The intent of this interview was to discuss the new piece of legislation which would ban the direct shipment of wine to consumers within Michigan and its relationship to the wine industry, hence the agricultural aspect. Since the interview was conducted, Governor Granholm has signed the bill and it was assigned PA 474 of 2008, although it is not up on the legislature's site as of this writing. The bill can be viewed here however.
The interview does cover the wine industry angle, but additionally much space is spent giving a rather fascinating look at the inter-workings of the state's alcohol regulation system, and the alcohol industry as a whole from the perspective of someone who has been involved in most aspects. This interview provides insight into both what Michigan's policy is towards alcohol, and the effects of some of those policies, as well as some ancillary policies. John Russo is a wine specialist who currently runs a retail store in Grand Rapids. He also served as a consultant to Michigan wineries and has worked in importation and wholesaling. His website is http://www.gbrusso.com
Peter: Can you give a description of your business and your relationship with the wine industry?
John Russo: I've been in the retail industry most of my life, I have spent some time in the wholesale/importing side, thirty years ago, but most of my career has been at the retail end of it. I've also done a lot of brand creation, some consulting on the side, created brands like Pepperwood Grove which is out there quite a bit. Madonna's wines, I put that together for her family. But I've got a pretty well rounded bit of experience over the last half a century.
Our business that we're in now is more of the specialty, retail, ethnic. We've got probably close to 4000 different kinds of wine, a lot of different kind of beer in the store. We're involved in a lot of different layers of the industry.
Peter: A lot of the controversy with wine importation recently has a lot to do with the three-tiered alcohol distribution in place in most states. Could you give an overview of how that works?
John: I'm not opposed to the three-tier system. You have your wineries, and distilleries, and breweries, the manufacturing sector. They do what they do. The wholesalers and importers are pretty valuable to the whole thing because they're the ones who bring the goods in, clear them, tax pay them at the federal and state level, then they distribute it to the various retail and restaurant accounts in their given marketing area, whether it be statewide or a couple of counties. Some of the larger firms have gone into several states. There's companies like Charmer and National Wine and Spirits that are just huge. I think they're getting to huge; I think there should be some enforcement of the antitrust laws because now were getting monopolies that are causing problems for the smaller businesses, and ultimately it does hurt the consumer, and it also puts people out of work.
I think we need more smaller niche marketers that can do a better job for the independent producers of these products, and then let the big guys handle the mass merchandise, brands like Gallo and so on, because that's what they're best at. But now were finding that the smaller guys are getting gobbled up by the big guys, so brands that should be specialty-niche products are now having their images dumbed down so to speak. It's nothing to walk into a supermarket and a display of a cheap wine like Ripple, and right next to it a bottle of Dom Pérignon standing up which is the wrong way to merchandise it. The products aren't being handled physically like they should be, there's temperature control issues. A lot of the really specialized wines need to be in temperature control situations; the cork needs to be wet so the bottle needs to be laying down, and it's not happening in a number of venues, both at the wholesale and retail end. It's getting to be this mentality that big is the only way to go and so a lot of that personal attention is disappearing, and smaller businesses are disappearing along with jobs.
Peter: So would you say that the mandate for the wholesalers [to exist] has an effect on the ability of smaller businesses to go elsewhere if their specialty wines are not being treated properly?
John: We need alternatives, but you've got an economy that promotes bigness. You have high taxes and lots of stupid regulations out there that make it next to impossible for smaller niche marketers to survive. Whether they're wholesalers, or wineries, or breweries, or retailers the little guys are getting squashed because of the weight of big government. And a lot times, the larger wholesalers, they buy politicians and get laws passed like this current thing about banning retailers from delivering wine or liquor to a customer. That is going to put a lot of little guys out of business. It gives more strength to the wholesalers because it reduces the potential for smuggling from other states outside their territories, but it hurts the consumer, and it hurts the smaller retailers.
The gift basket business will be destroyed in this state if that law goes through. You're going to see at least 90% of the gift basket business just disappear because the average customer calls you on the phone or emails you, "I want such and such delivered to my client, or my friend, or some funeral somewhere" and then they can hang up and walk away from it and people at my level make sure that that product is created to the specifications of the customer and all the attention to detail that goes with it.
There's a lot of work involved, and it's not a high paying job, but if we can get enough volume and efficiencies in place we can make money. But when you have government in the way, that really destroys the ability to make money. So you will see more and more of this bigness happen, more small companies, wineries, retailers, and wholesalers disappear.
