Grape growing and winemaking have rapidly become attractive business models for family farmers. Today, grapes are the sixth largest crop in the U.S. and, according to latest government statistics, U.S. wine consumers drank 300 million cases of wine in 2006.

According to a recent VinQuest™ U.S. Consumer Direct Wine Sales Report for 2006, total direct sales by U.S. wineries amounted to $2.4 billion and the value of wine shipped directly to U.S. consumers was $1 billion. Wine club sales of $598 million at U.S. wineries was up a whopping 66 percent while $197 million in online sales at U.S. wineries showed a 45 percent gain.

Prior to the Granholm decision, small wineries typically sold a majority of their wine from tasting rooms, but today, in the plurality of states, they are able to reach a larger consumer base outside their state borders. Most newcomers to the wine industry are now able to capitalize on the growing U.S. wine culture in a way that was not possible prior to the Granholm decision.

In his March 28, 2007 Notes on Wine Distribution, R. Corbin Houchins, Esq., of CorbinCounsel.com writes: "Wine distribution law is changing more rapidly and profoundly than at any time since Repeal. Published lists, carrier policies, and regulatory personnel (sometimes from the same agency) disagree on the legality of various means of reaching customers, and regulators change their minds in response to numerous factors of varying transparency. Meanwhile, the economic significance of alternative distribution methods grows."

Jeremy Benson of Benson Marketing, who through Free the Grapes makes consumers aware of direct shipping issues, says "the U.S. Supreme Court Granholm ruling has been a huge boost for consumer choice. Legal direct shipping is now the rule rather than the exception."

Compliance Burdens

"But, for wineries," Benson notes, "there has certainly been some short-term pain as burdensome legislation is producing time-consuming compliance requirements."

Jeff Carroll, VP of Compliance for ShipCompliant™, explains the realities for wineries using the direct-to-consumer distribution channel in the post Granholm era: "Many people assumed that the Granholm decision would make it easier for wineries to ship directly to consumers. Although we have seen a tremendous growth in the percentage of the U.S. population that is now accessible by wineries for shipping, the reality is that it has become more difficult to comply with the state laws. Because most of the state statutes contain remnants of the post-Prohibition legislation, the volume limitations, permit process, and reporting requirements are very different from one state to the next. A winery that is shipping to all of the possible states could submit between 400 and 500 state reports (excise, sales, and direct shipping) per year.

“The good news is that in spite of the compliance headaches, we have seen incredible growth in the volume of direct to consumer shipments. The direct channel can be extremely powerful for wineries of all sizes and we therefore expect this growth to continue, especially given the positive trends in wine consumption. Hopefully, we will see more uniformity in the laws from state to state over time."

Benson agrees that despite the challenges, "compliance vendors are helping wineries manage the new complexity and the industry's lobbyists are quietly correcting onerous laws."

Examples of such corrections are:
1) Virginia removed a background check provision in its 2003 law;
2) New Hampshire removed its $237 annual permit fee;
3) Minnesota consumers can now make orders online;
4) Colorado removed its on-site provision.

APPELLATION AMERICA’s online wine store gets a consumer quickly through the direct shipping process in the 34 direct-ship states. Shipping companies such as UPS have helped wineries reduce returns through the shipper's new features such as Address Validation, Email Ship Notification and Voice Notification, which lets consumer purchasers know via an automated voicemail message when wine shipments will be delivered to their residence.

On the other hand, although direct shipping is legal in Florida, 2007 began with an issue that will keep it in the wine news headlines. In December 2006, State Senator Burt L. Saunders (R) prefiled SB 126 which includes the same discriminatory production caps as the bill he sponsored earlier. Proposed legislation excludes shipments from any retailer and prevents wineries from direct shipping if they produce more than 250,000 gallons of wine (approximately 105,000 cases) annually. A bill to this effect was approved unanimously by a Senate committee on April 9, 2007. In SB 2282, approved by the Senate Regulated Industries Committee, a consumer would be allowed to receive no more than 12 cases per calendar year from any one winery. Florida HB 1217 does not contain a 250,000 gallon stipulation. With more committee stops in both the Florida House and Senate, bills will have to be reconciled before measures can become law.

Yet, the website for Florida's Division of Alcohol Beverages and Tobacco demonstrates that the 2005 Granholm v. Heald decision has benefited the state's tax coffers. From February 2006, when shipments began, through June 2006, 337 out-of-state wineries registered with the state and paid $52,480 in taxes. During the next comparable five-month period, 468 wineries paid $104,622 in excise taxes to the state.

This is but one proof that consumers are responding to direct shipping as a way to purchase wine and that state tax revenues are benefiting. If Senator Saunder's bill becomes law, it will not only significantly deteriorate Florida's business and consumer environment for wine but will also hamper two large Florida charity wine auctions: Florida Winefest and Auction in Sarasota and the Naples Winter Wine Festival, which in 2007 set an American record for charity auctions by raising $16.5 million. Currently, both auctions receive wine shipped to the state as winery donations. On the Florida issues, there's just one applicable phrase, stay tuned.

