E-Commerce in Wine: E-Commerce in Wine: Is It Time?Is It Time?

Jerry ElligJerry ElligSenior Research FellowSenior Research Fellow

Mercatus CenterMercatus Centerjellig@gmu.edujellig@gmu.edu

Why discuss wine?Why discuss wine?

Generates significant interest: Congressional Generates significant interest: Congressional hearings, litigation, FTC studieshearings, litigation, FTC studies

Holds implications for e-commerce issues Holds implications for e-commerce issues generallygenerally

Teaches lessons about standards for argument Teaches lessons about standards for argument and evidence in policy debatesand evidence in policy debates

Barriers to Internet Wine SalesBarriers to Internet Wine Sales Prohibition of online ordersProhibition of online orders Low quantity ceilingsLow quantity ceilings Connoisseurs’ permitsConnoisseurs’ permits Bans on advertising by out-Bans on advertising by out-

of-state sellers of-state sellers High license fees for sellersHigh license fees for sellers Individual licensing of Individual licensing of

delivery company trucksdelivery company trucks Requirement that seller Requirement that seller

must use own vehicles to must use own vehicles to deliverdeliver

Ban on direct shipmentBan on direct shipment

Direct shipment bansDirect shipment bans ““Three tier” system separates production, wholesaling, Three tier” system separates production, wholesaling,

retailingretailing

Many states require wine to pass through all 3 levels (some Many states require wine to pass through all 3 levels (some exceptions)exceptions)

About half of states prohibit direct shipment from out-of-state About half of states prohibit direct shipment from out-of-state sellers to consumerssellers to consumers

7 states consider it a felony7 states consider it a felony

About 30 states permit direct shipment from in-state sellers to About 30 states permit direct shipment from in-state sellers to consumersconsumers

Consumer impact of direct shipmentConsumer impact of direct shipment

Price savings Price savings Online purchase and direct shipment could save consumers in McLean, Online purchase and direct shipment could save consumers in McLean, VA, 8-13% on wines costing more than $20/bottle and 20-21% on VA, 8-13% on wines costing more than $20/bottle and 20-21% on wines costing more than $40/bottle.wines costing more than $40/bottle.

Increased varietyIncreased variety15% of a sample of popular wines available online were not available 15% of a sample of popular wines available online were not available in McLean, VA wine stores.in McLean, VA wine stores.

U.S has more than 25,000 domestic wine labels. Testimony indicates U.S has more than 25,000 domestic wine labels. Testimony indicates that direct shipment bans limit consumer access to thousands of wines that direct shipment bans limit consumer access to thousands of wines from smaller wineries not included in the FTC study.from smaller wineries not included in the FTC study.

Source: FTC staff report, Source: FTC staff report, Possible Anticompetitive Barriers to E-Commerce: WinePossible Anticompetitive Barriers to E-Commerce: Wine (July 2003) (July 2003) and testimony presented at the FTC’s workshop on Possible Anticompetitive Efforts to and testimony presented at the FTC’s workshop on Possible Anticompetitive Efforts to Restrict Competition on the Internet (Oct. 2002). Restrict Competition on the Internet (Oct. 2002).

WhyWhy?? Ability to search vastly larger # of sellers nationwideAbility to search vastly larger # of sellers nationwide

Cost to wholesaler of handling small amounts of lesser-known wines may Cost to wholesaler of handling small amounts of lesser-known wines may be prohibitivebe prohibitive

Online sellers may avoid some bricks-and-mortar costsOnline sellers may avoid some bricks-and-mortar costs

Wine and spirits industries have higher-cost distribution systems than other Wine and spirits industries have higher-cost distribution systems than other packaged goodspackaged goods

Online purchase avoids wholesaler market power, if it exists Online purchase avoids wholesaler market power, if it exists

Tax evasion unlikely a big factorTax evasion unlikely a big factor

VA excise tax on 750 ml 30 centsOnline savings on bottle costing more than $20 $4.40-$7.19

Policy objectives of the direct Policy objectives of the direct shipment banshipment ban

Prevent underage drinkingPrevent underage drinking

TemperanceTemperance

Tax revenuesTax revenues

Underage drinkingUnderage drinking No studies directly assess whether direct shipping increases No studies directly assess whether direct shipping increases

underage drinkingunderage drinking

FTC and Natl. Academy of Sciences cite one survey showing FTC and Natl. Academy of Sciences cite one survey showing 7-10 % of minors purchased alcohol for “home delivery”7-10 % of minors purchased alcohol for “home delivery” Unknown if this included any online purchasesUnknown if this included any online purchases Unclear if this represents an increase in consumptionUnclear if this represents an increase in consumption

““Stings” in closed states show that shippers who violate state Stings” in closed states show that shippers who violate state laws prohibiting direct shipping are also willing to violate laws prohibiting direct shipping are also willing to violate laws prohibiting sale to minorslaws prohibiting sale to minors

States that permit out-of-state direct shipment do not appear to States that permit out-of-state direct shipment do not appear to think stings are worth the effortthink stings are worth the effort

Why online sales may not increase Why online sales may not increase underage drinkingunderage drinking

Expense – Wines priced below $20 cost 33-83% Expense – Wines priced below $20 cost 33-83% more online (McLean study)more online (McLean study)

Requires waiting and timing of delivery when Requires waiting and timing of delivery when unsupervised minor is homeunsupervised minor is home

Large percentages of high school students already say Large percentages of high school students already say alcohol is fairly or very easy to obtainalcohol is fairly or very easy to obtain

Most significant sources are home, friends, other Most significant sources are home, friends, other adults, and retail purchase (for older minors) adults, and retail purchase (for older minors)

““Stings” find minors can purchase alcohol in stores Stings” find minors can purchase alcohol in stores 15-30% of the time15-30% of the time

