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Home > Blogs > Uncorked > Archives > 2006 > January > 15 > Entry
Wine Bill’s Sponsor Says Some Opponents ‘Just Want to Protect Their Monopolies’
This story published in the Dayton Daily News on 1-15-06.
By Mark Fisher
Dayton Daily News
COLUMBUS — A wholesale wine proposal fermenting in the Ohio General Assembly will either lower prices, stimulate competition and expand choices for consumers — or it will reduce selection, have little or no impact on prices and throw thousands of Ohioans out of work.
Those two starkly contrasting scenarios emerged last week as the bitter battle over Ohio’s wholesale wine laws spilled over before state lawmakers…
A bill sponsored by State Rep. Bill Seitz, R-Cincinnati, would:
— eliminate Ohio’s mandated minimum wholesale markup of 33.3 percent on wines, leaving the markup to be negotiated between wine wholesalers and retailers. Seitz said his proposal also would specifically prohibit preferential pricing practices.
— eliminate the exclusive geographic territories that restrict wineries and other wine suppliers from having more than one wholesaler in any particular region of the state.
— make it easier for a wine producer or importer to switch from one wholesaler to another.
— allow wholesalers and retailers to purchase wine on credit.
It would also change other rules that govern how wholesalers operate in the state — changes that the overwhelming majority of Dayton-area fine-wine retailers oppose.
The proposed changes have stirred considerable controversy within the wine industry: the bill’s first hearing Tuesday before the Ohio House of Representatives Finance and Appropriations Committee attracted a standing-room-only crowd of 150.
And the tone of the testimony had the tension of a shaken-up bottle of Champagne, starting with Seitz, the bill’s sponsor, accusing some of the bill’s wholesaler opponents of “just wanting to protect their monopolies.”
Legislators’ questions, however, suggested some are concerned about the impact on existing wine wholesalers and retailers, and the bill’s fate is uncertain.
The rhetoric on both sides of the debate has left local wine enthusiasts, such as Doug Lehrer of Centerville, in the middle. Like other consumers, Lehrer said he would love to see lower prices, but is concerned about the impact of the proposal on Dayton’s “vibrant, progressive wine community.”
The cornerstone of that wine community is the diversity of independent wine shops, and any legislation that harms those shops in favor of “big-box stores” will ultimately hurt consumers, Lehrer said.
Seitz said his research suggests Ohio is one of only two states — Washington is the other — to still have state-mandated wholesale minimum markups on wine. Such markups were implemented after Prohibition in part to discourage cut-rate sales of alcohol.
Under Ohio’s three-tiered wine distribution system, a bottle that a winery sells to a wholesaler for $10 is marked up to a minimum of $13.33 when sold by the wholesaler to a retailer. The retailer is then required to sell the wine to consumers for at least $20.
Seitz’s proposal would not affect wine’s 50 percent minimum state-mandated markup from the retailer to the consumer.
In his sponsor testimony before his fellow legislators, Seitz said he wanted to avoid the fate of past efforts to overhaul wine pricing laws that failed after strong resistance from retailers.
The bill’s proponents, who have formed the Coalition for Fair Wine Laws, brought some wine country glamour and clout to their witness list. Testifying before legislators were Iron Horse Vineyards co-owner Joy Sterling, whose Sonoma County sparkling wines have been served at the White House for four consecutive administrations, and Pete Downs, vice president for government affairs for Kendall-Jackson Wine Estates and chairman of the legislative committee for the Family Winemakers of California. And bill sponsor Seitz also released a letter from Federal Trade Commission staff that supports his position.
The staffs of the FTC Office of Policy Planning, Bureau of Competition, and Bureau of Economics said in a letter to Seitz that passage of the bill “would increase wholesalers’ incentives to lower wholesale prices. … if enacted, the proposed legislation is likely to lead to lower wine prices for Ohio consumers, and may increase the variety of wines from which Ohio consumers can choose.”
