As the economy shifts to an online, direct-shipping model during the pandemic, America’s antiquated alcohol laws — already a huge hindrance for alcohol producers — are becoming a massive barrier to growth. At a time when alcohol producers, particularly craft distilleries, need direct access to consumers the most, they are instead hidebound by laws written in the 1930s, a time when moral panic plagued the nation and a powerful lobby set policy in place that made alcohol more expensive, and more difficult to obtain, for the decades to come.
Nearly a century later, these inconsistent laws continue to rule alcohol sales through the three-tier system. Why, exactly, is it so difficult to ship spirits, and reasonably difficult to ship wine and beer, across state lines? Why do we give distribution companies a huge cut of profits just to move alcohol around? Is this economy-crushing pandemic finally the time that producers and consumers can unite to effect change?
These pressing questions are (passionately) discussed on this week’s episode of The VinePair Podcast, hosted by Adam Teeter, Erica Duecy, and Zach Geballe.
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Adam: From Brooklyn, New York, I’m Adam Teeter.
Erica: From Connecticut, I’m Erica Duecy.
Zach: And in Seattle, Washington, I’m Zach Geballe.
A: And this is the VinePair Podcast. Before we jump into today’s amazing topic, a word from our sponsor Cognac USA. Cognac USA, Speedrack, and us, VinePair, are hosting a Cognac cocktail competition and we’re thrilled to offer 10 $1,000 scholarship prizes exclusively for professional bartenders. To enter, all you have to do is create an original Cognac cocktail. But then, you can also get bonus points on that Cognac cocktail for joining virtual webinars. All you have to do to enter is visit cognacconnection.com for details. The deadline is Aug. 31. That’s cognacconnection.com, and all you have to do is bring your most dope original Cognac cocktails. So no Sazeracs, it’s not original. I’m sure you could email Zach or Erica, they’ll probably have great ideas for you.
Z: Don’t steal anything from Erica’s book.
A: Exactly, don’t steal anything from Erica’s book. You have to deliver an amazing Cognac cocktail. Then, on top of that, if you take part in some of these webinars you earn bonus points on that cocktail so you can inch your way up a little bit higher. Then the finalists are going to actually demo those cocktails in front of judges while on Zoom, but you have to get there first, so enter. And I’d be remiss if I didn’t say this: The campaign is financed with aid from the European Union. Thanks, E.U. Before we jump into today’s topic, Zach, you were obviously not affected, but, Erica, how did you survive that hurricane?
E: Pretty much everyone around us lost power but somehow we did not. I’m not sure why we got lucky, but it was not too bad for us.
Z: Wow, you got a 2020 win.
A: It was crazy around here, I didn’t know that trees in Brooklyn could go down, and it was very fast, too. I feel like it lasted only two hours or so, and in those two hours, the winds were absolutely insane, and then I came out of my apartment and there were just down trees all over the place. But besides that, we’re lucky that we still had power, too, because a lot of people lost power, and still don’t have power today, when we’re recording on Aug. 6, which sucks. If you are one of those people, we definitely feel your pain, and I hope you’re doing OK because it was crazy.
Z: It rained in Seattle today but that’s all I got.
A: That’s my question for you Seattle people, I’m going to show a little interest in your home. Do you have extreme weather? I know you get a lot of rain but you don’t have tornadoes and hurricanes or any of that stuff, do you?
Z: Not as of yet, just rain and earthquakes, that’s about all we’ve got.
A: You can get earthquakes in Seattle?
Z: Absolutely. We’re on a huge fault. If you want to scare yourself and you live in this area, Google “Seattle big one” and read all the disaster porn.
A: That’s crazy, I had no idea Seattle was also on a fault.
Z: Here’s a really funny story that I think you will both appreciate. As you all know, I went to NYU for undergrad. I moved to New York as an 18-year-old and one of my first classes was a big science lecture. We’re maybe 15 to 20 minutes into the first day of class, we’re going over the syllabus, and all of a sudden the whole room starts to shake, and me, being from Seattle, I’m like, “Oh sh*t, it’s an earthquake.” It took me about 10 seconds of seeing absolutely no one else in the room even notice to realize, oh no, we’re just really close to the subway line and what’s shaking the room is the subway, not a massive earthquake. But it really freaked me and would occasionally from time to time still catch me unaware in that lecture. Which may or may not explain my not great grade in that class.
