THE ECONOMICS OF INTRODUCING WINE INTO GROCERY STORES

I. INTRODUCTION Thirty-five states have laws that allow wine to be sold in liquor stores and grocery stores (including supermarkets and all other outlets that sell food products). The remaining 15 states restrict the distribution of wine such that it is only available in liquor stores. (1) Proposals to allow wine sales in grocery stores have been recently initiated in Colorado, Delaware, Kentucky, Massachusetts, New York State, Oklahoma, and Tennessee; however, none of these proposals have become legislation. In New York State proposals seeking to introduce wine into grocery stores have resurfaced several times beginning in 1964 (New York State Moreland Commission 1964) and most recently as part of the Executive Budget in 2010 (State of New York 2010). Potential changes in laws that affect how wine is distributed, coupled with changes in wine consumption and production patterns, would have important industry implications. The U.S. per capita consumption rate of wine has doubled over the past 40 years and continues to increase (Wine Institute 2008), and each of the -states that has considered proposals to introduce wine into grocery stores produces wine. This issue is especially pertinent in New York State as it is the second largest wine consuming state (NIH-NIAAA 2009) and the third largest wine grape producing state (USDA-NASS 2008). Legislative bills that attempted to introduce wine into grocery stores in New York State have generated much discussion, yet little research has been completed to quantify the likely economic effects for various stakeholders. Proposals put forward have been viewed as a vehicle for state governments to raise additional revenue through sales taxes, excise taxes, annual license fees, and initiation fees charged to grocery stores. A recent poll finds that 58% of the residents in New York State support the introduction of wine into grocery stores (Siena Research Institute 2010). Many consumers believe that introducing wine into grocery stores will increase convenience, increase the number of products available, and may lead to lower prices. Other consumers and social interest groups are concerned that increased availability of wine will increase alcohol abuse and increase the acute problems (e.g., traffic accidents) and chronic problems (e.g., liver cirrhosis) associated with alcohol consumption; an increase in the number of such problems would create additional social costs. (2) Grocery store owners have favored recent proposals (see Vote for Wine 2009), and liquor store owners have opposed such changes (see The Last Store on Main Street 2009). Wine producers in New York State appear to be divided on the issue (see Frank 2008; NYWIA 2009). There are indications that up to 35% of wineries in New York State have publicly opposed proposals that would allow wine to be sold in grocery stores, and at first this seems counter-intuitive. It is reasonable to think that producers would welcome the opportunity to distribute their wine in additional outlets, but there are several explanations why this might not be the case. First, there are indications that wineries located close to urban centers fear that wider distribution of wine would decrease tasting room sales (Kindall 2009), where tasting room sales often comprise a large share of total sales for many small producers. Second, small wineries may not have the capacity to enter the grocery store market because of slotting fees (Sullivan 1997) or other entry costs (Rao and McLaughlin 1989). Third, there have been many reports suggesting that liquor stores have created a "blacklist" of wineries that support the policy change (Fickenscher 2009; Gentile 2010). Therefore, some wineries may oppose legislation that seeks to introduce wine into grocery stores for strategic reasons. That is, they do not expect the distribution laws to change and do not want to upset relationships with the liquor stores that currently distribute their products, so they publicly oppose such proposals. …