Ep. 2175 Tom Wark | Masterclass US Wine Market With Barbara Fitzgerald

The problem with the three tier system is it doesn't work in the twenty first century. Let me go back to this idea of the tide house and the tavern. All those things that were true prior to prohibition are not true today. That is to say, We have air conditioning. We have interstate travel. We have streaming internet. We have television and we have radio. Nobody goes to the bar or the tavern these days to get a job. Nobody goes to the bar or the tavern these days to find out what the news is. No one goes to the bar or tavern to commune with their people. All of this happens online. Welcome to Masterclass US wine market with me, Barbara Fitzgerald. In this show, we'll break down the complexities of selling wine in the US by discussing the relevant issues of today with experts from around the globe. Each episode serves up three key insights to help elevate your wineries presence in the US market. So grab a pen and paper, and let's pave the way for your success in the US. Hello and welcome to Masterclass US wine market. Today, I am thrilled to welcome Tom Lark to the show. Tom is a thirty year veteran of the wine industry. And as a marketing and public relations consultant, he's worked with dozens of wineries, retailers, trade associations, and wine service companies to help tell their story. Additionally, he's been the executive director of the National Association of Wine Retailers. He's probably best known for his prolific writing on the wine business, wine regulations, wine politics, and the intersection of wine and culture. Since two thousand four, he's published more than four thousand posts articles and newsletters on these subjects and currently writes at the fermentation sub stack. So welcome to the show, Tommy. It's really great to have you here. Well, thank you for having me. I'm excited to talk to you. I've been looking forward to this. Oh, that's so great. Me too. And well, before we dive into today's discussion, can you tell us a little bit more about your background and how you came to work in the wine business? That was a long time ago. Let me think. Okay. So I had just gotten my master's degree planning to go on and get a PhD and spend the rest of my life in academia, teaching freshmen and whatnot about American history. But it turned out I did a little bit of, lecturing while I was getting my master's more importantly, I started grading papers, and I noticed that freshmen often didn't include verbs and entire paragraphs. And I started marking them wrong, right? You can't write like this. And my, my professor told me no no no, no, Tom. You can't mark them down on how they write. You have to try to discern what they know. And then I had this flash forward of thirty years of trying to discern what freshmen were trying to say, and I realized I don't want that life. So now I had to get a job. Right? And so I assessed my skills and my talents, and it looked like marketing was a good idea, but then marketing's pretty big. So inside marketing, there was public relations. And then inside public relations, there were all sorts of public relations, sirs. High-tech PR, and there was book publishing, but there was wine PR too. Well, I had spent a good deal of time going up to Napa and Sonoma, and that sounded good to me. And so someone made the mistake of giving me a job in a wine PR firm because I knew nothing about it But it turned out I was actually pretty good at it. And so after three years of being in a PR firm, it took me that long to do the math. How much am I being paid versus how much are the clients that I'm servicing paying the firm? And that's when I decided I need to go out on my own and be a consultant, which I did. And so that was in nineteen ninety three. And I guess I've been doing it ever since. Yeah. So you've been around for a little while. It's safe to say. It's safe to say. Yes. In this episode, we'll talk to Tom more specifically about the really serious challenges the current US three tier distribution system poses for small and mid sized alcohol producers and especially wineries. Also with history, you're really uniquely positioned to talk about these things. So our three key takeaways for today's master class are, and what we're really excited to learn from, Tom, are, first of all, the history of the three tier system and when and why it was built. Second, what are the challenges it's currently posing? And then third, what does reform to the three tier system look like? So let's let's go back to the beginning. Let's let's pull out your history teaching, dust off those boots, but Could you briefly walk us through the history of the three tier alcohol distribution system and explain why it was initially established? I'd be happy to. First, let's, establish what the three tier system is. The three tier system is generally a system of alcohol regulation in place in most states. And it boils down to basically two points. The state will issue licenses with certain privileges to producers, the folks who make the wine, the wholesalers, the folks who distribute the wine, and the retailers, the folks that sell the wine. Now, in addition to that, the three tier system is unique in that it mandates that a producer sell its products to a wholesaler in the state And then