Encounter with the Three Tier System

In my free time, I am working on my food Instagram @jzthefoodie as an influencer and yesterday, I received confirmation that I was placed on a collaboration between Kroger and Delatorri Prosecco. Because of this class, the first thing I thought about was whether the three-tier system would allow for this. Technically, this was a link between a manufacturer and retailer and reminded me a bit of the marketing techniques we debated a few weeks ago. What was more intriguing were the rules I will need to follow in order to participate in this campaign which are different than the ones I typically follow. For example:

• Hashtags: I need to include #sponsored and #corksandcheers tag Corksandcheers and Krogers
• Picture: Everyone in the picture had to be above 26 (I would have assumed 21 would have been enough) 
• Free Product: It is critical that when I post this, I have to mention that the product was free which I would never do with any other products

After more research into the rules, I found out that Corks and Cheers is a marketing pattern so I can't actually tag Delatorri Prosecco in any of my pictures which I believe is their way of avoiding issues with the three tier system. 

What are people's thoughts - is this entering into the grey area?

Aging Wine

Older wine vintages are often considered more prestigious, and I personally enjoy some of the secondary taste characteristics that emerge as a wine gets older. I wanted to do a little research about aging wine and how much a given vintage improves in value over time.

The first thing I learned is that only a small percentage of wines have "aging potential". Ninety percent of the world's wine production is meant to be drunk within one year of production, and 99% of the world's wine production is meant to be drunk within 5 years of production.

Wines that do age well are often high quality, and initially tannic. Bordeaux blends and cabernet sauvignon are examples of wine that are considered prime aging candidates.

How much does wine appreciate in value as it is aged? This article estimates that fine wine vintages have appreciated in value by about 12.5% per year over the last 50 years -- in contrast, the S&P 500 has returned around 11% over the last 30 years. Some very elite wines have appreciated even more rapidly:

I wonder if there is a business opportunity for someone to specialize in storing wines for sale when they are older and more valuable. Older vintages are uncommon in the typical liquor store, but some stores like K&L in San Francisco do carry older vintages, especially from Bordeaux. Of course, some of the return from aging is not attributable to the increase in drinking quality of older wine, but rather, that the supply of a given vintage declines over time as most of the bottles are drunk. If a large storage facility created a supply glut, I imagine that the 12.5% "return" would come down significantly.

You can see this somewhat with the Bordeaux wines at K&L. Because Bordeaux is so infrequently drunk at a young age, larger portions of it are stored and you can buy a bottle from the 1990s at K&L for $25 - $50 -- much cheaper than old vintages from other regions. While the business opportunity for storage may be limited, I am enjoying the availability of cheap older wine at K&L.

The Growing Role of Affordable Wine in the US

In “WineDirect: Supply Chain Management in the U.S. Wine Industry,” I was surprised to learn that 90% of wine sold in the United States came with an average price tag of less than $10 per bottle. I associate wine consumption to the upper echelons of society, yet US consumers' behavior towards the category are clearly shifting. A 2013 Gallup survey shows that "beer has declined as the preferred beverage of U.S. drinkers, shrinking its advantage over wine from 20 percentage points in 1992 to one point today."

According to this survey, millennials (ages 18-29) are increasingly switching to wine from beer with a 10% increase in wine consumption from 1992-1994 to 2012-2013.

A big answer to this consumer shift is women. As countries become more developed, women are entering the workforce and feel alienated by the beer industry. They also own the share of wallet and are shifting household purchase behavior to wine off-trade. In this same survey, Gallup found that "Among women, 52% say they drink wine most often, while 24% say liquor and 20% beer." Women are more likely to be aware of the ABV to calorie ratio - with wine, consumers can get drunk at a lower health cost than beer. They are also budget conscious and aware that wine is better bang for your buck. 

The Three-Tiered System: How Did We Get Here? Part I: Pre-Prohibition

Before Prohibition came into effect in 1920, wineries, distilleries and breweries often owned retail outlets in whole or in part, enjoying vertical integration and quasi-monopoly power over a small geographic area.[1]

State regulators were concerned about these “tied house” practices, and began restricting who could sell alcohol, and how.[2]  The United States Temperance Movement increased community focus on these laws, and caused increasingly strict regulation of the production, distribution and sale of alcohol.  Even before Prohibition, and far before Granholm v. Heald, the Supreme Court recognized states’ broad authority to regulate the alcoholic beverage industry, free from the strictures of the Commerce Clause of the Constitution in the License Cases.[3] 

When Leisy v. Hardin[4] undercut the reasoning behind the License Cases, Congress did not assert its power to supersede the states.  Instead it strengthened the power of the states to regulate alcohol by passing two laws.  The Wilson Act of 1890 reads in pertinent part,

All . . . intoxicating liquors or liquids transported into any State or Territory . . . shall upon arrival in such State or Territory be subject to the operation and effect of the laws of such State or Territory enacted in the exercise of its police powers, to the same extent and in the same manner as though such liquids or liquors had been produced in such State or Territory . . . .[5]

In English, this means that when alcohol produced by one state crossed over the border to a second state, the law of the second state began to regulate the product.  So if wine in California could only be sold in red bottles, and wine in Nevada could only be sold in blue bottles, California wine would have to be painted blue upon crossing the Nevada border to comply with the Wilson Act.

The Webb-Canyon Act, passed in 1913, made state-wide prohibition enforceable, prohibiting

the shipment or transportation . . . of any . . . intoxicating liquor of any kind from one State, Territory, or District . . . into any other State, Territory, or District . . . (for the purpose of being) received, possessed, sold, or in any manner used . . . in violation of any law of such State, Territory, or District . . . .[6]

Therefore, the story of alcoholic beverage prohibition in the pre-Prohibition years was one of robust state power and Congressional deference, the reverse of generally-accepted federalism principles in the United States.

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[1] Alcoholic Beverage Industry Three-Tier System, Park Street (last visited Feb. 1, 2018), http://www.parkstreet.com/wine-spirits-industry-background/.

[2] See Thurlow v. Com. of Mass., 46 U.S. 504 (1847), overruled in part by Leisy v. Hardin, 135 U.S. 100 (1890) (discussing a Massachusetts law restricting liquor retail licenses and a Rhode Island law intriguingly forbidding the sale of “rum, gin and brandy, etc. in a quantity less than ten gallons”).

[3] Id.

[4]135 U.S. 100 (1890).

[5] The Wilson Act, 27 U.S.C. § 121 (1890).

[6] The Webb-Canyon Act,  27 U.S.C. § 122 (1913).