One of the biggest things that really, really, hurt here in Michigan was the returnable bottle law. That immediately put a lot of retailers and small wholesalers out of business. That set of this wave of bigness at the wholesale level. So many smaller wholesalers could not afford to spend a couple hundred thousand dollars on each truck they had to buy, to haul empties around. And a lot of retailers couldn't afford it. The cost of sorting all those empty bottles, and all the sanitation problems, and the increased insurance, and increased labor costs for something that is completely non-productive for the retailer and the wholesaler.
All that is, is a huge added liability. A lot of those products are contaminated with germs, and bugs, and rats, and even poison, and they're coming into retail stores where food is being processed. It's horrible. The consumer would be horrified if they really knew about the level of contamination that that law has brought into where food is being processed and stored, it's ugly.
These big stores can afford to buy those machines that crush the cans, and count them, and all that, but one retailer of a medium sized supermarket was saying it was costing him $100,000 a year just to maintain those machines. We don't get compensated for having those empties, so what happens is the profit margins have to be increased to try to compensate. In reality the net profit to most retailers has dropped considerably and it ends up being a loss leader just to get people in the door and you hope their going to buy the potato chips that you put a fat markup on to offset it. This is wrong.
There are recyclable laws out there like in Minnesota and Arizona that call for mandatory curbside recycling for every resident and business, and it actually works. Our former state representative Glen Steil worked in Arizona and he lived there, and saw that it works and he tried to introduce that legislation here in Michigan and it got shot down because of the environmentalists that are more concerned with keeping their agenda out there versus what makes sense and what's gonna help the people of the state, so you end up with a lot of problems.
We have a huge smuggling problem going on because of Michigan's high taxes and stupid regulations. People run to Chicago, or they run to Indiana to by beer, wine, soft drinks, and liquor. Michigan state tax on liquor is somewhere around 70%, on top of the federal tax. The retailers get a tiny little margin, and then we end up getting ripped off when it comes time to renew the liquor license. As a reverse incentive the more liquor you sell the higher your annual fee for the license is. Instead of saying "'Atta boy, here's a bonus," they take away what modicum of profit you might have made. This is the typical socialist mentality that permeates government.
As a retailer you have to have a lot of things that just end up being loss leaders, that cost you more to put it on the shelf than what actually can make on it, and you just praying that they'll buy other stuff that you can make something on to balance it out.
Peter: The bill that you mentioned is a result of the court case Siesta Village Market LLC. v. Granholm, which is a result of Granholm v. Heald. I've heard it said that the justification for the law is to maintain the three tier system because it's felt that if wine retailers are able to import whatever wine directly to consumers, both in state and out of state, than they believe it's only a matter of time until the same thing happens with beer, and liquor, and the three-tier system collapses.
John: Right, and I don't want to see the three-tier system collapse. But to clarify, I, as a retailer cannot go directly to a winery in another state and purchase wine to sell in my store. But consumers are doing it, and I am not happy with that as a retailer because it's hurting my business. However, we have to be able to open that up, if you going to allow some... and frankly when it was totally banned and you couldn't ship across state lines it was rampant anyway. Consumers have been driving to Chicago for decades and picking up discounted liquor and wine and beer. You can go into, at least the last time I checked, you can go into a 7/11 and buy a six pack of beer at retail for less than what I can buy it for wholesale here because of the stupid tax and regulatory policies of Michigan. The consumer is going to go wherever they can get the best deal, whether it be price, or convenience, or specific products that they cannot normally get.
There are a lot of wineries in California for example, that I would love to sell here but I can't bring them in because of the trade barriers that are involved, both tax and regulatory, and a lot of these wholesalers just wont take these products on because their warehouses are jammed already. And they're being dictated to by a handful of very large producers, Anheuser-Busch for the beer, and Miller, and you've got Canandaigua Wine Company which is now the worlds largest conglomerate in the industry, they're publicly traded, and the second largest in the world is Gallo, which is still family owned but they act like they're this mega-corporation. They dictate to the wholesalers and the wholesalers dictate to the retailers pretty much what we can get.
So even though our store sells close to 4000 different kinds of wine, there is a lot more out there that I could bring in if I was free to do it. And that's where we need more small niche wholesalers to spring up to take care of us specialized retailers and restaurateurs. But were losing that because you've got the returnable bottle law that's crippling and bankrupting small wholesalers, so they get gobbled up. Either your small wholesaler just gives up shuts his door and walks away, or they will sell out to one of the big mega-wholesalers.
