Groceries get ready for wine

There are significant legislative barriers to selling wine in US supermarkets, explains Jeff Siegel. But they have come down in two states, and there could be more to follow.

Bill Bishop,  Brick Meets Click, Chicago area; Tucker Herndon, attorney, Burr & Forman LLP
Bill Bishop, Brick Meets Click, Chicago area; Tucker Herndon, attorney, Burr & Forman LLP

The US is infamous for its confusing and contradictory laws about where wine can be sold. But it may be ready to make one of those laws more consistent – whether grocery stores can sell wine. This summer, two states that had long opposed supermarket wine sales changed their laws, and that may portend a move by the dozen or so holdouts to approve grocery store wine sales. 

The catch is that some of the reasons for this summer’s changes in Colorado and Pennsylvania were unique to each state, and the reasons for reform there may not be applicable elsewhere. In Colorado, the biggest independent retailers worked with the grocers to get the law changed because it will allow them to open more than one location. Usually, independents fight grocery store sales. And Pennsylvania’s system, in which the retailers are owned by the state, is about as unique as it gets.

So the question is whether what each state had in common applies to the remaining holdouts, including the lucrative markets in New York and New Jersey. Those conditions include ever-increasing consumer demand for wine in supermarkets; changing social views, in which drinking isn’t seen as immoral as it was 30 years ago; and a major push by powerful national chains like Kroger and Walmart to add wine sales to boost their suddenly skimpy bottom lines.

“No, what happened this summer wasn’t a fluke,” says grocery store consultant Joseph Welsh of El Paso, Texas. “The sheer economics of the supermarket business will overwhelm any objections, and the national companies and the lobbying groups are heavy hitters in getting things to change.”

50 states, 50 systems

The political compromise that ended Prohibition in 1933 allowed each state to regulate alcohol its own way, so that today there are 50 states and more than 50 forms of regulation – and sometimes even different rules in the same state. For example, grocery stores in California can sell beer, wine, and spirits, while only state-owned stores can sell wine and spirits in New Hampshire. Or consider Utah, with its eight different liquor licenses for retailers and restaurants.

This is one reason why the US has no national alcohol retailers in the way it has McDonald’s and Starbucks. Those that tried, like California’s Liquor Barn in the 1990s, gave up in frustration and bankruptcy. What’s the point of opening a store in a state where you can’t sell all of your product – if you can even open at all? Hence, the country’s national supermarket chains, like Kroger and Whole Foods, don’t sell alcohol in every store – and with the added cost and aggravation of having different floor plans, inventory sets and the like depending on each state’s liquor laws.

 And in New York state, one of the country’s most lucrative markets, they can only sell beer and wine in one location. New York doesn’t allow chains to sell alcohol; the state grants one license to one company. So even national chains with New York stores, like Costco, which is the biggest wine retailer in the world, do it in just one store. New Jersey, on the other hand, allows one company to own two licenses.

Talk about a mess.

“These local options are a remnant of Prohibition that have stayed with us,” says Eric Reller, the director of state government communications for DISCUS, the national spirits trade group. “Will those local options change? It’s hard to say, and if it happens, it will have to be on a case by case basis.”

The next step

That’s why this summer’s changes in Colorado and Pennsylvania were so unexpected. Each state had fought reform proposals for decades, and no one expected it to be any different this year. The changes in each state were the most significant since the repeal of Prohibition and required compromises that extended across political and social lines.

In Colorado, the laws were similar to New York, with one license per company. That gave the state a mix of national chains with one store that sold alcohol, many small independents, and a cadre of large, superstore-style independents. The new law phases in the changes over 20 years, mandating when chains can add new stores. It also includes provisions for buying out independents who don’t want to compete in the new environment, and for allowing alcohol retailers to sell food products, which had been forbidden.

“The biggest difference I’ve noticed is a lot of stores are up for sale – last I heard more than 150,” says Glenn Ehrlich, the co-owner of Corks, a small independent in Denver. “But because the license issues are phased in, nobody is panicked about losing everything as they were before the law. Prior to it, stores on parking lots of the grocery stores were sure the ‘big guys were gonna stomp us out of business’. Haven’t talked to many people in our position who are adding non-alcohol products yet.” 

The reforms in Pennsylvania are even more complicated. The state will retain its government-owned stores, which will compete with grocery stores and other retailers who will be allowed to sell wine. But every retailer must buy its wine from the state, which will act as a fourth tier after the traditional wholesalers. This will make it almost impossible to discount, since everyone will be paying the same wholesale price.