it's only the wholesaler who can sell to the retailer. Now one thing to take note of in all that is that the contours of the three tier system do not encompass how our wine is sold and encompasses how a wine is brought to retail in a given state. So that's the three tier system, licensing, and then mandating that producers sell to wholesalers and wholesalers sell to retailers. And we've had this system since nineteen thirty three. Or nineteen thirty four. When the twenty first amendment was passed that ended prohibition, regulators had to decide, well, how are we going to regulate all this alcohol that's going to be legal once again? And the primary focus of the regulator at that time was how to prevent a return to what was called the Tighthouse system. The Tighthouse system was a way of distributing alcohol prior to prohibition, and it lasted from, like, eighteen fifty all the way up until nineteen nineteen. And the way it basically worked was, it mainly applied to brewers and distillers. The way it worked is a brewer in a city would set up a tavern with all the things they needed. Fixtures, leases, etcetera, etcetera. They would give them all sorts of different things. And in return, the tavern would only sell their brand of beer. Now, the more beer the tavern sold, the better the the brewer did. And so there was a lot of pressure that was put on taverns to sell lots of lots of beer. And so they instituted these really terrible, terrible policies, like buy a bucket of beer, and literally they sold buckets of beer then. Buy a bucket of beer and get a free lunch, buy a bucket of beer and get a free dinner, open twenty four seven. Right? They might have prostitution in the back. They might have gambling in the back. I mean, it was an all purpose bad thing. Basically. But it's important to remember that at the time in the early twentieth century and in late eighteenth century, we had just had a wave of immigration in the United States, a lot of Italians, a lot of Germans, a lot of Jews, a lot of Jews come into the United States. And they tended to gather in urban areas. And at the time, there was no air conditioning. There was no television. There was no radio. There was no internet. There was no streaming services. There was no interstate travel. I mean, you'd have to get on a train. It would take ages. So basically the center of your life was your community. In your community, it happened at the time, centered around the tavern. The tavern was critical. Right? It's where you would go to get your news. It was where you would go to get a job. It where you would go to, to organize politically, and to organize political parties. It's where you went to commune with your people, but it also caused a lot of problems, right, with those terrible marketing tactics, families were broken up, There were drunks everywhere on the streets. It was bad, and a lot of what people saw led to support a prohibition. And so we got prohibition. In nineteen nineteen, ended in nineteen thirty three, but when they decided, how are we going to reregulate alcohol? The primary thing on their mind was to make sure this tied house system, this connection between the producer and the retailer where the tavern no longer exists. So they decided, we'll create a three tier system where there's somebody between the producer and the retailer. So the producer can't have that kind of influence over the retailer. And that's how the three year system came into effect. Interesting. And so, you know, who did they look to to help them decide also how they were gonna move you know, alcohol around the state and around the country. There are examples of former bootleggers who, all of a sudden, didn't wanna be, bootleggers anymore because bootlegging, there was no profit in bootlegging now that alcohol was gonna be legal. But the one thing they knew how do was the one thing they knew was logistics. Right? It's not easy to get a, you know, a case of a Canadian whiskey across the lake into Wisconsin or into Michigan. Right? But they knew how to do that and they knew how to move it around. Some of those people actually became distributors. That's not to say that today's wholesalers and distributors have anything to do with organized crime. I would never make such a Right. No. No. No. But I have heard an outrageous stat that, you know, something like every drink sold in Massachusetts or something that Kennedy Family makes, like, seven cents still to this day off every drink sold or something like that? No. I don't. I don't think that's the case. Although I can't confirm it. I seven cents a drink you imagined? I don't think so. Well, let's talk about where we are now because obviously the alcohol industry has really evolved over time. And so what worked then isn't necessarily what's going to work now. So what are some of the most significant challenges that the three tier system is posing today? Well, the problem with the three tier system is it doesn't work in the twenty first century. Let me go back to this idea of the tide house and the tavern All those things that were true prior to prohibition are not true today. That is to say, we have air conditioning. We have interstate travel. We have streaming internet. We have television and we have radio. Nobody goes to the bar or the tavern these days to get a job. Nobody