David Appears to Beat Goliath in Wine War

Jake Sobotka loves fine wine, and he found a way to make it pay.

As co-owner of Pasadena’s Joshua Tree Imports, Sobotka supplies Southern California’s wine connoisseurs and restaurateurs with the elusive vintages they seek, often at better prices than official U.S. distributors. He calls France in the morning, casting about for cases of rare Bordeaux. He dials up Australia in the afternoon, searching for sweet deals on Shiraz.

Until recently, phoning Sacramento was hardly on Sobotka’s to-do list. But he and dozens of other wine shop owners are making frequent calls to the state capital, where they appear to be successfully fighting off legislation backed by the world’s largest liquor supplier that threatened to drive them out of business.

Diageo, a British conglomerate that counts Burger King, Guinness beer and Moet & Chandon champagne among its holdings, convinced Assemblyman Marco Firebaugh (D-Los Angeles) to carry a measure outlawing so-called gray market wine imports.

Only authorized distributors chosen by winemakers would be able to bring their brands into California--an outcome that would clearly benefit Diageo, which owns or has import rights to hundreds of French and Italian wines, and two wholesalers that already control roughly 70% of the California market.

Confronted with a death sentence by the Goliath of the industry, Sobotka and other small importers could have somberly cracked open a reserve bottle of Medoc and contemplated a career peddling insurance. Instead they have chosen to fight.

Under the name California Fine Wine Alliance, they have banded together, hired lobbyists and publicists, put up a Web site and begun waging war on what they consider a classic example of malodorous special-interest legislation.

They have cast a light on the campaign contributions the alcohol giants have made to top legislators, including Firebaugh and Assembly Speaker Herb Wesson (D-Culver City). And they have recruited a key ally: Robert M. Parker Jr. The wine critic who can make or break the fortunes of vintners around the globe has written a blistering critique of Assembly Bill 1922 as a monopolistic power play that would ruin America’s last truly free wine market.

“California wine lovers would find the availability of fine imported wines to be sharply reduced,” Parker wrote in a letter. “Many of the small entrepreneurs who have turned their passion for wine into their life’s work would be forced to find another way to make a living. Without competition in the marketplace, prices will inevitably rise--the additional profits going straight into the pockets of a few large companies.”

Surprisingly, the little guys are winning. A Sonoma Valley winery recently canceled a $5,000-per-couple fund-raiser for Firebaugh, fearing bad publicity, and Firebaugh has since withdrawn his bill from committee.

“I am not interested in putting anyone out of business,” Firebaugh, who believes his reputation has been unfairly tarnished by the opposition campaign, said in an interview before pulling his measure. An aide said it may return later this year in amended form.

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Initially, opponents said, passage of the wine bill looked like a fait accompli.

It sailed through the euphemistically titled Assembly Governmental Organization Committee, the panel that considers alcohol, tobacco and gambling legislation, on an 18-1 vote in April.

Wesson, who chaired the committee before becoming speaker, said through a spokeswoman that he was not involved in the legislation. But George Wiley, his former chief consultant on the panel, was helping shepherd the bill along from Wiley’s new job in the speaker’s office. And the idea had national momentum on its side.

Thanks in part to lobbying from liquor wholesalers, 34 states have passed so-called primary source laws that in practice give a handful of distributors the rights to market most wines within a state’s borders.

California, in fact, already has such a law pertaining to vodka and other distilled spirits, as do most other states. As a result, two large wholesalers, Young’s Market Co. and Southern Wine & Spirits, control the bulk of the state’s hard liquor trade.

Neither Southern nor Young’s returned calls for this story. Diageo also did not respond to repeated requests for comment.

By requiring authorized sellers, the laws fortify the three-tiered system most states promoted or formally adopted after Prohibition to control alcoholic beverages: Wine and liquor makers sell to state-licensed distributors, distributors sell to state-licensed retailers, and retailers sell to the public.

Supporters, primarily wholesalers but also state regulators, say the system helped rid the industry of organized crime and allowed states to better police alcohol consumption, as well as collect their share of excise taxes. But the system has begun to fray in recent years as new means of distribution--most notably, sales over the Internet--have given winemakers new ways to peddle their products.

Backers of a primary source law say it would improve the system in California by providing a clearer audit trail to enforcement officials. It would also let winemakers decide who will market their brands in California. That would not only allow them to more easily recall products if there were health or quality problems, but also help them to ensure their bottles are handled properly. And it would help them execute their pricing strategies, supporters say.

