Special Delivery

The most profitable way to sell wine is directly to the consumer. However, for many years, it’s been illegal to ship wine to numerous states. “Alcohol is probably the most regulated industry in America,” says Tom Wark, president of Wark Communications and executive director of the Specialty Wine Retailers Association.

Before Prohibition, state governments had primary control over the sale and distribution of alcohol, but during Prohibition, the federal government completely took control of the industry. The 21st Amendment, which ended Prohibition, returned much of the control back to the states, which has led to 50 disparate sets of rules. “There’s no question that state control of alcohol regulations is one key reason that wineries and retailers seeking to sell wine across state borders face such a convoluted and diverse set of regulations,” says Wark.

Typically, wineries distribute their product through a “three-tier” system. Here’s how it works: A winery sells wine to a wholesaler in a different state, the wholesaler will then sell that wine to retailers or restaurants, which will ultimately sell it to consumers. Wineries set a Freight on Board (FOB) price for sales to wholesalers. Wholesalers mark that price up when they sell to retailers and restaurants, which mark the price up when they sell to consumers. Generally, the price at which a winery will sell a bottle of wine to a wholesaler is approximately half the price it would sell that bottle to a consumer in its tasting room.

The main problem with this three-tier system is that the wholesaler decides what brands it will represent and all the wholesalers in a given state can’t possibly represent all the brands that want distribution (thereby limiting access for wineries and choice for consumers). “The power of the tier is enormous,” says Wark. And when you add middlemen such as wholesalers and retailers, the profit margins for wineries shrink as each takes its share of the profit off the top. This system can be particularly devastating to smaller wineries because, more often than not, wholesalers don’t want to do business with them. According to Wark, wholesalers prefer to work with larger wineries that can provide a steady stream of familiar products.

“There’s no other industry where the law dictates how a product gets to market and, for years, this was the traditional path,” says Wark. Over the years, however, America’s interest in wine changed and direct-to-consumer sales eventually came to be driven by tourism.

Changes in the wine industry

How did the wine industry change? First, there was the famous 1976 Judgment of Paris wine tasting, a wine competition in which French judges conducted blind-tasting comparisons of top-quality Chardonnays and of red wine (Bordeaux from France and Cabernet Sauvignon from California). A California wine was rated best in both categories, which caught the French (as well as the rest of the world) by surprise, since France was, at the time, considered the foremost producer of wine.

“In one fell swoop, California wines were endorsed by the French, and that led to a significant increase and interest in American wines, which, in turn, led to an increase in purchases,” says Wark.

A second turning point came in 1991, when “60 Minutes” aired a segment describing the French paradox, in which French people suffer a relatively low incidence of coronary heart disease despite having a diet rich in saturated fats. The general speculation was that red wine decreased the risk of cardiac diseases. After the show aired, the consumption of red wine in the United States increased by 44 percent. “The message to consumers was that wine is healthy,” Wark explains.

Over the years, Americans seemed interested in drinking more and more vino, either for health reasons or because it was in vogue to drink California wines. “Then the baby boomers came into their peak earning years,” says Wark, “and they’re critical to the wine industry, because they’re buying more wine—and they’re buying expensive wine.”

“Ultimately, it was tourism that drove direct-to-consumer sales,” adds Jeremy Benson, executive director of Free the Grapes!, an organization dedicated to advocating for the reform of wine shipment laws.

As America’s taste for wine increased, so did the number of wine producers. Today, there are more than 8,300 wineries in the United States, according to The Wine Institute, a public policy group based in San Francisco representing California wineries. However, while the number of wineries in all 50 states continues to grow, the number of wholesalers has decreased significantly in the past several decades. And as consumers have learned more and more about wine, they’ve driven the market to change and demand wineries ship directly to them.

In 1997, a Model Direct Shipping Bill adopted by the National Conference of State Legislatures’ Task Force on the Wine Industry was instrumental in providing states with proven guidelines to change their laws and open their borders. This model bill (proposed by Family Winemakers of California, Coalition for Free Trade, The Wine Institute and WineAmerica) outlined basic guidelines for wine shipments to consumers. For example, a winery can ship up to 24 cases of wine annually directly to a consumer who is at least 21 years of age. However, an application must be filed with the Department of Alcoholic Beverage Control (ABC), a $100 registration fee must be paid, and the winery must provide a copy of its current alcoholic beverage license to the Department of ABC.

“The model bill was a catalyst for direct-to-consumer sales. It represented a solution when there wasn’t one before,” says Benson.

“This was a turning point in the wine industry. States started opening their borders to direct-to-consumer shipments,” says Jeff Carroll, vice president of compliance and strategy for ShipCompliant in Colorado. “This helped wineries establish a brand connection with customers. It helped them demonstrate a demand, which, in turn, eventually helps get their wine in restaurants and retail shops. Until you can prove demand, it’s really difficult to find a wholesaler.”

