Small Wineries Unite In Marketing Efforts

When holiday season nears, Pete Saltonstall’s phone starts ringing a bit more. As owner of the King Ferry Winery in the Finger Lakes region in upstate New York, tourists that visited his winery earlier that year often call to order a case of Chardonnay.

By TARA SIEGEL BERNARD
Staff Reporter of The Wall Street Journal.

From The Wall Street Journal Online

His response — not by choice — is often a reluctant "no."

That’s because it’s illegal to ship wine across state lines in New York. "Most of the times they are gracious, and say they understand, and other times they get angry," he adds, "Here you are making your customers angry at you, and it just drives you mad."

Mr. Saltonstall’s frustration is a familiar feeling for many small vintners across the nation. Some 87% of the wine drunk in the U.S. is produced by the 50 biggest vintners. The 3,700 or so smaller wineries, meanwhile, are struggling to break out of the market’s cellar, aggravated by a combination of conflicting state laws regarding interstate shipping, little distributor support, and a lack of marketing firepower.

The smaller operators are pushing back. Most of their efforts are local, planning special events to sell wine on location, or peddling their wares at nearby farmer’s markets, state fairs and wine festivals. Others are branching out, banding together with neighboring wineries to create "wine trails," for example, and to share marketing costs.

Legal Thicket

The effort with the biggest potential, however, is a campaign to uproot a tangle of state laws that is impeding the ability of small vintners to ship wine to consumers directly. Direct shipping is allowed in some form in 26 states, plus Washington, D.C. Thirteen allow direct shipping only to states with a reciprocal agreement. But interstate shipping is prohibited in 24 states — it’s a felony in several — although 39 states permit shipping to their own residents.

Most small wineries are tiny, family-run operations that have trouble forging relationships with distributors because of their lighter production volumes, vintners say. That essentially squeezes them out of the three-tier system in which alcohol is sold in most states. Under that system, producers must sell to licensed wholesalers, who in turn distribute to retailers, who sell to consumers.

"You have a whole lot of [larger] wine brands represented by fewer and fewer wholesalers, and the effect on smaller wineries is that they have a tougher and tougher time getting attention from wholesalers, who naturally will be spending more time and attention on the brands that contribute the most to their bottom line," says Jeremy Benson, executive director of Free the Grapes, a Napa, Calif.-based coalition that supports direct shipping. "It’s logical and nobody is blaming them for it."

Smaller wineries say that to gain entry to markets where they can’t secure a distributor, however, the ability to ship directly to consumers is key.

Numerous lawsuits challenging the state laws have been filed on behalf of small vintners across the country, so far yielding inconsistent rulings. But the smaller wines’ cause is about to mount a more prominent stage: The U.S. Supreme Court has agreed to hear cases from Michigan and New York on Dec. 7.

"This is the World Series of wine litigation at the moment," says Paul Kronenberg, president of Family Winemakers of California, a trade group. An opinion is expected sometime in the spring.

Mr. Saltonstall, the Finger Lakes vintner, is a crusader in the effort and, along with other New York state vintners, has visited Albany five or six times this year seeking to overturn their state’s law. They came close when Republican Gov. George Pataki included a proposal in his budget to allow New York wineries to ship a limited amount of wine to consumers outside the state. But the move was eliminated during last-minute legislative negotiations in August.

"It was a battle between the New York home-grown wine industry and the wholesalers and distributors industry. … A classic, classic case of David and Goliath," says Allison Lee, a lobbyist for small New York wineries with Patricia Lynch Associates in Albany. "We hope in time to be able to persuade the Legislature that they hurt no one by enacting direct shipment."

Wholesalers say they believe distribution is best left in their hands to keep it duly regulated, to ensure tax collections, and to thwart kids from ordering alcohol online. Karen Gravois, spokeswoman for the Wine & Spirits Wholesalers of America, adds that her Washington, D.C., trade group is willing to work with small wineries that are having trouble.

The small wineries are skeptical. Among other responses, they point to a 2003 Federal Trade Commission study that found that states with interstate deliveries report few or no problems with orders from minors, adding that most states allow direct shipping to their own residents anyway. The study also notes that several states have methods to collect taxes on direct shipments.

Banding Together

Meanwhile, not content to hold their breaths until legislative reforms are enacted, many small wineries are working hard to increase their sales more locally through individual and collective efforts.

"We have become very event-oriented to attract people to come and buy wine in our tasting rooms," says Marco Borghese, whose Castello di Borghese winery produces around 8,000 cases a year in Cutchogue, N.Y., on Long Island’s North Fork. Mr. Borghese and his wife, Ann Marie, hold several operas a year with wine-tasting intermissions, and tasting dinners with local restaurants, after which diners are encouraged to visit the winery’s tasting room. Mr. Borghese says his retail sales are edging up, and profit margins are wider, too, because no wholesaler middleman takes a cut.

In California, some small vineyards have banded together to break out from the shadows of their larger competitors. Wine country in Lodi, Calif., for example, about 90 miles east of San Francisco, doesn’t have nearly the same brand magnetism of Napa or Sonoma. So the local Lodi-Woodbridge Winegrape Commission started a visitor’s center to drum up excitement for the 50 or so boutique wineries in the area.

The Lodi Wine Visitors Center, open now about four years, gives tastings and sells bottles of local wine. It also refers visitors to local vineyards, whose sales have increased thanks to the center, says Mark Chandler, executive director of the local commission. "It’s a very successful promotional mechanism," he says.

Wine clubs are also used, whereby oenophiles sign up for regular wine deliveries. "The problem becomes what states you can ship to," Mr. Chandler says.

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