Kendall-Jackson’s Downs said minimum wholesale markups “serve no purpose other than to assure a particular level of wholesaler profits at the direct expense of Ohio consumers.”
For beer, Ohio sets a minimum retail price but does not specify a wholesale markup.
Timothy Bechtold, senior counsel for the Wholesale Beer and Wine Association of Ohio — which opposes the legislation said in a letter to legislators that the FTC has no authority to regulate the sale of alcoholic beverages in the state. Ohio’s history, Bechtold said, “has taught us there are social costs that need to be balanced against purely economic considerations when the product in question is alcoholic beverages.”
But the costs will be far more than social, according to Ohioans for Choice and Competition, the umbrella group of several wine retailers, wholesalers and others opposing the legislation.
The coalition said the legislation, if it becomes law, would “result in the loss of anywhere from 3,200 to 6,800 jobs at Ohio distributors, retailers and wineries, as more and more power is placed in the hands of mega-retailers and mega-wholesalers.”
And the coalition names names, singling out Texas-based wine wholesaler Glazer’s, which moved into the Ohio market five years ago, as the driving force behind the legislation, with the aid of large retail chains such as Wal-Mart, Wal-Mart-owned Sam’s Club, World Market/Costco and Meijer. The bill would allow Glazer’s “to seize control of vast segments of the Ohio wine market,” a coalition report said.
A.J. Hammer, who sold his northeast Ohio wine importing company to Glazer’s in 2002 and who now works for the wholesaler, acknowledged Glazer’s is spearheading the effort to change Ohio’s laws, but said hundreds of smaller wine-retail outlets and restaurants have signed on to support the effort. And Hammer said the bill would allow Ohio to reclaim wine sales it is now losing to Ohioans buying their wines in other states because of the Buckeye state’s higher prices.
But the overwhelming majority of fine-wine retailers in the Dayton area oppose the legislation and are listed among the members of the opposition group, Ohioans for Choice and Competition. The retailers include Marshall’s Wine and Liquor, Boston Wine Cellar, The Little Store, Miami Valley Wine, Dorothy Lane Market, Cuvee Wine Bar & Cellar, the Winds Wine Cellar, Grapes of Ruth and Arrow Wine & Spirits.
Ruth Hagedorn, owner of Grapes of Ruth wine shop in Springboro, said she’s not convinced the bill would lead to lower prices for consumers. She visited Los Angeles in recent weeks — California has no minimum markups — and found wine prices there to be “the same or higher on the more common brands like Kendall-Jackson, Blackstone and Yellowtail,” although lower on Champagnes, Hagedorn said. The larger retailers she shopped had only a limited selection of wines, she said.
Denny Freyvogel, who operates Arrow’s Centerville store, said he believes the bill is a precursor to eliminating the retail markup and will squeeze out smaller wholesalers and ultimately smaller retailers. Large wholesalers, Freyvogel said, “will want to deal almost exclusively with big-box retailers.”
Seitz said he would not accept “in any way, shape or form” any amendments that would affect the retail markup. But in the advisory letter he requested from the FTC, bureau staffers apparently felt compelled to comment on the retail markup anyway, noting that it “limits price competition and protects inefficient, high-cost retailers from competition from more efficient rivals, all to the detriment of wine consumers in Ohio.”
Seitz’s bill was introduced in the previous session of the Ohio General Assembly but did not receive a hearing. The Cincinnati legislator wouldn’t predict his bill’s chance of passing, other than to say, “Go ask the House leadership.”
House Speaker Jon Husted, R-Kettering, said so far he hasn’t seen much support for the bill. If that were to change, the House Republicans would give it a look, he said.
From Mark: An earlier posting last week that simply mentioned the bill and that a hearing was scheduled on it drew two dozen fascinating and insightful comments that you can find by clicking on these underlined words of the post’s title, Eliminating Ohio’s Wholesale Markup on Wines.
YOUR thoughts?
Cheers!