goes to the bar or the tavern these days to find out what the news is. No one goes to the bar or tavern to commune with their people. All of this happens online. So it's unlikely that if the three tier system didn't exist, that all of a sudden we'd have these tide houses all over the country, and they'd be filling people up with buckets of beer, and people would lie to be lying around on the streets. The conditions that that necessitated the three tier system don't exist today. And so the three tier system is necessary. And so then we have to ask ourselves what provisions of the three tier system are necessary today. Do we really need a wholesaler in between the producer or the importer for that matter? And the retailer, I don't think we do. And the reason I don't think we do is because I know that as consumers, go to their local stores and look on the shelves, they tend to see an array of wines that are produced by the largest companies in the world. They take up at least fifty percent of the shelf space, if not more, and they have this other smaller section for maybe smaller wineries. And this presents a problem for producers. Right? How do they get their wines on the shelves if the wholesaler won't represent them? And the number of wholesalers in the United States says shrunk and shrunk and shrunk and shrunk just as the number of producers and importers have exploded over time. We now have three wholesalers in the United States that that sell upwards of fifty percent of all wine in the United States. Right. And in some states, isn't it as high as ninety percent in certain states that that's their It is as a matter of fact. That's right. It's really difficult then for our small mid sized wineries. I mean, obviously so many of what is in Italy, but also so much of what is in most Most wine producing countries. Absolutely. Absolutely. So what I think we need today is a legal way for producers and importers and retailers to cut out the middleman. To not have to use, not be mandated to use the wholesaler. And that's what's necessary in order to give producers and importers a better chance of connecting with retailers and consumers. We also need expanded direct to consumer shipping, not just for producers in the United States who have largely obtained it, but also for importers and for retailers. Retailers are particularly important. We go back to importers. It's always been a little bit shocking to me that over the past twenty years, importers have not asked for the right to ship direct to consumers. They're the natural equivalency of domestic producers, yet they've never asked, and their trade associations, have never asked for the right to ship direct. So in lieu of the importer shipping direct to consumers, which would be a boom for consumers as well as importers. If imported brands are going to reach more consumers beyond the local store shelf, they need retailers to be able to to be able to be shipping direct across the country. Right now, only twelve states and the district of Columbia allow out of state retailers to ship into their state. And remember, in the United States, it's only retailers who sell imported lines. So those are the two changes that we absolutely need to see happen. We need producers and importers to be able to sell directly to retailers and restaurants without using a wholesaler, and we need retailers and importers to be able to ship direct to the consumer. If that happened, we would see an explosion interest in wine in the United States. And we would see a great deal of innovation too. So not obviously this poses a huge challenge for our producers, our wineries, but also you're saying, you know, this is produces a challenge in people even being able to engage with wine period. Dis benefited by not being able have the wider selection choice, but also just by not being invited into wine because it's so limited. It's true. Kansas, for example, since it's the middle of the country, it serves as a perfect example. You can go to the Kansas ABC website, and you can see how many wines are approved for sale in that state, and it's about twenty seven thousand. Now that might seem like a lot. Twenty seven thousand wines were approved for distribution. Last year, a hundred and fifty one thousand wines were approved for sale in the United States, and that doesn't count Wines that were approved previous to twenty twenty three. That doesn't count all the rare and collectible back vintages of wines that you can find at specialty wine retailers and online options. There are literally every year upwards of a half million different kinds of wines available. Now, let's say you go to Sonoma County and you visit a Sonoma Valley winery, and it's one of those older wineries. It's been around for about forty or fifty years, and you're at the bar and you're tasting wine, And they talked to you about these great vintages that they've produced in the past. Now maybe they have a, you know, a, a two thousand fifteen or a twenty sixteen vintage available in addition to their, their current vintage. But wouldn't it be cool? If you could taste something from two thousand or from nineteen ninety five. Well, if it's legal for retailers to ship into your state, all you need to do is go to winebid dot com, and you can find thousands of wines that are older than