Small wine, beer, spirits producers seek freedom to bypass wholesalers

If all goes according to plan, Scott Hanson and his family will open their distillery to the public next month in Carneros, where customers will be able to sample his award-winning vodka made with organic grapes.

Hanson said he is eager to showcase his Hanson of Sonoma brand in the new facility just off Highway 12, hoping to capitalize on all the tourists and wine enthusiasts who travel the road and are looking to take home something besides another bottle of cabernet.

But all he will be able to offer them is a tasting, and even those are capped by California law at six per customer and only a quarter-ounce per sample.

To add insult to injury, his customers will be able to walk nearby at the complex to buy beer and growlers at Carneros Brewing Co. and stroll to the Ceja Vineyards and buy its red blend or pinot noir.

And if Hanson or his staff were to instruct customers on where to buy his vodka, they would have to direct them to two or more unaffiliated retailers, according to beverage law attorney John Hinman. The requirement stems from so-called “tied house” laws implemented after Prohibition to cut down on the rampant bribery and predatory business practices by major producers at the time.

“It’s truly a disadvantage,” said Hanson, who got into the business at the urging of his two sons, Chris and Brandon, with the notion that selling grape-based vodka in Wine Country could be a hit, especially as the custom spirits business made major inroads in the $23 billion U.S. industry.

“As a small brand building your brand and business, you would like to have a customer be able to take a bottle home and give it to their neighbor,” Hanson said. “You want to have them talk about it and say, ‘I just discovered this brand,’ and share it with people.”

Hanson and his approximately 70 fellow California distillers may have some relief soon as Assemblyman Marc Levine, D-San Rafael, has introduced a bill that would allow them to sell up to three distilled spirits per person per day at their facilities.

But Levine’s bill faces the politically powerful wholesale industry. While not as well-known as some lobbying groups, alcohol wholesalers carry great sway in the legislative rooms of Sacramento with their high-powered lobbyists and political donations.

“It will be very interesting to see how the wholesalers react,” said Tom Wark, a wine industry communications consultant who has battled against distributors. “These wholesalers make political arguments that are as disingenuous as they come.”

Their money, however, has helped create support in the political arena. From 2010 to 2014, the alcohol beverage industry provided $3.9 million in donations to California political parties and politicians running for the state Legislature, according to the National Institute of Money In State Politics. The three biggest givers during that time frame were distributors: the California Beer and Beverage Distributors, a trade group, provided $1.4 million; Southern Wine and Spirits gave $1 million; and Tustin-based Young’s Market Co. spent $738,000.

Wholesale industry officials did not comment for this story prior to deadline, despite repeated attempts.

Not an attack on three-tier system

In an interview, Levine stressed that his bill was not an attack on the three-tier system - the vertical supply chain of independent producers, distributors and retailers - that states developed in the aftermath of the 21st Amendment in an effort to crack down on the abuses of the early 20th century.

He contends his bill is a minor tweak to the law, one that makes little sense to oppose in light of the growing popularity of the farm-to-table food movement and the economic strength of the craft beer movement.

“The three-tier system works effectively, but my legislation ensures that it is not so rigid that it could break or be attacked,” said Levine, who has so far received $17,122 from the alcohol industry in political contributions, including $7,500 from wholesalers.

The industry has not taken a public stance on the bill. Beer, wine and spirits wholesalers essentially contend the system that transported $189 billion in products in 2011 is not broken, so it doesn’t need to be revamped. Furthermore, they argue that excessive tampering could revert back to monopolies and corrupt sales techniques that plagued the country before Prohibition. Instead, they proclaim they’re the honest broker because they serve both producers and retailers, driving competition and consumer choice.

The wholesalers’ argument has gotten much tougher in the era of the sharing economy, where disruptive technologies have transformed industries from taxis to music to newspapers. In addition, consumers have gotten much more savvy over how much a bottle of wine costs through websites such as wine-searcher.com and where to learn about different craft beers at sites such as BeerAdvocate and RateBeer. One new smartphone app, Drizly, allows home delivery of booze from a retailer in selected cities; the company notes it is not part of the three-tier system, though it is “bringing value to each tier.”

