Issue link: http://winesandvines.uberflip.com/i/658375
66 WINES&VINES April 2016 BUSINESS PRACTICAL WINERY & VINEYARD www.scottlab.com • info@scottlab.com High-tech meets handcrafted. High-tech meets High-tech meets handcrafted. handcrafted. SIGMA press with patented pressing principle and FLEXIDRAIN® technology for vertical juice extraction. Visit our website for a video of the SIGMA in action. tection for themselves, even though some of the key characteristics of the automobile fran- chise model (such as exclusivity and supplier control) were not always evident. States tried to define a "franchise" relation- ship to include other industries (such as restau- rant business format franchises) and generally limited the definition of "franchise" to require a strong link between the supplier's trademark and the distributor (such as a licensing agree- ment and a "community of interest"). Despite the fact that alcoholic beverage distribution agreements do not generally re- quire supplier exclusivity or involve trademark licensing, certain states applied franchise laws to the alcoholic beverage industry. New Mex- ico, for example, adopted an alcoholic bever- age franchise law act in 1978, finding that there was a need to "provide an equal bargain- ing position between the parties" and ensure an orderly and fair distribution system. Today, wholesalers continue to defend fran- chise laws on similar grounds. According to the Virginia Wine Wholesalers Association, state franchise law "protect(s) distributors from intimidation, bullying and abuse by more powerful (producers)." However, the wine industry has undergone significant changes since these franchise laws were first adopted in the 1970s. The number of wineries has exploded and, at the same time, there has been a massive consolidation of the wholesale tier. In October 2015, Wirtz Beverage Group and Charmer Sunbelt Group announced their merger to become the nation's second-largest distributor with an estimated $8 billion in gross annual sales. Later that month, Southern Wine & Spirits and Glazer's announced plans to merge—a combination of the first- and fourth-largest spirits and wine wholesalers. This ongoing wholesaler consolidation makes it increasingly difficult for suppliers to find adequate distribution arrangements and has given wholesalers the upper hand in ne- gotiating distribution agreements. Although certain wineries have been able to bypass this bottleneck in the distribution of alcohol by having strong wine club and direct- to-consumer programs, most wineries continue to rely heavily on the three-tier system to sell their wines. With this drastic shift in bargaining power between suppliers and wholesalers, one could question whether the franchise law protections for distributors are still warranted, or whether they are simply antiquated laws meant to solve problems past. In short, the reasons for adopt- ing franchise laws may no longer be present in today's wine industry. Why should producers and consumers care? The cost of anti-competitive franchise laws is borne by both producers and consumers. Producers may be locked into under-per- forming distributor relationships that are too costly to terminate, damaging their bottom line and brand value. As in the Virginia example, even if a producer has valid economic reasons to terminate a distributor relationship, that may not be enough to meet the "good cause" requirement. A winery that feels its distributor is not ad- equately representing its brands not only faces diminished sales but also may see the goodwill associated with its intellectual property—its brands—diminished in that franchise law state. Consumers feel the impact of franchise laws through higher prices and more limited choices. In a 2013 study, researchers at So- noma State University's Wine Business Insti- tute compared wine sales in Florida, a non-franchise law state, and Georgia, which has strict franchise law regulations. The study concluded that Florida consumers enjoyed generally lower prices for wine brands that were sold in both Florida and Georgia, and that Florida offered a wider wine selection. The study used qualitative interviews with 14 wineries, distributors and retailers, statisti-