Mark Fisher
Comments
By a.g. scheid
January 20, 2006 5:12 PM | Link to this
Mr. Fisher, Ms. Hagedorn must have visited the wrong LA. I live here and we have more wines than you can imagine, low prices and there are many small retailers. Wineries can ship to everyone - stores, restaurants, citizens - everyone without a problem. Guess what? The wholesalers are making tons of money too. Free trade works to the best interests of the common citizen - it is a simple as that. Al ScheidBy Peter
January 17, 2006 8:08 PM | Link to this
Spratt is confusing Gross Margin and Mark-Up. If a wine costs the retailer $10 and the retail shelf price is $15, then the Mark-Up is 50%, and the Gross Margin is 33.3%. This terminology is often confused in the wine business. I will also add, as a small fine wine merchant in CA where the wine market is far less restricted, that we compete by differentiating ourselves in selection and offering a level of expertise that the big box folks can’t come close to. The better Ohio merchants will thrive in an open market.By Morris
January 17, 2006 1:10 PM | Link to this
As a consumer who lives in Montgomery County in Maryland (bordering DC), which has the only local jurisdiction that controls ALL wholesale distribution of alcohol in the country (i.e., restaurants and wine stores buy from the county all beer and wine that they need, and only the county sells liquor), I experience a regulated monopoly every day. While you can find good wines in the County, the prices are way too high, and the selection is not what it should be. Of course, there is NO competition for distribution; this is THE MOST extreme case you will find in the country. However, there are excellent wine shops in DC with great prices and selection (Calvert Woodley comes to mind), and in Virginia, the Costcos of the world have made buying wine for every day use affordable, which is to the benefit of the consumer. Yet even with the Costcos and the like in Virginia, you still find independent wine stores. At the end of the day, the three-tier system is a post-prohibition concoction created by the government. Like any industry regulated by the government, anyone that operates a business in that marketplace wants to maintain the status quo because they do not want to endanger the protected status that they have. Ultimately, it is the consumer that suffers. Would there still be distributors and retailers in a completely open, direct-ship marketplace? Of course! Just look at other consumer segments that are out there. Stores still exist even though you can buy everything on the Internet. Complain as you will about the Wal-Marts and Home Depots of the world, but they are only in business because people keep buying from them, not just because they exist. And that must mean that they are delivering to the consumer what they want: better prices and better selection. Any artificial, government-regulated management of the marketplace for alcohol will, by definition, not optimize the value to the consumer. The only remaining justification for these regulations are to determine what is in the public good with respect to the product (alcoholic beverages), and that is what the political process is all about. Whether that be controlling the product (such as age requirements) or taxing it, our political systems figure that out. But for anyone to assert that government regulation somehow “benefits” the consumer from a selection or price perspective, that’s bogus.By John Smeaton
January 17, 2006 1:06 PM | Link to this
Even better how about going for real deregulation and allow consumers, wine shops and wholesalers to deal direct with the world’s wineries? That would really be in the American tradition of free enterprise and result in great selection, prices and service as all sectors competed for the business.By wine-o
January 17, 2006 11:08 AM | Link to this
jens brings up a good point. There has been much banter back and forth during all of this about the markup and the profit. The reality of it is that people who run fine wine shops do it because they love it, not because it is a great investment. Looking at wine as an investment takes the soul out of it, and it burns me when people snap up rare and hard-to-find wines solely for the purpose of selling them at a much later date for a huge profit. I run a wine shop and I would LOVE to see lower prices across the board, becuase in the long run a more competitive atmosphere would increase wine consumption and knowledge and benefit everyone. The real fulcrum of this issue is which side will benefit the most. If anyone thinks that prices in OH will rival that in Chicago, NY and Washington DC think again. We do very little direct importing, and without this the prices will never be as low as they are in some other states. There has been a lot of emotion on the part of the small retailers and distributors about this. Not because we are trying to retain our high markups and favorable laws, but because we love this business, and we do not want to be forced out because a large out-of-state company changed the laws on us. This is how I see it, and I see the damage far outpacing the benefits to the consumer.By spratt
