Susan C. Cagann
1The debate over state power to regulate interstate shipment of wine reached the Supreme Court in 2004 in the form of Granholm v. Heald. State regulators, con- sumers, wineries, wholesalers, and many pundits entered the fray and debated a state’s right to limit access to the direct to consumer trade channel to in-state
Contents
Creation of Control and License Distribution Systems ... 60 Federal Regulatory Framework ... 60 State Regulatory Framework ...61 Control States ...62 License States ...63 Trade Practice Regulation ... 64 The Middle Tier and Franchise Protection ...67 Direct to Consumer Sales and Other Pressures on the System ...70 Conclusion ...72 References ...73
businesses. Stories appeared monthly in major U.S. newspapers. Law review articles digested the history of beverage alcohol law. Those who view wine as a commodity such as cheese or shrimp sharpened their wits against regulators and wholesalers raising America’s pre-Prohibition history with liquor as a shield. Extremists on both ends of the spectrum predicted the demise of the three-tier system separating the manufacture, distribution, and retail tiers. In the end, the Supreme Court nodded to state power to structure a distribution system, but tempered that power, breath- ing vigor into the battle to modernize federal and state control of alcohol sales.
To absorb the import of the recent decision and what it portends for the cur- rent systems of alcohol distribution, this chapter examines the current alcohol2 market, its stakeholders, and the evolution of its regulation since repeal of Prohibi- tion in 1933. Alcohol has been treated differently than other consumer products throughout the last century. It is the only consumer product that is the subject of two constitutional amendments. Alcohol’s manufacture, marketing, distribution, and sale are regulated like no other beverage or food. The confounding question is whether current regulatory constraints efficiently accomplish their goals in today’s global, consolidating market.
Alcohol is a popular, profit-generating product.3 This is a constant since our nation’s founders arrived with casks of liquor and planted vineyards in Virginia.
Today, retail sales of alcohol are a $155 billion industry.4 In 2004, the volume of wine sales climbed to a record 278,000,000 cases—an expansion of 105 million cases since 1991.5 As of 2002, wine contributed $45 billion to California’s economy adding 207,550 full-time jobs and 14.8 million visitors to its wineries.6 The United States is home to more than 1,800 brewers, 60 distilleries, and 3,000 wineries.7 United States imports exceed $3 billion in distilled spirits, and $2 billion each in beer and wine.8 Americans consume on average 21.6 gallons of beer, 1.3 gallons of distilled spirits, and 2.2 gallons of wine per capita.9
The players in today’s market differ greatly from their counterparts before, dur- ing, and just after repeal of Prohibition. Global spirits companies report annual revenues in the billions.10 Global retail chains have thousands of stores worldwide.11 Restaurant and hotel chains hold hundreds of on-premise licenses throughout the country. Wholesalers do business in dozens of states. As of 2004, the ten largest wholesalers had a 67.9 percent share of the U.S. market and cumulative sales rev- enue of $21.7 billion.12
Governments, as well as the private sector, profit from alcohol sales. Alcohol taxes are a steady source of funding for federal and state coffers. The Federal gov- ernment collected $6.8 billion in federal excise tax for beer, wine, and distilled spir- its in 2003.13 Annual revenues from alcohol trade reported for 27 states exceeded
$2.1 billion in 2004.14 Texas led the pack with revenues from alcoholic beverage taxes of $600 million for fiscal 2004.15 In California, revenues from beer, wine, and distilled spirits excise tax exceeded $300 million for fiscal year 2003–2004.16 New York and Illinois reported revenues from alcohol as $140 million and $190 million, respectively.17
Contents Under Pressure n 59
Although the market has changed considerably since 1933, most state regula- tions have not.
Prohibition’s legacy is a fractionalized beverage alcohol market keenly stressed by today’s global economy. The evils of “tied houses,” bootlegging, and criminal domination of the market motivated lawmakers to constrain the marketing and sale of alcohol. Pre-Prohibition excess is legend. Suppliers dominated saloons—creating the tied house. Tied houses would sell beer or ale and offer a free lunch to attract customers. Tied houses were the font of excessive consumption and gave birth to the phrase, “there is no such thing as a free lunch.” Retailers were weak, single-store businesses. Booze was cheap and easily obtained. Pre-Prohibition annual consump- tion of distilled spirits was as high as 7.5 gallons per capita as compared with 1.36 gallons in recent years.18 In as early as 1810, there were more than 14,000 distillers in the United States with an estimated production of 33,000,000 gallons.19 Abuses by manufacturers and excessive consumption fueled temperance activism and led to the passage of the 18th amendment prohibiting almost all legitimate trade in alcohol in the United States.
Prohibition failed. Prohibition did not render America dry; rather, illegitimate enterprises dominated by organized crime flourished. Bootleggers and gangsters took over liquor trafficking.20 Large numbers of Americans defied the laws. In 1932, John D. Rockefeller, Jr. wrote to proponents of a plank in the Republican National party platform:
When the Eighteenth Amendment was passed I earnestly hoped … that it would be generally supported by public opinion and thus the day be hastened when the value to society of men with minds and bodies free from the undermining effects of alcohol would be generally realized.
That this has not been the result but rather that drinking has generally increased; that the speakeasy has replaced the salon … that a vast army of lawbreakers has been recruited and financed on a colossal scale; that many of our best citizens … have openly and unabashed disregarded the Eighteenth Amendment; that as an inevitable result respect for all law has been greatly lessened; that crime has increased to an unprec- edented degree—I have slowly and reluctantly come to believe. … In my judgment it will be so difficult for our people as a whole to agree in advance on what the substitute should be, and so unlikely that any one method will fit the entire nation, that repeal will be far less pos- sible if coupled with an alternative measure. For that reason I the more strongly approve the simple, clear cut proposition you are proposing to recommend and which I shall count it not only a duty but a privilege to support. …21
With the passage of the 21st Amendment repealing prohibition and prohibiting the transportation in, or importation of, intoxicating beverages to any state in viola- tion of its laws, America warily opened the spigot on re-legitimizing the alcoholic beverage trade. Since Repeal, states developed trade zones, sanctioned monopolies, and anticompetitive practices, and created unique and disjointed market systems for alcohol sales.
Consumers in Massachusetts, Pennsylvania, and California each uniquely experience the impact of the market system in their own state when purchasing a bottle of wine. A California consumer buys wine from a local retailer. The retailer may be owned by the winery. The wine may have been sold directly from the winery to the retailer or the winery may have sold the wine to a wholesaler who sold it to the retailer. The Pennsylvania consumer visits a state-operated store to purchase a bottle. The wine was sold by the winery to the Pennsylvania government by a broker the winery is required to use as a middle tier. The Massachusetts consumer buys wine from a retailer—not a chain retailer. (In Massachusetts, a retailer cannot hold more than three retail licenses.) The winery must sell the wine to a local wholesaler.
The wholesaler then sells the wine to the retailer. Only the California consumer has the option to purchase the wine directly from a California winery. To understand the rhyme and reason behind these different consumer experiences, we must exam- ine how the sale and marketing of alcohol has been controlled since Repeal.