“When we started in 1998, there were 17 states that let out-of-state wineries ship directly to consumers; today, there are 39 states,” says Benson.

Granholm v. Heald

In a landmark case in 2005⎯known as Granholm v. Heald⎯the U.S. Supreme Court ruled that states had the right, under the 21st Amendment, to regulate interstate shipments, including direct-to-consumer sales by out-of-state wineries and retailers. The Supreme Court also held that the Dormant Commerce Clause of the U.S. Constitution also applied and that, if in-state wineries could ship directly to consumers, then so could out-of-state wineries.

The effect of Granholm v. Heald was most sharply felt in increases of Internet wine sales by domestic wineries. However, the decision unintentionally created a minefield for shipping directly to consumers across the nation, because every state has its own set of regulations, its own schedule of permitting fees and its own reporting requirements. And even once a winery penetrates a state, individual counties have their own sales tax rates and remittance schemes. Any and all of these statutory responsibilities can change—and if you make a mistake, you can be fined and lose your license.

The direct-to-consumer sales challenge

“The amount of money that states make from alcohol tax is enormous,” adds Wark. “A state budget could be partially dismantled if it lost these monies. But the regulatory burden placed on wineries to ship direct is significant in terms of time and expense.”

That’s because, unfortunately, a proliferation of rules in each state makes it challenging to ship wine directly to consumers. Every state has separate licensing conditions, including forms to complete and renewal times. Wineries must comply with all policies to make sure they can legally trade across state boundaries.

A winery that currently ships to all 39 states where it’s legal, for example, must complete more than 700 reports per year, says Carroll. That includes reports outlining sales, excise, mark up and use taxes, direct-shipping accounts and more to every state’s individual ABC and its department of revenue. Every state’s forms are different and can be required monthly, quarterly or annually; some states may have up to 12 variations of the same report.

“Wineries that are understandably angry about the complexity of the various state laws often don’t know that there are solutions,” says Benson. “But we’re in a place now where wineries have options, and consumers have a lot more choices today than they did a decade ago.”

“Complying with all the regulations is just onerous,” says Wark. “What if you miss a deadline for a tax payment? What if you don’t fill out the form accurately? The consequence is you lose your license to ship wine to those consumers.”

Making wine compliance easier

So what’s a winery to do? There are four choices. One, hire someone to keep track of all the rules and regulations. Two, hire a compliance company to handle it, such as Divine Wine Compliance in St. Helena. Three, use an automated compliance software to handle shipping validation and reporting to make sure you’re complying with each state’s laws, preferably integrated with software that handles wine clubs, inventory management, tasting room sales and so forth. Or four, implement some combination of these measures, which seems to be a popular choice.

“We’ve gone to seminars and, every year, we get a huge notebook with all the new state regulations,” says Jo Ann Truchard, co-owner of Truchard Vineyards in Napa. “It took so much work, and for an individual winery to keep track of each state’s regulations is cumbersome.” As a result, Truchard Vineyards uses a consultant to help renew its licenses in each state to which it ships, while a software program handles the rest.

Six88 Solutions, Inc. was founded in Boulder, Colo., in 2000; its ShipCompliant product, launched in January 2006, offers a software program that facilitates winery transactions to ensure every shipment is compliant with each state’s laws. Here’s how it works: ShipCompliant is an online database, which has about 6,000 rules in it and a staff of employees to support it. In the simplest application, wineries (or the compliance service consultant they work with) can generate data files on their shipments and run them against the ShipCompliant database for validation and reporting. In more advanced implementations (which account for more than 70 percent of all transactions), ShipCompliant code is embedded in systems that capture data, such as point-of-sale (POS) systems or wine club software, and then connects via web services technology so that the program can validate or flag a transaction before it’s shipped. ShipCompliant also automatically generates all 700 reports that must be filed for each winery.

“We stay on top of the rules, which change frequently, we automatically update our database, and our software handles it all completely and elegantly,” says Carroll. ShipCompliant has 1,800 wineries that subscribe to its service. Last year, the company processed just under 4 million wine shipments.

Many wineries are finding that using a software program is the best way to go. “It took so much work, and ShipCompliant took all the work away,” says Truchard, who oversees 285 acres in the Carneros AVA. “Our shipping person puts the order in the computer and ShipCompliant does everything else. It revolutionized shipping wine to our consumers—and it also handles wine club shipments.”

For Truchard Vineyards, direct-to-consumer shipping is the lifeblood of the business. “We’re a small winery. We produce about 15,000 cases of wine per year and have visitors by appointment only. So for us, shipping direct is huge.”