A: That’s crazy. So today’s topic is direct-to-consumer, which I think is a really interesting topic. We’ve talked about it a little bit before but not to this extent and really, Zach, you proposed this topic so why don’t you kick it off.
Z: I think to me, the thing that’s really interesting to look at here is there’s a confrontation brewing that I think would have been brewing in any timeline. But the one we have now where the U.S. is still really closed down to a lot of on-premise sales of wine, beer, spirits, and producers who rely on the on-premise channel are predominantly smaller producers — or at least smaller producers predominantly rely on those channels as opposed to off-premise or direct-to-consumer sales. And the U.S., and we’ve talked about this to some extent on the podcast before, has this preposterous and totally antiquated patchwork of laws surrounding the sale and transport of alcohol. It all dates to the end of Prohibition, and this attempt to give states the ability to do whatever the hell they wanted, because a lot of states at the end of Prohibition were still quasi-dry or wanted to greatly restrict alcohol sales. And the problem is you have all these great producers in this country — of spirits, of wine, of beer — who once you step outside the boundaries of your own state, often cannot sell to directly to a consumer. Or can only sell to consumers in certain states that may have reciprocity with the state they’re in, or may have to get expensive licensing or permitting in other states. And again, these are issues that the really big producers out there don’t have a problem with. They have the money, they have the manpower, and they just have the know-how to do it. But if you’re a small producer of any of these categories but especially hard alcohol, which we’ll talk about in a little bit, it’s very, very difficult. In normal times, whatever those are, those producers might be able to sell their wine to a wholesaler or sell their spirits to a wholesaler, or their beer to a wholesaler who might then be able to distribute it across a region or the whole country and that gives those producers access to consumers. But with restaurants and bars largely closed and without the ability to go direct to consumer, really the only thing that’s standing are retail stores and most of the retail stores are big national chains with big national purchasing agreements that aren’t interested in stocking a lot of small-production products, especially ones from outside of the state that the store might be located in. So to have this issue where you have these producers who really want to expand their markets, it’s the only way they can stay afloat right now, but you have a system both legalistic and then an industry system that is designed to keep that from happening. And there’s a fight coming because consumers and producers alike want more freedom and wholesalers and retailers don’t.
E: I think one of the interesting things here is that when you read about it — we had our reporter Tim McKirdy this week, he wrote a piece about this — and when you actually look at the numbers it does make you think twice about who all of these restrictions are benefiting. For example, we know, like you were saying Zach, that the small producers are having a really hard time with their distillery tasting rooms closed. But we talked with one this week. Catoctin Creek in Virginia it’s a rye whiskey producer, and they told us that they have been able to ship in-state to consumers in Virginia since the state relaxed its laws in April. And since that time, even with a closed tasting room, they’ve been able to sell more DTC than they would during a normal, pre-Covid week of distillery visitors. So for these small producers, it can make a huge impact.
A: It’s crazy, it really can be something that is very much beneficial to everyone. But I think what Zach is saying is really accurate, which is there is a reason that these laws are not looser, especially when it comes to spirits. And that’s because selling through the three-tier system makes a lot of money for people in the middle, especially on spirits. Spirits have a very high margin. As we learn on the media side, they’re always the brands with the most money when it comes to marketing dollars. They’re always the brands that seem to be the healthiest, owned by the largest corporations, and there’s a lot of money to be made in the spirits world. And so, there’s a lot of lobbying power connected to that middle tier in D.C. that is preventing this direct-to-consumer from happening. And I think, Zach, your hypothesis is very right. I think there’s a huge fight coming. Because one of the easiest ways to help a lot of producers after Covid is simply relaxing the laws. It is one of the easiest ways in which we could do that. You’re basically saying, “Look, if you think you have consumers out there we’re not going to have you worry about finding distributors and fighting for shelf space inside stores or working with third parties who do delivery, like Drizly. If you think you have consumers and you have the ability to build some sort of mailing list that you can then market to directly, feel free to sell directly to them.” That would be the easiest way to allow a lot of these people to try to come back and then live or die based on their own work. It’s not live or die now based on whether or not they could get shelf space in a bunch of different stores. It’s live or die based on whether or not they can target the right consumers, market them in the right way, build an email list, build a mailing list, and then sell their products. I don’t think that’s going to happen because, as you’re saying, Zach, there is just too much money involved.
