The Fed's Lawsuit Against Wine Wholesalers Can't Fix the Problem

Feds take on a regulatory system designed to harm retailers and consumers

The Federal Trade Commission is claiming in a lawsuit that the discounted prices (often significant in size) that Southern Glazers Wine & Spirits extends to those gigantic chain retailers that buy large volumes of wines and spirits violate the Robinson Patman Act of 1936. The claim is that offering these large discounts to the likes of Total Wine, Walmart and others damages marketplace competition by putting small, independent retailers at a significant price disadvantage, which in turn harms consumers by by reducing choice and price.

I don’t know if the FTC has a good case. I’m not qualified to make the determination. However, I do know the FTC is correct in claiming these volume discounts offered to the largest retailers in the land absolutely do put smaller, independent wine shops at a significant disadvantage.

What’s also unquestionably true is that the damage done to the smaller wine merchants who pay higher prices from wholesalers is a feature of the wholesalers’ business model, not a bug. It is in the best interests of the largest wholesalers who (between just Southern and Republic) control nearly 50% of the wine and spirits market that more and more wine flow through the large chains and not through the small, independent wine merchants.

Wholesalers cut their costs and increase their profits by helping to diminish the number of small, dedicated wine merchants by charging them higher prices for the smaller amounts of wine they purchase. It’s far less expensive for a wholesaler to service large chains where they can drop off a pallet of wine than it is to service the small wine merchant who buys smaller quantities of many more wines.

Moreover, when there are fewer small wine merchants to service, wholesalers can reduce the diversity of wines they distribute, again increasing their profits by focusing on the bigger brands that large chains tend to sell.

However, the problem that these smaller wine merchants face is exacerbated by the fact that in addition to paying the highest prices, they are also forced to buy their inventories from Southern and other wholesalers, the same as the large retailers getting the discount.

The obvious reaction to being screwed on prices is for the smaller retailer to differentiate themselves from the Total Wines and Walmarts of the world by offering customers a selection of wines they can’t find at these larger retailers. But they can’t do that due to the three-tier system and its legal mandate that retailers only procure their inventory from the in-state wholesalers that screw them on price. These small retailers are FORCED to buy the same wine that the larger retailers are buying for less from the same wholesalers.

The other obvious way for small wine merchants to react to being screwed on prices is to find a larger market to sell to, specifically, the whole country instead of its local region and state. By cultivating a clientele across the country that appreciates their services and their selections and their convenience, retailers aren’t forced to compete with the big box down the road getting huge discounts on the same wines Southern Glazers’s offers them. But here again, retailers are screwed because state after state bans out-of-state retailers from legally shipping to their residents.

The issue of volume discounts and rebates that the FTC has focused upon as it deploys the Robinson Patman Act against Southern Glazer’s is already a confusing, complex issue even at the state level. Several states prohibit wholesale volume discounting under some circumstances but not others. Other states allow it. Some disallow it completely. The very issue of “discounting” is fraught at every level of the alcohol industry whether due to questions of illegal inducement, fairness, or temperance.

Take the great state of Pennsylvania. Not long ago the Pennsylvania Liquor Control Board (PLCB) issued an “advisory” on the question of wineries offering volume discounts to customers at the tasting room. The problem is that some believed that in doing this, the wineries were engaging in illegal inducement to buy alcohol. The PLCB solved the issue by announcing the following:

A winery that has a sign indicating “20% off” if you buy a case of that $30 red wine is in fact an illegal inducement to buy alcohol. However, said the PLCB, if the same winery notes on a sign or price sheet that its fixed price for the same $30 bottle of red wine is $288.00 if the customer buys 12 bottles, that is not illegal inducement.

My point is that if this lawsuit goes forward, it’s probably going to get odd.

I’m in support of anything that can be done to bring the likes of Southern-Glazers and Republic National to heel, even if it is just forcing them to contend with the awesome powers of the federal government to make their lives more difficult by hauling them into court—whether or not the Feds have a good case.

These behemoth wholesalers spend hundreds of millions of dollars, take every step they can, and lie straight to the face of the public and lawmakers in their efforts to reduce consumer choice and step on the necks of both retailers and producers. I say “well done” to anything that the Feds do to expose their rent-seeking ways.

It’s not enough that archaic alcohol laws protect wholesalers from competition and support their obscene markups. They have to make sure America’s best wine merchants are put at a price disadvantage in the hopes they can run them out of business so they can then spend time simply servicing the largest retailers with the minimum effort. And again, all under the protection of state laws that haven’t served a legitimate purpose since 1965.

In the end, there is reason to believe the lawsuit brought by the FTC will end relatively quickly. The chairperson of the FTC who pursued this lawsuit, Lina Khan, will be replaced in the Trump administration by an FTC commissioner named Andrew Ferguson. It turns out that Ferguson was one of two FTC commissioners who voted against bringing this suit and issued a dissenting statement against the lawsuit. He was outvoted three to two. But when Khan leaves the FTC and is replaced by a commissioner who may be far less likely to support her aggressive anti-trust efforts, the Commission may vote to end the lawsuit before it really gets started.