Dutcher Crossing Winery in Dry Creek Valley produces 8,000 cases of wine per year. “Our compliance is dealt with by two staff members, working with a compliance company, and by ShipCompliant,” says proprietor Debra Mathy. “We work hard to make sure we get it right by checking and double checking. ShipCompliant makes it much simpler to understand now.”

Iron Horse Vineyards, a small, family-owned estate based in Sonoma County, also uses ShipCompliant and has an employee on staff to help steer direct-to-consumer shipments. “It was a totally different world before using this [software service],” says winery co-owner Joy Sterling. “Our big change came in 2008,” she says. “Direct-to-consumer sales increased significantly and the exciting thing is, it continues to grow.”

The future of wine compliance

Direct-to-consumer sales have increased across the board in the wine industry over the last 15 years, but the most dramatic increase has been experienced in the last eight years. “There are several reasons for that," says Benson. “One, the number of legal states has increased. Two, the number of wineries has increased. And three, consumers now expect the option of direct shipping.” According to Benson, no state has ever rescinded a direct-shipment law because of noncompliance.

In 2011, 211.9 million 9-liter cases of California wine were shipped via all sales channels in the United States market, according to a report from Gomberg, Fredrikson & Associates. The estimated retail value of that wine was $19.9 billion.

A report issued by ShipCompliant and Wines and Vines shows that from May 2011 to April 2012, the volume of direct-to-consumer shipments from wineries increased 8.2 percent over the previous period. The value of these direct-to-consumer shipments also went up 11.5 percent. California wines account for 90 percent of all wines shipped in the United States. The highest demand by consumers was for Cabernet Sauvignon, Pinot Noir and Chardonnay, which account for 58 percent of all shipments. Cabernet Sauvignon was by far the most expensive direct-to-consumer varietal. The average bottle shipped was $62.38, compared with the overall bottle price of $37.69. What’s more, 48 percent of all shipments went to three states: California, Texas and New York.

Today, 39 states allow direct-to-consumer shipments, and 89 percent of total U.S. wine consumption occurs in those states. The Wine Institute has worked with wine producers in states around the country to improve and streamline state-to-state regulations (WI is the voice for California wine, representing 1,000 wineries and affiliated businesses). Nevertheless, there are still a number of states that don’t let wineries ship directly to consumers. They include Alabama, Arkansas, Delaware, Kentucky, Massachusetts, Mississippi, Montana, Oklahoma, Pennsylvania, South Dakota and Utah. Free the Grapes! is committed to getting every state to open its borders to direct shipment. “It’s going to take years,” says Benson. (OK, Utah may take some real effort, but FtG! has high hopes for Massachusetts.)

What does the future hold as far as state regulations?

“We’ll see streamlining of more state-to-state rules that will ease winery compliance,” says Benson. “And we’ll continue to see some of the more onerous state regulations removed.”

Direct shipping offers a win-win situation for everyone. “It improves customer choices and it supports all tiers of the distribution system,” says Benson. “Direct shipping will ensure a diverse and financially healthy industry.”

Find Compliance Help

If you’re looking for help with wine shipping compliance and regulations, there are a number of companies that can help, both locally and farther afield. Here are some of your options:

LOCAL COMPANIES

Baril Compliance Service
Santa Rosa, California
(707) 578-7807
www.complianceservice.com

Compliance Connection
160 Wikiup Drive, Suite 206
Santa Rosa, CA 95403
(707) 284-2828
www.compliance-connect.com

DH Wine Compliance
5570 Skylane Blvd., Ste C
Santa Rosa, CA 95403
(707) 528-8500
www.dhwinecompliance.com

Divine Wine Compliance
1222 Money Way
St. Helena, CA 94574
(707) 963-9733
www.divinecompliance.com

La Vina Wine Re-Packing & Compliance
3430 Brickway Blvd.
Santa Rosa, CA 95403
(707) 480-3755
www.la-vina.com

Wine Compliance Alliance
P.O. Box 10649
Napa, CA 94581
(707) 320-8575
www.winecompliancealliance.com

Wine Industry Compliance Services LLC
P.O. Box 1842
Windsor, CA 95492
(866) 661-4190 or (707) 545-7593
www.wineindustrycompliance.com

OUT OF AREA COMPANIES

Compli Beverage Industry Compliance
8834 Morro Rd.
Atascadero, CA 93422
(877) 255-1440 or (805) 239-4502
www.compli-beverage.com

ShipCompliant
1877 Broadway, Suite 703
Boulder, CO 80302
(888) 449 5285
http://shipcompliant.com

Note: If you know a North Bay-based wine compliance company that’s not listed here, please let us know and we’ll add it to this list.