This is truly an historic moment for the wine industry. The Proposed California Direct Shipment Law before you bears the stamp of industry unity. As the executive director of the Coalition for Free Trade in Licensed Beverages I extend thanks to our colleagues in Family Wine-makers of California and Wine Institute who have worked together to produce this document. While the missions of the trade associations represented here are different, it is clear we are all behind making direct shipping legal across the country.

I also want to recognize the California Retail Association, Virtual Vineyards, the retail trade in general, Henry Wine Group and other wholesalers supporting us. Their marketing, selling and establishing the brands of many small wineries who are denied free access to the national market by the mandatory three-tier system.

I must also thank Eileen Fredrikson of Gomberg-Fredrikson & Associates for her help in researching this presentation. As anyone who has tried to analyze the licensed beverage industry knows reliable sources are few and the data presented is not in table wine-friendly form.

I believe there is no other issue, whether it be taxation or regulation, tat is more important to the majority of America’s vintners than establishing our right to ship directly to consumers. No other issue is more important to the growth of the wine industry because under the present mandatory three-tier system, market access is severely restricted and, most often, practically closed to the majority of producers. It serves neither consumer nor producer efficiently. I believe it is the single greatest deterrent to the growth of the wine industry.

Distribution systems can be illustrated graphically. For most industries, the graph looks like a funnel. Suppliers represent the narrow end. A greater number of distributors are where it begins to open wide. The base represents millions of consumers. In this system, products move quickly and conveniently from supplier trough distributor to consumer.

By contrast for the licensed beverage industry, the distribution system graph is shaped like an hour glass: A large number of producers at the top, a vast number of consumers at the bottom and in between a minute number of full-service distributors constricting the path through which the wine must flow to reach a growing number of consumers.

The game for most wineries is how to get through the constricted part of the hourglass.

Since Prohibition wiped out the U.S. table wine industry, Americans, after Repeal, knew little about wine and a lot about bathtub’ gin. Through the 1950’s the majority of California wine was shipped in bulk to bottlers and marketed along with spirits. There was little, if any, table wine. Due to poor wine quality, and what I call the booze mentality" that most Americans grew up with, wine was just another way to get high.

Most of us here are old enough to remember the phrase, "wine’s fine but likker is quicker?"

Leon Adams, America’s preeminent wine historian, in his book, The Wines of America, said 20% of American wines in the ‘50’s were ‘special flavored" wines such as "Thunderbird" and "Silver Satin." Many of these wines were "fortified" with additional alcohol after fermentation stopped. Another two-thirds of the wines were high alcohol dessert wines produced in the same quantities as before WWII. According to Adams, these wines ‘were shipped across the country in tank cars to more than a thousand local bottlers, who sold them, not always in sound condition, under a multi-hide of local brands.

By 1961 table wine represented only 29% of shipments of California wines. Then, as now, about 40 wineries shipped about 90% of the wine produced by 244 "bonded" wineries. In the decade between 1961 and 1970 the number of bonded wineries was static. The decade began with 240 and ended with 244, dipping as low as 229.

Bottled and branded wines did not become an industry norm until the middle ‘60’s when Robert Mondavi boldly bucked the trend and succeeded in putting California on the map as a world class wine region. By 1968 consumption of table wine doubled and sparkling wine trebled.

This explosion in consumption came because of marketing, better wines and, instructive to our purpose here today, states began to make their liquor laws more compatible with the changing market and consumer demand. By 1972, Adams reports that wine consumer had "soared" because a few states began amending their laws to let table wines be sold in grocery stores. In the next ten years wine consumption doubled.

The ‘80’s brought a boom in the number of bonded wineries which grew from 244 in 1970 to 591 in 1980 and 726 in 1986.

The three-tier system bottleneck forced the ever growing number of wineries to organize regional marketing associations in search of ways to push their wines through an unfriendly system. Winery owners hit the road. Instead of being wine-makers and growers we became promoters, marketers and sales people. We became supplicants to liquor wholesalers who knew nothing about table wine, considered it a distraction and "cherry picked" wineries who had made names for them-selves. The majority were left to fend for themselves in a most unfriendly environment. It is no small wonder they turned to direct shipments. There was no other place to go.

Ten years later in 1996 there were more than 1,020 California bonded wineries and marketing companies—representing an increase of 76% since 1970. The Gomberg-Fredrikson Report estimates 935 of these are "active commercial enterprises." As I shall discuss later, the numbers of wholesale companies were rapidly declining.

