Stop HR 5034

Dear Senators Feinstein and Boxer, and Congressman Thompson:

I am a small business owner in the wine industry. My consulting firm assists wineries – most in California – market and sell their wine throughout the U.S. The recent bill, HR 5034, threatens both my clients and my own business.

In the last 20 years the number of wine wholesale distributors in the U.S. has declined from roughly 7,000 to around 700 today. This consolidation in the wine wholesale distribution channel has increased the difficulty of small wine producers to reach markets, especially since there are over 250,000 different wines available. There are simply not enough wine wholesale distributors to be able to effectively represent and sell that many products.

That is why direct access to the market, be it to restaurants, retailers, or consumers, is now vital to the U.S. wine industry. HR 5034 blocks this access to market. It serves no other purpose but to protect wine wholesale distributors’ business, without providing for protecting and enhancing wine producers’ business.

The wine wholesale distributors claim that HR 5034 gives Constitutional powers back to the States. But it overturns the Constitutional provisions of unfettered and equal commerce between States. Such a bill that directly contravenes the U.S. Constitution is not a viable solution.

Wine wholesale distributors also claim to safe-guard against underage drinking and promote temperance. But even a cursory understanding of the wine sales channel clearly shows that wine wholesalers have no interaction with the public, and often spend vast amounts of money in the promotion of consuming alcohol. It is the wineries themselves, along with restaurants and retailers, that are the front line against underage drinking, and actively promoting moderate consumption.

Please do not let powerful lobbyists destroy California jobs with the erroneous arguments for HR 5034. The future of all commerce should be well-regulated but open markets – for both wine and other products.

I do hope that you will stand with California small businesses and stop HR 5034 from ever reaching the floor for a vote, much less ever become law. California needs its small businesses in this time of deep recession and financial turmoil.

Sincerely,

Paul Tincknell
President
Tincknell & Tincknell, Inc.
Wine Sales and Marketing Consultants since 1997

PS – This letter was sent to all three of my representatives. It’s time to stop wine wholesale distributors from buying market protection from our government. Please feel free to use any of the above in your own correspondence to your elected representatives. You can find and email them through this site: www.contactingthecongress.org.

A Reply

May 26, 2010

Dear Mr. Tincknell:

Thank you for contacting me regarding the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act of 2010 (H.R. 5034). I appreciate you taking the time to share your concerns with me on this issue.

As you are aware, this bill would significantly harm the California wine community, especially small wineries. H.R. 5034 was proposed by the National Beer Wholesalers of America as an attempt to increase their control over which products are sold by beer, wine and spirits wholesalers. It’s completely wrong-headed, which is why I’m working extremely hard to make sure it goes nowhere.

Before I give you the background on the bill, let me assure you – this bill is widely opposed in Congress, and I’ve been told by Speaker Pelosi that it’s very unlikely to succeed. However, the effects of this bill could be devastating to California wine and the beer wholesaler guys are working overtime for its passage, so I am going to stay vigilant in my opposition. And I hope you will join me in that effort.

What’s in this wrong-headed bill?

Simply put, this bill is an attempt to upend our country’s current alcohol distribution system. For decades, our courts have struck a balance between the 21st Amendment, which allows states to regulate the transportation or importation of alcohol, and other constitutional rights such as the Commerce Clause, which ensures the federal government’s right to protect fair and non-discriminatory commerce across state lines.

H.R. 5034 would make the dormant Commerce Clause inapplicable to any state laws dealing with alcohol unless “unjustified” and “facially discriminatory.” It would shift the burden of proof away from the states to defend laws they pass and make state laws supersede any federal law that is inconsistent with state law’s provisions. Laws like the recently struck-down direct shipment law in Massachusetts would be immune from Constitutional scrutiny.

Bottom line: this legislation allows Congress to pick the winners and losers in the wine business. It means wholesalers could have complete control over which wines consumers can access. And wineries and wine retailers would have no recourse if discriminated against.

What can you do about it?

I’ve heard from many people in our Congressional District who oppose this legislation and I am very grateful for your support. If you have colleagues or friends in any other Congressional Districts – in California or any other state – I encourage you to have them contact their Member of Congress and ask them to not co-sponsor H.R. 5034.

You can read more about this harmful legislation in Wine Spectator: http://www.winespectator.com/webfeature/show/id/42526
And you can also join a Facebook group against H.R. 5034: http://www.facebook.com/STOPHR5034

Again, thank you for sharing your thoughts with me. Please continue to contact me on all issues of importance to you and to our district.

