Importers Aim to Control Market : Law to Bottle Up Foreign Wine Bargains Sought

For lovers of fine European wines--and those merely impressed by prestige labels--something extraordinary is happening.

Dom Perignon, one of the best and most expensive champagnes the world has to offer, suddenly has been appearing on California supermarket shelves and in neighborhood liquor stores at almost half price.

Even those who blanch at its $34 discount price can find other, slightly less-celebrated labels, seldom advertised and almost never on sale, for less than $14 a bottle.

Better stock up now.

Domestic wineries, fearing new competition, and a few importers of European wines who prefer not to lower their prices have gone to the Legislature with a well-orchestrated campaign to kill the so-called gray market that has made these bargains possible.

The importers’ plan is to gain exclusive control over all wines and beers brought into California.

Industry experts believe that if they succeed, there will be an immediate surge in prices for prestigious European champagnes and eventually higher prices for all imported wines and beer.

“The present system allows retailers to buy cheaper and sell cheaper, and they want to close that door. It’s just that simple,” said Leslie D. Howe, vice president of governmental affairs for the California Retailers Assn.

Sen. Ralph C. Dills (D-Gardena), who is leading the fight for the importers, charged that opponents of the measure are falsely portraying it as a consumer issue when it is really an “elitist” issue.

“If it is our main concern that people who have yachts and airplanes be able to buy a bottle of champagne for $10, then that isn’t much of a consumer issue,” Dills said.

The battle reflects growing concern over a variety of luxury products that have been brought into California through legal, but unconventional, channels.

Big Importers Undercut

With the dollar rising in value and authorized distributors reluctant to pass the savings along, gray marketeers have purchased products on the open market overseas and successfully undercut big importers on a range of luxury items--from Rolex watches to $50,000 Mercedes-Benz automobiles to wines.

In the case of wines, gray marketeers have taken particular advantage of a two-tiered price structure that European wineries have traditionally maintained for their top champagnes--a lower price for European consumers and a higher price for Americans who are viewed as able to pay more.

That difference combined with the growing strength of the American dollar have fueled the gray market, where entrepreneurs are able to buy from second-hand sources in Europe, pay for shipping to the United States and still undercut the prices of the official importers by as much as 50%.

Several years ago, the Legislature, responding to the gray market’s effect on the domestic liquor industry, gave hard liquor wholesalers a virtual monopoly over foreign imports. The result, according to retailers and other industry sources, is liquor prices that seem immune to the U.S. dollar’s growing strength overseas and strong competition at home.

In similar fashion, wine importers--in many cases the same companies that deal in hard liquor--are hoping to extend those same protections to wines.

Victory in 24 States

So far, they have mounted successful campaigns in 24 states and are making a major effort in California.

Their bill, carried by Dills, would allow foreign wines to be brought into the state only by dealers who are specifically chosen by the brand owners. It would make it illegal for large discount liquor stores or other retailers to deal with anyone else, thereby effectively killing the gray market.

The measure, while focused on champagne and a few other high-priced European wines, would apply as well to beer and other wine products that may become more attractive for gray marketeers in the future.

Supported by an influential and monied coalition of wine wholesalers and domestic wineries, the measure has had easy sailing in the Legislature, garnering no opposition in a Senate committee headed by Dills and clearing the full Senate on a 26-7 vote.

It is scheduled to be heard next in the Assembly Governmental Operations Committee where the liquor industry has a long history of successes. Just last week, the committee resoundingly approved a companion measure by Dills that would carve out exclusive territories for beer distributors within the state, making it difficult for chain stores to buy from maverick dealers offering large discounts.

‘State-Mandated Monopolies’

California Atty. Gen. John K. Van de Kamp charged in a strongly worded letter released last week that the bills together would establish “state-mandated monopolies” in an industry that already has extensive control over its marketing.

“It is simply an attempt to restrict competition and thereby maintain artificially high prices,” the letter said, adding that the gray market “is a textbook example of competition in a free market working to reduce artificially inflated prices.”

The measures are among the most heavily lobbied of the session with beer and wine wholesalers, wine producers and the hard liquor lobby squaring off with grocers, large retail liquor dealers and consumer groups.

In all, these interest groups have provided more than $1.4 million in campaign contributions to lawmakers in the last four years, with proponents of the bills outspending opponents by nearly a 2-1 margin. Dills, for example, has received at least $37,000 from the alcoholic beverage industry during that period, almost all from segments that support the bill, according to Legi-Tech, a private service that collects information on legislation and campaign contributions.

“Let’s face it; it’s a real juice bill. Big bucks are at stake,” one lobbyist acknowledged.