Z: I think you’re right and I don’t want to be this blindly optimistic political novice that I might actually be but I’m going to pretend otherwise for the purposes of this conversation. I think the one thing that’s true about what’s going on now is that I think we’re seeing, and again this is maybe broadly applicable to this country at the moment, but we’re certainly seeing it in the specific space that we all talk about, which is that there were a lot of things that were basically broken that limped along because of inertia and because there was just enough revenue to be found for just enough people that it worked. But I think we’re finding right now that so many of the systems that we put in place or came to exist, especially after Prohibition, just don’t work very well for anyone. They create these bizarre, convoluted government agencies and regulations that don’t really seem to serve any real vested public interest. I’ll disclose, I’ve been trying to get a wine permit in the state of Washington for what feels like years and because of the way that our state’s laws are written, they’re not designed for the 21st century. They still look e-commerces as some sort of witchcraft. It’s really, really difficult. We’re in a time and a place where entrepreneurship and all that is being strained as is by this crisis. So to me, I think there should be a general societal interest in removing a lot of these restrictions that really don’t benefit anyone except for, as we mentioned, people in the middle of the three-tier system whose job and purpose is basically to take possession of these products to resell them because “Oh, alcohol is dangerous.” But it’s not any more dangerous when it comes through the hands of a big or small distributor than it is when it comes from the winery, brewery, or distillery directly to your house. You’re just paying a lot more for it because it’s one or two or three layers of profit that have been baked into the cost you pay. Again, the thing that has come up forever is that alcohol laws in this country haven’t changed because by and large consumers don’t know or don’t care. But I think we’re in a different place where people are stuck at home, where they’re perhaps seeing that their selection is greatly limited because if you’re shopping at some of the big online sites or if you’re shopping at your local grocery store your options are just limited in every category by what they choose to carry. And if you decide, “I want to go online and buy something I’ve heard about you. I read a great piece on VinePair about this producer in Virginia, I want to buy their rye.” Well, if you’re not in Virginia, tough sh*t. You’re just out of luck entirely and that does not mesh with our conception as modern 21st consumers.
E: I agree with that. I think that there also should be special consideration given to craft producers. If you look at the American Craft Spirits Association, 90 percent of the craft distilleries they work with make fewer than 10,000 bottles a year. That is a very small amount in comparison to the Smirnoff’s and the Tito’s and all of the other big brands that are out there. When I think about direct-to-consumer, I think that this is one of the only lifelines that is going to help these craft producers, I care less about these big producers, they’re on their own. But for the craft producers, I really think this is one of the few things that they can do to stay afloat during and after Covid until restaurants and bars and all these on-premise accounts are back. But even then, this puts some amount of power into their hands to be able to weather the storm, and without that, I think so many of them, a huge percentage, the majority will close.