Argument comes down to money

Like many arguments, it comes down to money and who gets to keep it. Amelia Morán Ceja, president of Ceja Vineyards, offered a back-of-the-envelope example. A wine she would retail for $40 would be sold for $20 to her wholesaler, which would incur the cost for licensing and shipping charges. Ceja said the distributor would mark up the bottle anywhere in the range from 25 to 50 percent.

Under this example, the distributor will sell it for around $37 to retailers and restaurants. Wine shops will typically look at 30 percent markup and with taxes could sell at $55, while restaurants may jack it up three times their purchase price to $100 a bottle.

Wineries can ship directly to consumers in 43 states, according to the Wine Institute. And while most states allow wineries and breweries to self-distribute, many barriers are still in place so they cannot operate like an Amazon.com for their retailers and restaurants.

“Anyone can make wine,” Ceja notes. “It’s not hard to make wine. It’s hard to sell wine.”

The issue has been more crucial given the rapid consolidation within the wholesale industry despite the increase of wine, beer and spirits producers during the craft boom. In 1995, there were 1,800 wineries and 3,000 distributors in the United States, according to a survey by Destination Analysts Inc. By 2008, there were more than 5,000 wineries, but little more than 700 distributors. The top 10, dominated by companies such as Southern Wine and Young’s, had 58 percent of sales.

The industry consolidation has had other effects, most notably forcing smaller wineries to bring customers into their tasting rooms because they find it hard to attract wholesalers. Instead, they must rely on direct sales to customers though their wine clubs and the Internet, said Michael Mondavi, whose family is synonymous with Napa wines and who personally owns two vineyards in the county.

“Today, most of the smaller wineries cannot survive selling exclusively through wholesalers,” Mondavi said during a March 10 Napa County forum on winery regulations. “Our wholesaler in California has 120,000 (items). We offer them about 20.”

Still, some have been able to break through without initial support of a wholesaler. St. Florian Brewery in Windsor, for example, grew rapidly during the craft beer boom, said co-owner Amy Levin. It has reached the point where it is unfeasible to continue to self-distribute, given its production is now up to 2,000 barrels annually.

“It started getting out of control,” Levin said. “I couldn’t even make sales calls.” In July, her company signed on with Morris Distributing in Petaluma, which makes running her business easier.

In fact, even liberalization proponents note that wholesalers play a vital role given their expertise and the fact the cargo cannot be easily delivered - such as, for example, by an Uber-like startup - given the weight of the products: boxes of wine, beer or spirits in heavy glass bottles. Wholesalers are not going away, even if most of the three-tier laws are wiped out.

“We love those guys,” said Hanson of his distributor, Young’s. “We are not trying to undercut them.” He noted as his brand grows, so will the amount of work for his distribution network.

The battle essentially is over the scope and pace of change that is occurring in the three-tier system, especially as some wineries and breweries already have distribution components. For example, Bill Foley, owner of Foley Family Wines, took a majority stake in Epic Wines in 2013 to help give him more control over where his wines are sold.

Important test for spirits industry

The Levine bill will be an important test as the spirits industry has been more heavily regulated and taxed than their brethren in the wine and beer business, a result of the potency of the drink. It also is the most profitable for wholesalers, analysts say, especially because their shelf life is much longer and they do not have to move the liquor items more quickly than other products.

But change is occurring despite attempts by wholesalers to beat it back, most notably in Kentucky, where distributors have pushed a bill in the state Legislature that would force Anheuser-Busch InBev to divest out of its two distributors in the state.

Hinman, the beverage law attorney, recently gave a presentation to the National Alcohol Beverage Control Association that noted while wholesalers are more profitable than they have ever been, their business is changing quickly.

Their biggest threat is the rapid growth of private and custom labels that suppliers make for retailers such as Costco and Trader Joe’s. That business will cut into their margins and control by making wholesalers into essentially a courier service, as opposed to their expanded roles in marketing, sales and other services.

But Hinman said wholesalers are adjusting by putting more resources into product integrity, reporting and account servicing.

“The three-tier system is evolving,” he said. “We’re in the middle of this (now).”

News researcher Janet Balicki contributed to this article. You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.