Virginia wineries are modernizing, caught in a system that isn't
When 75% of producers embrace innovation, state agencies resist change
Summary
The Virginia Wholesalers state their core mission is not supporting the market, but protecting the three tier system.
Wholesale distributors dominate the contributions to Virginia legislators and the Virginia Attorney General.
Virginia beer and wine wholesaler statements on the industry protect their interests at the expense of category growth
Virginia beer and wine wholesalers do everything they can to maintain their relevance, all at the expense of the industry. They bully their large home state producers, who are terrified that their products will not be distributed if they dare ask for better service or better privileges that circumvent the wholesale tier. I’ve been told the local Virginia winery association is paralyzed in fear of consequences to their members if they push for change against the wholesaler tier, even though it would benefit the overall market. The wholesalers also completely outspend producers via contributions to legislators to help protect their position on the market. See table below.
Wholesalers claim health and safety concerns: Show me one
The wholesale tier, their associations, and legal representation continue to espouse that they have to maintain the three tier system because alcohol products are “inherently dangerous if abused”. Shovels can be inherently dangerous if abused, but I can still buy a shovel from a manufacturer. The only positive from their latest statement are the words “if abused”, which is an added softening of their stance. The reality is the wholesale tier does nothing, zero, nada, when it comes to health and safety of products. They are not involved in the sale to the end consumer, that falls to bars or retailers. Their claims of health and safety are nonsensical. The wholesale tier is not involved in age verification, sales tax collection, or any other aspects of safety. To claim otherwise is a blatant lie to those involved in the industry and to the legislatures tasked with setting laws to regulate and grow a thriving but currently throttled traditional American industry.
Core mission: Very misplaced
In official court documents the Virginia Wine Wholesalers Association and Virginia Beer Wholesalers Association said, “The core mission of both VWWA and VBWA is the preservation and protection of Virginia's three-tier system of alcohol distribution.” You would think that it would be a core mission of an alcohol distribution company to support the industry and its participants, i.e. producers, retailers, themselves, consumers, but that is not the stated mission. Their goal is preservation of themselves and of their right to make money off every bottle sold in a state, even though the model they cling to is 90 years old and failing nearly every other participant in their antiquated tier system. They do go on to say the system they support “fosters healthier competition, improved consumer choice, and community safety”. None of this actually happens with a mandated wholesaler involved in the transaction. To repeat, all the services they perform can be completed without a mandated structure. The free market will select the appropriate route to market, of which for some companies the wholesale tier is the best.
Wholesale associations often justify their opposition to direct-to-consumer (DTC) reform with dismissive lines like “however inconvenient it may be to the applicant’s business model”. In plain terms, that means, we don’t care if the current system makes your business unworkable, the law comes first, and your model needs to adapt. But that logic cuts both ways. If wholesalers find it “inconvenient” to be constrained by the current structure, limited to traditional distribution, reliant on scale, and increasingly cut out of DTC growth, that’s not a flaw in the system. That’s the business model they chose. Just like they tell small producers to adapt, wholesalers made a bet on the old way of doing business. The market is evolving, and legislators are expanding access through self-distribution and DTC, and that’s market progress. Wholesalers should stop complaining about the erosion of their gatekeeper status and use their financial and political power to open and expand markets, not lock them down. The wholesale associations also make claims that rules are “not there to stifle any particular enterprise”. Well of course the regulations they push are there to stifle everyone but the wholesalers, otherwise the wholesalers would welcome and support new and innovative models, which once again would grow the overall market, AND the wholesalers. Am I starting to get repetitive?
The wholesalers do not “promote health, safety, welfare, convenience, and prosperity of the people of the commonwealth of Virginia” – this is such marketing nonsense once again. They are there to protect their businesses and the financial money machine they have had the luxury of owning by getting a piece of every sale, whether they contribute to the process or not. By example, over 80% of the products distributed by the wholesalers are NOT of Virginian origin. In fact, they routinely promote international products over domestic products, which puts money into the pockets of international shareholders as opposed to small family US wineries. When I see wholesalers make their claims, they are “never” supported by real statistics, because up until now all conversations have been behind closed doors. Again, they are the ones telling legislatures that they sell “products that are inherently dangerous”.
