[“PDXMan” saw the comment below, and decided to fill me in. I thought his response was so good, it deserved publishing. I appreciate the time he took crafting his response.]
“Many times imports are a much better bargain then domestics. It drives me crazy that heavy bottles can be shipped half way across the world and still be cheaper then local wines.” Food Dude, October 25, 2005 https://portlandfoodanddrink.com/?p=188#comments
Imagine coming home from a long day at work and finding a letter from your favorite Oregon winery in your mailbox. The letter announces the availability of the winery’s latest releases, and invites you to place an order. As you select your favorite wines on the enclosed form, you mark the delivery date on your calendar. At the appointed time, a truck from the winery shows up at your house to deliver a load of wine. Good as this already is, it gets even better: paying for your shipment doesn’t deplete your bank account. Most of the wines cost no more than six dollars, and the most expensive bottles are only ten dollars. It almost seems too good to be true…
In October of this year I was in Europe on vacation. While there I spent a few days with a friend in Krefeld, Germany. Having corresponded about wines for a number of months preceding the trip, he had promised to put together a wine tasting for me when I visited. In one of his last e-mails before I left Portland, he mentioned that he would soon receive a new shipment of wine from his supplier, and that the delivery would be made by the winemaker himself. That announcement took me by surprise. Once in Krefeld, our conversation soon turned to this shipment of wine. My friend has purchased his wines from the same German winery since 1976. Three times a year the winemaker sends out a letter to his customers in which he describes which of the fourteen (!) types of wines he makes is available. The winemaker then drives a truck up from southern Germany and personally delivers each customer’s shipment. And by American standards, the prices of his wines are astonishingly low.
So why don’t Americans don’t get such deals when we buy wine? It’s a long story, and a very complex one. I certainly do not possess the requisite knowledge to explain all of the reasons for high booze prices in America. (Disclaimer: I’m not a lawyer and I’m not in the alcohol business. I just imbibe.) But I can try to shine a little light on a major cause of our current state of affairs: the three tier system of alcoholic beverage distribution.
Before passage of the 18th Amendment ushered in the era of Prohibition in 1919, alcoholic beverages were sold in a free-market system that consisted of two tiers: suppliers and retailers. Suppliers served small geographic areas and often owned their own retail outlets, which in turn usually served only the brands of the suppliers. This system gave rise to many problems, including intimidation and corruption on the part of suppliers seeking to control retailers.
America’s “Noble Experiment” was, of course, a failure. Prohibition was repealed on December 5th, 1933, when Utah, the final state needed for a three quarters majority, ratified the 21st Amendment. But Prohibition brought with it a mandatory system that regulated the distribution and sales of liquor. Section 2 of the Amendment gave states authority to regulate the production, importation, distribution, retail sale, and consumption of alcoholic beverages within their borders. Laws implementing this authority were passed in each state. The result was what has become known as the “three tier system.”
In the most basic terms, the three tier system means that licensed producers of wine, beer, and spirits must sell their products to licensed distributors, who in turn resell these beverages to licensed retailers. Consumers must go to these retailers to put their hands on a bottle of booze. To prevent collusion and anticompetitive behavior, each tier is supposed to be entirely separate and independent of the others. To achieve this goal, complex regulatory schemes, including pricing requirements and franchise protections, have evolved over time. These tiers, and all of the associated regulatory overhead, are expensive. Each tier also adds its own markup to the product. All of these costs are passed on to the consumer of alcoholic beverages.
The three tier system has evolved to become increasingly monopolistic. It is common practice for producers to give to a distributor the exclusive rights to market their products within a geographical area. This prevents multiple distributors in one area from needing to compete with each other. There are exceptions to this rule; a brewpub is an example of a business that is simultaneously a producer and a retailer. Some states, including Oregon, also permit interstate shipments of wine directly from the producer to the consumer. It is important to note, however, that wineries still charge retail prices when shipping directly to consumers. Price competition with distributors or retailers would poison these all-important relationships.
The three tier system has definite benefits for the government, as it ensures the collection of billions of tax dollars for federal, state, and local governments. In fact, it has been claimed that the three tier system is the world’s most cost effective system of revenue collection and alcoholic beverage control. The State of Oregon recently published a summary that explains why it supports the three tier system:
“The purposes of the three-tier regulation of beer and wine distribution, including the tied-house laws, are: promoting temperance by reducing economic incentives to promote alcohol consumption; insuring collection of state taxes on alcohol; keeping organized criminal elements out of the alcohol industry; and protecting the statewide beer and wine market to ensure appropriate, legal availability for beer and wine in all areas of the state.”
