By Joe Tennis
Photos by Glenn Fajota
For two decades, farm wineries in Virginia could cart their hand-crafted Chardonnay or Merlot-filled bottles from their tasting rooms to restaurants, all on their own. "Self-distribution worked successfully for 20-some years," says attorney Terri Cofer Beirne of the Richmond firm McCandlish Holton. "But there was a question of allowing for a free-flow of commerce."
Then came a court decision, halting self-distribution by wineries and leaving many small operations, like the Abingdon Vineyard and Winery, scratching to discover ways to remain in business. "I think it short-changed us," says Bob Carlson, co-owner of the Abingdon winery. "It slowed down our growth. We've grown a little in the last two years. But we were growing at about 25 percent a year."
Now, though, Carlson – and about 70 other winery owners and operators – are hoping to regain sales by using the services of the newly established Virginia Winery Distribution Company. This novel operation serves, technically, as a distributor for wineries wanting to make direct sales to stores or restaurants.
"But, from the perspective of the wineries, they are making the deliveries themselves,” says Beirne, the legal counsel for the Virginia Winery Distribution Company. The company provides an alternative for small wineries, Beirne says. "It will create a vehicle for the smallest and the newest of Virginia wineries to get in the business of wholesale sales." ?
David King, a winemaker from Crozet who helped organize the company, pays thanks to the Virginia General Assembly for creating this alternative to the Virginia wineries' loss of self-distribution.
"This new wine wholesaler provides a distribution option for many Virginia wineries, especially smaller wineries that may not have other wholesale representation," says the principal of King Family Vineyards. "It's exciting for all sectors of the industry – wineries, wholesalers, and retailers – to finally have this wine wholesaler in place."
For Carlson and his wife, Janet Lee Nordin, getting products to market was once pretty simple, as they delivered their wine bottles to restaurants in nearby Abingdon, Bristol, Marion and Chilhowie. Regularly, the couple would self-distribute about 400 cases a year.
Then came a ruling in 2005: a federal appeals court prohibited wineries from being their own distributors. "If Virginia had allowed us to self-distribute, then they would have to treat out-of-state wineries the same way,” Nordin says. “The distributors did not want to be allowed that to be opened up.”
Prior to the 2005 ruling, the Virginia Wineries Association (VWA) estimated that 90 percent of Virginia's farm wineries self-distributed their products to local markets, even if they also contracted with a wholesale distributor for wider distribution, says Todd P. Haymore, the commissioner of the Virginia Department of Agriculture and Consumer Services.
Phoebe Harper, owner of Naked Mountain Vineyard and Winery in Markham would once simply answer a call when a restaurant wanted more wine to sell.
Nordin and Carlson did the same, just like dozens of other small wineries in Virginia. It was a way of life, just as natural as growing grapes.
"They made their wines and put it in their car," Nordin says. "And when they took that right away from them, their whole business went down the tubes."
Ultimately, the court ruling took effect in 2006, and the Abingdon winery, to stay in business, had to rely on customers coming to their tasting room overlooking the rocky waters of the South Fork of the Holston River.
"We're fortunate," Nordin says. "We simply sold the wine out of the tasting room. But we didn't have the growth."
The court stressed the preservation of a three-tier system in getting alcohol to market – and keeping separate the manufacturer, the wholesaler and the retailer.
"The wholesale distributors have a strong lobby in Virginia, and they had wanted to reserve the three-tier system, which is the classical system," says Harper, who co-owns Naked Mountain Vineyard and Winery with her husband, Bob. "And this all has to do with wineries that are not in Virginia, as well."
Federal courts ruled that self-distribution by Virginia wineries was unconstitutional because it granted Virginia wineries privileges that were not extended to out-of-state wineries. "Losing the capability to self distribute was a major blow to many of our farm wineries," says Haymore.
The law particularly hurt the much smaller vineyards and wineries, Harper says, "because most of them are not producing enough to be attractive enough for a wholesaler to add them to their portfolio."
Wineries need to produce between 3,000 and 5,000 cases in order to make using a wholesaler financially feasible, Haymore says. "And, according to a survey by the VWA, the average production size at Virginia's wineries is about 2,500 cases."
The Abingdon operation, according to Nordin, makes between 2,500 cases and 3,000 cases a year."Most of us are small," Nordin says. "And we don't have that much wine. So distributors don't care about being our distributors because we couldn't provide them with a whole lot of stuff."
Still, it wasn’t just the small wineries that got hurt in the shuffle.
"When self-distribution became illegal on July 1, 2006," Haymore says, "many shops and restaurants were concerned that some wines would not be available due to small wineries producing less or closing their doors because of the inability to afford a wholesale distributor."
By 2006, Emmett Hanger, a state senator from Augusta County, took note of the situation and tried to find a solution, especially for the smallest operations not able to get their products to market. "For a time, the small ones lost access to markets," Hanger says. "The bulk of the business is actually done through distributors. But many of the smaller entities - it's cost-prohibitive to go through a distributor - not only costly but something that the distributors are not necessarily wanting to be involved with.”
