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Ruling blocks direct sales of wine from producers to stores and restaurants

By OK Blawg Editor - James Dee Graves

Gene Clifton, owner of Canadian River Winery & Vineyard near Norman, has more on his mind than this year's grape harvest.
He's worried his business will go belly-up because of a recent court ruling prohibiting wineries from selling directly to retailers and restaurants. For Clifton, direct distribution makes up 65 percent of his sales.
"Like most wine makers, we based our business plan on outside sales, so now we're stuck,? he said. "It's almost impossible to make up that kind of hit.?
In 2000, Oklahoma voters approved a measure that made wine makers exempt under Oklahoma liquor laws, which require all alcohol manufacturers to sell through a wholesaler.
But a change came after three large liquor wholesalers sued the Alcoholic Beverage Laws Enforcement Commission in federal court last year. In November, a federal judge ruled the provision was in violation of interstate commerce laws. He gave the Legislature six months to fix it, but lawmakers failed to directly address the issue during the 2007 session. So on June 15, the judge ruled in favor of the wholesalers, striking down wineries' exemption and upholding a three-tier system for alcohol distribution.
Liquor wholesalers argue the three-tier system reinforces the way Oklahoma taxes, regulates and enforces alcohol laws. Winemakers say reverting to the pre-2000 law burdens the fledgling wine industry and puts the reins on agritourism, with vineyards and wineries playing a major role. Winemakers statewide also fear wholesalers will overlook newer, less established wineries and their brands. They also say wholesaler costs ? about 22 percent ? will cut too deep into their profits.
Mike Greenfield, co-owner Greenfield Vineyard and Winery, said the new regulations are prohibitive for startup vineyards that only produce a few thousand bottles of wine a year. His vineyard, for example, doesn't produce enough to offer large discounts to stay competitive, he said. He already discounts 33 percent to compensate for the retailer's mark up; an additional discount would be cost-prohibitive.
"Even if we wanted to use a wholesaler at this point, they don't have to use us. It's a huge hardship. My prediction is there're going to be wineries that go out of business,? Greenfield said. "We invested everything we had ? bet the farm basically ? that we were going to be able to directly distribute, so that if traffic was low a particular month we could hit the retail market hard, but we can't do that ... unless we use a wholesaler and we can't make any money that way.?
Alexander said a few wholesalers are placing orders with the wineries that are posting their prices with them. Alcohol manufacturers are required to post their prices to wholesalers every month. Those who waited to hear the federal judge's ruling probably will post July 15 in order to make the deadline for Sept. 1 orders.
Alexander said Oklahoma City-based Central Wholesale Liquor Co. has placed orders with the eight wineries that have posted prices.
"As far as I know, every major wholesaler in the state is carrying Oklahoma wines right now and has ordered Oklahoma wines. Now that doesn't mean that they'll order every specific brand,? he said.
Alexander said many Oklahoma wineries don't have enough demand for their products, and that's not the fault of the wholesalers or the Legislature.
Besides direct distribution, many Oklahoma wineries also were shipping their products. In April, Gov. Brad Henry signed into law HB 1753 which made it illegal for wineries to ship in state. Wineries are still able to ship products out of state, but most say they don't have a need to.
"This was not specific to stop Oklahoma wineries. This was specific to stop anyone else from shipping directly,? Alexander said. "If Gallo and other wineries could ship directly to consumers, it would absolutely affect wholesalers. We can't allow Oklahoma companies to do something that California companies or Arizona companies are not allowed to do.?
Gary Butler, president of the Oklahoma Grape Growers and Wine Makers Association, said wholesalers are concerned more about the future of their industry than the 53,000 gallons of wine Oklahoma wineries sold last year. The group Oklahomans for Modern Laws is trying to legalize the sale of strong beer and wine in grocery and convenience stores, and is making headway on a petition that could put the issue before voters.
"The wholesalers, I think, are primarily concerned about losing revenue with the large retailers if it does get in grocery stores,? he said. "I think they're more concerned about leaving the door open for large retailers to bypass (the wholesalers).?
Recently, Costco, a large discount chain, challenged alcohol distribution laws in Washington state and won the right to order directly from wineries. But Butler is most concerned that the law will cause small wineries to go out of business and make it difficult for people to enter the industry.
"Self distribution is crucial,? he said. "It gives small farm-based wineries an opportunity to build their businesses without huge capital investment.?
For seven years, winemakers have enjoyed self distribution, and the fledgling industry grew from two wineries to 45 licensed wineries, said Marta Patton, deputy director of the ABLE Commission, the agency that regulates Oklahoma's liquor laws.
"It's a trade off. It costs them. They make probably less for their wine because there's a markup when it goes through the (wholesaler), but if someone wants it, they're willing to pay for it. That's supply and demand.?
Much like the wine they grow, Patton said winemakers are a "resilient? group of people and will survive.
"I know this is a setback for them in their minds, but I also know the system is set up to help them,? she said.
Rewriting the law to include production caps could help appease winemakers and distributors, said Rep. Jeff Hickman, R-Woodward. He wrote one bill that would have required wineries that produce more than 10,000 gallons a year to use a wholesaler.
Hickman said he is hopeful that the wholesalers and winemakers can reach common ground next session. But he doesn't have much hope for overhauling the entire alcohol distribution system.
SOURCE: www.newsok.com
By Trisha Evans
Business Writer

Full post as published by OK Blawg - The Oklahoma Law Blog on July 10, 2007 (boomark / email).