Wholesalers ensured the DTC structure was messy
Wholesalers in VA state “the enormous growth of the direct-to-consumer market has costs for Virginia, chief among them is the time-consuming and labor-intensive task of investigating and enforcing compliance”. This is a fact-less claim. The following comment made by the VWWA and VBWA in official court documents, provides the answer to the above problem they identify “Both VWWA and VBWA were heavily involved in the early design and development of Virginia's ‘direct-to-consumer' licensing and shipping scheme”. The associations understand the direct sales business and use that to their advantage to intentionally add complexity. Their direct involvement has created speed bumps, which have made it time consuming for regulators to manage, not to mention slows the progress of emerging brands, leading to product fatigue in the retail setting, dropping sales, and thus hurting three tier’s own bottom line. Wholesalers – look at the big picture!
Cost to the state
In reality, DTC is easy for states to manage. DTC sellers increase the effectiveness of tax collection as it is all reported and paid directly online, with full transparency of knowing who bought, where it went and how much. In fact, the biggest impediment and cost to the state is the unnecessary monitoring of shipping quantity limits, a requirement not put on retail stores. Put DTC shipments on parity with retail stores and a whole section of unnecessary monitoring goes away. Just ask any state that does not have this impediment. My suggestion is always to add tracking numbers to state reports, which would streamline the state’s enforcement of unreported sales. States like New Hampshire can be a model, as they have been doing this successfully for close to twenty years. It is the state’s responsibility to get advice from those that know how the markets work, and they could very quickly and easily cut cost and time and begin redirecting resources to where they would truly help, like illegal shipping, words that their own board have stated in private hearings. The wholesaler’s decision to ignore modern technology, blatantly lie about their role in the industry, and funnel millions in legislative contributions, manipulates the way legislatures see the market. It’s unethical.
Wholesalers in Virginia need to live by their words and live by the channel they chose “no matter how inconvenient to their operations” and leave the other channels alone. DTC is the onramp to wholesale. By throttling DTC, they throttle their own future cash flows.
An update on VA ABC hearing
I have said it before, and I will say it again; the VA ABC leadership represents a terrible organization that will go to any lengths to prevent the legitimate modernization of state legislation. They make up definitions and rulings that are not set in any precedents. And let’s be clear, when legislators are silent on an issue, it’s not an invitation for agencies to make things up. Lawmakers in Virginia are precise when they want to make a point. If something isn’t spelled out, it’s because they didn’t intend it. VA ABC’s job is to enforce the law, not rewrite it.
Ask yourself: if 75% of the producers in a state use a platform to help their business, yet the state agency works as hard as it can to close down the platform, who are they really acting on behalf of? Follow the money.
I believe the VA ABC has lost sight of what their state legislators wanted for their constituents. To clarify, I will outline the key legislated requirements for direct shippers:
Licensed direct shippers who agree to make books and records available for inspection up to a certain time period.
Report and pay taxes – both sales and excise taxes as if the sale takes place in the state.
Age verification of the buyers at both the point of purchase and delivery (notably, local ABC stores fail at this significantly more than online sellers).
Adherence to monthly quantity limits – a wholesale compromise since local retailers do not have this restriction. Removing this requirement would eliminate an entire layer of complexity.
Applying an adult signature sticker to the box – easily managed by wineries, direct shippers, or fulfillment facilities.
Use of an approved common carrier – whether that be UPS, Fedex, one maybe one day USPS (that’s a blog post for another day).
Those are the things the legislators care about as they allow for management, enforcement, and provide safety.
What the legislation does not state, meaning the legislators do not worry about these details, or they would have been specific like they were about requiring the seller’s license number on the shipping label (quite detailed, I would say):
Who applies the adult sticker on the box - Preprinted boxes blow their minds.
Where the product ships from - The legislators’ concerns were around where the books and records were kept for inspection.
Understanding the legal framework helps clarify why these distinctions matter. The state is licensing direct shippers to allow them to ship from out of state to customers in Virginia. They are not dictating how out of state businesses operate because they lack jurisdiction to license businesses in other states—they simply license the right to ship to Virginia customers. The 21st Amendment provides the state the right to manage what happens "within" their state, not what happens in the process of getting products to residents until those products cross the border or are "imported" to the state.
Many of you may think, “this guy” hates wholesalers, but that is not 100% true. I very much dislike their monopolistic, mandated nature. They serve a purpose in the industry and will continue to do so. They may even serve a greater purpose if they stop throttling the whole darned industry.
Wow. Just wow. It seems like it keeps getting worse. :(