A: I agree with you. The problem is whenever this gets brought up there’s the rational and then there’s the reality. The rational is the argument that you’re making, which is that the majority of people that are going to benefit from direct-to-consumer are the craft brands. Those craft brands, the very, very large majority, are never going to become much larger than they already are being direct-to-consumer. They have another sales channel and they can sell. They’re not going to become the next Warby Parker. I don’t think that’s going to happen for a lot of these producers. But that’s the way that the second-tier is going to have their lobbyists go to lawmakers and say that there could be the possibility of. That there could be this large brand that comes up and all of a sudden its direct-to-consumer. Then all of a sudden, alcohol is just freely flowing around the country and we’re swimming in it, every time a UPS truck stops there’s just alcohol on it, and all of a sudden anyone can grab that alcohol, and that’s what they’re scared of. So they’re going to use all that fear to say to all of the lawmakers, “Look, we can’t let this happen, but this wall may not become a huge issue for a majority of producers, there’s one or two for whom they could come in and really take advantage of the fact that there’s a direct-to-consumer law. I think it sucks but until there are people on the craft side of the game that has enough financial backing to lobby in a way that convinces lawmakers to vote for their side instead of the other, I just don’t really know if that’s going to happen. It sucks, it really sucks because I think we’re going to wind up seeing a lot of these brands, as you’re saying, are going to go out of business.
E: I think lobbying is the only way to do it. But I just wonder, can the power of craft producers go up against the wholesaler organizations? That’s the question.
Z: Here’s the thing. The topic of lobbying is a really good point. We’ve seen over the last six to eight months these multiple efforts by people throughout the beverage trade, wine specifically but on all sides, unite to try to rally support to either stop or curtail attempts by the U.S. trade department to impose tariffs on imports from the E.U., principally. That was something where everyone from the big to the small was on the same side. It was like, “This is going to be bad for business. Yes, the really big brands can weather it better but none of them really want to see tariffs put in place because it’s only going to hurt business.” So it’s deeply hypocritical for those same brands to turn around and say, “Yes, yes, yes, we must protect our ability to bring wine, bring beer, bring spirits to consumers in this country at a reasonable price to not impose all these tariffs. And then at the same time, and the other side of their mouth, talk to lobbyists “but alcohol is evil, we can’t let just anyone buy it from anyone who makes it, we must be the shepherds of it,” it’s this incredibly hypocritical bullsh*t. The problem is that alcohol, look we all know and we talked about on this podcast a lot, responsible drinking is a real thing and is a real challenge and there are, unfortunately, way too many examples of irresponsible drinking, but in the end, these laws do absolutely nothing to prevent that. It does not matter. Frankly, I think you probably find an inverse relationship that the more restrictive the laws are the worse behavior is. If we are honest and open and truthful about the fact that people like alcohol, that people are going to buy it, that people are going to consume it and sometimes they’re going to do so irresponsibly and we don’t let those scare tactics sway us, if we as an industry and we as people in this country say, “You know what, we think that having access to a wider and more diverse array of wine, beer, spirits from producers all over the country and, frankly, all over the world is an unquestionable good it is something that we should not just tolerate but advocate for,” I don’t think there’s an argument against. Yes, there’s a lot of money on the other side because there’s a lot of money in the industry and that in and of itself should illustrate just how f*cked up the system currently is. But maybe I’m just being sort of naively optimistic in this, but I think that you are seeing as our options are curtailed because of Covid, you are seeing people awaken to the idea like, “Wait a second, it’s really important to me to be able to get wine, beer, spirits delivered to my house and to be able to do that it has to be legal and it means that the shipping companies have to be comfortable taking it on.” The system that existed 30 years ago, 40 years ago, 50 years ago, does not work now and yet we’re still operating under it.
A: I want to be clear here, I actually think that a lot of the larger companies that own the large brands actually would be 100 percent for DTC. I think it’s the distributors and wholesalers that won’t be. You can see by Constellation purchasing Empathy, that they want to move into DTC, too. They’re all looking for DTC options because they all want to have these direct relationships with the consumer. The entire trend we’re moving towards in commerce in general in the United States is direct relationships between brand and consumer. The best way to do that is through a direct-to-consumer relationship. If you are the one who is fulfilling you could ensure how the product is delivered, how it shows up, what the packaging fully looks like, what the experience is like when you unbox that product, how then you communicate back with the consumer. It’s what makes some of the most profitable startups of the last 10 years work. Warby Parker is successful because the experience is so amazing because they control it the entire time. That’s why people love it. That’s why people loved Everlane and Bonobos and things like that because it’s a really great experience. And there’s a lot of alcohol companies who’ve been thinking about what that experience could be instead of putting that experience in the hands of even a Drizly or a Minibar. It’s still not a great experience. It’s a random person that shows up, the box could be damaged, it could be in a black plastic bag. It doesn’t feel premium even if you’re buying a $100 bottle of whiskey on Drizly, depending on where it was fulfilled from, it could be a really crappy experience the way it’s delivered. So these brands that are owned by these larger companies want to control that experience. But we’re not going to let that happen, I don’t think. Unless you get those bigger brands involved. Can you convince the Camparis, Diageos, LVMHs, Constellations, Gallos of the world to also lobby in support of direct-to-consumer? If you could do that then I do think we could see a much more likely scenario of direct-to-consumer liberalizing. But if you can’t because they’re also a little bit nervous about the relationships that they have with the second-tier then it’s just not going to happen.
