Helping small and medium producers - Oct 1 Comment Deadline

Hey, this came to me via VinoShipper and sorry for the long post (no time to edit during harvest/crush).

“This summer, President Biden issued an Executive Order directing the U.S. Treasury Department to review its trade practice regulations that may “unnecessarily inhibit competition” and to consider “reducing any barriers that impede market access for smaller and independent brewers, winemakers, and distilleries.” The Biden Administration has asked an important question related to our industry at a time when equity, commerce and technology have merged into a once-in-a-lifetime opportunity to give independent producers like you a chance to compete under modern rules from this century.

The Alcohol and Tobacco Tax and Trade Bureau (TTB) is currently accepting comments online here as it considers any changes to federal law related to the sale and distribution of beer, wine, and spirits.

A central part of the discussion is the three-tier system enacted after the 21st Amendment and the end of Prohibition. The nearly 90-year-old system benefits major wholesalers and large producers as the industry consolidates to the disadvantage of small and medium-sized producers. For example, out of more than 11,000 wineries in the U.S., the top 10 producers account for 67 percent of all output. While at the same time, the wholesale lobby annually spends record-level cash to influence and support the status quo.

Please make your voice heard and comment on the pending regulations. Here are some suggested points to consider making in your submission:

We support open, fair, and competitive markets. We oppose excessive market concentrations that threaten basic economic liberties for small businesses, workers, startups, and consumers.

The nearly 90-year-old three-tier system needs to be reformed, most importantly by not mandating the distributor tier for small and medium-sized producers.

Regulators should allow small and medium-sized producers, farmers, and small businesses more opportunity to compete in a modern marketplace where we can sell directly to consumers and trade accounts.

Independent producers can benefit the economy and thrive by using modern e-commerce-based platforms that give consumers more information, choice, and value. More brands will reach more households.

Direct e-commerce platforms are safe and effective at tracking taxes, licensing, and all levels of compliance.

We believe in strict legal compliance, licensing, and taxation throughout our industry. We are committed to the safe and responsible consumption of alcoholic beverages in our communities.

The deadline for commenting is October 1, 2021, 11.59 EST. The process is simple, follow these directions to submit your comments.

Go to Regulations.gov

Personalize the talking points above. The more personal the comment the less likely that your comments will be considered a form letter and will be more powerful.

Drop in any attachments you wish to add.

Enter your email address.
Answer the question, “Tell us about yourself”.
Click “I am not a robot”.
Click “Submit Comment”.

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Done.

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Love your letter CJ! [bye2.gif] [bye2.gif] [bye2.gif] [dance-clap.gif]

Thanks for this heads up. I am the Chair of the Wine Beer and Spirits Law Committee of the NYS Bar Association, which is a serious group that does continuing legal education programs, and I am also occasionally referred to as the Vice President for Having Fun. I do not know if we can put together a committee comment in time (I normally write comment letters for the Banking Law Committee and it’s not as easy as you would think, but it’s worth a try. I will probably not be able to get a formal committee vote so that we can say that the letter is the position of the committee, but I know how to deal with that issue and make it look like it is. Bye. I’ve got to get to work on this.

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Okey Dokey. I just ran it up the flag pole and requested help putting a comment letter together to 2,800 members of the Business Law Section of the NYS Bar Association and 30 members of our committee. Now we see if anyone salutes.

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Thanks Jay! Amazing [cheers.gif]

Sent a comment as a consumer. Good to get behind this for the sake of others like me, and the many small/medium sized wineries in my area.

Done. Change? We’ll see!

Thanks, Richard!

wait so are we pushing for all out abolishment of the 3 tier system here? what is the game plan with these comments?

Thanks, Richard. Here’s an example of the crazy rules we encounter: NC only allows 2 cases per month shipped from a winery to a household thus making it impossible to supply wine directly for events (weddings, charity dinners, etc.)

Done

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submitted

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I think, at least for now, the goal is to make the laws for small and medium producers more uniform state to state. In California, I can receive wine by shipment direct from wineries here, and from those in other states; small wineries can sell direct to shops and to restaurants. Our rules are very permissive. (So for all of you who want to start an argument about California’s hostility to business, think twice.) But it’s a total patchwork for those wineries in dealing with consumers in other states, and puts them at a huge disadvantage to large brands that can afford to play the 3-tier game. Bad for small business, bad for consumers.

I’d like to see the 3-tier system go away, but I don’t think that’s the immediate goal.

