Category Archives: Wine law regulations

Client FAQs – Third in a Series

10 Sunday May 2020

Posted by in FAQ, new importer, organic, warehouse, wine labels, Wine law regulations, wine regions

≈ 1 Comment

Tags

, , , ,

map flag cover (2)

 

I’m getting back to my blog after a long absence and that is true of the FAQ series as well. So, let’s get started.

Whether someone schedules one appointment, or a series of appointments with me I ask them to email me a list of issues they hope to cover. For them, it helps to organize their thoughts and focus their time. For me, it allows a preview of their thinking and goals. Often, it highlights early misconceptions that I can address. I receive everything from a paragraph of bullet point questions to a five-page background and proposed business plan. These are more of the most common questions from clients, presented here verbatim and taken from some of those emails. This first one often arises in different forms from others.

Would it be an advantage or a disadvantage for us (two partners in the import business under one Federal Basic Permit) to live in different states?

In this case, there are no real advantages or disadvantages. There are only various ways in which you choose to build your business, based on complying with laws, your personal preferences, and your financial and career goals. That there are two of you means two people to share the liabilities and profits and two people to share responsibilities. You can decide that one takes care of compliance, logistics, forecasting and communicating with distributors and the other can be working accounts in the state and traveling the country. Or you can split up regions of the country and both cover sales, working with appointed distributors in each state.

The Federal Basic Permit is tied to one fixed address. If you move, the Permit must be amended with TTB, but the business cannot occupy two different addresses in two different states.

In some cases, the state in which you are located may be an advantage. If one of you is in Texas and the other in California, e.g., choosing California as your import base allows the opportunity for DtC online sales and, with the right CA ABC “types” allows significant options overall in a state where the economy relies on the wine business.

Is the market oversaturated with importers? In other words, are there still a fair number of good wineries out there looking to partner with new importers?

There are always wineries looking for importers, far greater in number than importers looking for wineries. Apart from one brand, which is a special circumstance, I have not imported anything for ten years and yet I receive at least twenty emails a week from foreign producers looking for US representation. These are not the overlooked producers, the ones that were not good enough to be considered for export. They have awards, pedigrees, history, and exceptional vineyard management. There just happen to be so many appellations that have expanded or started a brand, and other recently “discovered” regions that are ready to export to the US.

The issue for a new importer is to identify the country or region they want to represent. Whether it is old world or new, there will always be available brands.

Wine knowledge.  How much is needed/expected?  Is it necessary to have certifications?

I began my business with rudimentary wine knowledge. I had never been in the wine industry. In fact, the only time I had even worked around alcohol was when I was a bartender in Spain, and I didn’t even drink! I took a basic, but thorough wine course before I started my importing company which gave me a broader understanding of varieties and regions. From there, I tasted through wines to start to identify flavors. I was fortunate to have someone in Australia who could do some sourcing for me, but this still did not guarantee that they would suit American palates, especially since I started at the very early stages of Australian export to the US. It was only with time that I began to understand not only what was good wine, but what could work in the US. This means finding that sweet spot of quality, flavor profile and price. There is plenty of competition and new brands must fight that much harder to be included in the lineup, but it doesn’t mean your new, unknown, untested brands can’t be the breakout stars.

Knowledge and experience are always good attributes, in all areas, but can sometimes mean less flexibility. Although this is an industry founded on rigid regulation, it also thrives on innovation, out of the box thinking and being open to doing things differently from other industries and other times. Although wine knowledge or certification can be a distinct advantage, it can fail without a good business plan.

One last thing I would add: make sure you taste wines with professionals before adding them to your portfolio. Your friends may love the wine, but will they pay $60 a bottle for it? It’s a buyer opinion that matters, because they’re the ones that know whether they have the prized shelf space for this wine and how it compares to others of the same category, or if it fits a restaurant wine list and will elevate the food.

Is it up to me to prepare the labels or is that on the winery?

Unless you are asking the producer for a completely different label that will only be used in the US, or have asked them to provide wine for your private label, the cost of label design, printing and applying to bottles is the expense of the producer.

US compliant changes will still have to be incorporated for approval by TTB, and some graphics and wording that may be prohibited by TTB. Anything objectionable in the descriptive text, which TTB calls the “puffery”, must be removed. There are ways to minimize the costs, especially on the first order when bottles are already labeled, by having the brand owner prepare additional, inexpensive labels with the mandatory information. It’s all a matter of aesthetics, budget and their inclination to provide entirely new, professionally prepared labels.

On the other hand, submitting label applications for approval (COLA) is entirely up to you. It’s not something they can do. Only the appointed, licensed importer and their authorized compliance consultants can submit label applications through COLAs Online.

If the vineyard is organic and biodynamic can I say that on the label?

Organic terms are all subject to strict guidelines and must include paperwork from a certifying body to include with the application. If the producer has all of that, then yes. There is no current regulation regarding biodynamic, so it’s okay to include that without additional documentation.

What about the EU leaf? Can I leave that on if I have them remove the organic statement?

No, this is specifically associated with EU organic certification and cannot remain on the label if all other organic compliance is absent.