January 17, 2006 11:01 AM | Link to this
Okay,math was never my strong suit..! I still believe that there is this perception by the average wine consumer that they are getting the short end of the stick by being “forced by the State” to pay certain prices for wine. After all, this is America and nobody likes to be told what to do. I only hope that, as is the case with all political issues, people truly take the time to understand what the hub-bub is about and who any changes would affect. Oh yeah, and peace on earth too.By jens at cincinnati wine warehouse
January 16, 2006 6:26 PM | Link to this
It is a 50% mark-up, but the gross margin is 33.3%. From that, the retailer must cover overhead, spoilage, labor, etc. As a wine rep recently mentioned to me, no one makes a fortune from running a fine wine store. Most get into the business because they love wine. I heard the newspaper business is much more profitable! jens at the cincinnati wine non-profit agencyBy Mark Fisher
January 16, 2006 3:17 PM | Link to this
Spratt: I think you’re doing your percentage calculation backwards. I suspect you’re looking at those two numbers and starting with the larger number and figuring that since $9.99 is one-third less than $14.99, it must be a 33.3 percent markup. But you’ve got to start with ORIGINAL BASE PRICE of $9.99 and THEN figure out what a 50 percent increase would add to that base price — in this case, five bucks — to reach $14.99. So marking up a wine from $9.99 to $14.99 is a 50 percent markup, not a 33.3 percent markup. I don’t believe I’ve ever said that retailers “make a 50 percent profit off of a bottle of wine.” If I did, that’s not accurate. That would assume retailers have no costs — that they don’t pay their employees, they don’t pay rent, or utilities, or taxes, etc. I wonder how much the ingredients in a cheese pizza cost and how much “markup” there is between the ingredients and the final product? MarkBy spratt
January 16, 2006 12:04 PM | Link to this
Mark, I’m confused…there are quite a few references to a 50% retail mark up, which implies that when a retailer buys a wine for $9.99 from the wholesaler distributor that we MUST sell it for $20. It is on every invoice that I have ever checked in, the Ohio minimum retail price on that $9.99 wine is $14.99, which is 33 1/3% mark up and that is the price that goes on our wines. I think it’s misleading to say that WE (the retailer) make a 50% profit off of a bottle of wine. The margins are much smaller….please clafify and have pity on my mathematical skills!!!By Paul
January 15, 2006 12:58 PM | Link to this
I’ve refrained from entering this discussion because I seldom buy wine anymore, so price really isn’t much of an issue (although I admit I might buy more if the prices were less [novel idea!]). But I just can’t resist any longer. I should note that I’m speaking strictly from a consumer standpoint, and have never worked in wine shop or for a wholesaler or distributor. First, having lived in the Washington, DC area for many years, I can guarantee you prices are much lower in the DC area (at least in Maryland and DC proper — can’t speak for Virginia) than Ohio. You can frequently find wines in the DC area with a retail price LOWER than the Ohio wholesale price. So retail prices could drop in Ohio if Ohio retailers could buy from out-of-state sources, including out-of-state retailers. Next, the idea that removing artificially elevated wholesale prices somehow would hurt the independent wine store also flies in the face of reality. Check the number of independent wine shops in the phone book for DC and its Maryland suburbs and I think you find many more independent (and prosperous) wine shops per square mile than in Ohio cities/suburbs. In fact, I suspect that the opposite it true — small wine shops do better when the prices are lower and more consumers are willing to buy their product. Third, selection. I just don’t buy the argument that selection will somehow decrease if mandatory markups are eliminated. Using the DC area as an example, I almost always find better selections in the DC and Maryland stores than in Ohio stores. Including many wines that simply are not available in Ohio at any price. However, I’m not trying to make a case for the retailer or