SECOND INTERNATIONAL HARVARD CONFERENCE ON INTERNET & SOCIETY  may 26-29, 1998

Showdown at the Willard by Patrick Campbell This is an abbreviated version of an article that first appeared in "Wine Trader," Nov. 5, 1995 Groups wishing to reconcile differences might seek venues other than the Willard Hotel. In 1861, delegates from 34 northern and southern states met at the venerable Washington, D.C. hotel to avert war. On September 30, 1997, wine industry factions gathered to avert a similar and, though on a smaller scale, equally destructive war. Both groups no doubt entered the room with guarded optimism, if only because the possibility of failure was so daunting. And both groups succeeded, if such can be called success, in laying out unequivocally opposed positions that would result in an internecine, unnecessary war. Many of the 1997 sentiments could have come right out of the 1861 meeting. Proponents of the leave-the-three-tier-distribution-as-it-is position, like the slave owners of old, saw no need for change: If it was good enough for my Grandpappy, it's good enough for me. Even a familiar paternalism was invoked: Without us big wholesalers around all those little Mom and Pop retailers would fall on hard times; we'll welcome any small winery without representation into our portfolio; any consumer who wants any wine need only ask us; the three-tier distribution system (3TDS) shields the youth of America from mail-order mayhem; and finally, absent us, who would collect wine taxes? And so on. After the Civil War, a divided nation reconciled. And after the dust has cleared, the wine industry will reunite too, stronger and more efficient. Unlike the Civil War, however, the wine industry's battle was not inevitable: a compromise on direct shipping was both in everyone's best interests and fundamentally so simple to achieve. Going into the meeting at the Willard, the proponents of compromise had reason to believe the wholesalers and their supporters would agree to some form of limited, direct shipper model legislation. After all, the meeting was a follow-up to an August 4 meeting in which the participants—including wholesalers—had pledged to explore alternatives to the 3TDS and which had been held under the joint auspices of the American Vintners Association and the Wines and Spirits Wholesalers Association. Perhaps the wholesalers had been hardened between the two meetings. The national press had been busy exposing, in one editorial after another, the wholesalers' anti-shipper registration position as protectionist and monopolistic. Surely, they wrote, the wholesalers would not—could not—continue to hide behind 65 years of antediluvian legislation in the age of the Internet, mail-order sales, and consumer demand for the goods they want. Or maybe the wholesalers' leadership had just gotten out ahead of the rank and file, who saw any change as a slippery slope to an open market and had been admonished to hold to the status quo at any cost. Which is exactly what they did. Here's what happened: Some 35 industry members gathered to state their cases. An attorney representing the state liquor control administrators began. [In order to protect the confidentiality of the proceedings, no names or actual affiliations will be mentioned]. While his clients had no position per se on direct shipping, they were concerned that if model legislation were enacted, applicable taxes must be collected and paid and that an effective penalty provision for offenders must be established. His observations that his clients merely administer, not make, laws and that state felony statutes are born out of jurisdiction frustration, were underscored in a subsequent editorial in the Wall Street Journal in which he termed direct shippers "bootleggers." Translation: proponents of direct shipping should expect no support from state liquor administrators, who benefit from a status quo that works for them. Two retailer trade association executives followed. National direct shipper registration will be opposed by their members - all change must be instituted on a state-by-state basis. All mail order, if any, must pass through both the wholesale and retail tiers and only wine not otherwise available in the state would be eligible. They then uttered what would become the mantra of the meeting: "Don't chip away at the 3TDS with new laws." If customers want limited wines, they can order them through us. The status quo protects retailers. The retail trade associations clearly did not speak for all retailers. Two retailer camps emerged within the pro-direct shipping forces. Specialist retailers who had built their business shipping connoisseurs rare and unusual wines joined with their latter-day brothers, the Internet retailers, to demand direct access to their consumer customers. Why, they implied, should wholesalers and retailers in the customer's state profit from a sale that was none of their doing? Representatives of multi-state retail chains echoed a similar sentiment, though for profoundly different reasons: reasons that may well be the wholesalers' ultimate nightmare. Where specialist and Internet retailers want to ship necessarily limited goods direct to the customer, multi-state chains would like to purchase truckloads of wine direct from the producer, thereby bypassing the wholesaler. Wholesalers