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I finally got a chance to read your comment. Excellent, well written and obviously personal, not a copy job representing 100 identical comments submitted by 100 members of the same special interest group. I am going to draft a committee comment letter today, which will be limited in scope because there are certain issues (e.g., the three tier system), over which the TTB has no authority, and which we will not discuss.

Please do not get confused. The TTB has no authority over the three tier system. At least that is virtually the unanimous view. State regulation, so long as it is not discriminatory against out of state actors, and does not discriminate based upon sex or some other protected class, is itself protected by the second section of the 21st Amendment. I have just finished the first draft of the first section of my comment letter and it addresses consolidation, lack of competition and antitrust issues. I am now considering labelling regulations, which create a problem because there is an inherent conflict between simplicity and truthful complete disclosure.

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Yes, but only two people saluted, and one of them , who happens to be a friend of mine, is a shill for the three tiered system.

Great ideas, Jay. Because the feds. can’t overreach too much due to the 21st amendment, I requested that the U.S. sponsor educational and voluntary efforts and incentives to States to reach the goals of efficiency and more uniform standards. Governors have national and regional associations and other coordinating bodies that the TTB and other US Bureaus/Depts. could actively engage on these issues. (The National Governors Association is the most prominent; they have lots of committees, staff, etc.)

The other argument that I used is that ultimately, it’s not just large U.S. producers that benefit, but also we are losing market share to large foreign producers with low-price products (and large admin. resources/budgets).

Thanks for keeping this going!

I haven’t had a chance to comment yet but I feel that one area where they could be spurred to action regarding small wineries is if it can be shown that racial/ethnic minorities and/or women own those and whatever regulation is hampering their growth or success (even, and in fact especially, if indirectly). Any idea what those regulations could be?

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I was unable to get unanimous buy in to an information letter to TTB on behalf of my committee, so I submitted a letter under my own signature. If TTB establishes an investigative task force to look into the adverse effects of state regulation on the national markets, you heard it here first. Here is the text. If some of this seems a bit technical and obtuse, please remember that I am writing to people who live, eat and breathe the regulatory technicalities every day.


October 1, 2021
The Honorable Amy Greenberg
Director, Regulations and Rulings Division
Alcohol and Tobacco Tax and Trade Bureau
1310 G ST, NW, Box 12
Washington, DC 20005

RE: Docket number TTB-2021-0007, Notice No. 204

Submitted electronically via Regulations.gov

Dear Director Greenberg:

I am the Chair of the Wine, Beer and Spirits Law Committee of the Business Law Section of the New York State Bar Association but I am writing to express my personal thoughts on the request for information referenced above. I recommend the following should be addressed to further President Biden’s desire to reduce or eliminate, “threats to competition and barriers to new entrants.”

Competition/Antitrust Enforcement.

There needs to be a reinvigoration of the antitrust laws as they apply to both the production and the distribution components of the market so that the largest players in the industry cannot increase their market power, and their ability to bully the smaller market participants, by the almost monopolistic share of the market controlled by a few players. One complaint that we often hear from the smaller producers is that they cannot compete with the behemoths because the distributors demand markups so large that sales outside their local community are economically unviable. Why can the distributors do this? Because their market power has destroyed competition and they would rather deal with a few producer conglomerates. The smaller producers have limited ability to seek better deals from competitors and thus they are left with the choice of either accepting very thin margins or leaving the market entirely.

Likewise, I have often heard from retailers that they have no choice but to provide excessive shelf space for products that they can barely sell in order for the few major distributors to be willing to sell them the bottles that their customers really want. Retailers, who are beholden to distributors for product and thus are less likely to comment publicly, often tell us privately that they cannot offer what they want to sell because the largest distributors have a stranglehold on the market. Although anti-tying antitrust jurisprudence should address this issue, it does not.

Evidence of concentration of power is easy to find. According to the Wine Analytics Report, the top two wine distributors in the United States accounted for more than half of the retail sales of domestic wines in 2019. Both of those companies are also significant participants in the spirit distribution business. Although there has been an increase in the number of producers, from craft brewers to boutique wineries to artisan and small batch distillers, the concentration of distribution power, combined with the requirement in many states that producers do business through distributors, limits the ability of these new and emerging companies to get their products into the hands of consumers.

