On June 26th, the U.S. Supreme Court upheld the decision by two lower courts by a vote of 7-2 that imposing residency requirements and discriminating against out-of-state retailers shipping wine into the state is unconstitutional if they are allowing retailers in state to ship directly to the consumer.
“Tennessee’s 2-year residency requirement cannot be sustained. The provision expressly discriminates against nonresidents and has at best a highly attenuated relationship to public health or safety,” wrote Justice Samuel Alioto. Furthermore, this ruling provides absolute clarity that retailers should have been included in scope with regards to the 2005 case of Granholm v. Heald ruled that states could not discriminate against out-of-state wineries from shipping in state when they allowed wineries in their own state to ship directly to consumers.
Immediate Impact to Small Producers
Very little will change immediately from a winery operations perspective as state legislatures will need to update their laws to be in line with the Supreme Court ruling. This will require lawmakers to push ahead and change current laws on the books. In some cases, this might come from civil suits as legal entities challenge these laws. This will take approximately 3 to 5 years as the slow wheels of justice begin to turn and special interest groups forge ahead to push for change.
One immediate challenge for smaller producers, who have less of an online presence, “They will now face a much bigger body of competitors for the wine shipping dollars. Internet based retailers have computer and e-marketing savvy that many small brick and mortar wineries have never developed,” said Liz Holtzclaw, principal at Holtzclaw Compliance.
Long-term (3-5 yr) Impact to Small Producers
As state laws get rewritten, and further deregulation occurs, wineries may see faster turnover. “As more retailers sell over the internet and ship and as more states open for them it’s entirely possible that the small and medium sized wineries that dabble in the wholesale channel will see their wines move faster if they are represented at the small, independent fine wine retailers,” said Tom Wark, executive director at the National Association of Wine Retailers.
Another potential benefit may be a reduction in costs for wineries. “…Very small producers now will have the ability to work with an on-line retailer to carry their products, reducing the high cost of obtaining and maintaining their own DTC licenses,” noted Holtzclaw.
The Amazon Effect
Amazon could leverage its Whole Foods acquisition to emulate what wine.com is doing and retrieve customers wine order options online based on the state the consumer resides in by utilizing the Wholesaler in that state to determine purchase options.
Once Amazon starts running the numbers and assesses the wine distribution channel profit potential, they could disrupt the three-tier system as we know it today and leverage centralized warehouses across the country and state of the art logistics infrastructure to allow consumers to transact in more of a real time manner while lowering transportation costs. Essentially, allowing wineries to outsource large aspects of the inventory and distribution components of the business while bypassing the distributors to create more of a two-tier dynamic.
That being said, “Amazon will have to wait until states change their laws and create permits for retailers that are out of state,” said Wark. Amazon is a good example given where they are in the market, but many other retailers could step in and meet this need as well.
Only time will tell and the wine industry usually innovates slower than anticipated. Long-term, this decision should help in making wine more accessible to the consumer, but contrast that with a shrinking forecasted consumer base. I’m cautiously optimistic.