revealed their cards early: direct sales are a "matter of who sells the wine and who takes all the profit." Plain and simple, wholesalers felt that shippers (whether producers, retailers, or other wholesalers) cutting them out of the sales loop and ending up with maximum profit would not "be fair." Lack of state legal jurisdiction over rogue shippers who FLAUNT THE LAW clearly concerned the wholesalers AS WELL. Absent jurisdiction, they noted, direct shipper registration was a non-starter. This issue segued into what was to become their sole and oft-repeated concession: let's improve the wholesaler system with Internet and technology upgrades, so we can use the 3TDS to get the consumer any wine they want on a special-order basis. Surely, they pleaded, if a technical and legal committee were established, it could work out such a system of distribution and maintain the 3TDS basically as it had been for decades. In other words, thought the shippers to themselves, take the "direct" out of the "shipping." The shippers did not share the wholesalers' enthusiasm for study groups. They had struggled through enough tortuous producer-to-consumer-via-wholesaler-then-retailer concepts to be jaundiced about their viability and suspicious of the wholesalers' motives. Instead, the shippers held fast to the model direct shipper registration concept, which had been discussed for years in industry forums and had provided the framework for the recently enacted Louisiana bill, H.1754. Direct shipper registration, they pointed out, meets all the publicly stated objections of the wholesalers: no shipments to underage recipients or to dry counties; collection of taxes is assured; compliance is encouraged and violations punished. Furthermore, shipment amounts per customer could be limited. Although the 3TDS is the most efficient method of distribution for the majority of wines, it is increasingly unresponsive to the special needs of producers, consumers, and even of many retailers. Distributorship consolidation, ever more wineries vying for distributors' attention, lack of access to the market for hundreds of wineries, the decline of small retailers, the Internet and other direct-sales mechanisms, increasing consumer demand for wines unavailable locally—these market force factors have combined to undermine the wholesalers' monopoly over distribution, now and forever. It is the intent of direct shipper registration, the producers stressed, to augment, not supplant, the 3TDS. In fact, they noted, by providing the consumer with a simple and legal method of receiving the wines they want, direct shipper registration would function as a "safety valve" by accommodating that small percentage of wine which isn't well served by the six-decades-old system. The 3TDS would then be free to concentrate on those customers who it best serves, which is to say, not the small, the specialist, and the otherwise disenfranchised. The wholesalers were not convinced. Challenged by the producers and several retailers to adapt to a new world order, they eventually closed ranks and swore to resist fundamental change. The proponents of direct shipper registration were equally adamant: change was not merely inevitable, it was already here, and the clock was not about to be turned back by appeals to the good old days and threats of further felony laws. Faced with an impasse, participants agreed that four parallel and simultaneous roads will be taken: direct shipments will continue, producers will push for direct shipper registration legislation state-by-state, wholesalers will establish a technical and legal committee to eliminate legal impediments to a Cellarmasters-type solution, and further court challenges (again, on a state-to-state basis) to the Twenty-first Amendment will be pursued. Legislation, court challenges, and perhaps even wholesaler ingenuity will foment change. Ultimately though, as in all things, market forces will eventually prevail, because, as a prominent Internet merchant in attendance drolly observed, consumer desire butting up against antiquated law results in end-runs around the status quo. In the meantime, wine industry cooperation is at an all-time high, with agendas and strategies fully in synch. Combined with consumer cheerleading, press approval, legal sympathy, legislative attention, and at least tacit support from more forward-thinking members of the wholesale and retail community, industry unity will prove to be a formidable force. While a battle was not averted at the Willard, cooler heads hope a war will not follow. Patrick Campbell established Laurel Glen Winery in Glen Ellen, Sonoma County in 1981. A true innovator in the wine industry, Campbell spends several months each year in Latin America, producing a high quality, inexpensive Cabernet Sauvignon for sale in the U.S. He earned his B.A. in English Literature from Pomona College in California and his M.A. in Philiosophy of Religion from Harvard. Upon graduating, Campbell moved to Sonoma and worked as a vineyard manager by day and as a violist in a Bay Area symphony orchestra by night. He has served as president of Family Winemakers of California and a member of the Executive Board of the American Vintners Association. This reference was contributed by Jerry Brentar on behalf of Peter Granoff, Wine Expert and Co-Founder, Virtual Vineyards.