Do California Wholesalers want Market Prohibition?

The Wine & Spirits Wholesalers of California are launching a major effort to defeat SB 620,[1] which would allow distilleries to ship directly to California consumers. Their position is DTC shipping would threaten up to 10,000 union employee jobs, of course how they come to this hocus pocus math is anyone’s guess, and the bill puts small retailers at risk. Previously, I wrote how expanding DTC shipping would actually increase union jobs, but I will not belabor the point anymore.

Now that the Wholesalers stated their position on the negative effects if this bill passed, I want to analyze the negative effects if this bill does not pass.

The present liquor system, as it is setup, works as a market prohibition against small producers and the California legislation is a start at chipping away at this prohibition. The efforts by wholesalers to keep this bill from passing, works as an effort to maintain market prohibition.

Let’s look at how the liquor system works in reality. Major liquor producers do not have a problem entering a market and gaining market share. The brand names of Bacardi, Jameson, and Jack Daniels are so well known that as soon as they are put on the shelf, they sell. With big marketing budgets and large sales, they have a national distribution network and will sell in any state.

Now let’s take a small producer from Ohio that has a cult following among a small group of whiskey connoisseurs across the county. It has a very small marketing budget and is not well known by the general public. Its lack of marketing budget and brand recognition, does not make it an attractive candidate for in-state distribution, except maybe in its home state.

It’s simple economics, if it does not make economic sense for a distributor to take on an unknown distillery, then generally it won’t. And I can’t blame them!

Even if a distributor decides to take on the brand, often times the brand does not succeed in traditional channels, as the small distillery is competing against bigger brands like Jack Daniels in the distribution network. Also, any attorney that represents small brands, at some time experienced a situation where the distributor begins to ignore the distillery and the product doesn’t move.

The present liquor environment, makes it untenable for the small producer in Ohio to sell into California.

The reality is, the Ohio distillery is shut out of the California market and the barrier to entry is insurmountable.

The liquor market status quo acts as a market prohibition, which the Wine & Spirits Wholesalers of California support maintaining. But California SB 620 offers a different way forward. And here is why.

Previously, I wrote about the Fred Biletnikoff Principle of liquor markets. Under the Biletnikoff Principle, certain wines lack a concentrated demand in a state to justify distribution. The traditional three-tier network if maintained for wine, would shut the small winery out of the marketplace. However, with DTC wine shipping’s advent, a small producer with a cult following could sell small amounts of product to 46 states, they would otherwise not be allowed into. Instead of being shut out of the 46 states completely, the small winery is able to make enough sales through access to these numerous markets to grow and remain in business. Which has led to the exploding growth of wineries.

Problematically, the spirits industry lacks this growth vehicle and can’t generally satisfy the Biletnikoff Principle, because state alcohol laws shut them off from DTC shipping, which is their only potential access point to the markets.

Unlike a winery, a spirits producer requires concentrated demand to survive in a state and build a market. Since this concentrated demand is nearly impossible for small producers, the market prohibits them from participating in nearly every state marketplace across the county.

The real prohibitions ended up in 1933, however, market prohibition exist today. Instead of making product illegal, the modern prohibition acts to make to prevent the expansion and growth of new and smaller producers, and may even kill them off. Similar to laws preventing vertical integration, the market prohibition laws work to inhibit grow and a more diversified portfolio of spirits.

Unfortunately, with the political clout of wholesalers, market prohibition is nearly entrenched, however, if SB 620 becomes law, it would go a long way towards breaking up market prohibitions.