This summary was published as part of a “Brief of Amicus Curiae” filed by the state in the case of Costco Wholesale Corp. vs. Hoen. This lawsuit resulted in a landmark ruling with implications for the future of the three tier system. Judge Marsha Pechman ruled that the Washington state-mandated wholesaler monopoly was not shielded by the 21st Amendment and was in violation of the Sherman Antitrust Act. Put in simple English, she ruled that states could not discriminate between in-state and out-of-state wineries.
It is far too soon to know whether this ruling will stand; legal appeals will take years to work their ways through the courts. But the ruling gave hope to many that the three tier system is on its way out, with lower prices for consumers as the result, particularly for consumers of wine. Other legal challenges to the system have also met with initial success.
In an analysis of the effects of legal challenges to current laws, Sara Schorske and Alex Heckathorn wrote, “Small wineries and wine lovers have won significant legal victories in their challenges to the three tier system.” Even the Federal Trade Commission has concluded that the three tier system limits consumer options and increases the price of alcoholic beverages. Ultimately, these lawsuits may demonstrate that the 21st Amendment did not cast the three tier system in stone. In Schorske’s and Heckathorn’s words: “In recent direct shipping cases, the courts have consistently overturned parts of the three tier system that anti-competitively discriminate in favor of local economic interests.”
The three tier system is also under attack from outside the United States. The European Union (EU) has requested the United States to liberalize its alcoholic beverage distribution system. In Europe, wine has multiple distribution channels. Suppliers can sell directly to retail chains; they can also use wholesalers to service smaller outlets. EU negotiators are careful to state that they are willing to recognize the rights of American states to have alcohol beverage commissions, but the negotiators do not want states to control access to markets. What the negotiators want, plainly put, is the liberalization of markets.
Such liberalization is precisely what is specified by the international free trade treaties that American politicians have been so eager to ratify. These ratifications may, however, eventually contribute to the weakening of America’s three tier system. The World Trade Organization has been granted the power to dictate what member states can do in terms of legislation, regulations, and procedures. Despite the protection afforded to the American three tier system by our local domestic legal system, America’s international obligations inherent to the free trade treaties ratified by our government may ultimately prevail over the protectionist aspects of our three tier system.
It is far too soon to predict what the eventual outcome of these legal struggles will be. But there is some hope that the absolute control of the three tier system over the distribution of alcoholic beverages in America may be weakened. Wineries may be the biggest beneficiaries of any changes, since they may be able to ship directly to customers in any state. In practice, the most probable outcome is that wineries would ship directly to large retailers (such as Costco) without going through a distributor. This could reduce retail wine prices. Home deliveries of wine at lower prices are less likely, even if they prove to be legally feasible.
polloelastico says
Thanks for the wonderful, detailed explanation.
This sort of anachronism unfortunately permeates and infects American bureaucracy to varying, detrimental degrees. For instance, a small number of citizens in Iowa (many of whom could be considered “hayseeds”), use a capriciously devised selection system to pretty much determine who will be a party’s nominee for the presidency. We might as well just consult the Magic 8-ball or Miss Cleo.
ckrogstad says
Most states have tax/shipping reciprocity (sp?) with one another so right now I can e-mail a winery in any number of states and have a case sent to me directly from the winery to my home via Fedex, UPS and such. This case will cost me almost exactly what it would cost at retail, the winery pocketing the extra margin. In fact many small wineries stay alive on the extra margin they make on retail sales. If we cut out all the middle men, we wouldn’t see much reduction in prices, but a huge reduction in selection.
The main reason that domestic wines are so expensive, in my arrogant opinion, is ROI. Investors invest to make money. It takes a lot of capital to plant a vineyard, only to wait years for a decent yield, then every so often a bad harvest. Even at $4000 per ton, thats a bad investment compared to, say, GE or an indexed mutual fund. Ditto wineries.
The main reason that import wines are such a comparative bargain, again in my not so humble opinion, is that they tend to be older, paid-off and fully depreciated, so don’t need to produce such high operating profits.
Also the exchange rate, and we’ll see the effect of that soon, so prices of domestic and import wines will converge some.
But I’m not an economist.
Ouroboros says
A point of information on the effect of age on vineyard yields: many California wineries that market a wine as “old vine” estimate the age of their vines at 50-100yrs, vineyards of such age when dry-farmed produce as much as 1-2 tons per acre; target yields for a significantly younger vineyard (say 8-10yrs) is more dependent on farming practice, but could be as high as 5-8 tons per acre.
