Ruling might keep state wine sales bottled up

May 25, 2005

By: James Fuller Daily Herald Staff Writer

The fruit of Rudolph Valentino DiTommaso’s labor might never pass the lips of wine lovers as close to home as Indiana.

DiTommaso runs his own wine label, Valentino Vineyards in Long Grove, with grapes first planted 10 years ago.

Countless wine aficionados have never known DiTommaso’s vintage, nor those of more than 50 other small wineries in Illinois. Those wineries can’t ship wine directly to customers in roughly half the nation’s states, where wine import bans shut them out of the market.

Florida’s law would slap DiTommaso with a felony if he mailed a bottle to his father, who lives there.

But Florida and other states must rethink those bans in the wake of a U.S. Supreme Court decision - a 5-4 ruling last week declaring interstate shipping bans unconstitutional in Michigan and New York.

Illinois wineries already have petitioned the federal courts to strike down Indiana’s direct shipping ban.

Their dream is for an open market that intoxicates their bottom lines. But states could just as easily dash those hopes into sour grapes by ending all direct shipping, closing the market even more.

At least one key concern for states is a fear that direct shipping of alcohol is yet another catalyst for underage drinking.

‘Low-level trade war’

States must treat in-state and out-of-state businesses the same, the court ruled.

“The current patchwork of laws - with some states banning direct shipments altogether, others doing so only for out-of-state wines and still others requiring reciprocity - is essentially the product of an ongoing, low-level trade war,” Justice Anthony Kennedy wrote in the prevailing opinion.

Only four states consume more wine than Illinois, according to the Illinois Grape Growers & Vintners Association. For local consumers, the ruling may open up the wine market across the country to a war where only the strongest grapes survive. Better quality wine at lower prices with more labels to choose from could be the outcome.

As many as 50 decisions must happen before that, as states must rewrite laws to reflect the court’s ruling.

Wine is a big-money business. Direct shipments of wine to consumers doubled from 1994 to 1999, according to the Federal Trade Commission. Direct shipping accounts for only 3 percent of all wine sales, but is worth $500 million a year.

The growth is not from the Beringers and Gallos of the world. It’s the little guys. There are more than 3,000 local wineries in the country now, three times the number 30 years ago, according to the National Association of American Wineries.

But wine wholesalers and distributors have consolidated, making it tough for wineries that don’t produce massive quantities of well-known products to make it to store shelves.

Prohibition-era roots

Distributors, who some small vineyards blame for squeezing them out, became part of the mix when Prohibition ended. States still wanted to regulate alcohol, so a three-tier system was born.

It injects a distributor between alcohol producers and retailers. That helped calm the retail pressure of selling as much alcohol as possible to maximize profits.

Local wineries say the system works only for the Robert Mondavis of the world.

For instance, Galena Cellars, which operates a store in Geneva, can’t pay distributors to ship their wine without charging an elite price.

Scott Lawlor, whose family owns Galena Cellars, said distributors and retailers each want such a large chunk of the pie that a $30 price tag would be the only way to turn a profit.

“In other words, I don’t make money in that circle,” he said.

A $30 bottle of wine is too pricey for most consumers, especially the burgeoning twentysomething market, he added.

Movies like the Oscar-winning “Sideways” and local wine shops are defusing the hoity-toity stigma, attracting younger customers, wineries say.

The Glunz Family Winery in Grayslake is benefiting from the youth movement, but not enough for distributors to carry their relatively few bottles of wine, General Manager Suzzie Glunz Holtgrieve said. Direct shipping is the best way to turn a profit for them. The difficulty is achieving visibility without a distributor.

“There must be a happy medium,” she said.

Illinois wineries must wait at least a little longer for that because the initial impact of the court’s ruling will be modest locally, Illinois Solicitor General Gary Feinerman said.

Illinois has agreements with several other states allowing direct shipments of wine to consumers. The state is an open market, even for other states that don’t allow Illinois to ship in.

The Supreme Court revoked the choice to discriminate, but set in motion a host of other choices, said Jeff Modisett, a commercial litigation expert who worked to end the direct-shipping bans.

State legislatures must open the floodgates to direct shipping, or ban it for everyone, Modisett said.

Word is Michigan may be one of the states to kill all direct shipping, Modisett said.

“That to me is like throwing the baby out with the bath water,” he said. “It’s not clear to me what they are trying to protect by doing that.”

The answer is money and underage drinking.

Money and minors

States with bans argue it’s harder to ensure an out-of-state winery pays taxes on the wine it ships in.

The second concern is an outcry from substance abuse groups.

“When there is increased availability, there’s more of a chance youth will get alcohol,” said Sara Moscato, associate director of the Illinois Alcoholism and Drug Dependence Association. “The majority of people with alcohol dependence started before 21. This is definitely not going to help.”

The counter argument says 16-year-olds won’t wait a week for a bottle of wine to come in the mail when they can get their older brother to buy beer at the local 7-Eleven. Just put a label on the package and require an adult’s signature.

That doesn’t always happen, Moscato said. She’s aware of at least two tests where minors obtained alcohol by mail because the package wasn’t labeled or the delivery person didn’t ask for an ID.

“Do we want or expect to have FedEx and UPS start being bouncers and checking IDs when they drop off packages?” Moscato said. “Their job is not to prevent underage drinking.”

The Supreme Court said the evidence doesn’t support Moscato’s concerns. Local wineries don’t buy into the drunken-youths argument either. They fear a negative impact on their livelihoods.

“Huge,” “big” and “incredible” are all words used by local grape gurus to describe what a truly open wine market would mean for them. Word-of-mouth and Internet advertising will trickle into other states potentially causing more sales in new markets.

Potentially.

“I was excited about the ruling for one day, but then I sat back and thought that our state could now pass a law that could really hurt us,” said Galena Cellar’s Lawlor. “The ruling could help us, but it may put us back in the dark ages.”

Indeed, lawmakers say the wine trade across the country, is “up for grabs” now.

The Illinois Senate hosted hearings on the issue, under the leadership of Sen. Ira Silverstein, to forecast the impact of the Supreme Court’s ruling. None of the parties that testified swayed Silverstein into thinking anything was wrong with Illinois’ current setup.

But Silverstein didn’t expect the court to rule anything unconstitutional.

His immediate concern is the potential of a lawsuit claiming Illinois’ special shipping arrangements with several states are unconstitutional.

Local winemakers fear distributors will either try to limit the amount of wine local wineries can ship, or close off all direct shipping in Illinois.

Fred Koehler, who owns Lynfred Winery in Roselle, said a total direct shipping ban or severe limits would be poison in his glass.

“It’d put us out of business,” Koehler said. “That’s how serious it is. Why does the state want to put up more challenges for businesses when we’re an industry that’s trying to grow? But that’s what we have to watch out for because distributors are trying to monopolize the industry.”

It’s a fine line between monopoly and protecting your business. Distributors will continue to fight for the supremacy of face-to-face sales.

DiTommaso makes many face-to-face sales at his winery. He also doesn’t have a problem with shipping wine with a label requiring an adult signature.

Until new laws are written, it’ll be business as usual for DiTommaso. He has his local regular customers. And he’ll still have tourists come in, fall in love with his wine and return home with a few precious bottles because they can’t order any more by mail.

But one day, DiTommaso said he believes that will all change.

“As time goes on, and more wine customers and wineries put the pressure on, more states will open up. This isn’t a done deal yet.”