Fourteen years ago in Granholm v Heald, the Supreme Court ruled that if a state allowed their own wineries to ship wine directly to their residents, they had to allow out of state wineries to do the same. This past June in Tennessee Wine vs. Thomas, SCOTUS ruled that the same principle of non-discrimination applies to retailers. If a state allows in-state retailers to ship to that state’s residents, they must allow out-of-state retailers to do so as well.

Neither ruling mandates that in-state shipments be allowed. States can outlaw them if they want but they must treat in-state and out-of-state retailers and wineries the same. Thus, states that are out of compliance face a choice—permit shipping for everyone or harm your own wineries, retailers, and consumers by outlawing shipping for everyone. As Tom Wark, who continues to do yeoman work promoting the interests of wine consumers and wineries,  wrote yesterday:

How this happens over the next several years will largely depend on who lawmakers in various states believe are their most important constituents. Should the changes in retailer DTC shipping laws address the concerns of wholesalers and retailers who fear competition from out-of-state sources? Or should lawmakers look to the interests of consumers? Depending on who’s interests are taken most seriously will determine how the discriminatory retailer DTC laws are changed to come into compliance with the Tennessee Wine decision and the U.S. Constitution.

In other words, in states where distributors have political power, their politicians may just go ahead and prohibit all direct-to-consumer shipping.

I want to emphasize Tom’s argument against this maneuver because I think it’s key to the whole debate. When Prohibition was repealed in 1933, the legal and regulatory framework that was put in place allowed states considerable leeway in regulating the sale and distribution of alcohol. The justification for these regulations was that states needed a way of encouraging the responsible use of alcohol. Health and safety was the justification then and it continues to be the reason given by distributors for wanting states to restrict out of state direct to consumer shipping. (Their real motivations are of course a different matter). Against this “health and safety” argument Tom writes:

Here is a serious rhetorical question. In a state where consumers are able open their door, greet a FedEx driver, sign for and receive a box of wine shipped from an out-of-state winery, an in-state winery and an in-state retailer, what concern for safety or health of the community justifies barring that consumer at the door from signing for a package of wine from an out-of-state retailer?

The answer of course is that there is no such concern. The issue isn’t and never was about health and safety—it was and still is about profit. Distributors lose money when wineries and retailers can ship directly to consumers cutting out the middle man. Tom’s rhetorical question nicely focuses the utter bankruptcy of arguments supporting three-tier.

It never ceases to amaze me how the thinnest of arguments can be used to justify naked self interest. It’s really quite shameless.

As the wine world waits for the Supreme Court to, hopefully, put another nail in the coffin of the 3 tier distribution system, wine retailers and small wineries will benefit from another development—LibDib (Liberation Distribution) and Republic National Distributing Company, the second largest alcohol distributer in the U.S., are teeming up to expand LibDib’s online distribution model to 22 additional states.

Here is why this is an important development.

In the three-tier distribution system, which was deliberately designed after prohibition to be an inefficient market , with the exception of purchases made directly from the winery, a consumer can buy wine only from a retailer or restaurant. And a restaurant or wine shop can buy only from a distributor. If a retailer wants to offer its customers a boutique wine and their distributor doesn’t carry it, they are out of luck. (California is an exception allowing wineries to sell directly to restaurants and other retailers). Because of industry consolidation, most wine is sold by large distributors who want to deal only with large producers. Because they can buy large quantities from a large producer they get better prices, have fewer shipping hassles because they deal with only a few companies, and by working only with large producers they don’t have to worry about running out of a particular wine.  If you’re a small winery these large distributors are simply not interested in promoting and selling your wines.

The result is that it’s impossible for retailers to get their hands on wines from small wineries who lack distribution.

LibDib (aka Liberation Distribution), a San Jose California company, was invented to solve this problem for retailers. It is an Internet distribution platform that levels the playing field for small producers by efficiently connecting producers with retailers and eliminating many of the pricing and marketing practices of the big distributors. Because it is a wholly online platform, LibDib doesn’t needs a large sales staff or warehouse space thus bringing down the cost of distribution. There is no minimum purchase and any winery regardless of size can have their product distributed through LibDib. The problem has been that, until this deal with Republic, LibDib operated only in California and New York.

