Proposals to loosen Indiana's wine distribution system fail

March 17, 2008

Oliver Winery considered starting a wine club that would ship to members through UPS, giving them access to boutique wines not available in stores. But the Bloomington business held off because it would have to exclude a key state: its home base, Indiana.

The state prohibits its wineries from shipping more than 3,000 cases a year in-state. Oliver is nearly spilling over that limit already, owner Bill Oliver said.

At IBJ press time, the General Assembly was set to close another session last week without significant change to the state's complex alcohol distribution system, ensuring another year of wrangling between wineries and wholesalers.

A proposal to raise the direct shipping limit to 10,000 cases failed. So did a broader deregulation bill brought by a new Indiana wine drinker's group, VinSense.

The Legislature did achieve a compromise on one limit: It increased the total amount of wine a winery can sell in a year--through UPS or any other venue--from 500,000 to 1 million gallons. The bill was tailored for Oliver, the largest of the state's 35 wineries, which sold 497,000 gallons last year.

"This has been an industry that's seen a lot of success," State Rep. Eric Koch, R-Bedford, said. "This not only allows Oliver to keep growing, but it encourages continued investment in the industry."

This is the third time the Legislature has raised the annual limit for Oliver since the 1973 Farm Winery Act, which was meant to encourage startup wineries. Oliver has doubled its sales every four years for the last 16 years. Sales reached $14.4 million last year, Bill Oliver said.

State wineries grew 78 percent between 2000 and 2005, according to the Indiana Wine Grape Council. But growth has been more difficult since 2005, when the U.S. Supreme Court struck down Michigan's practice of allowing in-state wineries, but not out-of-state ones, to ship directly to consumers. State legislatures, like Indiana's, that had been giving their home wineries the same advantage had a choice: Loosen restrictions for out-of-state wineries or tighten them for in-state ones.

Indiana's Legislature responded in 2006 with a series of new restrictions. One required buyers to complete a face-to-face transaction at a winery before having wine shipped to them. Another prevented wineries from shipping directly if they had their own wholesaler permit. This effectively kept all California, Oregon and Washington wineries from shipping to Indiana, because those states give their wineries wholesaler permits automatically. A lawsuit challenging the 2006 changes is pending in the 7th U.S. Circuit Court of Appeals in Chicago.

Through the disputes, wineries found themselves opposed by wholesalers, who had an interest in defending the "three-tier" producer-distributor-retailer system established at the end of Prohibition to thwart bootleggers.

"It's not a free market for a reason," said Jim Purucker, lobbyist for Wine and Spirits Wholesalers of Indiana, a trade group. "It's regulated because of the product we sell. We're unapologetic about our defense of the system. It's worked well for three quarters of a century and we don't want to see it dismantled for a small number of oenophiles and the interests of wineries."

The wholesale industry supported the increase of the total annual limit, which passed. It opposed the increase of the direct shipping limit, which was removed from the same bill in a Senate committee hearing.

The fact that there are limits at all rankles winemakers like Chateau Thomas owner Charles Thomas, whose wine club ships to more than 700 Hoosiers.

"[Wholesalers] are so powerful that they get to dictate what we can and can't do," he said.

For the first time, wine drinkers in the year-old VinSense brought their own bill this year, hoping to remove hurdles for out-of-state wineries that wanted to ship directly to consumers and retailers.

Brown County VinSense member Rick Hofstetter complained that wholesalers are interested in carrying only high-volume sellers, making most small-batch varietals unavailable to upscale restaurants like his Story Inn.

"I can't legally buy 95 percent of the wines made in this country," he said. "If [wholesalers] refuse to provide it, why can't I go out and buy it directly from the producer?"

He and VinSense President Allen Dale Olson, Story Inn's wine steward, rejected the idea that direct shipping would provide a channel for minors to get alcohol. They say specialty wines are too expensive and would take too long to arrive to interest teen-agers.

Purucker defended the wholesalers' position.

"Everyone wants to say this is about $50 bottles of wine," he said. "But someone will create a fortified wine, put it in juice boxes and find a way to sell it to kids. It's foreign to VinSense and most legislators, but someone will find a way to make it happen."

Oliver sees the conflict between winemakers and wineries as unnecessary. He said 85 percent of his sales go through his wholesaler, Olinger of Indianapolis. Tasting-room sales account for about 14 percent and direct shipping for only about 1 percent--too little to pose a threat to wholesalers, he said.

"The service that Olinger provides to us is great," he said. "They earn every penny we give them. But they could survive and thrive in a free market.

"If they took some of the resources they're putting into the state Legislature and put it into improving their business, then I could take the money I put into the Legislature and spend it on winemaking. It's wasted money."

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