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Wine.com Conducts Sting Operation Against Other Retailers

Move is seen by retailers and consumers as a blow to the larger effort to reform wine-shipping laws

Eric Arnold

Posted: Tuesday, January 08, 2008

Long-struggling online wine retailer Wine.com has put itself front and center in a nasty dispute with other retailers—and consumers—over the laws concerning the ability of wine retailers to ship to consumers across state lines. The company set up a series of stings on other retailers—and alerted state regulators—to show that they were violating wine-shipping laws in at least nine states, leaving consumers and other retailers wondering if Wine.com seeks to improve the country's wine-shipping laws, as it claims to, or is simply trying to compete in a new way.

At the heart of the debate is Wine.com's business model. Unlike brick-and-mortar retailers such as Sam's Wine & Spirits in Chicago or K&L Wine Merchants in Redwood City, Calif., both of which ship wine from their stores to consumers in other states, Wine.com has warehouses and inventory in each state in which it does business. A shopper on the Wine.com site may select only from the existing inventory in his or her state. The company argues that despite the higher costs of operating in this manner, it is unquestionably legal, and therefore puts Wine.com in a better position to push for reform of wine-shipping laws across the country—unlike the retailers singled out in Wine.com's sting operation.

"We'd like to see markets open up, and we'd like to see fair competition," said Wine.com CEO Richard Bergsund. "There are two ways to try and make change in a law you don't like: One is operating within the law, and one is ignoring the law. We've chosen the former. We just believe that we're at an enormous disadvantage if we're the only one paying the high cost of compliance."

Some argue, however, that Wine.com simply has an unwieldy, inefficient business model that has resulted in poorer selection and higher prices. Since brick-and-mortar retailers shipping from a single location can offer lower prices, some see this as a move by Wine.com to knock its competition out of certain states.

"It is absolutely terrible what they're doing. They're trying to bring the wine industry back 50 years to execute a bad idea that will only cost the consumer much more money," said Michael Aaron, chairman of New York wine retailer Sherry-Lehmann. "They have set up a method that is so impractical and so costly for the consumer. Have you made a comparison on their prices and what they charge? It's unbelievable. They're gouging the public."

Most of the hostile response has come online, with consumers, retailers and at least one lobbying group making impassioned posts in wine-related forums, including that of WineSpectator.com. Even Bergsund made a post to defend his company's actions. "I think the backlash I'm seeing is from retailers who ship illegally, and people who knowingly buy from them. Nobody is questioning whether all these folks ship illegally," he said. "We're prepared to take negative PR as necessary."

Wine.com vehemently contends that it simply wants everyone in the wine-shipping game to play by the rules, not that it was making a competitive move. "What we find is unfair is when a state tells us we can't ship in, and ignores others doing it," said Bergsund. It depends on the state, but retailers that ship into restricted states have less to fear from prosecution than the consumers receiving the wine (who might be fined), a fact that puts Wine.com at a disadvantage if, to operate legally, it must set up warehouses and inventory in those states. "I doubt any other competitor put in that situation would feel that was fair," Bergsund added.

The Wine and Spirits Wholesalers of America (WSWA) issued a press release lauding the sting operation by Wine.com even though the WSWA is technically against the practice of direct shipping. In a previous interview, WSWA CEO Craig Wolf told WineSpectator.com that his organization's opposition to direct shipping isn't about the money. "People think because we're wholesalers we always speak from a financial self-interest, and that's not the case. The reason [we] don't like it is that it's a bad public policy."

But some, such as Tom Wark, executive director of the Specialty Wine Retailers Association (SWRA), a group that advocates wine-shipping rights for retailers, believe that by embracing Wine.com, WSWA has essentially said that the retailer-shipping issue is entirely about the money.

"The wholesalers very much like the Wine.com model since they buy from wholesalers in each and every state," explained Wark. "The wholesalers do not like the idea of a California retailer purchasing wine from a California wholesaler and then shipping it direct to another state because...the wholesaler in that state is being shut out. In the Wine.com model, no wholesaler is shut out of the process."

In a report issued today, the SWRA pointed out that the nation's wine and spirits wholesalers spent $50 million from 2000 to 2006 in political contributions to make wine-shipping laws in several states more wholesaler-friendly. But Wine.com contends that it's solely concerned with playing by the rules, not pleasing the wholesalers.

Other retailers such as Sherry-Lehmann's Michael Aaron, however, are unconvinced. "It's a terrible situation…it holds everybody back," he said. If Wine.com is successful in pushing its competitors out of the nine states in which it ran sting operations, "consumer[s] better dig deep into their pocketbooks, because the prices of wine will go skyrocketing," said Aaron. "It's an outrage."

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