Today, while consumers clamor for wines and many vintners, with hats in hand, look for a friendly distributor, the wholesalers refuse to consider changes in the system to accommodate the vast changes in production and the market. Instead they have responded with pernicious political power to protect their margins. Felony bills were rushed through in Tennessee, Kentucky, Georgia, Florida and North Carolina.

Liquor regulators, wholesalers and retailers who could not compete in the developing market set up sting operations and raised the specter of rampant bootlegging across the country Franchise laws were dusted off and more threatened. The clamp down is in high gear as we speak.

The mandatory system is a dinosaur. Except for the wholesaler’s monopoly power, no segment of the three-tier system would lose if the mandatory system was replaced tomorrow with the proposed legislation we have brought here today. But even the wholesalers will benefit. Wholesalers win because they can concentrate on profitable brands and stop wasting valuable political capital and financial resources prosecuting lawsuits which they are losing.

Wineries will be able to serve market niches they have independently developed. The heretofore sovereign consumer will be able to exercise free choice. Government treasuries will capture millions of dollars in taxes now lost due to avoidance and constrained growth. California’s economy will grow.

From all the tortured arguments the wholesalers make for the mandatory three-tier system, one would think immense quantities of wine are going around the system, corrupting youth, damaging local retailers and robbing state governments of rightful taxes. Nothing could be further from the truth.

I call your attention to the Wine Shipment Analysis in my presentation package. The Gomberg-Fredrikson Report puts the issue in perspective. The fact is 95% of California wine (11, 876,000 cases), produced by about 45 wineries is unquestionably shipped to market through the three-tier wholesale system!

Arguably, another 1,719,000 cases, shipped by 23 wineries, brings the total shipped through wholesalers to 13,595,000 cases by 68 wineries— making the percentage about 97% that the wholesale system distributes.

That leaves 3% of all wines shipped in the hands of 867 California wineries. In a letter of 2 October 1997, Jon Fredrikson reported that "half of all California wineries sold 3,000 cases or less in 1996."

So what is the wholesalers’ problem? It is very difficult to look at these facts without labeling the problem as mere greed.

Let’s take a look at the condition of the wholesale industry over this same period.

Twenty-five wholesale companies control 56% market share in wine sales. Four companies gross over a billion dollars in sales each year— one company alone has 10.6% market share with projected sales of $2,335,000,000 for 1997.

There are wholesalers and then there are wholesalers. It is impossible to determine how many "full service" wholesalers are available to the wine trade—wholesalers who have brick & mortar and sufficient delivery trucks and sales staff to provide marketing, promotion and sales services for their suppliers. Except for a dwindling number of intrastate-only distributors, most of us depend on the top 25 distributors to get our wine to market.

BATF data in Jobson’s Liquor Handbooks between 1979 and 1995 tracks the number of "BATF permits for operations relating to Alcoholic Beverages under the Federal Alcohol Administration Act.".

According to Jobson’s, there were 10,900 wholesale permits and 377 wine producers in 1963. By 1994 the number of wholesale permits had shrunk to 2,928 and the number of wine producers had climbed to 1,772. The ratio between wholesale permit to wine producer during this period shrunk from 28.9 wholesale permits to each wine producer in 1963. The ratio was 1.7 permits per wine producer in 1994.

The downward trend in wholesalers began in 1982 when the number of wholesaler permits shrunk from 10,522 to 7,418 by 1984, at the peak of that era’s table wine boom.

Market Watch magazine in May 1986 speaks to the consolidation issue: "While the number of wine and spirits wholesalers in the US has been declining over the past nine years…the rate of attrition has accelerated in the past two or three years only four major wholesalers in metro New York" are left." "Chicago has only four full-line distributors left..."

In the same article, Frank Gentile, Senior V/P for Villa Banfi, USA, makes it very clear that the wholesalers fully understand the wine industry’s dilemma. He said, "if the second tier shrinks, the first tier shrinks."

Obviously when a small producer is introduced to that environment, there will be no sell-through by the wholesaler, despite what the wholesalers tell you. They cannot wholesale every brand from every winery in America. Neither can the traditional retailers who believe consumers should only have wines sold by local retailers.

Simply put, there is a limit to the number of wines distributor sales people can present to any account. Sales people know well that the wine shown to an account must be from the list of wineries the distributor defines as priority brands for the company And which brands are those? They are primarily the big guys, the wineries that represent the meat and potatoes of the distributor’s portfolio. Most small and medium wineries are all but forgotten.

It is past time to make direct shipping legal so all wineries can fully and freely participate in the market. There’s room and a market for everyone. There is no reason to maintain the present system except to satisfy the wholesalers’ penchant for absolute control.

Let us begin here today opening the door to all wine shipments into California—America’s wine capitol.

Thank you for the opportunity to address the issue.