wholesaler, just the consumer. If a few wholesalers can’t compete, or a few retailers can’t compete, that’s life. Welcome to the world of competition. Isn’t that a large part of what makes our economy — free enterprise? If mandatory markups really benefit the consumer, why don’t we have mandatory markups for meats, seafood, paper products, TVs, DVDs, etc. If we suffered the same markups on those products that we have for wines in Ohio, we’d have to earn twice as much to have the same standard of living. Now in fairness, not all of the blame for Ohio’s inflated prices is the result of the wholesale markup. Much of the inflation is due to the 50% retail markup. But surely some improvement is better than no improvement! As a consumer, I’d like to see all mandatory markups eliminated. But I’ll settle for some relief while continuing to hope for complete relief at a later date.By wine-o
January 15, 2006 12:23 PM | Link to this
Thank you winerus. And what are these “hundreds of small retail outlets and restaurants” in favor of the bill that George Hammer speaks of? I am yet to find anyone in support of this bill not named Costco et al. While everyone is probably tired of hearing my rhetoric after last monday’s blog I have to say this: As one of the small retailers caught in the middle I believe that this bill is for big business by big business. Nothing more. Saying that it is “for the consumer” is disingenuous at best. If it walks like a duck, call it a duck.By winerus
January 15, 2006 9:31 AM | Link to this
Both sides overestimate and underestimate the potential damage. Most importantly, this bill is crafted for one Organization, and one only, Glazer Wholesale. Consider the following: 1) There are no exclusive territories allowed. This would allow Glazer to sell vertically across the state to all the large chains at their prices, probably lower than the local full market coverage distributor. By doing so, Wal Mart, Meijers, Cost Plus, and whoever else would be able to offer cheaper retails on Mainstream items and put huge pressure on the independents…ie KJ @ $1-$2 cheaper while taking the same 50% Mark-up on cost. Since their coverage will be verticle, as opposed to Geographic, the cost pressures on the local wholesalers will be overwhelming. Wholesalers offer quality service to everyone, but remember, they live for the high volume retailers. Without that revenue coming in, it will be very hard to stay viable. 2) Credit will be offered to everyone. While Rep. Seitz speaks of “Equal pricing for all” the concept of Credit to some, others COD, is discriminatory, largely based on Credit worthiness and size. Once again, the large chains will have all the advantages. Not only that, but credit for wine without credit for beer will cause the Beer Companies and their lobbyists to raise Holy Hell. It’s tough enough in the Beer business in their battle against wine and spirits; giving them an unfair advantage(and by spirits, I mean under 42 proof, as that will more than likely be considered as part of “wine”)will only mean that credit for all wholesale alcohol is inevitable.(and by the way, wholesalers do not have credit terms with their suppliers, they typically have EFT within a day or so of their product leaving the winery, brewery, etc. That’s a lot of cash tied-up in their warehouses) 3) Glazer wields tremendous power in the US Alcoholic beverage business. I know of several recent instances where wholesale transactions and transfers were influenced by them. Brands have shifted to them solely based upon their relationships with Wineries and Suppliers; so much so that reasons given for these shifts were because “the suppliers wanted to enhance their relationship with Glazer nationwide”. This bill allows Glazer to affect significant changes in the wholesale industry in Ohio, with little cost to them or without the approval (or reimbursement) of the wholesaler’s who posess the brands that Glazers covet. and finally, 4) One cannot argue for consumers when the largest portion of wine pricing is the retail mark-up, and that remains untouched. The Cost Plus lady said it best, that Ohio affords her the ability to make a lot of money, because her wine margins are so good. She doesn’t have to be concerned about other stores’s prices because they are all the same; her concerns were strictly logistical, as in, what a pain to have 5 wholesalers in Cleveland sell the same items to her in 6 stores. Gee, that’s too bad. However, if you’re a wine consumer, and not a retailer, I would hope your view would be that you would rather hear the Cost Plus lady complain about how she has to keep cutting prices to be competitive. THAT is when you have a Bill favoring consumers, and not just Glazer Wholesale.