Wine Sales Thrive
As Old Barriers
Start to Crumble
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By VANESSA O'CONNELL
August 25, 2006; Page A1[/FONT]
[/FONT]
The business of wine is breaking free of one of the world's most archaic and tangled retail systems. The result: a rise in sales, and an explosion of new ways to buy wine.
One of wine's new winners is Gary Vaynerchuk, a 30-year-old Belarus immigrant who recently dipped his nose into a glass, inhaled deeply, and stared into a videocamera. "Bell pepper, green pepper, red pepper," he declared. "This smells like a salad."
That observation helped ring up sales of 194 cases of 2003 Noblaie Chinon Rouge, an obscure French red, at $14 a bottle, by the Wine Library in Springfield, N.J. It used to be a small store in a New York City suburb. Today, with a busy Web site, it's one of the highest-grossing independently owned wine and liquor retailers in the nation, with about $45 million in annual revenue. Web sales -- launched in 1997 and buoyed by Mr. Vaynerchuk's folksy online reviews -- grew by about $10 million in the past two years alone.
The market is in upheaval because its many barriers are starting to crumble. Recently, a Seattle federal court struck down state rules forcing retailers to buy through wholesalers at pre-established prices. Several states are lifting rules that prevent consumers from buying wine directly from out-of-state producers and retailers.
At the same time, giant players like Costco Wholesale Corp. -- today the biggest wine seller in the country -- are pressing for reforms that would largely eliminate the industry's powerful middlemen.
VENDING VINTAGES
1 Vanessa O'Connell talks2 with Gary Vaynerchuck about the business of selling wine today.
The changing landscape is helping wine move into new mainstream markets. At 7-Eleven Stores Inc., shoppers can buy Chardonnays and Pinot Noirs. Roughly 500 Target Corp. stores carry wine, compared to 280 last year. Growth in U.S. dollar sales of wine is outpacing that of beer and liquor, according to research firm ACNielsen. Americans spent $7 billion on table wine at food, drug and liquor stores over the past year, 9% more than they spent the previous year.
For decades, wine and liquor marketers have been restrained by the 21st Amendment, which ended Prohibition in 1933 and granted the states broad power to control sales of alcoholic beverages. Fearful that a single player might dominate alcohol sales as gangsters had in the 1920s, the states set up a three-tier marketing system.
Power of the Wholesalers
By law, producers could sell alcohol only to state-licensed wholesalers. Wholesalers then sold products to state-licensed stores, who ultimately made sales to consumers. Until recently, the three-tier system -- with its patchwork of state regulations -- made online sales nearly impossible. Some states, such as Missouri, even had laws in place setting a minimum wholesale price for wine and liquor sold in the state. Elsewhere, wholesalers often had to adhere to mandated minimum markups of 10% or more, or were required to sell each wine to all retailers in a state at the same price.
Retailers grew dependent on wholesalers -- some larger than the companies whose products they sell. Miami-based Southern Wine & Spirits of America Inc. is the market leader, with roughly $7 billion in annual revenue, according to the research firm Impact. The world's biggest wine company, Constellation Brands Inc., by comparison, has roughly $3.2 billion in annual wine sales.
Wholesalers only carry certain brands in a particular market, so stores must often go to dozens of them just to get the products they want. Since no one wholesaler does business in every state, national chains might have to deal with more than 450 different wholesale suppliers.
The snarl of rules explains why no retailer has emerged to carve out a nationwide franchise in wine, as Starbucks did with coffee, Victoria's Secret with lingerie or Home Depot with hardware.
Over the past several years, a spate of mergers in the wine business sparked similar consolidation among wholesalers, anxious to maintain their bargaining power. Giant companies like Southern, whose operations straddle several states, fought state-mandated controls on wholesale prices and some other restrictions.
First Big Challenge
The first major challenge to the old system came in the late 1990s, from small wineries in Virginia, Northern California and elsewhere. Eager to ship wine to customers in other states, the wineries began mounting legal campaigns against laws barring interstate wine sales in Indiana, Texas, Michigan, New York and North Carolina.
Their efforts culminated in a major victory last year, when the Supreme Court ruled that states must allow wine shipments to consumers from wineries both in and out of state -- or ban such sales altogether. While the court sanctioned interstate sales, it left it up to each state to permit them or not. The ruling didn't address beer and liquor producers, which are fewer in number than wineries and whose products are more broadly distributed in retail stores across the U.S.
Today, 34 states let consumers order direct from out-of-state wineries. In 1997, only 17 states allowed such shipments, thanks to lobbying in the 1980s and 1990s in those states by wineries in California and elsewhere.
Big retailers such as Costco, Target and Wal-Mart Stores Inc. are now pushing for change too, eyeing a lucrative new way to expand their sales. Wal-Mart found that at its new, upscale store in Plano, Texas -- where the median household income is nearly twice the national average -- its 144-square-foot wine section generates more sales per square foot than dairy products.