Most smaller wineries were and are still dependent on self-distribution to deliver their wines to local restaurants and wine shops, says Annette Ringwood Boyd, the director of the Virginia Wineries Association. But even larger operations, in addition to having a distributor, have relied on self-distribution for some sales. King, for one, said his King Family Vineyards once distributed about seven percent of its wine using the self-distribution method - until July 1, 2006, when self-distribution became illegal.
As it turned out, passing the law "could have had a very adverse effect," Haymore says. "Action by the Virginia General Assembly and the Department of Agriculture and Consumer Services addressed these issues early on, so the actual impact was not as dire as predicted, but if left un-addressed, it could have been extremely adverse." To Hanger, Virginia's wine industry had become too important to let this court ruling potentially allow wineries to die on the vine.
"From the economics of it, it makes good sense to help this industry,” Hanger says. “Virginia is becoming one of the top destination points in the world for agri-tourism. The wine industry is becoming a significant addition to the agriculture industry. We want to promote that, and we want to provide incentives for this farm-related industry."
In the end, more than incentives inspired Hanger to draft the bill creating the Virginia Winery Distribution Company. “The entity itself was necessary so that we, the state, could be the process of assisting these farm wineries have access to market," Hanger says. "The other part is because of federal laws and the three-tier marketing system - you've got to do it in a way that is Constitutional. So the reason has to do with helping the industry and creating a legal way for the state to be involved in facilitating these industries."
It was only natural, too, for Hanger to become involved in this matter. He had worked on several different agricultural commodity issues. And, as originally envisioned, Hanger figured a compromise could come by promoting farm wineries like a farmers’ market.
"I came up with the concept initially of doing something with our farmers' markets – of specifically creating a distribution channel for the farm wineries," Hanger says.
Hanger also met with King, the chairman of the Virginia Wineries Association’s legislative affairs committee - the group that came up with the idea of the Virginia Winery Distribution Company.
King himself, spent two months in Richmond lobbying for the bill until it passed in 2007 in the Virginia General Assembly.
Today, he serves as board chairman of the Virginia Winery Distribution Company.
By law, King says, having a distributor is incredibly important.
“The legal setup of the three-tier system requires the use of a wholesaler when selling wine to retail licensees. So, unless a winery can sell all of their wine from their tasting room, every winery needs a wholesaler."
The Board of Agriculture and Consumer Services appointed the winery and distributor members of the Virginia Wine Distribution Company Board, Haymore says, and the Virginia Department of Agriculture and Consumer Services sought and obtained approval to hire legal counsel to help set up and incorporate the Virginia Winery Distribution Company.
"The working group met a number of times to go over operational issues that ultimately led to the creation of bylaws and contracts," Haymore says. "Once they were drafted, the Virginia Wine Distribution Company Board began discussing and taking action on these items."
The issue was complicated, Hanger says.
"There were a lot of stakeholders involved in the conversation and the debate,” says Hanger. “But this would be a unique way for them to be able to do this type of distribution."
Essentially, the company allows Virginia wineries to resume self-distribution, Haymore says. "The process will be different, but the end result should be the same."
Winery workers will actually act as agents of the Virginia Winery Distribution Company when placing orders and making wholesale deliveries of their wine. "The new company will create a 'virtual distribution company' that will allow Virginia wineries to distribute to their direct accounts again," Boyd says. The Virginia Winery Distribution Company (VWDC) will provide electronic purchase orders and invoices, collect and remit all taxes and submit necessary government reports.
By contract, the state-run company and each winery will share delivery workers, bonded warehouse space and delivery vehicles. "We virtually are set up to have a space in our winery that is their space - the VWDC space," Nordin says. "And so they get this order over the Internet and send back the official paperwork; the Alcohol Bureau in Virginia asks to transfer wine out of the winery. We have actually made it work. We've sold wine to several of our local people."
What this all means, Haymore figures, is that even wineries with limited production will be able to afford distribution without paying the fees to a wholesale distributor.
"The wine industry should continue to grow and flourish,” Haymore says. “And we expect to see a continuation in the growth of new wineries." Fees do come into play. The initial cost to wineries is $5 per transaction.
In yesteryear, of course, nobody paid such a fee, Harper says. "But at least there's a mechanism there. You can get your wine out the door."
Nordin agrees. "At least we've got a process now that can work," Nordin says. "I don't know how they can do it any better, given the constraints that they have with the law."
Initially, money from the state’s general fund - about $268,000 - was needed "to get this up and going," Hanger says.
Still, if all goes as planned, those $5 fees will ultimately make the Virginia Winery Distribution Company entirely self-supporting, he notes.
Along the way, the smallest of operations, like the winery in Abingdon, will have options to see their wines on dinner tables and store shelves again.
"Most of what we do is distribute our wines locally, which is good,” Nordin says. “We sold it to our neighbors, like restaurants." She favors the compromise in creating the new distribution company but adds that using it means “a whole more work and a lot more cost." Carlson, her husband, agrees, and calls the new state rules laborious. "[It’s] a little painful at times, but it's better than nothing," he says.