Marshall Manning says
Okay, let’s get this out of the way first. I’m the accountant/office manager/wine geek for a small local wine distributor.
The author of this piece seems to have a serious bias against distributors, and by focusing on that bias, he’s only telling a small part of the story. I’m not going to go into detail about the many benefits of having a distribution network, but without distributors we here in Portland would have a much more limited selection of wine available.
First, to correct a fallacy in the article. Oregon does not mandate a three-tier system. In Oregon you are allowed to be an importer as well as a distributor, and many local distributors, both large and small, import wines directly from Europe. By doing so, that extra level is bypassed, and it’s one of the reasons that certain wines (Produttori Barbarescos, for example) are often cheaper here than anywhere else in the country. Oregon also allows Oregon wineries to act as distributors for their own product, so many of the smaller wineries do this as a means of making more profit until they get to the point of needing a distributor to get their product out to a wider audience.
Now, a few other reasons why wine is generally less expensive in Europe:
1) Much of the land has been in the family for generations, and was paid for long ago. They don’t have to price their wines to cover a large land purchase, vineyard development, etc.
2) In most regions of Europe (especially the ones with less expensive wine), the winemaker is a family member, and probably the farmer, too. They look at the land, the vineyards, and the wine as a long-term lifestyle for their family, not just as a way to make a quick buck. Many old producers in Europe are still making wine into their 80s. Here in the US, many winery owners want to get their money back quickly, and make as much money as possible in the shortest amount of time and then sell the winery so they can retire early. It’s a different mindset, and in order to make a short-term profit in the wine industry you need to price the wines more aggressively.
3) New oak. Old, traditional European wineries (again, at least those that sell inexpensive table wine) only buy new barrels when the old ones need to be replaced, not as a major flavoring ingredient, and they are generally large casks that hold large quantities of wine. Here in the US, many producers brag about their percentage of new oak. Guess who’s paying for those new $900 small French barrels? Those barrels hold about 25 cases of wine (300 bottles), so the winery COST for a wine aged in all new oak is $3 per bottle. At retail pricing, you’re talking about $10 or more per bottle for that wine just for the oak treatment.
4) Some countries also give subsidies to wine producers, which allow them to keep prices low.
These are just a few of the reasons that some European wines are cheaper than their US counterparts. There are others (Americans fascination with Parker/Spectator ratings & points, the number of marketing agencies involved in the wine business, non-standard bottle sizes) that are also worth considering, but I’ve used up enough of Dude’s page already.
Marshall
porkfat says
Interesting article. I don’t think it really answers the Dude’s original question, however. It helps to explain why German wine is cheaper in Germany, but not why it is still cheaper than the stuff from the Columbia Valley in my local New Seasons. That’s because imported liquor still has to go through the same “three tiered” system. In fact, there’s a fourth teir, it needs an importer. Winery-Importer-Distributor-Retailer-Me.
I think Marshall’s suggestions are all possibilities and would just add another: marketing. American wines are much more effectively marketed to a mass audience. This has two effects: cost of production goes up, and demand goes up… hence, price goes up. European wine makers (especially those wonderful small producers that make the majority of inexpensive wine) have a historical adversity to marketing. That’s why the average consumer doesn’t understand European wine. The winemakers make no effort to explain themselves, and don’t feel that they should have to. If you don’t know which ($12) Cote-du-Rhone has that same grape combo as that ($45) Syrah you love so much, that’s your problem. Costs stay lower, demand stays lower, and therefore, price stays lower.
MrDonutsu says
Two Words: Columbia Crest
one swell foop says
@Mr.Donutsu:
Two More Words: Cooking Wine.
We must also take into account the more conservative attitude of Americans in general to alcohol as opposed to the European. Prohibition destroyed many a winery and killed the growing cultural acceptance of drinking on a daily basis. I don’t know many people that open a bottle of wine each day(I would, but it would both kill my wallet and ensure I’d awake with a hangover the next morning) or have more than one drink each day. It is my understanding that it’s more common to have a glass of wine with your meal than it is to have a glass of water in a lot of Euro countries, particularly the wine producing ones.
The decades long puritanical quest against the consumption of any alcohol at all still has some effect. This cultural pressure contributes to the attitude that cracking even a cheap bottle of wine is something to do on the weekends or a special occasion rather than each day. If the bottle is for a special occasion then you should spend more on a special bottle yes? How does the uneducated consumer tell the difference between a special bottle and one that’s not? Most often by the price, which helps drive the price on all the bottles up. There seems to be a general glorification of expensive bottles overall, and bottles that are highly rated and inexpensive quickly go up in price(Chateau St. Jean Cinq Cepages anyone?).
