Letter from Washington

November 1, 2005 By Greg Kitsock

“Victory for Interstate Shippers,” proclaimed the Washington Post headline.

Judging from this and other reports in the mainstream press, you’d think that last spring’s Supreme Court ruling on direct shipping unleashed a deluge of alcohol across state borders.

Nothing could be further from the truth.

Although small wineries and their allies declared victory (“the best day for wine lovers since the invention of the corkscrew,” crowed attorney Clint Boleck), the High Court’s ruling could conceivably make it more difficult for small wineries and small breweries to get their product to market. In the long run it could mean less choice for you, the consumer.

Let’s recap

In a 5-4 decision, the Supreme Court largely left intact the 21st Amendment, which gives states the power to regulate alcohol however they see fit. But that power isn’t absolute. The states of Michigan and New York erred, the justices decided, in granting in-state wineries the right to mail their wares directly to customers, while denying this privilege to out-of-state wineries. States must regulate wineries “on even-handed terms,” wrote Justice Anthony Kennedy in the majority opinion.

As a result, Michigan, New York and about eight or nine other states with similar polices must “level up” or “level down,” in the words of Marc Sorini, legal counsel for the Brewers Association. They must extend the direct shipping privilege to all wineries or rescind it for in-state businesses. Whether they become stricter or more lenient may depend on who has the more powerful lobby, the small vintners or the wholesalers.

What does it mean for brewers? In the short run, it has very little effect. States must also adopt an evenhanded policy with regard to breweries, but, actually, there isn’t a great deal of beer being shipped through the mail … nor is there any great outcry on the part of brewers for this privilege. It’s a matter of economics. You can send a $50 bottle of Chardonnay through the mail profitably, but it’s much harder to justify shipping a $7.95 six-pack of IPA cross-country when the postage exceeds the cost of the beer. This is one reason why you don’t see many beer-of-the-month clubs anymore.

However, the ruling on direct shipping might have serious long-term consequences for small brewers.

Potential Impacts

The Supreme Court’s insistence on even-handedness could be applied to all facets of alcohol regulation. And many states grant small brewers within their borders the right to distribute their own beer, while forbidding out-of-state brewers from doing so.

Does this amount to illegal protectionism? If they lost the right to self-distribute, many smaller, start-up breweries would fold very quickly. It isn’t easy to find a wholesaler nowadays if you don’t have a beer with a proven track record. The number of wholesalers has plummeted from over 5,000 in 1972 to fewer than 2,000 active businesses away. And large breweries, Anheuser-Busch in particular, can exert enormous influence on their wholesalers not to carry rivals’ products. There are smaller wholesalers who specialize in domestic craft beer and exotic imports, but these are few and far between.

Larger craft breweries that self-distribute in backyard, like California’s Stone Brewing Co., could lose a very lucrative sideline.

The fallout from the Supreme Court decision might also affect brewpubs. What is a brewpub anyway? It’s a restaurant that possesses a license to brew its own beer and sell it directly to the customer. Almost all states (Montana is the only exception I can think of) grant this privilege to certain businesses in-state, while insisting that out-of-state brewers sell their beer through a wholesaler. Do we see a pattern of discrimination here?

Seeking Equal Treatment Under The Law

Already, trouble is brewing in the form of a lawsuit brought against the State of Washington by the big-box chain store Costco. Costco is seeking the right to eliminate the middleman and to buy beer directly from the manufacturer, which would enable it to pass on extra savings to the consumer. If Costco is successful, other chains, like Wal-Mart, might do the same. And they might seize on the issue of equal treatment under the law to further their ends.

To head off any more lawsuits, the wholesalers’ powerful lobby, the National Beer Wholesalers Associations, has urged the states not to “Swiss-cheese” the law by granting exemptions to the three-tier system.

Charlie Papazian, president of the Brewers Association (which represents the smaller craft brewers), likewise defends the three-tier system, but insists that “exceptions … are needed for small businesses.”

Let’s sum things up: the Supreme Court ruling probably generates more questions than answers. The controversy over direct shipping will continue, but the battlefield will shift from the federal courts to the states.

“It will be an interesting next few years for state legislatures,” concluded Sorini.