Because we have a franchise law, here in Michigan in particular, if you have XYZ brand the only way you can lose it to commit fraud, or to sell your franchise to another wholesaler. So the big guys are going to the little guys and saying, "We're going to put you out of business anyway, here, why don't you just take x number of dollars and shut you place down and we'll take your product." And that's what's happening.
Peter: Do you think there is anything to... the other justification often thrown out is we can't have direct shipment because we can't have people, or children getting their hands on alcoholic products?
John: That's b.s. There is less half of a percentage of a chance of that happening. Because the product is shipped UPS or FedEx. An adult has to sign for it when it's delivered or it doesn't get delivered. If there a kid in the house and there is no adult, they can't deliver it. And generally a kid is going to go into a party store and swipe a bottle of Ripple or MD 20/20, they don't really have, most of them don't have the educated palliate to try and get a great bottle of Cabernet, and that is mainly the kind of stuff getting shipped to the consumer. I ship to the consumer, wherever I can legally slip my way in I'm shipping. But that will all be banned, I'll be out of business, that's a big chunk of my business.
I am shipping to a few reciprocal states, especially when we had the Madonna thing a couple years ago, when it was huge. I was shipping to any state that didn't say it was a felony for me to ship, and I moved a lot of product because people wanted the collectors value, these were numbered bottles from her Confessions tour and we raised a lot of money for charity from that particular promotion. And it opened a lot of doors for new customers for my store as well.
I think that what we need to do is either open it up for all retailers to be able to direct ship to consumers and niche wineries to be able to ship, you know there are wineries that only produce a couple thousand cases of wine a year or less and they can't afford to go into distribution, they don't have enough product anyway. Let them go ahead and ship to the consumer. I don't have a problem with that. Where I do have a problem is where I've got, let's say Beringer White Zin on my shelf, and then the winery is shipping that same product to my consumer here in Grand Rapids I get pissed off because here I have invested my shelf space and my dollars in their product, I think that's unfair. Most wineries who have distribution are deferring to their retailers and wholesalers, they're not overtly shipping to consumers. If you go to a winery tasting room you'll generally will pay a higher price for that same wine than what I would sell it for in the store because when you go in that tasting room, that's a tourist thing. That's a hospitality situation, the winery wants you to taste their wine but they also want you to buy it at your local retailer if it's available. So they're going to raise the price to help cover the cost of the samples they're giving away, but also to not piss off the retailers. That's in most cases.
It's a tricky situation, I think we really need to overhaul the alcohol laws throughout the whole country and give it an even playing field so everybody has a fair chance at competing. Right now every state has their own separate laws and their own separate taxes. Some states don't care if you ship in direct, other states call it a felony. So if I ship a bottle of wine to Florida it's a felony offense. That's ridiculous... and I have a lot of customers, individuals, and corporate accounts that want me to create gifts to ship to their clients in various states around the country, and I have to turn away a lot of business simply because certain states say, "No, you can't ship to us," other states say, "Okay, don't worry about it."
I think one thing that could help solve a lot of this is if you are a resident of, let's say the state of Michigan, and you wish to purchase a gift and ship it to your friend in Illinois, that should be perfectly legal because you're a local citizen and you're just shipping out... It's good revenue for the state.
The other thing that I think would help solve the problem is if the consumer who is purchasing this product over the Internet, or by phone, pays the local sales tax. Let's say if your here and you're buying something in California, if you're paying California's sales tax than that should be it, and not be forced to pay sales tax in Michigan too and vice versa. The customer from another state that buys from me, I'm charging them Michigan sales tax. That way Michigan gets their money and the other guy gets their money, and you don't have all this massive bureaucracy trying to chase after pennies.
Peter: Do you feel that there is any protectionism going on in terms of trying to protect Michigan wineries with respect to gallonage restrictions. In a lot of cases they seem to have been written is such ways as to protect the home state wineries.
John: Well that's true, and I agree with protectionism up to a point. In the past there was even a discount in the tax level for a Michigan winery verses the tax from other states but I think the feds shot that down so everybody is paying the same tax. But I have no problem giving a break to a local business to help them compete. Instead nowadays all the government does is try to figure out new ways to screw you.