I can’t help but think that these jumps on price help fund more expensive production techniques that beget an even more expensive bottle. The focus here is on getting the ratings and making the money in the short term. Over there it’s about making good wine that reflects the terroir and spirit of a place, money is something that comes along with a great bottle. It seems as if in its age Europe understands the thing that most professionals learn in time, do a good job and the money will come
MrDonutsu says
What $6 bottle of European wine (hand delivered by the farmer or not) is so much better than Columbia Crest – say their “Two Vines Cab” – that you would consider CC to be “cooking wine”?
I don’t really follow how cheap wine from Europe is somehow a wise reflection of terroir, whereas well regarded and reviewed “value” wine from the US to be dismissed out of hand as crap.
one swell foop says
Cheap European wine CAN be a reflection of terroir. It is often not, but I’ve been finding it increasingly harder to find good bottles produced domestically for the prices I pay for something like a bottle of, say, the ’04 Parallel 45 Cotes Du Rhone($8.99-$9.99 most places, but the ’05 should be out now), and while it’s not European, the ’04 Pillar Box red($9.99 for the case or so I bought before the case discount was applied). My argument was that the cultural influences on wine making and purchasing affect the American wine production and retail market in a way that does not promote or encourage high quality at a low price. While the market elsewhere in the world may not encourage that, it seems as though a higher proportion of low priced and high quality bottles from those areas are one the shelves.
I don’t dismiss domestic value wines as crap, I dismiss crap as crap. While Columbia Crest is better than some American wine, it’s certainly worse than a lot of others in the same price range. It’s unpalatable to me. It’ll get me drunk, that’s for sure, but so will Boones Farm. Everything I’ve tasted by CC lacks almost any sort of depth what so ever, is harsh, and badly balanced. I don’t care what I pay for the bottle, be it $2, $20, or $200, a price tag isn’t going to fool me into thinking that a bad wine is any better, or a good wine any worse.
You don’t necessarily have to trust my palate and my taste for wine, everyone has their own, but feel free to choose some bottles of $9-$12 domestic wine that you drink on a regular basis and compare them in WA and WS to the ratings Pillar Box and Parallel got. That’s as close as I can think of at the moment to finding an experienced taster who’s not biased towards either of us. If you like CC, good for you, you spend less than I do to drink a bottle and have a thicker wallet. I can’t drink it, I’d rather not drink. To each his own, the subject is…subjective.
AnthonyBoutard says
At its core, wine is processed fruit. As a farmer, I grow a lot of fruit, many tons per year, including grapes (table types only). It is neither easy nor cheap to grow fruit in Oregon, especially in the Willamette Valley. That is why, despite the fact that we grow amazing prunes, cane fruit, table grapes and strawberries, we have ceded the market advantage to California. The California climate allows them to grow cheaper fruit with more reliable yields. They also grow varieties adapted to mechanical harvest. We grow the very finest prunes in the world, yet our prune industry is just about dead. Ditto the strawberry. Table grapes have never gotten off the ground in Oregon.
In many parts of the US and Europe, wine grapes are pruned and harvested by machine. Machine harvesting produces a reasonable table grade wine at a cheaper price. — Labor accounts for approximately half the cost of producing hand harvested fruits and vegetables. — In the typical Willamette Valley vineyard, machine harvesting is impossible. The steep, southeast facing slopes necessary to ripen wine grapes at this latitude are too steep for the current generation of machine harvesters. As a quirk of history, Oregon’s early vineyards were established on the hillsides because that was the cheapest land available for what was then a financially risky venture.
Sensibly, Oregon’s vintners have have worked the premium end of the wine market, as opposed to table wines. The best pay a great deal of attention to fruit quality. That means that the fruit must be thinned in the summer so as to reduce fruit production. The number of vines per acre is also lower than in many places. These are all factors that drive up the price of fruit and consequently, the wine. The pinot noir grape is also more demanding, and has relatively low yields. Finally, the smaller size of Oregon’s wineries requires a higher margin. If you are dreaming about $6 bottles of Oregon table wine, that is not the direction Oregon is traveling.
Our strawberry and prune industries are all but dead because they played to the low end of the market. When it comes to fruit, Oregon will always fail to compete in terms of price, so we have to grow the highest quality fruit and hope people discern the difference and are willing to pay for the quality. Even then, fruit growing is a huge investment followed by a lot of work. As a farmer, I can assure you, high quality fruit costs more to produce. If it were easy, you would see a lot cheap Willamette Valley fruit.