Submitted electronically via Regulations.gov
September 30, 2021
Ms. Amy Greenberg, Director
Regulations and Rulings Division
Alcohol and Tobacco Tax and Trade Division
1310 G ST, NW, Box 12 Washington, DC 20005
RE: Docket number TTB-2021-0007, Notice No. 204
Dear Ms. Greenberg,
On behalf of Zero Link Markets, Inc. (dba Vinoshipper.com), we appreciate the opportunity to comment on the pending regulations to review what is a ninety-year-old mandated system. As one of the premier e-commerce platforms for direct-to-consumer wine sales, we represent more than 2,500 small and medium-sized wineries throughout the United States. We have been providing these services for over fifteen years and have built a platform that makes every sale compliant and has traceability of every parcel that is sent, this is what technology can do today in a modern commerce era.
Equally, it is very important that we support our small agricultural businesses that ultimately provide these products to the market. States benefit as well; they are benefiting directly from their producers bringing both direct employment and taxes to the state and the growth and expansion in related hospitality businesses. For example, the impact of wine-related tourism contributed $893.6 million in revenues to the Oregon economy in 2019, supporting 8,600 jobs and over $270 million in wages specific to wine-related travel in Oregon.
We view this as a historic opportunity to modernize our system of regulating the sale of wine, beer, and spirits.
Nearly 90-years-old, the three-tier system was created after the repeal of Prohibition and does not factor in important evolution since then, such as the complexity of markets, range of state and local regulations, technological developments, and consumer trends, all of which the post-COVID economy has underscored the need for sweeping reform. When COVID-19 hit producer tasting rooms were closed and without direct-to-consumer and self-distribution (limited opportunities) channels the wineries would have gone out of business. Distilleries had to pivot to making hand sanitizer because they had no direct selling opportunities at all. A platform such as ours demonstrates the ability to democratize the sale of wine, allowing small rural businesses to survive and thrive during the pandemic. These businesses in large part are the ones that have been shut out from the wholesaler channel. It is time for all states to set one standard to allow for the direct sale and shipping of alcohol products.
The three-tier system, intended to correct anti-competitive market leverage by producers, has been eclipsed by major producers and wholesalers gaining a stronghold on markets, ultimately leading to a consolidation of wholesalers and large producers, resulting in less competition and higher prices for consumers. What wholesalers have referred to as “one of the most dynamic marketplaces in the world” for alcohol products suffers from the widespread influence of well-financed lobbyists protecting the status quo, markets that have historically and systemically worked against small and medium-sized producers.
There are 47 states currently open to some form of consumer direct shipping of wine and this has worked smoothly for some of the early-adopting states now for over twenty years. There is no reason that this cannot be expanded to spirits and beer and to trade sales as well. However, the influence of large producers and wholesalers and their associated lobbying is continuously building walls around the system, that are both unnecessary, costly to enforce, and lead to anti-competitive behavior.
Wholesalers have gone to great lengths to make it difficult for small and medium producers to thrive, including the creation of unfounded questions as to the risk of online sales, lack of tax collection, underage access, and a need for a wholesaler to deliver to a trade account. None of which are supported by any facts or figures. Moreover, wholesalers are currently advocating for eliminating any winery that produces less than one thousand gallons. An important article[i] written by Susan Lorde Martin (Cypres Family Distinguished Professor of Legal Studies in Business, Zarb School of Business, and Director of the Center for Teaching and Scholarly Excellence, Hofstra University) summarizes the state of the market as it is today. We have added a link to the article save reprinting the whole document.
There is also a lack of understanding by the wholesale tier as to how the producer market works and how the TTB licenses producers to operate. There is a move by the wholesale tier to create rules around who can produce, where it can be produced, and where it can be shipped from, but introducing this at the state level to override the structure created by the TTB.
According to market statistics, some important market facts include:
- The Wine & Spirits Wholesalers of America (WSWA) represent 100 wholesalers covering all 50 states and who distribute 70% of wine and spirits sold in the U.S.