Haymore, meanwhile, credits self-distribution with being the single most important factor in the growth of Virginia's farm wineries - from six in 1980 to more than 130 today.
"Distribution is absolutely key to the winery business," he says. "A winery can make the finest wine in the world, but without access to distribution channels to get it in the hands of consumers, wine-makers would simply be amusing themselves."
By law, wineries need distributors, Boyd says. "Wineries need a distributor to sell wines to any wine shop, restaurant or local grocery. Without the distribution, wineries lose an important outlet to promote their wines and build an extended network of sales."
Wholesalers, also, serve a very valuable service in getting a product to market, Beirne says, because that allows wine-makers to better concentrate on their craft. ,/
"They get into this business to make wines, not to truck it around.”
The state-run company will help many fledgling operations that have struggled in early years.
"There's no guarantee they're going to get the attention of an independent wholesaler," Beirne says. "But, by using the Virginia Winery Distribution Company, there's no question they're going to market their own products better.”
Jon Wehner has been growing grapes since 2001 at Chatham Vineyards in Machipongo on the Eastern Shore. His winery opened in 2005.
“We had spent two or three years setting up accounts,” he says. “We spent time and money going on the road and setting up relationships. We felt like we had invested a tremendous amount of time with these accounts. And, in one short letter and 30 days worth of notice, we found out our right to self-distribute was taken away." \
After that, Wehner looked for an immediate solution. With the help of an attorney, he set up his own distribution company.
"The decision was pretty simple," Wehner says. "We had no option. I could not see two years worth of income walk out this door.”
Within 30 days, Wehner set up Eastern Shore Classic Wines. Now he runs the winery while his wife, Mills, runs the distributorship. "We run separate books,” Jon Wehner says. “We have a secured, locked facility inside the winery. The distribution company rents the space from the winery."
In turn, Eastern Shore Classic Wines distributes only wines from Chatham, which produces about 2,200 cases a year. "I don't think we ever missed a sale," Wehner says. In contrast, by waiting nearly two years for a solution by the state, Carlson and Nordin at the Abingdon winery lost business. Even now, Carlson says, "I'm out every day trying to get some of the retailers back. They've gotten other wines."
Had Chatham Vineyards waited the same couple of years for the state-run company’s solution to arrive, Wehner says, "We would have lost significant income - not to mention the exposure we would have lost. It would have been a huge loss had we not done this."
At Naked Mountain, Harper wants to sign up for the new state-run distribution company, but she has yet to do so. Instead, relies on traditional distributors to get her wine to restaurants around Maryland, Virginia, Florida, and Washington, D.C.
But, at this point, I don't think we lose sales," Harper says. "We're now accustomed to having a wholesale distributor."
In time, the management of Jefferson Vineyards might also want to work with the Virginia Winery Distribution Company, says manager Chad Zakaib.
But not yet.
"For us, we used self-distribution for many years to build our business to a point that working with a wholesaler made sense financially and logistically,” Zakaib says. “There's a lot of costs attributed with distributing your wine. You drive into town with a trunk full of wine. And, the fact is, gas is four bucks a gallon. If you spend a day or two trying to take all these orders; you tie yourself up doing it."
About once a week, Zakaib loads a pallet with various bottles so his distributor can ship that wine to various accounts. After that, Zakaib says, his winery goes back to the business of making wine - and not worrying about distribution.
"For us, it's easier just to work with a distributor," Zakaib says. Even so, he says he is interested in someday having access to the Virginia Winery Distribution Company. "It provides a nice option,” Zakaib notes. “If there's an account where our distributors don't go, and there undoubtedly will be, it's not going to pay for them to send six bottles of wine."
Wehner, meanwhile, says there is no need for his family operation to use the state-run organization, "unless the regulations get to the point that we just get more regulated. I think what we're doing now is the most efficient and inexpensive, direct way for us to get our wines to market." King, however, says he plans to use the Virginia Winery Distribution Company to service the area immediately around his winery at Crozet. Yet, he won’t be using it for everything, he adds. "We also have a traditional distributor for the rest of the state."
Boyd, the director of the Virginia Wineries Association, views this new state company as a tool to help the wine industry. This new company will open distribution to many smaller wineries that would have found it difficult to sell their wines outside their wineries without this option," she says. The company allows any size winery to distribute its products in-state, even if they use a wholesale distributor, Haymore says. Right now, more than half of Virginia's wineries have signed up to use the company.
"With 70 wineries already on board as customers of VWDC, I believe we can anticipate even more Virginia wine sales," Haymore says. "For small wineries that may not be able to afford the services of a wholesaler, the VWDC still allows them to sell directly to shops and restaurants. For many small wineries, this is their main avenue of distribution to the public. Without this ability, we likely would have seen less growth, or even worse, the potential closure of some operations."
King, for one, sees much promise. “We hope that this tool will allow small and/or new wineries to expand their brand at low cost in order to enhance the economic viability of the Virginia wine industry." |