Since it targets imports, the proposed law would have little direct effect on California’s bustling winemaking industry. Nonetheless, it is supported by some state wineries that have supported similar laws in other states. Although California’s small importers find wines elsewhere and bring them to market in the state at lower prices than official distributors, those sales often come at the expense of winemakers, said Mike Felasco of the Wine Institute, a trade group of small and large wineries that backs Firebaugh’s bill.

“Maybe it provides the consumer with a great deal,” Felasco said, “But it upsets your relationship with retailers. If you are going to make these investments, you are going to want control.”

Critics of the three-tier system call it a relic of a time when states worried that Al Capone would dominate the alcohol business. Though it may help states collect taxes and control alcohol, it also guarantees that middlemen and their profit margins are a part of every bottle sold, driving up costs for consumers.

Opponents of a California primary source law say it would limit competition by creating near monopolies for a few wholesalers. Reduced competition, they say, would lead to higher prices and smaller selections, especially in the old and rare wines that small importers consider their specialty.

Wine experts such as Sobotka can legally serve as both importer and distributor in California under the status quo. Because they only take one cut off the top instead of two, they say they can offer better prices.

“I call it the wine monopoly and price-fixing bill. That’s what this is about,” said Jeff Kavin, the owner of Greenblatt’s Deli & Fine Wine Shop in Hollywood.

Kavin sells a bottle of 1996 Chateau D’Armailhac, which he buys from a small wholesaler, for $28.95. Southern Wine & Spirits sells the same wine for $40.75. If he had to buy it from them at that price, Kavin said, his prices would have to be higher.

To understand the effect of the bill, opponents say, one must understand the way the gray wine market works.

For a number of reasons, often because there is not enough of the good stuff to go around, certain foreign winemakers limit allocations to the United States to far less than consumer demand. In other cases, a winemaker may have met initial demand, but some outside factor--a glowing review by Parker is a common culprit--causes a wine to get hot. Or, perhaps a wine that does not excite customers in Europe and is sitting in a warehouse in Spain catches on in some California restaurant, creating a new market.

For that reason, opposition to Firebaugh’s bill has come not only from California grocers and importers, but also from Australian vintners and businessmen in German towns near the Austrian border.

“Worldwide, we have free trade, right? Everybody is in competition? I think it is a stupid thing,” said Michael Unger, the proprietor of Unger Weine in Aschau, south of Munich. “If I was a California consumer, I would complain. Merchants always want to have options, and this is the opposite of that.”

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Opponents were steaming after the Governmental Organization Committee meeting in April, and not just because of the result.

The chairman of the panel, Assemblyman Jerome Horton (D-Inglewood), had cut short their testimony, and lawmakers did not seem interested in hearing their side of the issue. They realized they needed to play hardball.

Diageo’s main lobbyist, John Latimer, is a former policy consultant to the Governmental Organization Committee who knew California liquor laws as well as anyone. In response, opponents hired Doug Elmets, a public relations specialist whose past clients include the payday loan industry, and Rick Lehman, a former congressman who runs a lobbying practice in Sacramento.

The Fine Wine Alliance used local merchants and wine traders to lobby their legislators on the prospective impact of the wine bill on their businesses.

At the same time, they contacted reporters and editorial boards and pointed to the donations Diageo and the big wholesalers had lavished on the Legislature in recent years.

One of their biggest beneficiaries was Wesson, who got $84,000 from them since 2000. The money added to the imposing war chest that helped Wesson become speaker.

Editorials opposing the legislation soon appeared in The Times and the San Francisco Chronicle. And opponents found allies in Parker and the Family Winemakers of California, who opposed the bill on grounds that it would harm the local distributors and retailers they depend on to sell their brands.

Shortly before May 15, the day Firebaugh was supposed to take up his bill in the Assembly Appropriations Committee, he withdrew it, surprising opponents, who were braced for a long fight.

But their excitement soon faded into wariness. The entire wine bill fight had an element of deja vu to it, with good reason. In 1985, the Legislature had passed an almost identical bill, but it was vetoed by Gov. George Deukmejian, who concluded it would harm consumers. They vowed to remain vigilant, mindful of the adage that in Sacramento, no bill ever really dies.

Firebaugh, in turn, was left feeling bitter over the opposition’s tactics, saying they saw links that did not exist among his legislation, Wesson and the winery fund-raiser. The so-called little guys, he noted, were hardly living a hand-to-mouth existence, and turned out with plenty of cash to wage a highly sophisticated David vs. Goliath campaign.

“It was a political hack job,” Firebaugh said.