Costco mounted a federal court challenge to the three-tier system in Washington state's U.S. district court. In April, it emerged victorious when Judge Marsha Pechman issued a sweeping ruling, calling state wine and liquor regulations "plainly anticompetitive" and in violation of antitrust laws.
see other post for rest of article
As Old Barriers
Start to Crumble
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By VANESSA O'CONNELL
August 25, 2006; Page A1[/FONT]
[/FONT]
The business of wine is breaking free of one of the world's most archaic and tangled retail systems. The result: a rise in sales, and an explosion of new ways to buy wine.
One of wine's new winners is Gary Vaynerchuk, a 30-year-old Belarus immigrant who recently dipped his nose into a glass, inhaled deeply, and stared into a videocamera. "Bell pepper, green pepper, red pepper," he declared. "This smells like a salad."
The market is in upheaval because its many barriers are starting to crumble. Recently, a Seattle federal court struck down state rules forcing retailers to buy through wholesalers at pre-established prices. Several states are lifting rules that prevent consumers from buying wine directly from out-of-state producers and retailers.
At the same time, giant players like Costco Wholesale Corp. -- today the biggest wine seller in the country -- are pressing for reforms that would largely eliminate the industry's powerful middlemen.
VENDING VINTAGES
1 Vanessa O'Connell talks2 with Gary Vaynerchuck about the business of selling wine today.
The changing landscape is helping wine move into new mainstream markets. At 7-Eleven Stores Inc., shoppers can buy Chardonnays and Pinot Noirs. Roughly 500 Target Corp. stores carry wine, compared to 280 last year. Growth in U.S. dollar sales of wine is outpacing that of beer and liquor, according to research firm ACNielsen. Americans spent $7 billion on table wine at food, drug and liquor stores over the past year, 9% more than they spent the previous year.
For decades, wine and liquor marketers have been restrained by the 21st Amendment, which ended Prohibition in 1933 and granted the states broad power to control sales of alcoholic beverages. Fearful that a single player might dominate alcohol sales as gangsters had in the 1920s, the states set up a three-tier marketing system.
Power of the Wholesalers
By law, producers could sell alcohol only to state-licensed wholesalers. Wholesalers then sold products to state-licensed stores, who ultimately made sales to consumers. Until recently, the three-tier system -- with its patchwork of state regulations -- made online sales nearly impossible. Some states, such as Missouri, even had laws in place setting a minimum wholesale price for wine and liquor sold in the state. Elsewhere, wholesalers often had to adhere to mandated minimum markups of 10% or more, or were required to sell each wine to all retailers in a state at the same price.
Retailers grew dependent on wholesalers -- some larger than the companies whose products they sell. Miami-based Southern Wine & Spirits of America Inc. is the market leader, with roughly $7 billion in annual revenue, according to the research firm Impact. The world's biggest wine company, Constellation Brands Inc., by comparison, has roughly $3.2 billion in annual wine sales.
Wholesalers only carry certain brands in a particular market, so stores must often go to dozens of them just to get the products they want. Since no one wholesaler does business in every state, national chains might have to deal with more than 450 different wholesale suppliers.
The snarl of rules explains why no retailer has emerged to carve out a nationwide franchise in wine, as Starbucks did with coffee, Victoria's Secret with lingerie or Home Depot with hardware.
Over the past several years, a spate of mergers in the wine business sparked similar consolidation among wholesalers, anxious to maintain their bargaining power. Giant companies like Southern, whose operations straddle several states, fought state-mandated controls on wholesale prices and some other restrictions.
First Big Challenge
The first major challenge to the old system came in the late 1990s, from small wineries in Virginia, Northern California and elsewhere. Eager to ship wine to customers in other states, the wineries began mounting legal campaigns against laws barring interstate wine sales in Indiana, Texas, Michigan, New York and North Carolina.
Their efforts culminated in a major victory last year, when the Supreme Court ruled that states must allow wine shipments to consumers from wineries both in and out of state -- or ban such sales altogether. While the court sanctioned interstate sales, it left it up to each state to permit them or not. The ruling didn't address beer and liquor producers, which are fewer in number than wineries and whose products are more broadly distributed in retail stores across the U.S.
Today, 34 states let consumers order direct from out-of-state wineries. In 1997, only 17 states allowed such shipments, thanks to lobbying in the 1980s and 1990s in those states by wineries in California and elsewhere.
Big retailers such as Costco, Target and Wal-Mart Stores Inc. are now pushing for change too, eyeing a lucrative new way to expand their sales. Wal-Mart found that at its new, upscale store in Plano, Texas -- where the median household income is nearly twice the national average -- its 144-square-foot wine section generates more sales per square foot than dairy products.
Costco mounted a federal court challenge to the three-tier system in Washington state's U.S. district court. In April, it emerged victorious when Judge Marsha Pechman issued a sweeping ruling, calling state wine and liquor regulations "plainly anticompetitive" and in violation of antitrust laws.
see other post for rest of article