Why winemakers are split on Initiative 1100

The Horse Heaven Hills vineyard at Columbia Crest winery Credit: Columbia Crest

Washington wine producers are split on a November ballot initiative that would make their state the most deregulated wine market in the country. The state’s main wine lobby, the Washington Wine Institute, opposes I-1100, while a rival group, Family Wineries of Washington State, supports it.

Some winery owners say they feel conflicted, welcoming some of the initiative’s likely effects while fearing others. While typically describing themselves as free-market libertarians, they admit they fear the impact of a deregulated free market on small producers like themselves facing off against giant wholesalers and retailers.

I-1100, backed by Issaquah-based Costco, Safeway, and other large retailers, would erase state laws regulating the economic aspects of the wine, beer, and spirits industries, as well as close state-run liquor stores and allow private liquor sales. The measure would repeal laws barring volume discounting and centralized warehousing, requiring retailers to pay cash on delivery, and limiting cross-ownership between the producer, distributor, and retailer tiers. Costco, the Washington Restaurant Association, and other supporters say they could offer consumers lower prices if they could negotiate discounts for big orders, as they do with other types of products.

The wine institute and other opponents are using explicitly protectionist arguments, and are spending significantly more than supporters on TV ads. An anti-1100 coalition called Protect Our Communities — backed by the wine institute and the Washington Beer & Wine Wholesalers Association — has been airing a TV ad featuring Darby English of Darby Winery in Woodinville, walking through a vineyard and urging viewers: “Protect Washington wine and jobs: Please vote no on 1100 and 1105.”

Wine producers are not taking a position on a separate ballot measure, I-1105, spearheaded by the wholesalers association, which also would close state-run liquor stores but would have no direct impact on wine. It would retain many of the current regulations on the wine business. If both initiatives pass, it’s unclear what would happen other than liquor sales would be privatized.

Both I-1100 and I-1105 have been polling at less than 50 percent support in various surveys.

Costco first tried to win the right to engage in volume discounting and other free-market practices when it sued Washington state in federal court six years ago, arguing that the state’s regulatory system violated federal antitrust laws. It lost that case on appeal in 2008. Last year, the company unsuccessfully pushed for state legislation to allow volume discounting.

The wine institute has held meetings with winemakers around the state urging them to oppose I-1100, even though its largest member, Chateau Ste. Michelle, is remaining neutral.

Washington’s current wine laws allow small wineries, which make up more than 90 percent of the state’s 700 bonded wineries, equal access to the marketplace, said Jean Leonard, director of government relations for the institute, which has more than 200 winery members. “If all the laws are crossed out,” Leonard said, “that would allow retailers to force wineries to pay for the best shelf space and for advertising and promotional materials. That will tip the scales against small wineries.”

At a Sept. 8 meeting in Walla Walla attended by about 20 winemakers, Rick Garza, deputy director of the state’s Liquor Control Board, said if I-1100 passes, his agency no longer would have any role in overseeing pricing and market activity, though he took no position on the initiative.

Many of the winemakers who attended the meeting spoke against the initiative with only one speaking in favor, according to Caleb Foster, owner and winemaker at Buty Winery, who was there. “Most people understood the dangerous ramifications for small Washington producers,” he said. “We’d have to pay to have significant placements. And retailers would say, ‘If you don’t give me a 2-for-1 deal, I won’t sell your wine.’ I can’t play that game. This would leave the market to the biggest, baddest, fastest, and most monied interests.”

Leonard added that “our wineries already feel price point pressure, and quantity discounts will wipe them out of the market.”

But other winery owners argue that passing I-1100 would create a more competitive marketplace that would benefit entrepreneurial, high-quality producers. “This would give me the ability to work deals and reward people for picking up volume,” said Chris Sparkman, owner and winemaker at Sparkman Cellars in Woodinville. “Yes, there’s going to be some fallout, but we have a market economy in the USA. What other product is protected?”

Being able to give restaurants a quantity discount could help a lot in marketing, said Brett Isenhower, owner and winemaker at Isenhower Cellars in Walla Walla. “If people have dinner at a prestige restaurant and my wine is available by the glass, it increases the chances of them coming to my winery the next day,” he said. “You have to look at it as an opportunity, not as, “Hey, I’m going to get hammered by the big wine shops.’ ”

But Sparkman and Isenhower, along with many other producers, are nervous about repeal of the law requiring restaurants and retailers to pay cash on delivery. “How many restaurants go out of business every day?” Sparkman worries. “If we have to extend credit terms, it’s entirely conceivable that instead of making sales calls we’ll turn into bill collectors.” This issue has left Sparkman undecided about I-1100; he’d like to see some protection for wineries worked out after the initiative is passed.

Isenhower, however, feels the other benefits are worth the risk. “There always will be disreputable people who will stick you,” he said. “The credit issue should concern small winemakers. But it’s not enough to dissuade me from supporting the initiative.”

One likely benefit, he predicts, is that if the measure passes and private liquor sales are legalized, big-box stores will sprout up, as in California and other states, that stock a broad range of wines, including those of small producers like himself. “Liquor, with its higher profit margins, subsidizes wine, so they can carry more wine. It gives you a shot.”

James Mantone, owner and winemaker at Syncline Wine Cellars in Lyle, who describes himself as a libertarian, warns that offering restaurants and retailers payment terms and variable volume discounts would increase his business and accounting costs and force him to raise prices. “The initiative is billed as being good for consumers but it would end up costing consumers more,” he said. “I just don’t see how it works.”

Foster particularly frets that if state oversight of market activity ends, retailers and restaurants will begin demanding slotting fees and other forms of payment to carry his wine. Passage of I-1100 “might allow people to buy out positions in restaurants and bottle shops, such as buying the top shelf or the entire western wall,” he warned.

But Sparkman, who until recently managed and bought wine for the Waterfront Seafood Grill in Seattle, said he suspects that’s already happening now, quietly and illegally, but it doesn’t bother him. “If they like my wine, cool. If not, that’s OK, too.”

Isenhower said slotting fees would hurt small wineries. But that is more likely to happen at the supermarket chains and big-box stores, and artisanal producers like himself aren’t interested in selling there anyway. “I hope smaller retailers have enough integrity not to ask for bribes,” he said. “Most of the ones I know wouldn’t.”

Even if retailers want to engage in predatory practices like slotting fees, federal and state alcohol and antitrust laws prohibit such practices, said Paul Beveridge, proprietor of Wilridge Winery in Seattle and president of Family Wineries of Washington State, which claims nearly 100 winery members. “The way to combat that is to sue the retailers, rather than having the state meddle in the free market,” he argued.

(Note: The location of Darby Winery has been corrected since the article first appeared.)

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