December 14, 2004

A Taste of E-Commerce in Wine Country

For wine sellers, the prospect of online sales has been a persistent force in the industry and a motivating factor in the Supreme Court's headline-grabbing review of two cases involving wineries.

By Deborah Asbrand

It's been a long time since e-commerce made anyone's list of emerging technologies. But for smaller wineries around the country, the routine process of conducting business over the Internet has been burdened by a thorny set of state laws that bars wineries in many states from shipping to customers in others.

Now the U.S. Supreme Court is weighing in on the dilemma, and the result for consumers could be the opportunity to buy wine from any vineyard they choose. The high court is mulling how the right of states to regulate interstate alcohol sales stacks up against the Constitution's provisions for free trade. A decision in favor of the wineries will permit them to ship freely throughout the country.

The backstory in this widely followed court case, however, is how the Internet's reshaping of commerce is propelling change in the wine industry and on the laws that govern it. 

To New York School of Law professor David Johnson, challenges to the status quo by small and medium-sized wineries and their consumers resembles the challenges to opinion content that launched the blogging phenomenom.

"A small winery and a blog share the same inspiration: that everyone is a producer," says Johnson.

The wine industry has famously met the Internet before. Virtual Vineyard was an e-commerce star that pioneered the online spirits industry. It was a darling of venture capitalists until its business model of brokering sales directly from wineries ran afoul of the very law the Supreme Court may overturn. Virtual Vineyard morphed into Wine.com, which now sells through a network of wholesale distributors with physical locations throughout the country.

It's that distributor network that is now under scrutiny. Wholesalers' built the system as a way to manage the knot of Prohibition-era state laws that ban the shipment of alcohol directly from manufacturers to consumers.

But small vineyards can have a hard time getting into the distribution system. The $21-billion retail wine business is lopsided, with just 2.4 percent of wineries producing 87 percent of the wine sold in 2002, according to Wine America, a leading trade group that's actively involved in pushing for change. At a disadvantage is the thriving cottage industry of 1,659 wineries that produce less than 25,000 cases annually but comprise a whopping 81 percent of the total number of wineries. 

Consolidation among wholesalers is increasing the squeeze on modest-sized players.

"Wholesalers are purchasing each other, and their portfolios get larger and larger, and the smaller wineries find it hard to be carried," says Paul Tincknell, a Healdsburg, Calif., winery consultant.

As the Federal Trade Commission put it in a statement last year regarding anticompetitive barriers to e-commerce, while many of the alcohol industry's direct-shipping regulations "may have legitimate consumer protection rationales, many of them also have the effect of insulating local businesses from out-of-state competitors."