By teaming with Republic, LibDib will have access to the 22 states in which Republic operates, and Republic benefits from the sophisticated web operation developed by LibDib.

As a practical matter, this means that if you’re a sommelier buying wine for a restaurant in, for instance, Colorado, and you taste a lovely Tempranillo on a visit to Texas, you can order it through LibDib if the winery has signed on to work with LibDib.

It is one of the greatest of ironies, that in a country so dedicated to “free markets”, when it comes to alcohol we let oligarchs supported by government policy dictate our choices.

There are lots of great wines being made by small producers all over the U.S. The problem is it’s hard to get your hands on them because of the three-tier distribution system. Happily, because of some innovative business models, we are beginning to get some work-arounds that will help get wines into the hands of consumers who want them.

If you’re reading this blog you probably have some idea about how 3-tier works. But here is a quick summary.When prohibition was repealed, the U.S. still had an interest in making alcohol hard to get, and they wanted to keep the mob out of the liquor business, so they purposefully designed an inefficient market, giving each state the ability to develop its own rules for distribution.

The three-tier system has three parts—the producers, who can sell their products only to a distributor, the second tier, who is the only entity that can sell to the third tier, retail stores and restaurants. With the exception of purchases made directly from the winery, a consumer can buy wine only from a retailer or restaurant. And a restaurant or wine shop can buy only from a distributor.Thus, in much of the country, ordering wine from an out of state winery is illegal and in every state ordering wine from an out-of-state retailer is illegal.

If you taste a wine in New Mexico on vacation and you want to buy it at home in Minnesota you can’t because the Minnesota distributor doesn’t carry it. That might be OK if their were lots of distributors in Minnesota who carry unique, boutique wines, but there aren’t. Because of industry consolidation most wine is sold by large distributors who want to deal only with large producers. Because they can buy large quantities from a large producer they get better prices, have fewer shipping hassles because they deal with only a few companies, and by working only with large producers they don’t have to worry about running out of a wine.

If you’re a small winery you can forget about getting a distributor. At best you can find only one of the increasingly rare small distributors but they lack the clout to get your wine on the shelf. If you’re a restaurant you basically have to buy from the same 20 or 30 wine companies everyone else is buying from. And because each state has different regulations governing the sale and shipping of wine across state lines, it is costly and time consuming for small wineries with limited staff to navigate these regulations. Only three states have reciprocal agreements that allow retailers to ship across the state lines without getting a separate license—Idaho, California, and New Mexico. Only 10 states allow retailers to even apply for a license to ship across state lines.

The system still exists because state law enforcement likes it,  the big distributors like it and they have lots of dollars to spend on lobbying, and the courts have ruled it is constitutional.

But two companies have come up with innovative solutions that are making it easier to get the wines you want.

VinoShipper, is an Internet platform that enables consumers access to wines from wineries who have entered into an agreement with VinoShipper. VinoShipper maintains their own shipping licenses for most states. When a consumer places an order, the winery actually transfer the wines to VinoShipper and thus can ship under VinoShipper’s license avoiding the hassle of dealing with each state’s regulatory regime.  This is great for consumers but doesn’t do anything for retailers or sommeliers who still must buy from a distributor.

LibDib (aka Liberation Distribution), a relatively new company operating out of San Jose California, was invented to solve the problem for retailers. It is an Internet distribution platform whose expressed aim is to level the playing field for small producers by efficiently connecting producers with retailers and eliminating many of the pricing and marketing practices of the big distributors. LibDib doesn’t needs a large sales staff or warehouse space thus bringing down the cost of distribution. There is no minimum purchase and any winery regardless of size can have their product distributed through LibDib.

Libdib’s operation is not restricted to wine. Spirits and beer are also available through their website. So far they’re operating only in California and New York but promise to expand soon.