Sincerely,

MIKE THOMPSON
Member of Congress

http://www.mikethompson.house.gov

Consumer-Direct Sales

The Role of Consumer Direct Sales in the U.S. Market

The size of, and inherent competition in the U.S. wine industry requires a system of distribution that can ship and deliver large volumes of efficiently and cost-effectively. The current supplier > wholesale distributor > on-premise/off-premise distribution path that is the U.S. three-tier sales channel would exist even if all legal barriers to consumer-direct sales were eliminated. For the last 20+ years, wholesaler distributors have fought to keep in effect and reinforce state laws prohibiting or limiting consumer-direct sales in order to protect their local franchises. In many states, the alcohol wholesalers’ lobbies are the largest contributors to state legislature election campaigns and political causes.

The arguments given by the wholesale distributors to limit or prohibit consumer-direct shipments of wine and preserve the three-tier sales channel are that the secondary and tertiary tiers:

• Prevent underage persons from receiving alcoholic beverages;
• Ensure the collection of state taxes on sales;
• Reinforce moderate consumption;
• Provide broader selection;
• Create more competitive pricing.

Studies and experience are beginning to show otherwise; there is a growing body of evidence that shows consumer-direct sales create more sales through the three-tiers. Furthermore, consumer-direct sales via the internet create more competition, which affect selection and pricing positively for the consumer. Each argument made by the wholesale distributors is either not true or can be easily corrected; for instance, collection of state sales taxes is easily accomplished by various forms of compliance services, from firms to online mechanisms such as ShipCompliant.com. All states that allow consumer-direct sales mandate that common carriers require an adult signature to deliver alcohol. Eliminating those issues (and the one about temperance, which should not be in the purview of a commercial business IMO), wholesalers’ arguments about their legally protected role makes a market more competitive is hooey: barriers to market access never make a market more competitive – ever. Barriers to market only protect certain business interests.

Consumer-direct sales can only replace the three-tier sales channel for wineries that have very small production. Indeed, the three-tier sales channel is often inefficient and not cost-effective for smaller wineries or small-production wines. The volume produced cannot support the incurred marketing costs of supporting sales through the three tiers, especially given the consolidation in the wholesale tier over the last two decades.

Wineries that must utilize the three-tier sales channel due to the size of their production supplement, not replace, those sales through the marketing actions to promote consumer-direct sales. Excepting only extremely high-demand wines, consumer-direct sales do not cannibalize sales from the secondary and tertiary tiers; the volume needed to replace three-tier sales is not feasible consumer-direct.

Instead, consumer-direct sales have shown a causal link to building sales in the secondary and tertiary tiers through building beneficial relationships with key consumer opinion influencers in local markets.

Consumers that make an effort to have a relationship directly with a winery often are more serious about wine than a typical wine buyer. Likely, such a consumer is an opinion influencer, since their interests often make them a source of information for other consumers less serious or knowledgeable about wine. Opinion influencers – for any consumer good – are the point-of-contact for creating word-of-mouth (viral) marketing. Marketing consumer-direct sales effectively reaches a winery’s key customers that are likely to be influential among their social circle in respects to wine, and create new customers for the winery. Similar to the effect of the latest internet meme (currently chatroullete *eyes rolling*), positive word-of-mouth spreads out from the point-of-contact.

Indeed, studies show that word-of-mouth is the most influential form of marketing channel, and especially among younger demographics. Social networks and online media such as Facebook and Twitter are the new form of socializing, and this connecting socially via technology will only grow. Social media marketing is influencing online word-of-mouth, which amplifies the effect through Twitter followers and Facebook friends that are remotely connected to the word-of-mouth source. Most of these remote connections won’t purchase direct from the winery, but may if they encounter a brand they’ve heard/read positive reviews of from their social connections. This builds sales in the market … through the three-tiers.

Like many entrenched industries the internet has changed the market conditions faster than acceptance by entrenched industry players and, in the case of wine, legislation. However, like those other entrenched industries there is no turning back the clock on the internet’s effect; for the wine industry that will ultimately mean access to consumers by any licensed supplier, be it winery, retailer, importer, or wholesaler. It may take decades but it is inevitable. Those who ride the change embracing it will make the most money in the end. Distributors can either be the Apple iTunes for wine in their market, or the Tower Records watching their sales of CD’s collapse due to the effect of the internet.