Virginia takes novel approach to wine distribution

By Michael Felberbaum

CROZET, Va. – It was on the stone porch of David King’s sprawling estate in the foothills of the Blue Ridge Mountains that Virginia’s budding wine industry was saved.

There, a select group of lawmakers and industry officials met to craft a unique wine distribution system as a way to overcome legal challenges to decades-old legislation that threatened to strangle the industry on the vine.

Their creation, the state-run, state-funded Virginia Wine Distribution Co., began operations late last month. Now, vintners around the country – looking for cost-effective ways to get their wines from the vine to consumers’ glasses – are watching to see how well the Old Dominion’s concoction ages.

From a place that counted fewer than a half-dozen wineries in 1980, Virginia has grown into a minor powerhouse, with 130 vintners. Last year, Travel + Leisure magazine named it one of the top five new wine travel destinations in the world, joining Italy, Spain, Chile and New Zealand.

Until recently, all that progress was in jeopardy.

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Decades ago, state legislators exempted farm wineries from the three-tier system used by most states following the repeal of Prohibition in 1933, a system that takes the wine from the winery to the wholesaler to the retailer. The result was that wineries could take their products to stores and restaurants without a wholesaler in the middle, orchestrating the transaction.

But a 2005 federal appeals court ruled that the state law violated the laws of interstate commerce. Without the ability to cut out the middle man, many of the small wineries were faced with financial hardships, and many feared they could not bear the costs of independent wholesalers.

“I realized very quickly that self-distribution was dead, that in Virginia we were never going to, in my lifetime, have self-distribution back,” said King, who opened his winery in central Virginia in 1998.

Meeting amid the acres of vines and polo greens of the King Family Vineyards, a group of about a dozen hammered out the details that would become the nonprofit distribution company.

The company employs a creative way to allow wineries to get their product out without violating the law and without an independent wholesaler, said Todd P. Haymore, commissioner of the Virginia Department of Agriculture and Consumer Services.

“It’s very unique, probably one-of-a-kind, and not only being watched closely here in Virginia, but by other states as well,” Haymore said of the system being used by about 70 small-farm wineries.

In essence, wineries become agents of the state in order to deliver their product, allowing them to do virtually the same actions that were struck down in court.

Wineries work directly with retailers to obtain orders and submit them via computer.

After the winery receives the order, it can then take products from an area of its facilities that is leased to the state and then, as an agent of the distribution company, deliver those products. The retailer cuts a check to the distribution company, which in turn writes a check to the winery, less a $5 fee per transaction.

“No one has done anything quite like that before,” said Steve Gross, director of state relations for the Wine Institute, an industry trade group, which estimates wine sales in the U.S. of foreign and domestic wine rose to 745 million gallons at a cost of $30 billion in 2007, a sales increase of about 86 percent over the last 10 years.

King said the compromise between the state and vintners has prevented a bloodbath between the wine and wholesale industries in Virginia, allowing state wineries to use the service to distribute up to 3,000 cases per year.

The Virginia Wine Wholesalers Association has received no negative comment from members on the distribution company and has fully supported of the system, said Chuck Duvall, the group’s administrative vice president.

The success of most small, new wineries is dependent on getting over the initial hump of dealing with startup costs and building brand recognition, King said. Numerous winemakers had told him that only self-distribution would work and any alternative would have to be of little cost to the wineries.

“Because we are competing with every other wine region in the world in our marketplace, we have to be price-competitive,” said King. “The economics of the business are such that, in Virginia, we are not and cannot be a low-cost producer.”