A Vintage Hangover Hurts These Wineries

NAPA, Calif. â€”  Say you’re from Connecticut. On a visit to California, you enjoy Revere Chardonnay with dinner at the Ritz in Newport Beach, and when you get back home, you decide to buy some more.

Well, you can’t. You can’t order it from your local wine store either. You can’t even get John Kirlin to send you some from the idyllic little Napa Valley winery where he produces the stuff.

Much as Kirlin would like to oblige, sending you the wine would be illegal. Revere is too small to be licensed in all 50 states--it just doesn’t pay--and to merit much attention from distributors if it were.

What Kirlin really needs is a way to sell his wine more directly--through catalogues, direct mail or some arrangement such as Book-of-the-Month Club. But history and law conspire against him, and his situation is hardly atypical.

It’s a shame because California’s premium wineries are the most admirable of farming enterprises. They do not depend on anti-competitive marketing orders, price supports, subsidized water or other handouts.

Instead, these wineries succeed by investing for years in a difficult, long-term business and, with a dedication bordering on fanaticism, by making wines of outstanding quality. During the 1980s, they were rewarded handsomely; revenue for the state’s premium wineries rose to $1.3 billion from just $200 million, says wine industry consultant Jon Fredrickson. Prime grape-growing land around here is too expensive to build houses on.

They even fit our cherished image of family farmers. Fredrickson says 350 of the 450 truly commercial California wineries produce fewer than 10,000 cases of wine a year. Hundreds more produce far fewer.

All these wineries must leap some daunting hurdles. For example, U.S. tax laws make wineries deduct costs over the life of the product, instead of when they occur, which makes a winery one of the few businesses in which taxable income is greater than actual earnings. Inventory management, brand-name marketing and foreign-trade barriers are brutal too.

The unkindest cut of all, though, is from most of the other 49 states, where it is nearly impossible for California wineries to sell directly to the public.

“Every state is like dealing with a foreign country,� says Vic Motto, a CPA and wine industry consultant.

Fifty-eight years after the end of Prohibition, we’re still suffering from a lingering hangover. The Mafia is probably the biggest symptom, but another is that repeal left the states to regulate the sale of alcoholic beverages--bad news for California, which produces 90% of U.S. wine.

The result, by now, is a costly and confusing welter of rules and licensing requirements that helps shut out our good little wineries.

“I teach in France,� says attorney Richard Mendelson, a specialist in wine law. “It amazes people there who look to America as a model of free commerce.�

Kirlin’s winery is a good example. His painstakingly produced Chardonnays have been on the wine list at such culinary temples as Michael’s in Santa Monica.

But he produces only 2,000 cases annually. To sell wine in most states, you need both a license and a distributor, and both are problematic. The big distributors who now serve as mandatory middlemen in the business can’t do much for such a small operation. And, given Kirlin’s volume, licensing himself in all the states outside California is a huge burden.

Besides licensing and legal fees, there are onerous reporting requirements. Dan Duckhorn, president of the St. Helena, Calif., winery that bears his name, says he produces 30,000 cases a year and is still only licensed in 38 states.

In markets where Duckhorn is available, his wine is subject to the same three-tier distribution system--producer, wholesaler, retailer--that is standard in the industry. That means a 100% markup on a bottle of his Cabernet by the time it reaches the consumer, whose selection is also limited.

Selling direct ought to mean more profits for wineries and lower prices for consumers. It would also increase competition.

Some wineries flout the law and ship directly to out-of-state consumers. The Wine Rights Register, a mail order concern near Santa Rosa, Calif., has made a business of doing so.

“In a sense of the word, we’re the biggest bootlegger in the world,� acknowledges sales director Dick Warner.

Representing 150 small wineries, the company ships to about 10,000 customers in all but four “taboo� states through mailings and “personal wine consultants.� A computer database is used to track each customer’s tastes.

Since the Postal Service can’t legally ship alcoholic beverages and United Parcel is reluctant for legal reasons, Wine Rights Register uses independent freight carriers who charge about $32 a case. Warner says annual sales are “in the millions.�

There is hope, however. California, Colorado, Illinois, New Mexico, Oregon, Missouri and Wisconsin have adopted reciprocal laws permitting the shipment of limited quantities direct to customers, says Steve Gross of the Wine Institute, a trade group. And in Congress, Rep. Benjamin A. Gilman (R-N.Y.) is backing legislation to let the Postal Service ship wine.

Not surprisingly, the Wine & Spirits Wholesalers Assn. is opposed, warning that state taxes could be evaded (taxes the association generally opposes, a spokesman admits) and that minors might more easily get wine--as if they’ll ignore Budweiser and Boone’s Farm and start guzzling $25-a-bottle California Merlot by the mail order case.

The Wine Rights Register is taking action on its own. Acknowledging that what his company does now “isn’t strictly legal,� Warner says it will go straight by setting up local operations in several key states. Wine Rights has already been fined in Texas, and Warner complains that Kansas, home to a sizable stretch of Interstate 70, has barred the door to transshipments.

“It’s the wackiest bunch of laws in the world,� he says.