Continuing Challenges from Wholesalers and Distributors

Backed by the Associated Beer Distributors of Illinois (ABDI), a consortium of 70 distributors in the state, some Illinois lawmakers began pushing to curb the flow of wine between producer and consumer. However, an April 23, 2007 ABDI press release states, "After more than a year of negotiations centered around how to address wine shipments entering Illinois, key stakeholders have agreed on compromise legislation. The ABDI, Illinois Grape Growers and Vintners Association, Wine and Spirit Distributors of Illinois and the Wine Institute have agreed to support legislation that would regulate shipments of wine for both in-state and out-of-state wineries. The group will ask legislators to approve the compromise."

The press release adds that "Until legislation is passed, Illinois remains in violation of the 2005 Supreme Court ruling. The industry compromise is expected to be offered as an amendment to HB 429 sponsored by Rep. Edward Acevedo (D-Chicago) that is currently moving through the [Illinois] General Assembly. The Senate passed a similar bill last year."

Even though the Granholm opinion dismissed underage drinking as a reason to disallow direct shipping, Donna Spagnola, Chairman of the ABDI board of directors, was quoted in the Journal Gazette/Times Courier Online as saying that "forcing wineries to go through distributors ensures that people under the legal drinking age do not end up with any wine."

We must ask, did Ms. Spagnola ever read the Granholm decision?

"Under Granholm," Houchins writes, "the Commerce Clause requires states either to give local and out-of-state wineries access to consumers and retail accounts on economically equivalent terms or to deny it altogether. In response, some legislatures have attempted to accommodate wholesaler interests by allowing direct shipment or direct distribution only for wineries with annual production or capacity under a gallonage cap, typically set just above the output of the largest local winery and well below many producers in the major winegrowing states, and/or by imposing an 'equal' requirement that consumer purchases be made in person at the winery, irrespective of location.

"Challenge to production caps, either for excessive burden on interstate commerce or as de facto protectionism equivalent to Granholm-style overt discrimination, and to on-site requirements as disproportionately burdensome for distant wineries, is under way."

Family Winemakers of California indicates that its lawsuit against the State of Massachusetts seeking to overturn the 30,000 gallon production cap in the direct-to-consumer law is still in the discovery phase. Once completed, both sides will be preparing motions for summary judgment later in 2007.

In Indiana, two out-of-state wineries and five Indiana residents are challenging portions of the state's law that were revised in 2006, including a requirement that initial purchases of wine be made in person.

Yet another twist in the road is a problem in Pennsylvania, where the wholesaler is the state-owned Liquor Control Board. In his order over a year ago, Hon. John P. Fullam, Senior Judge for the U.S. District Court, Eastern District of Pennsylvania, was quite clear that the state and its agencies were enjoined from preventing shipments of wine from out of state to Pennsylvania consumers. Yet, the LCB has dragged its heels and has done nothing to promote direct shipments and has done much to prevent them. The state legislature has not passed a permit statute.

The upshot of this is that The Wine Institute still lists Pennsylvania as a no ship state. FedEx and UPS refuse to ship into the state. There is no incentive for the LCB to do anything at this point. The question here is: will it take attorneys to ask the judge to find the state in contempt?

Forecast is Still Sunny

Yet, "forecast long-term is sunny," Benson affirms. "Legal states now represent 78 percent of U.S. retail wine consumption. But some states, like Massachusetts and Georgia, have erected so many barriers to wineries that these states are effectively shut off.

"Arizona and Kentucky passed bills prohibiting wineries over an arbitrary production size from direct shipping; each of those laws are now being challenged in court as unconstitutional. They have replaced one form of discrimination (based on location, which was ruled unconstitutional by the U.S. Supreme Court) with another (winery size)."

From the perspective and experience of Benson Marketing, the winners are many and, realistically, all tiers of the industry are doing very well. The wine industry is very strong and successful wineries are adjusting appropriately to new compliance requirements because they are realizing sales and marketing benefits. "Not everyone is as upbeat," Benson notes, "but it must be said they are in the minority."

Owners David and Dorothy Gahimer indicated that the recent demise of their Terre Vin Winery after 10 years in business was precipitated by prohibitive direct shipping laws in their state of Indiana. "New state legislation, decline in local tourism and general economic conditions make it impossible for us to continue," stated a sign posted on the winery's entrance at 100 W. York St. near the square in Rockville. However, one must consider that there was not a single element causing the demise.

Today's wine consumers are more passionate, know their wines well, and expect that a new day has dawned for a quality-price-ratio. In the plurality of states, consumers are taking advantage of robust direct-to-consumer programs, often dubbed wine clubs.

St. Supéry in Napa Valley, as an example, produces at least six wines exclusively for its club members. Debby Baldwin, co-proprietor of Justin Vineyards in Paso Robles has had success melding a wine club with the winery's restaurant and inn. Jason Haas, General Manager of Tablas Creek Vineyards in Paso Robles, says he's doing "very well" with direct to consumer sales.

Indeed, over two years, the winners in Granholm v. Heald are many, despite the end run around the Supreme Court decision being attempted in some states by a new wholesaler approach which is aimed at regaining its cartel dominance and restricting consumer choice in wine purchases.