Professor Bainbridge...on law, politics, religion, culture & food

Amazon to Try Again

The Financial Times reports that Amazon is going to get into the on line wine business. Readers with long memories will recall that this is the third time Amazon.com has tried to get into the wine business. A 1999 stake in Wineshopper.com failed when Wineshopper.com went bankrupt. A 2005 deal with Wine.com went nowhere. Why should third time be a charm?

Motley Fool explains that the plan meshes nicely with Amazon’s business model:

The company’s push into nonperishable grocery items in bulk nationally and fresh items locally fit right in with cracking into the wine cellar. Between Amazon Prime’s membership club, fostering loyalty with subsidized shipping, and the company’s breadth spanning across dozens of merchandise categories, it may not be long before someone can subsist exclusively off Amazon’s deliveries. Be wary, Costco (Nasdaq: COST) and Safeway (NYSE: SWY). You’re in Amazon’s crosshairs. One company’s wine is another company’s whine.

Another report states that “In its hometown of Seattle, Amazon will be trying out wine and beer sales with its fresh grocery delivery service called Amazon Fresh.” If so, we can only hope that the fresh food program goes national ASAP. I may never have to darken the doors of a grocery store again.

Wine lovers should hope that Amazon succeeds. Buying wine online has a number of advantages over buying from your local retailer. As Todd Zywicki explains, an FTC study found that:

… states could significantly enhance consumer welfare by allowing the direct shipment of wine to consumers. Through direct shipping, consumers can purchase many wines online that are not available in nearby bricks-and-mortar stores. The McLean study found that 15% of a sample of wines available online were not available from retail wine stores within ten miles of McLean. Similarly, testimony unambiguously reveals that, by banning interstate direct shipments, states seriously limit consumers’ access to thousands of labels from smaller wineries.

Moreover, the report finds that, depending on the wine’s price, the quantity purchased, and the method of delivery, consumers can save money by purchasing wine online. Because shipping costs do not vary with the wine’s price, consumers can save more money on more expensive wines, while less expensive wines may be cheaper in bricks-and-mortar stores. The McLean study suggests that, if consumers use the least expensive shipping method, they could save an average of 8-13% on wines costing more than $20 per bottle and an average of 20-21% on wines costing more than $40 per bottle.

Of course, if you get a bum bottle that’s corked or cooked, a good local retailer will take it back. In my experience, online stores aren’t as accomodating.

Anyway, Amazon’s main problem will be that interstate sales of wine are much more highly regulated than most (all?) of the stuff Amazon sells. Under the common “three tier” distribution system, many states require that wine pass through a wholesaler or a retailer before reaching the consumer. The big liquour interests have a vested interest in maintaining those laws. Worse yet, they’ve forged an unholy alliance with puritanical neo-Prohibitionists to limit online direct to consumer sales. To be sure, in Granholm v. Heald, the Supreme Court by a 5-4 vote struck down New York’s and Michigan’s bans on direct-to-consumer wine sales. Unfortunately, the court did so on the narrowest possible grounds, holding those bans violated the Commerce Clause because they were discriminatory and protectionist: “States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.” Accordingly, Granholm did nothing to protect consumers from state laws banning direct-to-consumer sales by both in- and out-of-state retailers and wineries.

Indeed, it’s precisely that aspect of the Granholm decision that drove the recent stink over Wine.com’s efforts to shut down competing on line sales.

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.

Unless Amazon partners with Wine.com (again), it can expect to run into the same sort of flak from Wine.com and, of course, the biq liquour wholesalers who own so many state legislatures on this issue.

If anybody can pull it off, Amazon can. But I wouldn’t bet on it.