EU leaf

Once I set up an import company in one state can I warehouse in another?

Absolutely. As long as you comply with the laws of that state. My import business moved from Georgia to Colorado to California. In all that time (except for a brief period early in my career when I didn’t know any better) I have warehoused in Northern California. In fact, if your objective is to achieve distribution in more than one state it is preferable to warehouse on either coast, specifically the area around the port in New Jersey and Northern California. Distributors across the country are all familiar with picking up multiple supplier goods from these warehouses and truckers will be able to consolidate loads.

Are we out of our minds?

Yes, true question! And it’s not the only time I’ve been asked, but mostly in the form of a reality check. Is what I’m thinking realistic? Does this sound logical? Have I missed the boat on this country, idea, model?

Although many potential or new importers come to me with what they consider revolutionary concepts that have never been thought of before (they usually have), each one also comes with a unique background, experience, perspective and personality. This is really a recurring theme with me, but I think it’s also the most important advice I could give: you can make a success of this business if you are prepared, realistic and persevere.

Chain Store Sales – “Back Door” Distribution Still Relies on the 3-Tier System

08 Friday Sep 2017

Posted by in Wine law regulations

≈ Leave a comment

Tags

, , , , ,

chain store photo

The 3-Tier system has been explained at length in my books and online by others so I won’t spend more time here with the same thing. But it remains a hard concept to grasp, especially when you’re new to the US alcohol business and perhaps think there are exceptions, such as when an importer is selling to chains.

Take this example. The importer has contacted a national buyer for Sprouts, Lidl, Whole Foods or one of any number of large chains. Even though an importer is headquartered in Ohio, e.g., and the chain is a retail operation with the buying office in Atlanta, your presentation can be made to the chain buyer, who can then decide to place the wines in stores across 40 states. However, most importantly, the importer is not directly selling to the buyer, because the importer is not allowed to break the 3-Tier barrier of (1st tier) importer selling directly to (3rd tier) retailer.

When a chain store has locations in different states, you would think that an exception could be made to allow a purchase to be generated and distributed from a central location. It sounds reasonable, but the 3-Tier system has remained firmly in place since prohibition through vigorous lobbying efforts by influential state wholesalers, effectively preventing any crossover from wholesale to retail. Therefore, as the importer you have the option of:

  1. Using your existing distribution network to distribute to the chain’s stores, if you have distributors in each state in which the stores are located and where the buyer wishes to place your product
  2. Finding and appointing a new distributor in each state, which may be possible if the potential sales are large enough and therefore appealing to the new distributor
  3. Using the chain’s own distributor network relationship to satisfy the sales and 3-tier requirements.

The last option is the most common. The retail chain has presumably done this numerous times and already worked out the payment and logistical details with the distributors to make it a smooth order and delivery process. Plus, the chain is definitely realizing a pricing advantage from this relationship by negotiating a vastly reduced markup by the distributor. The retail chain may mark up the wines to be on a par with other retailers around the country, which allows them a greater profit margin. Or they may sell the wines at a considerable discount and still make a reasonable profit. Discuss the chain’s objective with them beforehand, so you can decide if this dovetails with your national pricing strategy.

To recap and expand on this concept:

  • All sales from an importer must be made individually to a licensed distributor in each state
  • No sales shipments can be made from an importer in CA direct to a retailer in any other state
  • If a chain is involved with stores in multiple states, buying may be a centralized decision, but each one orders product independently
  • Product is picked up by a state distributor’s trucker at the importer’s warehouse and taken to the wholesaler’s warehouse in their respective states
  • Some states have a workaround that is called a “bump the dock” state; in other words, the shipment can arrive at the dock of the wholesaler and not actually be unloaded, but receive paperwork showing that it arrived at the wholesaler location before going on to the retailer
  • Product must be delivered to retailer(s) of each individual state by the wholesaler
  • Depending upon the state laws (and they all vary) a retailer may have more than one store and the wine is delivered to a central store or depot for delivery to other stores from a centralized location. Again, for emphasis, this applies only to that one state and not multiple state locations.

I have been asked often which price list an importer should use when quoting to a retail chain. That’s a very fair question. After all, the sale is actually to the distributor which will, by the way, be the one to supply you with a purchase order and they’ll be the ones paying for the wine. But up to that point the importer may not have even met the distributor. All proposals and wine selection are conducted with the retailer. Please do not lose sight of the 3-tier system. Make no mistake that this sale is made from importer to appointed, approved, licensed state wholesaler.

As for all the other factors that may come into play in this transaction such as discounts, volume, promotions, market assistance, or market visits to educate sales staff, ongoing purchases, number of states involved and so on, this is going to depend on the chain. And if you get to the point where a chain is interested, they will advise you on their process and expectations. It is then up to you as to whether this is doable.

Tied-House Trouble

07 Tuesday Apr 2015

Posted by in Wine law regulations

≈ Leave a comment

Tags

, , , ,

Tied-House rules are the foundation of the U.S. wine industry regulations, at both federal and state level. They permeate every activity that involves the commercial making, importing, distribution, sale and consumption of wine. As antiquated as they are, the federal and state licensing bodies still oversee their adherence as rigidly as a feudal lord once managed his fiefdom.

