry is characterized by a relatively few large producers (some of which have their own national distribution systems in place) and a large number of small wineries that primarily sell directly to consumers. For smaller wineries to access a larger geographic market, they must develop relations with distributors or larger wineries, or find alternative means for directly accessing distant markets.

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