- Three companies, Southern Glazers, RNDC/Youngs and Breakthru Beverage – control about two-thirds of all wine sales in the US. The number of independent distributors has more than halved since the turn of the millennium. [ii]
- 67% of brands are owned by the top 10 producers. Vintage Wine Group recently went public, and in their reported statements claim to be the 15th largest winery in the country, and they only produce 2 million cases per year. The largest winery i.e., only 14 ahead of them producers in excess of 70 million cases. When discussing customer choice, the conversation usually goes to the number of brands available on store shelves, but brands are not the same as producers. The large producers with the help of large wholesalers control the shelf space and make it impossible for small producers to be represented.
- There are only 76 (out of 11,053) wineries that produce greater than 500,000 cases[iii]The top 10 producers account for approx. 67% of all output. There are many niche producers that are part of the marketing Long Tail[iv] i.e. the strategy of selling unique items with relatively small quantities over a wide consumer base, and their only sales channel both to the consumer and trade are the direct distribution models. They have limited local appeal, but nationally they have sufficient demand to create a business.
- Wholesalers and large producers have spent a record $174 million on lobbying efforts in the past two election cycles, according to data collected by the National Institute on Money in Politics. Wine, spirits, and beer wholesalers consistently outspend, by orders of magnitude at all levels of government, both producers and retailers.
As in other industries, wholesalers play an important role in facilitating market activity. However, the three-tier system, which mandates the middle tier, has resulted in the very market abuses it was once trying to avoid. It should be at the option of the producer to utilize wholesalers and not a mandated system for which there is no alternative for both consumer and trade sales for all lines of alcohol sales. A small or medium-sized producer is significantly disadvantaged when competing against vastly larger networks leveraged by wholesalers. If you are a small producer with insufficient volume for a distributor to carry your brand, you can literally be locked out of a market. The option for self-distribution is vital for many producers. Linked to this, and an item that should be reviewed are the anti-competitive Franchise laws, which legally mandate that the winery or spirits producer can only utilize one wholesaler, and if the wholesaler is not performing or sidelines the products, the producer has very little legal recourse for getting out of the arrangement and if they do it can be at great cost.
E-commerce/Compliance platforms such as ours facilitate direct-to-consumer (DTC) wine sales that are safe, compliant, and modern, helping to resolve inequities in markets. Through DTC platforms, more producers will have the opportunity to reach more households to help small and medium-sized producers thrive. Such systems also ensure tax collection and can oversee equal access to proper licensing that will help ensure one tier does not dominate the others. Already, over 40 states have instigated marketplace facilitator rules to ensure the efficient and accurate collection of sales taxes, expanding such structure to excise taxes will:
- Streamline the collection of taxes
- Save government time and cost of administration
- Ensure there is accountability for all transactions
The current structure also restricts innovation of market/product development as new ideas do not have a quick, simple, and compliant way to test market segments and thus prevents new innovative producers from competing in the national marketplace.
We live in a modern economy with well-educated consumers who have instant access to all information and share that information quickly about new products, whether good or bad. Technology has enabled the democratization of many industries, and with simple license control, the same can be accomplished in modernizing the alcohol industry. It should not be controlled by a relative few family businesses. The consumer is often forgotten in these discussions, but they are the ultimate purchaser of the industries production. They should be able to purchase from any licensed entity and have the product delivered directly to them.
Equally confusing for consumers are monthly state limits imposed on consumers for direct purchases. The consumer can walk into a store and buy any quantity of an alcohol product, but due to wholesale lobbying in some states if the consumer buys online they are limited to X quantity per month (as low as 12 bottles) from a producer. There are no reasons for such limits, and it falsely builds barriers and stops competition, and the same rule is not applied to onsite retail purchases
It is vital that all parts of the supply chain are overseen by licensed staff and facilities dedicated to the safe delivery and consumption of alcohol. However, the custody chain can go directly from producer to consumer or retailer. As in many other areas of modern life, the technology and traceability of products through modern systems are undeniable and inevitable. A mandated distribution system should not be required.
Please consider sweeping changes to the three-tier system to bring more competition to the beer, wine, and spirits markets across the United States and level the playing field for all producers. We understand that States have the right under the 21st Amendment to set their rules, but these should not counter the structure set at the Federal level for commerce to take place freely within the US and across state lines.
We welcome the opportunity to have further dialog with you on this subject and would be considered subject matter experts given our integration and support of more than 2,500 small producers.
Zero Link Markets, Inc.