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ONE LEGAL CHANGE THAT TRANSFORMED THE TEXAS WINE INDUSTRY -- TRY IT IN YOUR STATE

by Andrew Chalk


Estate Vineyard at Eden Hill Vineyards, Celina, Texas
Estate Vineyard at Eden Hill Vineyards, Celina, Texas

On July 9th the Biden administration released an Executive Order instructing the Treasury and the two branches of US antitrust enforcement, the Justice Dept. and the Federal Trade Commission (FTC) to to submit a report within 120 days “assessing the current market structure and conditions of competition [for beer, wine, and spirits], including an assessment of any threats to competition and barriers to new entrants.” Furthermore, “The report is to include discussion of unlawful trade practices; patterns of consolidation in production, distribution, or retail markets; and ‘any unnecessary trade practice regulations of matters such as bottle sizes, permitting, or labeling that may unnecessarily inhibit competition.’”


THE EXTENT OF ALCOHOL REGULATION IN AMERICA IS UNPRECEDENTED

I hope the administration is serious and I hope that these terms of reference do not exclude legislation to address uncompetitive market structures. The reason is that wine (and beer and spirits) is almost unique in the degree to which it is regulated. The origins of much of the harmful legislation is the way that prohibition was unravelled when the 18th amendment (Volstead Act) was repealed in 1933. Nobody had ever repealed prohibition before and that created a void into which the idea of the three-tier system (3TS) came into being. The 3TS saw the wine market as divided into three groups in each US state: producers, distributors, and consumers. The idea behind the 3TS was that producers could only sell to distributors, and consumers could only buy from distributors. It interposed distributors into every transaction involving wine whether it made economic sense or not. It also prevented many transactions from taking place. For example, if a consumer wanted a certain wine and it was not in the distributor’s ‘book’, that transaction did not take place. In short, it gave distributors legislatively protected monopolies.


How was such a pro-monopoly system legislatively approved? Because it was sold to state politicians as giving them an easy way to collect the lucrative tax revenues that were predicted from wine. Rather than having to collect taxes from millions of consumers or thousands of wineries, the states could collect from a handful of distributors.



A SMALL LEGAL CHANGE WITH BIG IMPLICATIONS

The 3TS is so inefficient that many cracks have emerged since it appeared. There is one that appeared in Texas in 2005 that has had immense beneficial effects to Texas consumers, grape growers, wineries, and the future members of the latter two groups who would have never entered those groups but for this crack.


That crack is direct shipping from the winery to the consumer, bypassing the 3TS. In Texas, the wine industry barely existed in 2005 when the measure passed. The new legislation (and I wish I could find out the names of the heroic men and women who were the motive force behind it) allowed wineries to ship to consumers, in state or outside. Since then:

  • The number of wineries has grown from about 40 to a number that is much larger. Some say over 500 (based on Texas Department of Agriculture license application numbers). I would guess 150 producing wineries. Either way, the growth in all parts of the state is impossible to miss;


  • The wine grape acreage has increased over 600% to 5,830 acres in 2019. Most producers are small family farms;


  • Collegiate institutions (Texas Tech. University, Texas A&M University, and Grayson County College) do research and teaching in the industry;


  • Numerous other wine events, festivals,and publications have emerged as part of the wine ecosystem;


  • Wine tourism numbers have gone stratospheric, making the corridor of US-290 between Johnson City and Fredericksburg in the Texas Hill Country second only to Napa’s Hwy. 29 in visitor numbers. According to the Fredericksburg CVB, 50% of visitors to Fredericksburg now say their main reason for coming is wine country. The Texas Hill Country is the wine industry’s shop window. Lubbock is its agricultural heart, and increasingly on the tourist map as well;


IF THE RIGHT TO SHIP DIRECT WERE ABOLISHED, THE TEXAS WINE INDUSTRY WOULD BE EFFECTIVELY DESTROYED

These indicators are not just coincident with The Right to Ship Direct. The Right to Ship Direct is the cause. If it were withdrawn today then most Texas wineries would go out of business. Fewer than 30 go through distribution at the present time due to their small size (typically family owned and operated) and the cost wedge that distribution imposes.


Distribution is not bad per se. On the contrary, a dedicated distribution channel is vital. It is when it is mandated, against economic reality, that it is bad, and that is what the 3TS did.


The effect of creating The Right To Ship Direct in Texas was to create the modern Texas wine industry. It is a small step to see how the same benefits would accrue in those other states that do not yet have it, or have a restricted version of it, if they were freed up in the same way.


There are collateral benefits as well.


Easier industry access. It is a small step to see how The Right To Ship Direct would open doors to minority producers and their customers.


Above, we omitted beer and spirits producers, but the benefits of the Right To Ship Direct to the wine industry accrue there too.


Of course, some states have already implemented The Right to Ship Direct but many either do not have it or have restrictive shipping laws that would benefit from a thoroughgoing overhaul.


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