Byzantine state regulation does not help, but the concentration of power in the hands of a few nationwide distributors makes things worse. The FTC, in 2019, quashed the merger of the second and third largest wine distributors, Republic National Distributing Co. and Breakthru Beverage Group, but Republic National was able to get approval for a partnership with Young’s Market Co. and thereby solidify its position. In August of this year, Republic National entered into another “partnership” with Heritage Wine Cellars, Ltd., one of the leading independent Wine and Spirits distribution and import companies in America. These partnerships, which seem to slip through the cracks in antitrust enforcement, do nothing to increase competition and improve the ability of producers to bargain with distributor. Competition, which the major players are working tirelessly to destroy, would give the producers the ability to seek more cost-effective distribution.

This problem is not exclusive to wine. It also exists in the spirits distribution sphere, where a handful of distributors have effectively cornered the market. As Emily Pennington, managing editor at Wine & Spirits Daily, said, the distribution sector has “hit a tipping point for consolidation.” She argues that as the biggest distribution companies have grown, their mid-sized competitors have either been bought or have closed up shop because they could not compete successfully, leading to a bifurcated sector populated by a few giants and a large number of smaller, craft-oriented companies. David Stubblefield, President of Independent Distributors Network, agreed, explaining that “The top 10 wine and spirits distributors account for roughly 75% of the national market . . . a trend for the past 20 years. It has led to more efficiency and economies of scale for those companies, but has also left more niche or craft wine and spirits brands with fewer options for 3-tier sales.”

As reported by Robert McMillan, EVP of Silicon Valley Bank and founder of the bank’s Wine Division in his 2020 industry report, “finding a sustainable path to sell it [wine produced in California] to the consumer . . . has been the dominant competitive issue since 2001.” If the target is to remove barriers to new entrants, and to ultimately give consumers more choices and lower prices, then the avoidance of concentration in the distribution of product, and an increase in competitive options available will go a long way towards advancing that goal.

The issue of consolidation is not just at the distributor level. Although I have been unable to obtain satisfactory data, there is no doubt that acquisitions of smaller companies by larger producers in the beer, wine and spirits industry have resulted in consolidation among existing players on the production side. This has the effect of blunting the positive effect of new entrants joining the industry. For example, three large conglomerates, Constellation, Bronco and Gallo, each control over 100 brands. Although I cannot determine how many of these brands were internally created and how many were the result of acquisitions, I know from my own experience that many small boutique producers that I used to patronize are now subsidiaries of the mega- players.

Although I do not begrudge the right of small producers to “cash out” and sell their companies, the effect of those sales is to increase the ability of the large holding companies to approach monopolization of shelf space at the retail level. New entrants report that they are fighting an uphill battle against large holding companies that gobble up small producers. The holding companies then have the ability to sell an entire portfolio through a distributor or directly to a retailer (depending on the state regulatory structure) and thereby monopolize shelf space. The appearance of diversity in product offerings is, in many cases, illusory when so many of those product offerings are different brands offered by the major producer conglomerates.

I urge the TTB to engage in a joint effort with other federal agency stakeholders to strengthen antitrust and trade regulation enforcement, both with respect to acquisitions, anti-tying and the payment of special benefits for shelf space. If entry into the market and a level playing field are the goals, the federal government needs to take the lead in putting a stop to industry consolidation and other restrictive trade practices so that they no longer create a bottleneck for producers as well as a limitation on choices available to consumers.

I know, from discussions with others and my review of some of the other “comment” letters, that many people identify restrictions caused by the three-tier distribution system and other state legislation as major threats to competition and barriers to entrance. Although I agree with those sentiments, I recognize that the authority granted to states by the Section Two of the 21st Amendment arguably puts many of those issues outside the TTB’s control. However, further investigation and analysis of the effect of state protective legislation on the market is needed. Therefore, I urge the TTB to establish a task force at the national level to investigate the extent to which state regulation does, in fact, impinge on interstate commerce and, if so, recommend actions to be taken to generate improvement in the markets on a national scale.

This letter represents my personal opinion as both a wine collector enthusiast and an attorney with an alcohol law practice. It does not constitute a formal comment letter of the New York State Bar Association, its Business Law Section, or the Wine, Beer and Spirits Law Committee.
I would be happy to participate in future discussions to improve the relevant markets, foster business expansion, remove threats to competition and eliminate or at least reduce barriers to new entrants.

Very truly yours,
Jay L. Hack – E-signed
Jay L. Hack, Esq.
Available by email at jlh@gdblaw.com

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