The most potent force behind the effort is the California wine industry, which has complained loudly about the effects of the gray market on its sales.

The state’s 600 wineries ship about $2.5 billion worth of wine each year and provide jobs for an estimated 60,000 Californians. Since 1982, when a 15-year boom in wine drinking suddenly ended, the market for California wines has remained relatively stable. Imports, meanwhile, have grown at a steady pace.

Drop in Champagne Shipments

Some California wine makers had pinned their hopes on champagne production, one of the few wine products that until recently was experiencing a gain in sales. Recent figures compiled by the Wine Institute, however, show nearly a 12% drop in champagne shipments this year and winery owners blame gray market imports for cutting into their market.

Some California wineries already have been forced to scale back the prices of some of their top champagnes.

“If the loophole (permitting the gray market) is not closed, it will start getting into table wine, and that is when we will have really serious problems,” said Paul Lunardi, lobbyist for the Wine Institute, which represents about 500 California wineries.

Large wine producers have been pressuring lawmakers from their districts with good results.

Other wine industry experts who have less at stake, such as San Francisco wine consultant George Vare, insist that the threat is not as widespread as it might appear.

While domestic champagne production has been on the rise, it represents only about 7% of all California wines, Vare said. The figure is even smaller, he noted, for high-quality champagnes that directly compete with the French brands brought in by gray marketeers.

Foreign-Owned Importers

More direct beneficiaries of the measure, these experts say, would be a small number of foreign-owned importers who have exclusive arrangements with the prestigious French wineries to distribute their champagne here. Four of the five most prestigious brands the measure is meant to protect, in fact, are owned by two companies--Seagrams and Moet-Hennessy--who have seen the gray market cut deeply into their profits.

Authorized spokesmen for both companies were reported traveling in Europe and could not be reached for comment.

Alain Leonnet, president of Lion Imports, a San Francisco gray marketeer, said the French champagne houses could instantly kill the gray market simply by lowering their prices in the United States or raising them to an equal level in Europe, something they have refused to do.

“They don’t because they think they can make more profits because Americans will pay anything,” he said. “But, I don’t think it’s just.”

The French companies have attempted to eliminate the gray market in other ways, principally by leaning on their European distributors to stop selling to unauthorized U.S. importers. But in 1981, the European Economic Community found that the practice violated free trade rules and fined Moet-Hennessy, manufacturers of Dom Perignon, $1.2 million.

Today, a bottle of Dom Perignon can be purchased in a French market for $18. Retailed through official importers, the price in the United States has generally been set at $65 a bottle, although restaurants often charge as much as $110. The same bottle purchased by gray marketeers is being sold here for less than $35.

Pricing Practice Defended

Jack Davies, chairman of the Wine Institute and owner of Schramsberg Vineyards in Napa Valley, which produces one of California’s highly rated champagnes, defended European wine producers’ practices, saying they built the image of their products and ought to be able to profit from that work.

“Dom Perignon has had the reputation for being the finest sparkling wine in the world for a very long time,” he said. “It cost them a lot to build that position. No other company in the world has contributed as much to advancement of the technology.”

Gray marketeers, he added, do their business by “stealing that investment” and importing only the top-line merchandise without paying any of the overhead costs that went into building the product’s reputation. That kind of free marketing, he said, could hurt a winery’s reputation if the wines are improperly shipped or sold at the wrong outlets.

Morris Katz, president of Paul Masson winery in Saratoga, which is owned by Seagrams, acknowledged that the California wine industry has little immediate cause to worry about the gray market because champagne represents such a small percentage of California production. But with the state’s wine industry already in a slump, he said, failing to pass the bill could encourage further inroads by gray marketeers.

“Given free access to this market without any impediments, it’s just human nature that they will expand their horizons,” Katz said.

William Kinzler, a San Francisco attorney who represents several gray market importers, countered that there simply is not enough profit in most other wines to make gray marketing worthwhile. Ultimately, he said, California wineries would be hurt by the bill because it would discourage the growth of small distributors, making it more difficult for many independent vintners to get their products to market.

Study of Effects

The Senate recently agreed to conduct its own study of the issue to determine how both the wine industry and consumers would fare under the plan. The $30,300 study will be financed by opponents of the bill, but there is little chance it will be finished before the Legislature acts.

Meanwhile, Kinzler and other opponents are seeking to convince some California wineries to actively oppose the measure. Large discount liquor chains have taken their appeal to the wine-consuming public by posting signs in stores across the state. Opponents also recently hired Russo-Watts, a political public relations firm with close ties to Gov. George Deukmejian.

Even if the effort is blocked this year, most industry insiders expect it to resurface again. “One way or another they are going to stop us,” one gray marketeer lamented.