Z: I think, though, this is where the point that you’re making is really important, Adam, which is that we existed in a world pre-Covid where that second tier was hugely determinative — because a huge access point for brands large and small were restaurants and bars and I’m not saying that we’re never going back to restaurants and bars but it’s going to be a while as I keep saying. The access point now is people in their homes and to some extent also, obviously, grocery stores and things like that, but the reality for producers of all sizes is they have to be looking at, “How do I connect to customers, especially with my more premium offerings, but even with the less premium offerings? How do I connect to them in their homes where they’re comfortable and safe and doing all their consuming and going to be for some long period of time, quite honestly?” And the world, in general, is moving that way. We can talk about another time what a shift to a work-from-home permanent lifestyle means for alcohol. I think that would be a fascinating conversation. But the reality is it’s coming, it’s going to stay and if you’re not positioned to thrive in that landscape you’re missing an opportunity, and I don’t think that second-tier does anything for you there. I don’t think if you’re Campari or Gallo or whoever you get a lot out of partnering with them other than their ability to get products to shelves. As someone who was a wine buyer for a long time, I have not always had the best impression of distributors and especially the large ones, and it’s because they’re kind of parasitic on the industry. They exist because of our laws, they don’t do anything all that useful for the most part and I wouldn’t be sad to see them go out of business. And I’m sorry to my friends and family who work in that industry but that’s the truth.
E: Wine has jumped on this a little bit more effectively because the laws have been more relaxed in more states, I think there are 33 or 35 states now where you can get wine delivery — and DTC laws are more relaxed for wine and beer in general. But still, it’s been amazing to me that even in those states and for those operations where it is more relaxed, you’ve not seen wine jump on DTC as effectively as it could have. In some of the statistics I’ve seen, the sales are somewhere between 5 and 20 percent of the general wine companies sales are attributable to DTC or other types of delivery. I think that is such a huge growing area of possibility for brands whether they’re wine or beer or spirits. This three-tier system is making it so difficult for the producers to really make the gains of the products that they are producing.
A: The whole thing is just absolutely nuts because we see the solution right in front of us, of how we could help solve all of this, and it’s just it’s frustrating because it seems like it’s one of those things that just isn’t going to happen.
E: I have hope that it will.
Z: Me too!
A: Do you know how long I’ve watched Pennsylvania push, push, push for there to be legal sales of alcohol in grocery stores? I’m picking out Pennsylvania because my wife is from there.
Z: And they have some of the worst laws.
A: But the lobbying is really strong to not let it happen. Even here in New York State, the grocery chains have pushed, pushed, and pushed to allow for them to sell more than Chateau Diana. If you’re not familiar with Chateau Diana, Zach, you’re lucky. They just won’t allow it to happen because the lobbying efforts are so strong amongst the retailers that say that they’d be put out of business, which I also don’t think is true. The alcohol laws in general in this country are so restrictive but there are people that, as you said Zach, have figured out a way to make a lot of money off of them. They’ve really stifled innovation in a lot of ways.