Despite that, Tied-House violations that relate to “providing something of benefit”, from a wholesaler to a retailer, seem to occur frequently, judging by the number of issues I observe or have brought to my attention by questioning clients. It’s not surprising, really. With the proliferation of social media in general, and wineries and importers who are using social media to promote their wines, in particular, this very public arena is fraught with risk. Additionally, the law isn’t all that clear until you run afoul of it. And then it’s often too late.

Wine Tasting sign

Although this is a confusing subject for most, I thought the media attention given last year to a rash of offenses relating to a wine tasting event in Sacramento, CA, sufficiently addressed it. News outlets reported on it, as did several blogs. But I’m still seeing clear Tied-House violations in tweets, Facebook posts and, at least in theory, in the questions from clients. So, perhaps another explanation won’t go amiss.

Before we get into that, let’s run through a brief refresher of the Tied-House definition and the restrictions that apply to the U.S. wine industry. I think it will help relate it to ways in which it can be breached.

Tied-House originally referred historically to England’s public houses – pubs, as they’re more commonly known – and their tied relationships with breweries, requiring them to buy a significant percentage of their beer from a particular brewery. This could be because the brewery owned the pub, rented the business to the pub or had invested in some way that gave them an advantage in this relationship – the crux of this problem. In some cases, this resulted in a disproportionate number of pubs in an area restricting their beer options to the consumer and became an opportunity to control pricing. In other words, the breweries with the greatest financial clout could control what the customer drank and at what price.

In the U.S. the familiar practice in England was transferred to the new world as they established saloons, and continued until Prohibition (1920-1933). In Europe, tied-house relationships weren’t a good idea, but tradition and convention served to keep the peace. In the new world, it was a really bad idea. It was virtually an unregulated free-for-all, with rampant violence and corruption.  Upon Prohibition’s repeal, when alcohol consumption was legal again, the U.S. government decided to learn from past mistakes and enact laws that prohibited “tied houses” and prevent the vertical integration of wholesale and retail business.

The result of all this is that wholesale entities – wineries, distributors, importers – cannot own retail entities – restaurants, bars or retail alcohol shops. There are loopholes in California these days, particularly to allow for online sales, but essentially this is the law.

Tied-House laws exist in almost every state in some form or another. In the case of California, where I reside and the recent cases occurred, the California Alcoholic Beverage Control, the regulating and licensing body, told me it has limited resources and actually don’t actively seek out violators. They don’t have to; according to the CA ABC, a large distributor or two is doing the job for them by calling their attention to infractions from their competitors. Whatever the case, it is certainly considered a serious offence by the CA ABC and dealt with accordingly through either fines, probation, suspension or revocation of license.

Instead of becoming mired in quotes from statutes and codes, which are available at state alcohol regulation websites, I’d rather distill the essentials into something a lot simpler. Here’s what to keep in mind:

  • The phrase “nothing of value” can be given to a retailer from a wholesaler is the bedrock of Tied-House rules.
  • This means no mention of a retailer by a wholesaler in a tweet of a retail event promoted by the event itself or another party. An example, “come and try our wines at XXX wine bar on May 16th”.
  • No photo of an event on Facebook, or on a blog or a website, either before or after the event, if the name of the place is mentioned or any signage is visible. Even if nothing is said, if the retail establishment can be identified in your photo it is a violation.
  • No mention of any retail account in a tweet (e.g.) to indicate that you’ve sold to the account, plan on selling to them, or that the wines can be found at this account now or in the future. For example, you cannot say, “We’re proud to have our wines in XXX store” or “If you’ve been having trouble finding our wines, they will soon be available at XXX store”.
  • No mention of XXX store loving the wine. For example, “Joe, at XXX store, said this is the best NZ Sauvignon Blanc he’s tasted all year” or “Cheryl, at XXX wine bar, loves the new vintage of our Syrah”.
  • No mention of a tasting you’ve done, or a photo of a tasting, if it’s at a retail location. The retailer may not even be carrying your wine, but if the event is a retail location, which is now tweeted or posted to potential followers, it is considered providing something of value to the retailer, thereby establishing a de facto favorable relationship between wholesaler and retailer.
  • No retweet by the wholesaler of a tweet by another party to promote an event at which the wholesaler’s wines will be poured or sold.

To round this out, many states do allow something “of value” to be given to the retailer in the form of product displays, samples and signage, but TTB (Alcohol Tobacco Tax Bureau) defines these as items that are specifically for the promotion of alcohol that is bought by the store. It is not intended as an inducement to favor placement for the wholesaler and cannot be greater than $300 in value.

Today, promotion of wine is ubiquitous on the internet and every wholesaler must be familiar with Tied-House regulations to understand how they can do so legally. If you are engaged in social media for your winery, wholesale distribution or importing business, before you post that photo, tweet that tweet or comment on your website, consider whether you are in fact promoting a retailer in the process, even seemingly innocuously and tangentially.