SONOMA, CALIF. -- Whether consumers can receive direct shipments of wine and other alcoholic beverages is a political hot potato that may have morphed into a live hand grenade this week -- with teetotaling Sen. Orrin Hatch (R-Utah) proposing legislation that would give states authority to prosecute interstate shipment of alcohol.

In the meantime, two private companies, Chicago-area

Lionstone International

and San Francisco start-up

Naxon

, emerged last week to want to horn in on the estimated $200 million to $400 million a year in direct wine sales revenues.

These two events have driven a wedge right through the heart of the wine world.

On one side are wine e-tailers like

Virtual Vineyards

, small wineries and craft brewers.

On the other side are the wine distributors

including one of my favorites,

Geerlings & Wade

(GEER)

, wine wholesalers, and state revenooers. It is not clear which side either of the newcomers, Lionstone and Naxon, is on.

No matter which side wins, the loser is likely to remain the American wine consumer, who finds increasing frustration that wholesalers and retailers artificially inflate prices.

Need proof? Just ask my colleague

Herb Greenberg

, who moved to New Jersey from California a year ago and is still recovering from beverage sticker shock.

Where do the vineyards vote in this battle for the bottle? Major wineries, like industry giants

Beringer

(BERW)

,

Mondavi

(MOND)

,

Canandaigua

(CBRNA)

and private giant

E.& J. Gallo

are likely to be supporters of the Hatch legislation, for the simple reason that it's their mass-market products that are most likely to find their way into distributors' warehouses and thus retailers' shelves. The whole trend to direct shipping -- which Hatch seeks to halt in its tracks -- would either force them to develop their own direct marketing capabilities to compete with small boutique wineries or simply concede that segment of the market.

But smaller vineyards are clearly pushing for more than the ability to sell more than just a few bottles to the grape touristas on their swings through Napa Valley. And they have a reason. According to recent

Judiciary Committee

testimony by telecom entrepreneur Michael Ballard -- he owns the small (4,000-case)

Savannah-Chanel Vineyards

south of Silicon Valley -- just 100, or about 6%, of the 1,600 U.S. wineries produce 95% of all the wine made in America.

"Our wines are inherently one of a kind," Ballard said, adding that although "consumers from all 50 states seek us out" he can't sell to customers in 35 of those states for fear of losing his federal license to make wine. "Requiring the insertion of the distributor bureaucracy between my small business and my customers adversely affects our customer service, and for this I must pay an exorbitant tribute."

Direct sales are a boon to outfits like Savannah-Chanel because it allows them to cut out the 25% to 35% markup that the middle tier of the system tacks on to the retail price. This is the key reason distributors are fighting disintermediation.

Desperately Seeking Reason

How do the big boys justify their opposition to direct distribution? "Claims of insufficient market access are a smokescreen for wineries and retailers who want to avoid taxes and charge maximum markups on their products," says Juanita D. Duggan, the chief executive of

Wines and Spirits Wholesalers of America

(WSWA). "Those are pretty poor reasons to block a state's efforts to enforce its own laws."

But this argument is highly suspect, because supporters like WSWA only argued initially that legislation was necessary because of lost tax revenues. After this, wine industry groups devised a system to pay state taxes on direct shipments.

Not to be deterred, the wholesalers -- led by WSWA -- formed and funded a "grass-roots" political group called

Americans for Responsible Alcohol Access

(ARAA), which has pressured the states to change their tack to one of protecting minors from obtaining alcohol. They maintain their righteous stance despite the fact that supporters have not been able to cite a single violation by a minor -- except in cases where that minor was supervised through the process by their parents or another adult using that adult's credit card.

A statement by Barry W. McCahill, the executive director of ARAA, clearly stakes out the group's turf: "Just as Willie Sutton robbed banks 'because that's where the money is,' some in the California wine industry, and unscrupulous retailers around the country who are getting in on the action, ship their products illegally across state borders because it is more profitable to bootleg than abide by state laws, and the chances of getting caught and prosecuted are slim."

Thankfully, there's a voice of reason here, even if Hatch doesn't want to hear it. John DeLuca, the president of the

California Wine Institute

, said in testimony before the Senate Judiciary Committee on March 10, "In California, we've had intrastate shipments allowed for 50 years, and since 1963 there have been interstate shipments allowed (from other states), yet the Alcohol Beverage Control chief says there are only 'minimal' problems with underage access; in fact, the complaints on that regard are just one-half of 1% of all complaints to the agency."

There's an inevitable hypocrisy, DeLuca also points out, between any state campaigning against interstate shipping of wine, beer and spirits and permitting shipments within its own borders -- which 30 now do. Teens, after all, have equal opportunity either way to obtain alcohol illegally.

Even if you take the wholesaler's arguments at face value, teens' ability to buy booze across state borders depends upon a carefully orchestrated series of events, in which the pimply faced hordes contrive to:

  • Steal their parent's credit cards
  • ,
  • place an order with an Internet cyberbootlegger
  • and wait for a week or two for the order to arrive. (Teens wanting to get drunk are notoriously patient and willing to defer gratification until they have an intoxicating substance with the right nose and balance of oak and fruit.)

Besides finessing the credit-card charge, these Teens with Taste must figure out just when the shipment arrives at home -- so they can slip out of algebra class at just the right time, and use their fake ID to sign for the box so Mom and Dad won't confiscate that big whacking red cuvee and serve it to a bunch of their boring friends at a weekend dinner party.

Works for me. But, hey, I live in California where everybody knows we check our common sense with the customs officer at the Arizona border.

How will this all play out? Stay tuned, this is certainly better than old reruns of

Falcon Crest

.

Lewis Perdue is the editor and publisher of Wine Investment News, which covers the 22 publicly traded wine and liquor companies. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.