thousand, let alone newer than the year two thousand, vintage two thousand, that are not expensive that you can have shipped to your home. But if retailers are not allowed to ship into your state, you don't have any access to those because those will never show up. On the store shelves that you visit that alone the grocery stores. So there are literally hundreds of thousands of wines that are not available to Kansas and to most consumers in all but twelve states. That's a problem. Because if somebody's just getting into wine, right? And they've heard about, and they've read about people tasting these older wines, how do they go about accessing those older wines? Well, they're not going to go down to Safeway, can find a nineteen ninety five Napa Valley cab, are they? Well, they're out of luck. Well, maybe they forget about their interest when they move on to something else, like cannabis or cocktails or whatever it is. That's how the wine market is diminished by these regulations. Yeah. Definitely. So you already mentioned some reforms that we could specifically cutting out, you know, the middle man and increasing accessibility from retailers and importers directly, but how might these be implemented? I mean, is it as simple as we cut out the middleman and then everyone takes care of it themselves or are there new regulations that need to be put in place? If you were writing the laws, what would you do? I've actually written a few laws before and a few bills on this, but the problem that we have is politics. To be honest with you. If you think about the way I've described the three tier system, there is a specific stakeholder who really values the three tier system, and that is the wholesaler in the middle. Remember, by law, in the three tier system, producers have to fell to the wholesaler, and the wholesaler is the only one who can sell to the retailer. They want things to stay in place exactly the way they are. And in order to change things, you have to go to the legislature. You have to present them with the idea that know, we opted reform to three tier system, but it turns out that every year, wholesalers in the United States donate tens of millions of dollars to state politicians. I'm not joking. Tens of millions of dollars to state politicians, not to folks who go to Washington, DC, but folks who work as lawmakers in the individual states. It's extraordinarily difficult to fight against that. And yet I spent the last seventeen or so years doing that. It can be a little bit frustrating, but we have our wins here and there. The only time, for example, a new direct shipping law is implemented in the state, is when consumers of them in that state really make their voices heard. And so when we have a bill running in a different state, so for example, this year, we're gonna run a bill in in Washington and in New York state that will allow how to state retailers to ship consumers there. When we do that, we're gonna activate as many consumers as we possibly can. To contact their legislator to go and testify without the consumer. The bill won't pass because the lawmakers will simply lean on the folks who have already demonstrated their commitment to their view, and that is the wholesalers who have given them millions of dollars. So it's a political problem. The other way to to sort of advance this agenda is through the courts. There are states where in state retailers can ship to consumers in that state, but out of state retailers may not. Now that should sound familiar to people who have sort of followed the courts and wine. In two thousand and five, New York and Michigan both allowed their own wineries to ship to consumers in those states, but they didn't allow other wineries outside the state to ship to Michiganers and New Yorkers, and so they were sued those two states. Case went all the way to the Supreme Court. The case was called Grand Home V Heeled. And in that case, the Supreme Court said no no no. You can't do that. You can't allow your own wineries to ship to consumers' nest state, but not allow the other wineries outside the state to do that. That's a violation of the dormant commerce clause. That's a violation of the very reason we created the constitution. And so after two thousand and five, the winery to consumer direct shipping channel really started to open up. But retailers were not included in that decision. At least that's what some of the opponents of retailers shipping have said. And so instead of having almost all the states open for retailer to consumer shipping, we only have about twelve of them. And it turns out there are now six cases in federal court, challenging state laws that ban out of state retailers from shipping. The hope is that we get one of those in front of the Supreme Court. And if we do, I'm very confident that we'll win. So that's the other way. Litigation will be a way to open up the States. Even if we do that though, eventually, we're going to need consumers to help us because I just have to tell you how this works. We get a decision in the Supreme Court, and the state of the Supreme Court says, no, you can't bar out of state retailers from shipping. Well, the state has a choice at that point. They can either allow out of state retailers and in state retailers to ship or they can shut down all retailers shipping from both