Breaking Down the 3-Tier System w/ Tom Wark, National Association of Wine Retailers

Instituted in a different time, post Prohibition, the 3-Tier system of alcohol distribution and sales in the US creates inefficiencies in matching inventory with demand.  Tom Wark, Executive Director of the National Association of Wine Retailers (“NAWR”), founder of Wark Communications, and writer of Fermentation -  the Daily Wine Blog educates us on the history, key issues, and challenges of navigating the 3-Tier system for wine consumers to get the wines they want.  The NAWR is on a mission to modernize the regulatory landscape for alcohol and bring choice to consumers. Listen in to Tom’s decades of war stories on wine regulation! 

Detailed Show Notes: 

• Tom’s background
  • He grew up in Northern California and got interested in wine at an early age
  • He got a Masters in History
  • Worked in wine PR, then started his firm - Wark Communications
  • Started Fermentation -  the Daily Wine Blog, in 2004 - wrote a lot about regulation, was pro-DTC (direct-to-consumer)
  • Approached by the board of National Association of Wine Retailers (“NAWR”) to be Executive Director (2008)
• NAWR
  • Members all independent fine wine retailers (e.g., K&L, Zachy’s, Grapes, the Wine Company)
  • >100 members nationwide
  • Estimate ~500 retailers actively doing e-commerce and interstate shipping
  • ~400,000 alcohol licenses nationally
• Wine Retail Space
  • Grocery stores, convenience stores, drug stores, big-box retailers - mostly <$15/bottle, ~75% of wine sold
  • Small independent retailers => focus of NAWR
  • Multi-state retailers (e.g., Total Wine, BevMo)
  • DTC from wineries
• Key issues for fine wine retailers
  • Primary - want to serve customers where they are
    • Amazon could get into the wine space w/ Whole Foods alcohol licenses and ship to anyone locally -> The only way for independent retailers to compete is to do interstate shipping
    • 16 states currently allow interstate shipping
    • Wine.com has retail licenses in many states to ship to most states
  • Secondary issue - procurement of inventory
    • Retailers must buy from in-state wholesalers who have a limited selection
    • Retailers desire to purchase directly from importers or wineries no matter where they are to broaden their selection
• NAWR mission - to modernize the regulatory landscape for alcohol
  • Most regulations  were written in the 1930s-1950s
  • Alcohol is more regulated than tobacco
    • E.g., if a brewery wants to sell direct to consumer, it needs to sell to a wholesaler and then repurchase it to sell to the consumer
    • Franchise laws - binds producer to a wholesaler for life, even if the wholesaler is no longer supporting the brand
  • Advocate litigation for change - e.g., states that allow their own retailers to ship to other states but don’t allow out-of-state retailers to ship in, believes that violates the dormant commerce clause of the Constitution
  • Lobbying, education of retailers, cultivation of allies (very few - consumers and media; most against - distributors, non-online retailers (believe it will create more competition), wineries (indifferent), importers (were not active supporters))
• The 3-Tier system in the US
  • 1930’s - post-prohibition (1933) - each state had to regulate alcohol, and each did it a bit differently
  • Two main concerns - prevent tied house laws and organized crime
    • Tied house - producers controlled retailers => got bars to do sketchy things and promote high alcohol consumption
  • 3-tiers - producer, wholesaler, retailer
  • Retailers must buy from wholesalers
  • Stopping tied house - wineries can’t own retailers
  • Historically - lots of wholesalers competing to represent producers
  • Today - 10,000+ wineries, fewer wholesalers -> wholesalers act as gatekeepers, not required to bring producers in and shut out small producers who aren’t worth the time and effort to represent them
  • CA producers and importers can sell direct to retailers/restaurants
  • Wholesalers are very powerful - contribute meaningfully ($10M+/year) to state political campaigns, 10x more than wineries and retailers combined
  • Each state has different 3-tier regulation, creates an enormous compliance burden
    • IL - wineries can sell directly to retailers only if they produce <25k cases/year and must sell <5k cases/year w/in the state
    • CA/WA - all direct sales from producers to retailers/restaurants
• E-commerce
  • ~10-12% of wine retail today, includes Drizly, Instacart, & grocery delivery
  • Shipping far smaller than delivery
  • To be successful, retailers need to engage consumers digitally - cultivate an email list, create an experience for customers
  • Challenges
    • Getting wine to consumers (illegal to ship to many states)
    • Hard to make time to do outreach to legislators, regulators while running a small business
    • Restaurants become retailers during the Covid pandemic
  • The 1980s & 1990s - number of wineries exploded, they needed to sell directly to consumers since distributors wouldn’t represent them, became legal a precedent with the 2005 Supreme Court Granholm case - which specified if states allowed in-state wineries to ship to consumers, it must allow out-of-state wineries to ship into the state
• Taxes
  • If states allow retailers to ship in, retailers are required to remit local sales taxes and have a permit
  • Software systems set up for wineries also can cover retailers (e.g., ShipCompliant, Avalara), makes compliance easier
• Pure online players - wine.com, Naked Wines => valuable for showing consumers what can be accessed online and the experience of online retail
• What needs to change?  The Supreme court needs to tell states not to discriminate (2019 case - Tennessee vs. Thomas - can’t discriminate against retailers)

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