Less restrictive alternatives Less restrictive alternatives Require age verification when ordering and adult signature Require age verification when ordering and adult signature

upon delivery (FedX and UPS policies require the latter) upon delivery (FedX and UPS policies require the latter)

Require out-of-state shippers to register and submit to state’s Require out-of-state shippers to register and submit to state’s jurisdictionjurisdiction

States can seek injunction in federal court against out-of-state States can seek injunction in federal court against out-of-state suppliers violating the state’s liquor lawssuppliers violating the state’s liquor laws

TTB (formerly ATF) can revoke a winery’s basic permit if the TTB (formerly ATF) can revoke a winery’s basic permit if the winery ships wine in violation of state lawwinery ships wine in violation of state law

Do these work? States that permit direct shipping surveyed by Do these work? States that permit direct shipping surveyed by FTC staff report few or no complaints or problems with direct FTC staff report few or no complaints or problems with direct shipment to minors.shipment to minors.

TemperanceTemperance

What What isis temperance? Reduced consumption? temperance? Reduced consumption? Reduced consumption by specific types of Reduced consumption by specific types of consumers?consumers?

Does a direct shipping ban target the Does a direct shipping ban target the consumers thought to drink excessively?consumers thought to drink excessively?

The ban increases prices…but only for The ban increases prices…but only for relatively expensive wines.relatively expensive wines.

Tax revenuesTax revenues

13 “reciprocity” states forego tax revenues.13 “reciprocity” states forego tax revenues.

Some states (eg, NH), license out-of-state shippers Some states (eg, NH), license out-of-state shippers and require them to remit taxes.and require them to remit taxes.

States that require out-of-state shippers to remit States that require out-of-state shippers to remit taxes report no problems with tax evasion.taxes report no problems with tax evasion.

Legalized direct shipping may reduce tax evasion. Legalized direct shipping may reduce tax evasion.

Wine highlights generic e-commerce Wine highlights generic e-commerce issuesissues

Legacy laws Legacy laws Bans on sales by out-of-state firms (autos, real Bans on sales by out-of-state firms (autos, real

estate)estate) Physical presence requirements (mortgages, Physical presence requirements (mortgages,

virtual schools, contact lenses)virtual schools, contact lenses) Franchise law and competition (autos)Franchise law and competition (autos) Licensing (law, real estate valuation, contact Licensing (law, real estate valuation, contact

lenses, caskets, cyber-charter schools) lenses, caskets, cyber-charter schools)

Implications for Policy DiscourseImplications for Policy Discourse

““Keep your eye on the ball” (ie, make sure Keep your eye on the ball” (ie, make sure they’re answering the right question!)they’re answering the right question!)

Seek less restrictive alternativesSeek less restrictive alternatives Ignore the spin, read the studies Ignore the spin, read the studies Not all “Level playing fields” are equal Not all “Level playing fields” are equal Beware arguments that begin with “Our Beware arguments that begin with “Our

product is special”product is special”

““Our product is special”Our product is special” ““I want to call attention to the one fact about wine which makes it different from all of the I want to call attention to the one fact about wine which makes it different from all of the

other commodities…that difference being that it is an alcoholic beverage.” (state regulator)other commodities…that difference being that it is an alcoholic beverage.” (state regulator)

““We are not selling books, CDs, or wine, but a very sophisticated product…vehicles are We are not selling books, CDs, or wine, but a very sophisticated product…vehicles are different because they require service and are involved in recalls…” (auto dealer)different because they require service and are involved in recalls…” (auto dealer)

““I think it is essential to keep in mind that we aren’t talking about contact lenses or caskets or I think it is essential to keep in mind that we aren’t talking about contact lenses or caskets or wine bottles, that we’re talking about something very different when we’re talking about wine bottles, that we’re talking about something very different when we’re talking about access to the justice system.” (law professor) access to the justice system.” (law professor)

“…“…because pharmaceuticals are inherently dangerous products, the complicating factor is that because pharmaceuticals are inherently dangerous products, the complicating factor is that unlike wine or contact lenses, if the pharmacy is a rogue site, is not monitoring the sales and unlike wine or contact lenses, if the pharmacy is a rogue site, is not monitoring the sales and monitoring what drugs you are buying and how those drugs may interact, that is the factor I’m monitoring what drugs you are buying and how those drugs may interact, that is the factor I’m trying to say is different…” (state official)trying to say is different…” (state official)

““We that are the brick-and-mortar auctioneers that sell automobiles…make sure the title is We that are the brick-and-mortar auctioneers that sell automobiles…make sure the title is filled out correctly, make sure the title is clear, and we make sure that the buyer’s going to get filled out correctly, make sure the title is clear, and we make sure that the buyer’s going to get a good title that he can use to go get a tag.” (representative of auctioneer trade association)a good title that he can use to go get a tag.” (representative of auctioneer trade association)

““Real estate is different and a real estate broker’s license is required if you provide that type of Real estate is different and a real estate broker’s license is required if you provide that type of service over the Internet…” (state regulator)service over the Internet…” (state regulator)

For off-premises consumptionFor off-premises consumption(ie, What you can take home from this)(ie, What you can take home from this)

Bans on direct wine shipping appear to generate Bans on direct wine shipping appear to generate substantial consumer costs, and there are less substantial consumer costs, and there are less restrictive ways of accomplishing the proffered policy restrictive ways of accomplishing the proffered policy goals.goals.

Other restrictions on e-commerce in a variety of Other restrictions on e-commerce in a variety of industries may have similar effects on consumers and industries may have similar effects on consumers and should be subjected to careful scrutiny.should be subjected to careful scrutiny.

The wine debate illustrates pitfalls and principles The wine debate illustrates pitfalls and principles common to many policy discussions.common to many policy discussions.