in state and out of state retailers. And that's when consumers need to get loud, right? Because if consumers don't say anything, when, when wholesalers try to advance, that particular view of the law. They'll end up with no retailer shipping whatsoever. I think I would wager that the average wine consumer has no idea really of these challenges that we as producers and and retailers, etcetera, if they so how would you suggest that we really make them aware, even tell them to get loud enough to make a difference in their state? Well, first of all, one of the things I do is I lobby. And in my role as a lobbyist, I'm also sort of in charge of ginning up public support for something. And one thing I know is you don't ask somebody to do something if there's not something for them to do. So it doesn't make much sense to ask consumers to tell your Illinois lawmakers to pass a law allowing retail and consumer shipping in your state if there's not a bill in the legislature that they can vote for. So you have to be very selective when you ask consumers to do something, but when we do have a bill in a certain state. And when we do reach out either via the media, when retailers reach out with emails saying we need your help, when we create these pages where people can tell the the lawmakers their views and then send it to mall with one click of a button. When we do do all that, consumers respond because it's not a very difficult issue to explain. You're not allowed to have this Tus and wine shipped to you because wholesalers in your state don't want you to because that's competition for them. We wanna change this. Please tell lawmakers you wouldn't be able to get your, your, tuscan wine and you're freely white. Right? It's not a difficult story to tell. We also work the media on a regular basis turns out that the media as a whole support direct to consumer shipping. I've never met a member of the media who doesn't because when you explain to them the discrimination and the protectionism, they just don't understand. Why would you do that? Right? We all live in a world where If I need an ivory button for a shirt that had the button ripped off, I can get it tomorrow. Right? If I need a box of diapers delivered, I can get it. Whatever I need, I can get it immediately by going on the internet and ordering it from the right place, not so with Italian one. In your opinion, what is the ideal balance between regulation and kind of innovation, you know, bringing us into the twenty first century? What kind of regulations should exist or not exist? We already know which ones shouldn't, but is there something that should? Yeah. For sure. I mean, when it's abused, alcohol can be dangerous for the people who abuse it and for some of the people around them. So it's always going to be the job of government to do what it can to dissuade people from overconsuming and miners getting their hands on wine. So where shipping is concerned, we know how to do that. Right? Put a big old sign on the side of the box that holds the wine that says contains alcohol must have a signature of somebody over twenty one you receive always have to have that. And you get a signature of, of an adult at the time of delivery. So that's pretty simple. Right? We need to have those kind of regulations in place. We also need to have taxes paid. There was a time in this country when the vast majority of state and federal budgets were based on excise taxes. And excise taxes in every state are still crucial. So there has to be a way whether we're talking about direct to consumer shipping or whether we're talking about producers selling directly to retailers in other states. There has to be a way, an efficient way to collect excise taxes from those people. Those sorts of things are very, very important. And, of course, I think it's reasonable to expect that a winery or a retailer shipping into another state will have to report how much wine they've sent to a state. So they have to remit reports, and they have to expose themselves to the regulatory and legal jurisdiction of those states into which they want to sell wine. All of that makes sense to me. But the idea that a producer must use a wholesaler to get into another state to make sure that we don't have taverns on the corner producing drunk people. Well, it's a little bit absurd. I have a thought. I don't know. And I'm curious what you think, but obviously, so we talked about, you know, the stakeholder of the wholesaler is probably has the most power from an economic standpoint at the moment and sway over legislators and what's happening with regulation. But if we were able to kind of state by state start to do away with them, with all of their experience in the movement and the transfer of alcohol, could they shift into, like, becoming a network of distribution for direct sales of lines? Or is that kind of outside of their? No. I don't I don't think that would happen at all. And it's funny when when I talk about taking the wholesaler out of the middle of the transaction, I'm not talking about getting rid of wholesalers. Wholesailers are absolutely critical. Who else is gonna move the boxes, right? Back in the day, I mean, wholesalers used to be extraordinarily good branders. Right? They'd go to restaurants and retailers, and they'd really talk up and they'd sell the