Why does Warren Buffett hate oenophiles?
By David White
The opinions expressed are his own.
Warren Buffett’s Berkshire Hathaway recently purchased Tennessee’s largest alcoholic beverage distributor. This move comes just months after Berkshire Hathaway also acquired liquor distributors in Georgia and North Carolina.
This is a bad sign for consumers. It’s yet more proof that America’s anachronistic system of alcohol distribution is here to stay. This system — which exists only because of government regulations — stifles consumer choice and keeps prices artificially high.
The laws that keep consumers away from alcohol date back to prohibition. When the “Noble Experiment” was repealed in 1933, states were given the power to regulate alcohol within their borders. Some chose to take over the sale and distribution of alcohol. But just about every other state created a “wholesale tier” to sit between producers and consumers.
In part, this was at the urging of temperance activists and retailers. Prohibitionists blamed producers for all the ills associated with drunkenness. Restaurants and liquor stores didn’t like the power that producers could wield. By creating a middle tier, lawmakers hoped to weaken the influence of brewers and distillers. Instead, they simply made wholesalers incredibly powerful.
Southern Wine and Spirits, America’s largest liquor distributor — and one of the nation’s largest private companies — had revenues of nearly $8.5 billion in 2008.
Also in 2008, during the election cycle, the National Beer Wholesalers Association (NBWA) donated nearly $3 million to candidates for federal office. At the state level, the donations are even larger. Between 2000 and 2006, wholesalers contributed nearly $50 million to statewide campaigns, according to the Specialty Wine Retailers Association. In Texas, wholesalers spent more on campaign contributions in 2006 than every single labor union combined.
Those donations make sense. Wholesalers need politicians to keep the regulatory structure in place — their survival depends on it. But the three-tier structure is at direct odds with the Commerce Clause, the enumerated power that ensures free trade between the states. This Constitutional question was addressed, in part, by the 2005 Supreme Court case of Granholm v. Heald. In part because the case only dealt with direct wine sales.
When Americans started developing a taste for high-quality, small-production wines — and could find them, thanks to the internet and the tourism appeal of Northern California — many folks started ordering wine directly from the producers. Direct sales cut wholesalers out of the deal, so they spearheaded a campaign to prohibit winery-to-consumer shipping. By 1998, after a few years of aggressive lobbying, only 17 states were allowed to direct ship their wine.
Consumers responded with lobbying and lawsuits. By 2005, 27 states allowed some form of direct-to-consumer wine sales. In Granholm v. Heald, the Supreme Court justices ruled that states could only limit direct sales if laws were applied consistently. Put simply, lawmakers could only prohibit direct shipping from out-of-state wineries if states were willing to block their own wineries from shipping wine.
Because that decision was so narrow, all sorts of silly regulations have remained. In Alabama, citizens can only order wine directly if they’ve received approval from the state’s Beverage Control Board. In Delaware, consumers can only order from out-of-state wineries if the wine is ordered in person.
This year, wholesalers convinced Rep. William Delahunt (D-MA) to introduce the “Comprehensive Alcohol Regulatory Effectiveness Act.” A Wine Spectator investigation found that this proposal was literally written by NBWA.
This bill would roll back Granholm by affirming states’ rights to ignore the Commerce Clause when it comes to alcohol. And it would make it extremely difficult to challenge a state’s liquor laws in court.
The wholesaling industry claims that it’s pushing the bill to protect children and prevent tainted liquor from entering the supply chain.
Teens are certainly creative when it comes to getting their hands on booze, but it’s hard to imagine a 16-year-old shelling out a few hundred dollars for a California cult wine. The “tainted product” argument is just plain silly. No other industry needs a government-backed middleman to keep its supply chain safe.
In the United States today, there are nearly 7,000 wineries. Most wine shops and supermarkets, though, offer just a couple of brands — think Kendall Jackson, Sutter Home, and Beringer, the three best-selling wine brands in the United States.
The reason? It’s a lot easier for wholesalers to work with the big producers than seek out small labels. Kendall Jackson produces about 6 million cases annually, and most of its wine is cheap.
While this bill is great for the Kendall Jacksons, it is incredibly damaging for the smaller wineries – and consumers. It would cut many consumers off from online specialty retailers — wholesalers see interstate sales as a threat to the three-tier system. And it could hurt direct shipping from wineries.
Meanwhile, the bill further encourages even more consolidation in the wholesale industry. The nation’s six largest liquor wholesalers already control more than 50 percent of the market. So to gain access to most consumers, all the nation’s wineries are fighting for the attention of just a handful of companies.
Worse, this consolidation of wholesalers would also drive prices higher. It’s estimated that the existence of wholesalers adds nearly 25 percent to the price of every single alcoholic beverage, whether sold at a liquor store, bar, or restaurant.
Buffett’s acquisition of Tennessee’s Horizon Wine and Spirits suggests that he’s willing to bet on wholesalers over consumers. This is tragic for wine lovers — as it means a free market in wine is unlikely to emerge any time soon.
David White, a member of the Society of Wine Educators, is the founder and editor of Terroirist.com, a new wine blog.
Photo: Bottles of Barolo wine are seen on a wall at the Barolo wine museum in Barolo, south of Turin. REUTERS/Paolo Bona