It’s a compromise that pleased almost no one, says Lew Bryson, who writes about Pennsylvania alcohol issues. But given the convoluted politics involved, where Republicans in the state house and senate fought each other and the Democratic governor hesitated before signing it into law, it’s about the best that could be done. Also, Bryson says, no one is sure how well such a gerrymandered system will work, and almost everyone expects the legislature to make changes over the next several years. Nevertheless, Pennsylvania’s biggest supermarkets added wine as soon as it was legally possible, despite the law’s shortcomings.

Looking for profit

So why did this happen – and not just in those two states, but in several other states over the past couple of years? “It’s a variety of reasons,” says Tucker Herndon, an attorney with Burr & Forman LLP in Nashville, Tennessee, a state that ended a decades-long ban on grocery store wine sales this year. “It’s generational change, in which the older voters who saw alcohol as evil are dying. It’s social and demographic change, where more younger people who didn’t grow up with that idea of alcohol are voting. And it’s convenience, because people want to be able to buy wine in grocery stores.”

And, perhaps most importantly, it’s the power of the national grocery store and superstore chains.

The US grocery store business, says Bill Bishop of the Brick Meets Click consultancy in suburban Chicago, is in turmoil. It’s buffeted by the internet and Amazon, from increasingly brutal competition and cost-cutting, and by younger consumers who shop differently than their parents did.

“Wine is the fastest-growing category in grocery and it’s profitable,” he says. “At a time when growth is hard to find, it isn’t complicated to see why grocery stores want to sell wine.”

Case in point: The profit on an $8.00 bottle of wine is about $4.00, says Welsh. Compare that to $0.10 on a 2-for-$5.00 package of potato chips.

So “chains and grocery stores are very committed to the wine space,” says John Grant, the chief operating officer for California’s The Hess Collection, which sells 90% of its product through grocers and chains in some markets. “Not only is it profitable, but it acts as a drawing card to get customers into the store.”

One possibility, says Bishop, is that supermarkets do for wine what they did for pharmacies, setting up the equivalent of small wine shops in their stores. You can see some of this in states that allow wine in grocery stores, like Texas and California, but it can be taken to the next level – better-trained employees and larger selections, for example. “The parallels are there,” he says, “and that it’s a shift in focus is one of the way retailers grow. Grocery is much different than it was 30 years ago.”

Hence the national chains’ efforts to expand wine in grocery stores, through direct political action and campaign contributions to the various state legislators, as well as lobbying through various trade groups, says Welsh. In this, “there are certainly hurdles that remain to be overcome on a state-by-state basis, but it’s like the blue laws we used to have when you couldn’t open or sell certain items on Sundays. They went away, and that will eventually happen here.”

In the Northeast

So where to for New York and New Jersey?

Intense lobbying is taking place, says Grant, with the chains and supermarkets on one side and the independent retailers, wholesalers, and distributors on the other. The politically powerful independent retailers want to protect themselves from what they see as unfair competition from the chains, who can undercut them on price and have deeper pockets. Their allies on the wholesale side, meanwhile, prefer to deal with a small retailer environment, which gives them more leverage for pricing, availability, and which brands they carry than if they were dealing with multinationals like Costco and Walmart.

How confusing is it? Some distributors who thrive in grocery states are opposed to changing the law in New York and New Jersey.

Plus, the political climate – especially in New York – still favours the anti-grocery store side. Fred LeBrun, the veteran political columnist for the Times Union newspaper in Albany, the state capital, says the fight has been especially brutal there. New York wineries who want grocery store sales have been blacklisted by retailers and distributors, and Governor Andrew Cuomo is vehemently opposed to opening up the market. “New York is in limbo,” says LeBrun. “Every poll shows consumer support for wine in grocery stores, but the political opposition won’t allow it.”

Yet Dan Wildermuth, who manages brand marketing for California’s Rodney Strong Vineyards, sees wine in grocery stores happening – later, perhaps, given the opposition, but still happening. “I think the movement in Pennsylvania, as well as what happened in Ontario [which also approved wine in grocery stores this summer after a long debate in the Canadian province] gives a sense that things are liberalising,” he says. “There’s momentum at work, and a movement in that direction. Maybe this is wishful thinking from a producer, but it’s difficult to believe that the government would still be restricting trade in this day and age.”

Or not so wishful, if the grocers get their way. 

 

 

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