producers in their portfolio. That doesn't happen so much anymore. Right? But we need wholesalers. And even if a producer were able to sell directly to a retailer without going through a wholesaler, I don't see KJ doing that. You know, I don't see, Antinori doing that. It doesn't make any sense, right? What are they gonna do by their own fleet of trucks and drive it around the country? That's not gonna happen. But small Oregon producer who knows a restaurant in New York who just needs a couple of cases of the reserved Peno. Well, heck, I can get refrigerated FedEx truck to take it over there in a few days. I don't need a wholesaler. So wholesalers won't go away. Wholesalers will continue doing what they're doing now, and they're very, very good at moving boxes. Well, that's, I think, an important call out too. It's not that we're calling for anyone who's calling for, like, the complete dissolution of an industry or a part of the industry. Like, yeah, but just a little bit more accessibility for the small guys. And for consumers. And for the consumer. Absolutely. They're at the center of this. Absolutely. As we start to kinda wind it down here, Tom, we like to ask our guests three questions to help our listeners better understand the US market and kind of cement the lessons of today's episode. So please try to answer, these next questions in a couple sentences if you can. What is your number one tip for mastering, the US wine market? I think it's gotta be developing multiple distribution channels. If you want to use the three tier system, that's fantastic, but you might wanna also develop direct to retail in those states where it's allowed. And you also want to develop a direct to consumer channel. That's gonna be important to you. You never know which way the winds are gonna turn the wine market and having multiple distribution channels is one way to hedge. Yeah. Absolutely. Kinda keep yourself insulated from any extreme events. It leads me to think back to COVID how challenging. That was if you only had one way to sell your wine. Okay. Number two, what is something you would have told your younger professional self about selling wine in the US? I would tell him, first of all, you should probably work on the weekends. I didn't like to work on the weekends, and I still don't. But no one and no entity is gonna tell your brand story, better than you are. Don't turn your brand and don't turn your brand story over to somebody else. And in today's world, you can tell it yourself too. It's so much easier now than it was in nineteen ninety five when I started started out in this business. Tell your own story. Don't rely on anybody else. Yeah. That's great advice. And like you said, so many avenues to get your message out there in today's world, Number three, we all move around a lot in the wine industry. So what is your favorite travel hack when doing work travel? It's not so much a hack as it is a principle. Always plan on arriving everywhere early. When I go to the airport, if my plane leaves at, I don't know, seven o'clock in the morning. Okay. I know I'm gonna have to board at six thirty. Right? And then I know there's all the I gotta park or I gotta take a an Uber, and then I have to go through. So, okay, that's gonna be an extra hour. After that, I always pat on about forty five minutes because I know something's gonna go wrong. Right? And no matter what we're talking about, you know, the Uber doesn't show up, right, at your place or whatever it is, there's always a good chance you'll be late. And you don't have to be. And because you don't have to be late, When you are late to something, people are wondering why didn't you plan to be here on time? I like that hack because I I play fast and loose. I'm like, oh, it takes seventeen minutes to get there. I'll leave seventeen and a half minutes. You never know you never know what's coming up. Well, Tom, But truly, thank you so much. This has been so helpful because, like I said, it's such a relevant issue for our small producers and important for them to hear this information and maybe even how they can do something about it when something pops up in their state or a state that they want to sell their wine in. How can our listeners connect with you specifically if they want any more insight or information from you? Well, if anybody ever wanted to contact me, all they would have to do is Google me. So I'm not gonna hide my email address. It's everywhere. So it's tom at Work, w a r k communications dot com. You can always reach me there if you have any questions or you wanna chat. I publish fairly regularly on my sub stack, and that is Tom work dot sub stack dot com. And then I'm also on X, and I'm on Facebook, and I'm on LinkedIn and just do a search on Tom Working, and I'll pop up. Fantastic. Well, again, thank you so much for all of these insights. It's been great to have you here. Thank you very much. And that's a wrap for this episode of Master Class US wine market. Thank you so much for joining us. If you enjoyed this episode and want to stay up to date with the latest industry trends, remember to like, follow and share our podcast. And if you find value in our conversations, please leave us a review to help others discover the show and grow our community. Stay tuned for new episodes every Monday. Until then,