Amazon.com, Prohibition, and the three-tier system
Prohibition — the constitutional amendment that made it illegal to manufacture or sell alcohol in the U.S. — ended 76 years ago. But its legacy is still with us.
That's what I find most intriguing about the news that on-line retailer Amazon.com has killed its plan to sell wine through a business called AmazonWine. It has been running a pilot program for about a year, testing the incredibly complicated logistics involved in selling wine to 50 different states. Last week, though, it said enough was enough. The company didn't give a reason, but most people who are supposed to understand these things say Amazon couldn't solve the distribution problems.
Or, as industry consultant John Fredrikson, who knows as much about this stuff as anyone, put it: "People have no idea how complex this is, dealing with 50 different [state] governments. You wonder if a company like Amazon, which is well organized to sell just about anything, can't pull it off. But wine is different from anything else they are selling."
More about the decision and what it means after the jump:
And those distribution problems are a result of Prohibition. The political compromise that ended Prohibition allowed each state to regulate alcohol in its own way, and they have — in ways that are completely unimaginable. New Yorkers can't buy wine in grocery stores. Montgomery County, Maryland, residents can't buy wine at retailers like Cost Plus World Market, but residents of adjacent Prince George's County can.
There are not just 50 laws for 50 states, but laws that vary from county to county within states, and even — get ready for this — different laws within the same city. In Dallas, for example, I live in a wet area. Go a mile or so north, where Dallas is dry, and ordering wine on-line (to say nothing of buying it in person) is a completely different legal proposition.
It's no wonder then, that Amazon gave up. I have been writing about on-line wine sales for as long as there has been such a thing, and no one has succeeded. Virtual Vineyard failed. WineShopper.com (which Amazon invested in) failed. The first version of Wine.com failed. Even the current version of Wine.com has limited reach, with wine sales to just three dozen or so states.
So why are we still hampered by a ban that ended almost eight decades ago? Because the system of 50 laws for 50 states works best for those who have the greatest financial stake in it — independent retailers, the distributors who sell wine to all retailers, and the legislators who write the laws and get campaign contributions from the first two groups. It's called the the three-tier system, and it's the law in every state. Consumers, with some exceptions, must buy wine from retailers, which must buy from distributors, which buy from the wineries. Retailers can't buy direct from the winery (which drove warehouse giant Costco to unsuccessfully sue Washingon state) and consumers mostly can't either. The three-tier system almost makes it unwieldy at best, and impossible at worst, for on-line retailers to do business.
I don't want to get into an argument about whether the three-tier system is good or bad — there are arguments to be made on both sides. I will note, however, that wine, beer, and spirits are about the only industries that have their distribution systems mandated by law. If I want to buy a TV, I can buy it from an independent retailer, a national chain, on-line or direct from the manufacturer. So why should wine be any different from buying a TV?
The other thing to note is that distributors and independent retailers do their utmost to keep the system in place. I understand this — retailers are terrified of competing with national chains that can underprice them by buying direct, and distributors are even more terrified of losing gigantic accounts like Costco and Walmart, which would buy directly from the wineries and bypass distributors if the three-tier system didn't exist.
But I'd also argue, and I have said this to retailers and distributors, that the three-tier system is not forever. It's going to change, and probably sooner rather than later. The Supreme Court chipped away at the system in its 2005 Granholm direct shipping decision, and there are other cases making their way to the court that will further chip away at it. Independent retailers and distributors would be better off in the long run if they spent more time figuring out what they're going to do when the three-tier system ends than by fighting to keep something that is the product of a failed social movement.
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