A Plan to Mitigate the Impact of Wine Tariffs

States need to immediately take these actions to aid their wine industries

Tariffs on wine are now in effect. The impact (higher prices) will, in some cases, be seen immediately, while the majority of increased prices for wine will begin trickling onto the price sheets of importers and wholesalers over time. States should and can take action to help their wine industries and consumers navigate these new waters.

The primary way a state can help its wine industry and consumers mitigate the impact of across-the-board tariffs is to take action to lower prices for wine. What the state governments should not do, of course, is impose price caps or price ceilings on wine. These are government-imposed limits on the maximum price a product or service can be sold at.

STEP 1
However, state governments should pass legislation to allow domestic producers, importers, and retailers to bypass wholesalers and thereby cut out an often unnecessary markup of the price of wine when it travels from importers and producers to the retailers.

In most states, post-Prohibition laws require domestic producers and importers to sell their wine to a wholesaler in the state where their products will be sold at retail. The wholesaler generally places a 25% to 30% markup on the wine before selling it to a retailer, who then puts their own similar markup on the wine. If states change their laws to allow their retailers and restaurants to buy directly from domestic producers and importers, the wholesaler markup can be eliminated. Bypassing the wholesalers in a state allows producers and importers to sell their wines directly to retailers and restaurants. The savings can then be used to reduce the price to retailers, while letting importers and domestic producers receive a better price for their wines than they would have received by selling them to a wholesaler first. Finally, part of the wholesaler's now-eliminated markup can also be used for shipping costs.

In some cases, bypassing the wholesaler will allow importers to retain important levels of margin and retailers to purchase inventory at prices below what they would have paid a wholesaler. In other cases, the benefit to importers and producers, and retailers will be smaller. What’s key here is in an environment where non-organic price increases driven not by market forces but by arbitrary tariffs are put in place, every bit of savings is important to profitability, if not survival.

STEP 2
States could further help mitigate the impact of higher prices on their importers, retailers, and, importantly, their consumers, by changing laws to allow retailers and importers to sell and ship wine directly to consumers.

Lawmakers traditionally think of importers as the equivalent of domestic producers—entities that supply wholesalers in the state where they reside and in other states. And this is generally true. Over the past 25 years, domestic producers have been given an escape from the traditional three-tier system through direct-to-consumer shipping rights. Importers should be given those same rights.

States should augment their direct shipping laws to allow their in-state and out-of-state importers to ship wine to consumers in the state. This change in the law would provide importers with a new revenue stream (as it has for domestic wineries) that could make a difference between survival and bankruptcy in this new world of tariffs.

Meanwhile, in order to ensure consumers can source the best prices on the wines they want, every state should similarly allow both their in-state and out-of-state retailers to ship wine directly to their consumers. Today, only 14 states allow consumers to source and receive shipments of wines from out-of-state wine retailers. A slightly larger number violates the Constitution and allows consumers to receive shipments from in-state retailers but not out-of-state retailers.

Keen eyes will note that this tariff-mitigation plan violates the three-tier system of alcohol distribution that requires suppliers (domestic producers and importers) to sell to middlemen wholesalers and retailers to purchase from in-state wholesalers. It’s a “system” that has been in place in various forms for close to a century. The foundation of this three-tier system is the provision of separate privileges to suppliers, wholesalers, and retailers, and the mandate that wholesalers get a cut of every transaction in a state.

Another benefit of this tariff-mitigation plan is that it disrupts the archaic and largely useless system that was put in place to address PRE-Prohibition problems that today are easily avoided through other, less restrictive means.

We do not know how long tariffs will be in place. The Trump administration has given no indication how or why it might remove the tariffs that went into effect at midnight on Wednesday and that impact wine imports from every wine-producing country. This uncertainty will negatively impact the American wine industry. But higher prices are going to impact the marketplace even more. States should immediately take the above actions to aid their wine industries by helping mitigate the burdens imposed by tariffs on importers, retailers, and restaurants.