Z: I want to say one thing about that whole thing about retailers being like, “We’ll be out of business.” If your product offerings can’t catch people’s attention, if your product offerings suck, if you’re not selling what people want, then whose fault is that? Who is struggling here? There’s always going to be a place for brick-and-mortar when done well, but if your business model is to put a bunch of unremarkable crap in a store, that’s a sh*tty business model. Maybe it worked when people didn’t have other options but nowadays when you can go online and order — again, to come back to the Warby Parker thing, people got away with selling sh*tty glasses for really high prices for a long time because there wasn’t competition, and, turns out, when there’s competition things get better for consumers. I’m not a free-market radical, I think a regulated marketplace is a really good thing, but this is regulated not for consumer benefit but regulated for the benefit of existing companies that again, just don’t provide anything of societal or individual value. They just leech off the product and I don’t get the point.
A: Well, I think we should leave it there.
Z: I can rant a lot longer, as you might have gathered.
A: I can tell, but yes I completely agree. And I think one of the first steps for anyone listening is if we want to help a lot of these distilleries and smaller producers that are really hurting right now we should be reaching out. I think one of the easiest ways to do that, and maybe the way in, is that there are a lot of these distilleries that have become, especially, very vital to their local communities. They’ve become gathering places, potentially some of them also offer restaurants, and they’ve become part of the fabric of communities. And it’s reaching out to your elected officials and those local communities to explain to them what can happen if these places go out of business and explain that if they are just allowed to be able to ship alcohol to people who live in that community and the surrounding communities, that would provide a very necessary lifeline that could allow them to continue to operate and essentially survive Covid and survive post-Covid. I think that might be what it takes — starting it really at the local grassroots level, I know we talk a lot about grassroots organizing in the country, but really going grassroots to the mayor, city councilmen — that can really bring it up the chain where it becomes this thing we’re all supporting. I think that’s the only way it happens. If we’re just taking it to the people who are at the end of the decision-making tree, the largest politicians, we know where they stand right now. They stand with the people that help them get re-elected on a national level, which takes a lot of money to do so. But the local politicians don’t need as much money to get re-elected and are more willing to listen to their constituents and their constituents whom may really love this distillery and may think that it employs 20 people in the town and has become a place where people celebrate birthdays and other milestones — and maybe they give back to the fire department — therefore, you really should support them.
E: Absolutely. I think where I want to leave it is in Tim’s article that is called “Why Craft Distillers Are Calling to Extend Direct-to-Consumer Shipping.” It ends with a really heartbreaking quote from Maggie Campbell at Privateer Rum. She’s the head distiller there. It’s a distillery based in Massachusetts. She says, “Every day, I probably spend at least an hour answering emails and messages from individuals in places that want to get our rum and they can’t. It’s hard as a business to know you’re not making that money.”
A: Well guys, it’s been another great conversation. If you have thoughts on what we chatted about today as a listener, please let us know, we’d love to hear from you. Just shoot us an email at email@example.com we always love to know your thoughts. A lot of you emailed after the clean wine episode, which is why Zach and Erica are really pushing me that we have to do a follow-up, which we probably will.
E: And we have more articles on the topic coming, stay tuned!
A: Let us know — if there are any other topics you want us to cover, please email those in as well. Before we go, another word from our sponsor, and the amazing Cognac Connection challenge, the contest I discussed earlier which is giving away $1,000 scholarships to qualified bartenders. All you have to do is create an amazing Cognac cocktail. The deadline is Aug. 31. Just go to cognacconnection.com to enter and for details. See you next week.
E: Take care.
Z: Sounds great.
A: Thanks so much for listening to the VinePair Podcast. If you enjoy listening to us every week, please leave us a review or rating on iTunes, Stitcher, Spotify, or wherever it is that you get your podcasts. It really helps everyone else discover the show. Now, for the credits. VinePair is produced and hosted by Zach Geballe, Erica Duecy and me: Adam Teeter. Our engineer is Nick Patri and Keith Beavers. I’d also like to give a special shout out to my VinePair co-founder Josh Malin and the rest of the VinePair team for their support. Thanks so much for listening and we’ll see you again right here next week.
Ed. note: This episode has been edited for length and clarity.