But What If...
How things may have been different for consumers and the wine industry.
I was asked by an interviewer the other day if I could succinctly explain my opposition to the “three-tier system” of alcohol regulation. I’m not known for always being succinct. Moreover, it’s a good question and it deserved some thought. So, I gave it some:
When product diversity was low, as in the years following the repeal of Prohibition, the regulatory walls erected around states had an insignificant impact on competition and the economic growth of the alcohol industry, not to mention the ability of local industries to address consumer demand. However, in time, as product diversity began to increase hand in hand with heightened consumer demand for new and innovative products, the walled-off markets created by state alcohol regulations have severely diminished competition and the economic growth that competition breeds.
From an economic perspective, the most interesting thing about the condition described above is how consumer demand for product diversity spurred an increase in different alcohol products, while increased diversity of alcohol products spurred greater demand for greater product diversity. The question that needs to be answered is at what point in history since Repeal do the states’ walled-off marketplaces begin to significantly impact the spread of product diversity and, in turn, retard the growth of the alcohol industry.
I don’t know the precise answer to that question. My suspicion is that this detrimental effect of the states’ commonly installed three-tier systems begins to deter alcohol entrepreneurship sometime between 1980 and 1995.
In 2018 David Morrison did an analysis of the number of wineries in the U.S. from 1940 through 2018. It shows a remarkable uptick in wineries beginning in the early 1990s, indicating enhanced levels of entrepreneurship in the winery sector.
Credit: David Morrison, The Wine Gourd
It was also in the early to mid-1990s that the California wine industry and states began to do battle over the issue of direct shipping. In a March 1995 issue of The Wine Spectator it was reported:
“Wines Seized as Part of Crackdown on Direct Shipments
In December, more than 650 cases of Napa, Sonoma and Mendocino county wines were seized by liquor control agents in New Jersey, Pennsylvania and Maryland in a strike at the increasingly common practice of shipping wine directly from wineries to consumers.”
Until a study is done, one is left to wonder the extent of the slower growth caused over the past 30 years by the incoherent alcohol policies of the states and their inability to divorce themselves from the highly inefficient three-tier system. One is left to wonder what innovations were deterred by unnecessarily funneling all wine sales into a state through a wholesaler. If retailers across the country had, like retailers of other products, been allowed to purchase directly from producers, it seems highly likely that the increased diversity of wines consumers would have been exposed to earlier would have increased interest in wine—further enhancing the American wine marketplace.
This whole conversation reminds me a lot of how the entertainment industry approached the discussion of piracy. Certainly, piracy had an impact, but it was largely a response to the global public no longer being satisfied with the distribution system as it then existed. And instead of address the cause, the industry roped in the FBI - THE FBI!!! - to make piracy a high-priority federal crime. For nearly two decades the industry would claim their losses in the capital-B "Billions" but this included countries where the product wasn't even available nor were there any plans to make it so, usually countries and/or consumers low enough on the economic scale that these weren't lost "sales", even if the ease of access to online pirated copies vs. that of the traditional distribution system was absolutely a concern.
But the issue was always about an industry needing to adapt to the times. And the conversation was never being held in good faith, with the industry inflating their loses and the damage done with numbers that never held up to any scrutiny. And yet governments across the world parroted the numbers and sicced our top law enforcement agencies on behalf of giant corporations for way too long. It's not quite a perfect comparison to the wine wholesaler model and protecting-our-own-interests approach, but there are definite similarities between the two.
The other problem with the three-tier system - I am sure you have hit on this before - is that very small wineries, like THE GRADE Cellars, cannot have a sufficient impact on a distributor's bottom line. The consolidation in the distribution participants creates an even higher barrier, especially when they can do business all day long with the mega-wineries. Our only option, and it isn't an easy one to implement, is to try to reach consumers directly.