Market Restrictions Seen in SB 589 : Proposed California Legislation Will Affect Wine Prices in the State

There is no peace in the wine world today. Consumers, vintners, importers and wholesalers are at odds over California legislation that appears to restrict competition and maintain artificially high prices, such as $65 for a bottle of Dom Perignon Champagne instead of the current price of $35.

The bill, SB 589, would require that any wine (or any alcoholic beverage) imported into California must come through an importer who has been appointed by the producer as its authorized agent for pricing and marketing that particular brand. The bill’s practical impact is to reduce competition by restricting the number of the brand’s distributors and by requiring the importer and/or producer to engage a wholesaler and/or middleman to deal with the retailer.

While it may be hard to find compassion for wine enthusiasts who are willing to pay for Dom Perignon, the noted Champagne presents a classic case of what can happen when supply and price are controlled by an exclusive agent. My concern is that all imports, even low priced ones, are likely to cost more. A worrisome side effect is that California vintners may increase domestic prices if imports are increased. Plunging prices on European wines plus the ready availability of most Common Market wines to discount dealers caused many to reduce their prices.

‘Most Regulated’ Consumer Product

At first sight, it seems that the bill is not in the best interests of the general wine consuming public. Jack Davies, proprietor of Schramsberg Vineyards and chairman of the California Wine Institute, disagrees. He claims that an objection raised by the bill’s opponents is that the legislation interferes with the free market for wine and is inappropriate in a free enterprise economy. The reality he noted is that wine is perhaps the most regulated of all consumer products. Davies explained: “The law tells me how to print my labels, which size letters I may use, what kinds of promotion I may employ, what ingredients I may use, how I may describe my wine, who I may have as investors, directors or officers. . . .” Moreover, he pointed out that the law requires him to pay an excise tax for every inventory location and collect among the highest excise taxes in the world on any consumer product. “That is hardly consistent with free market principles,” Davies said.

While recognizing the price concerns of the consumer, Davies feels the wine drinker’s welfare is not best served by short-term consumer cost consideration, apparently the only serious argument raised by the bill’s opponents.

Wines Are Unique

Davies noted that wines are unique; that their individualism, developed over decades, should be protected for the benefit of the product and the consumer. He explained: “We’re talking here about proper temperature control storage facilities, delivery vehicles, trained sales personnel and training support for retail clerks and restaurant personnel. The discount gray marketer, sometimes described as the gypsy wholesaler, who ‘cherry picks’ outstanding wines, which generally sell themselves, performs none of these services and indeed they never offer full lines. In the short run, they don’t need to. What about the long run and the damage that will inevitably be done to the brand and the consumer’s interest at the same time?”

Another question Davies poses is that if the legitimate wholesaler is forced to cut corners to meet competition from the gray market in the short run, where do funds come from to reinvest in the product, ultimately for the benefit of the consumer? If the only criterion is short-run price, inevitably all producers and marketers will have to compete on short-term pricing alone, resulting in forced quality cutting, product development and diversity that surely cannot be in the consumers’ long-term interest.

Davies concludes with concern for his right as a brand owner to do with it as he pleases insofar as determining who shall market it and who shall not. “In any part of the world,” he said, “I ought to be able to determine the quality and competency of an agent-marketer entrusted with the task of distribution and sale of my product in which I have invested millions.”

A Different View

California State Atty. Gen. John Van de Kamp and Allen Sumner, senior assistant, offer another view. They are concerned about the bill’s creation of state-mandated monopolies to preserve promotional costs of designated distributors and to ensure quality control. Sumner said: “There has been no showing whatsoever that traditional trademark protections and the prohibitions against unfair competition are incapable of protecting legitimate business interests; nor has there been any explanation why far more perishable products are successfully distributed by other industries without statutory monopolies.

“Manufacturers already have extensive control over their marketing system and can, if they so choose, grant exclusive territorial agreements,” he added. “They do not need the state-mandated monopolies. The only problem is that artificial overpricing in America has made it possible for competitors to undersell the manufacturers’ designated distributors. The bill’s proponents can solve the dilemma they have created for themselves by simply charging California consumers the same prices charged in Europe.”

Obviously, there are points on both sides of this consumer issue. The engagement of a wholesaler does not by itself determine product integrity, for which a trusting public might be willing to pay a higher price. What needs to be avoided are the artificial price increases created by a burgeoning, unreasoning product demand.

Claims of Wine-Discount Houses

Big wine-discount houses claim that if the bill passes, the consumer will pay more and they will be out of business. That seems doubtful as a designated agent is likely to deal with them even more by offering larger discounts based on high-volume purchasing that cannot be matched by small wine shops.

A key question in this whole matter seems to be who will control the price and the product? Apparently, the European Common Market did not deign to control products like Dom Perignon; therefore, why should California legislators? If Parisians can enjoy Dom Perignon at a price of less than $30, then why can’t Californians? Frankly, I am not concerned about the high cost of credentialed Champagne, a product which always sells, but rather for the low-cost import as well as lowered wine prices in general.

It would seem that promotional product costs and quality control ought to be resolved in the marketplace rather than in the Legislature. If anything, it seems to me the state should impose detailed standards on importers, wholesalers and retailers for proper storage, handling and delivery even to the point of periodic inspection of the condition of the wine. There is much more to be done to protect the product, but without doubling retail prices or manufacturing artificial consumer demands.

Obviously, there are no easy answers. However, both sides are forgetting in this legal battle that the ultimate primary source and price arbiter is not the Legislature, or even a designated agent, but rather the consumer who may decide that the grape may not be for them after all and that life can be just fine without wine. No matter which side wins, the consumer must still be wooed and pleased.