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California Shipping Bill, the Cat is out of the bag but the wholesalers work to contain it

COVID brought many changes to the liquor industry and for some of these changes, there is no turning back. In March 2020, I proposed legalizing cocktails-to-go in Illinois, which made me a radical. Over two years later, cocktails-to-go is mainstream and here to stay.

In California there was temporary relief for distillers via the right to direct-to-consumer (DTC) ship during COVID. As their tasting rooms were closed, DTC shipping became the life blood for some of these businesses to survive.

Unlike wineries that can DTC ship, spirits producers have limited DTC shipping rights.

What occurred during COVID is that the spooky man positions for not allowing DTC shipping such as manic overconsumption, putting small retailers out of business, and minors able to get their hands on spirits never seemed to become a major problem.

So, with momentum gaining towards DTC shipping and a lack of major problems with the how the DTC shipping program was executed, the excuses for not allowing DTC shipping were running low and did not have much credibility.

In other words, the cat was out of the bag and there was no going back to a Pre-COVID world.

But in came the liquor wholesalers into the fray, who decided that although everything was working great, it couldn’t continue forever.

Passing of the bill

In what is deemed a legislative compromise, the wholesaler permitted AB 920 to pass, which would allow craft distillers, those who produce less than 150,000 gallons to ship into the state. Anyone over that amount could not ship into California.

The consumer gets hurt

Again, with many bills where the liquor wholesalers flex their political muscle, the consumer gets hurt. The ability of consumers to obtain product via DTC is limited by the size of the manufacturer.

Now it is not inconceivable that California wholesalers may not find it profitable to pick up a distiller located on the east coast. Even one producing above 150K gallons. And as we know, the ability of the consumer to obtain product at retail is limited by what the wholesale network carries.

In this instance, the only avenue available for the consumer is obtaining the product DTC, and now this compromise bill will not allow the consumer to exercise this privilege for a distillery producing 150K gallons plus.

Like all anti-shipping limitations that become law, the consumer is the one that gets hurt.

If wholesalers, who like to brag that they are the ones responsible for product diversity, then why are they getting in the way of the consumer enjoying more product offerings?

Innovation gets stifled

For major producers the DTC channel allows them the ability to test market product. Suppose a major liquor company wants to test a pumpkin spice vodka, which is definitely a market risk. The DTC channel allows them to experiment with how the product is received and allows them to make their case to the wholesaler that they should distribute the product.

Without the DTC avenue, a wholesaler may not believe it is worth the risk to buy and distribute an untested product. Which will of course lead to major manufacturers taking less risk and less innovation.

Success is punitive

Another consequence of DTC shipping rights being limited by production limits is success becomes punitive. If a distiller grows beyond the 150,000-gallon limit based on its success, it is cut off from the DTC market. In other words, it is a victim of its own success.

Instead of letting the market dictate the terms of marketplace participation, the government through artificial limits will determine when it is time to stay or leave the marketplace.

This bill substitutes the power of markets and replaces it with government fiat.

Conclusion

The ability of small producers to enter a marketplace via DTC shipping, when a wholesaler would not pick them up, is a positive step in the right direction. The bill will allow the small producers an avenue for growth. And that is great!

However, this bill needs reform and should jettisoned the production limits, which serve no economic benefit other than protecting a niche industry.

By arbitrary limits becoming part of the law, California is concluding that the government should set artificial limits on when product is available to consumers, instead of the marketplace.

But maybe the State forgot, since COVID the world has changed, and the alcohol marketplace is no different. The cat is out of the bag and people don’t want the cat contained. But unfortunately, market forces are being held back again by bad liquor legislation.