San Jose Mercury News, December 4, 2004
Contra Costa Times, December 6, 2004

HIGH COURT TO HEAR CASE ON DIRECT SHIPMENTS, WHICH INVOLVES MANY ADVERSARIES

Every day Rob Jensen delivers the same bad news to a few customers who want to buy a bottle from his Testarossa Vineyards in Los Gatos: He can't sell it to them because they live in one of the 24 states that prohibit direct shipments of wine.

''It's probably 500 or 600 sales we could get if we could ship to those states,'' Jensen said.

While that may be a mere blip to a wine giant like Robert Mondavi, it's lost treasure to the thousands of small family-run wineries like Testarossa. And so the underdogs of the wine world have launched a legal assault on a regulatory system that has stirred passions rarely associated with the industry's refined image.

On Tuesday, this battle comes to a head when the U.S. Supreme Court hears two cases involving states that ban direct shipments of wine.

Advocates on both sides paint the dispute as an epic struggle over states' rights, free markets, cultural values and underage drinking.

But at its heart, the fight highlights the growing tension caused by the industry's changing economics. The number of winemakers has exploded in recent years, as Americans guzzle more wine than ever. Yet the the number of distributors has dwindled thanks to rapid consolidation.

Shut out of store shelves, these small labels believe direct distribution could be their salvation, as they use mail clubs and the Internet to connect with upscale customers seeking obscure vintages.

''For many of these vintners, this could open up a whole new market that's closed to them right now,'' said Tim Ramey, an analyst at investment bank D.A. Davidson & Co.

In some ways, this is a golden age for wine in the United States. In 2003 alone consumption rose 5 percent to 627 million gallons, according to the Pacific Research Institute, a free-market think tank in San Francisco.

Wineries abound
This love affair with wine has caused the number of wineries in the United States to double over the past decade to 2,700. The business attracted people like Jensen and his wife, Diana.

The key to their growth was the ability to sign up early on with lots of small, regional distributors who carried their product to 33 states and nine countries. Many of those distributors are gone.

''If we were to start today, it would be almost impossible to get distributors,'' Jensen said. ''The big distributors are gobbling up all the small distributors.''

While wineries now offer more than 25,000 varieties, only about 500 are likely to be found on a store shelf somewhere, according to the PRI.

''There may be more brands on the shelf than ever, but there are many more out there that don't get into the stores,'' said K. Lloyd Billingsley, editorial director for PRI.

Even for the fortunate labels like Testarossa, which is still carried by many bigger distributors, the nature of the relationship has changed.

Bigger distributors carrying more labels are focused on fulfilling orders and cutting costs rather than building name recognition for small labels. But smaller winemakers like Jensen can't afford big advertising campaigns or to travel around the country knocking on the doors of local retailers and restaurants.

So Jensen is banking on direct sales. Of the 10,000 cases he projects to move in 2005, he hopes to sell 70 percent either through a mail-order wine club, the tasting room, or the Internet.

The biggest roadblock to this plan, as he sees it, is the prohibition on direct sales to some of the largest potential markets -- including Florida, New York, Michigan and Ohio. From Jensen's perspective, the only people who want to see these restrictions remain are distributors who worry that direct sales could chip away at their business.

''More than two-thirds of legal residents in the country who can legally buy wine can not buy our wine,'' Jensen said. ''These laws are antiquated and need to be removed.''

Stan Hastings resents being painted as the bad guy.

Hastings is president of Moon Distributors in Little Rock, Ark. His family started its privately held distribution business in 1950 when there were 27 alcohol distributors in Arkansas. Today, there are two, as local distributors across the country have been bought up by larger players to achieve economies of scale.

But Hastings disputes the idea that distributors -- also known as wholesalers -- are to blame for winemakers' problems.

When Hastings looks around his warehouse, he sees 6,000 different brands of alcohol compared to only 2,000 he carried in 1990. The vast majority of that growth is new brands of wine.

A fraction of sales
He said it's silly for winemakers to be complaining when distributors are carrying more brands to more customers than ever. In addition, direct sales only account for about 1 percent of all wine sales. Even if Arkansas allowed direct sales, the impact on his business would be small.

The Wine & Spirits Wholesalers of America, the industry's main trade group, has led the fight against deregulation, joined by the attorneys general of 30 states and Mothers Against Drunk Driving. The organization argues that deregulation is being pushed by a giant industry because overproduction has created a glut that is crimping prices.

''Part of what has led up to this is the proliferation of wineries in the past 15 years,'' Hastings said. ''There's lots and lots of small wineries that are making these claims. But even with this huge proliferation of brands, the increase of volume hasn't kept up.''

About four years ago, David Lucas, owner of the Lucas Winery in Lodi, was approached by a Napa-based organization called Free the Grape. The group asked Lucas if he would be lead plaintiff in a case to strike down state laws banning direct distribution.

Lucas quickly agreed.

''It's not about the money,'' Lucas said. ''It's about the ability of the small farmer to stay in business.''

In particular, Lucas' suit -- which was joined by another small winery in Virginia, as well as two New York consumers -- targeted the state of New York because it allows direct shipment from wineries within the state, but not from outside. In a second lawsuit, a group of wine journalists, wine drinkers and the Domaine Alfred Winery in San Luis Obispo challenged the state of Michigan.

Two federal appeals courts split on the question.

Tuesday hearing
On Tuesday, the Supreme Court will hear appeals of both cases as it weighs two seemingly competing parts of the U.S. Constitution. The so-called ''commerce clause'' in Article I grants Congress the authority ''to regulate commerce. . . among the several states.'' But the 21st Amendment, ratified in 1933, repealed the nationwide prohibition on alcohol and gave states the right to regulate alcohol sales.

Even if the wineries win, change could be years away. The court is unlikely to rule until next summer at the earliest. If the bans on direct distribution are struck down, the states would then have to rewrite their rules, which could take months if not years. And then winemakers would have to decipher the new rules.

''It's not going to be instantaneous,'' said Steve Gross, director of state relations for the Wine Institute, which represents more than 800 California wineries. ''But it's an easier task if we've had the Supreme Court rule in our favor.''