Ellig E Commerce In Wine Cos Retreat Presentation 2004


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Ellig E Commerce In Wine Cos Retreat Presentation 2004

  1. 1. E-Commerce in Wine: Is It Time? Jerry Ellig Senior Research Fellow Mercatus Center [email_address]
  2. 2. Why discuss wine? <ul><li>Generates significant interest: Congressional hearings, litigation, FTC studies </li></ul><ul><li>Holds implications for e-commerce issues generally </li></ul><ul><li>Teaches lessons about standards for argument and evidence in policy debates </li></ul>
  3. 3. Barriers to Internet Wine Sales <ul><li>Prohibition of online orders </li></ul><ul><li>Low quantity ceilings </li></ul><ul><li>Connoisseurs’ permits </li></ul><ul><li>Bans on advertising by out-of-state sellers </li></ul><ul><li>High license fees for sellers </li></ul><ul><li>Individual licensing of delivery company trucks </li></ul><ul><li>Requirement that seller must use own vehicles to deliver </li></ul><ul><li>Ban on direct shipment </li></ul>
  4. 4. Direct shipment bans <ul><li>“ Three tier” system separates production, wholesaling, retailing </li></ul><ul><li>Many states require wine to pass through all 3 levels (some exceptions) </li></ul><ul><li>About half of states prohibit direct shipment from out-of-state sellers to consumers </li></ul><ul><li>7 states consider it a felony </li></ul><ul><li>About 30 states permit direct shipment from in-state sellers to consumers </li></ul>
  5. 5. Consumer impact of direct shipment <ul><li>Price savings </li></ul><ul><ul><li>Online purchase and direct shipment could save consumers in McLean, VA, 8-13% on wines costing more than $20/bottle and 20-21% on wines costing more than $40/bottle. </li></ul></ul><ul><li>Increased variety </li></ul><ul><ul><li>15% of a sample of popular wines available online were not available in McLean, VA wine stores. </li></ul></ul><ul><ul><li>U.S has more than 25,000 domestic wine labels. Testimony indicates that direct shipment bans limit consumer access to thousands of wines from smaller wineries not included in the FTC study. </li></ul></ul><ul><li>Source: FTC staff report, Possible Anticompetitive Barriers to E-Commerce: Wine (July 2003) and testimony presented at the FTC’s workshop on Possible Anticompetitive Efforts to Restrict Competition on the Internet (Oct. 2002). </li></ul>
  6. 6. Why ? <ul><li>Ability to search vastly larger # of sellers nationwide </li></ul><ul><li>Cost to wholesaler of handling small amounts of lesser-known wines may be prohibitive </li></ul><ul><li>Online sellers may avoid some bricks-and-mortar costs </li></ul><ul><li>Wine and spirits industries have higher-cost distribution systems than other packaged goods </li></ul><ul><li>Online purchase avoids wholesaler market power, if it exists </li></ul><ul><li>Tax evasion unlikely a big factor </li></ul>VA excise tax on 750 ml 30 cents Online savings on bottle costing more than $20 $4.40-$7.19
  7. 7. Policy objectives of the direct shipment ban <ul><li>Prevent underage drinking </li></ul><ul><li>Temperance </li></ul><ul><li>Tax revenues </li></ul>
  8. 8. Underage drinking <ul><li>No studies directly assess whether direct shipping increases underage drinking </li></ul><ul><li>FTC and Natl. Academy of Sciences cite one survey showing 7-10 % of minors purchased alcohol for “home delivery” </li></ul><ul><ul><li>Unknown if this included any online purchases </li></ul></ul><ul><ul><li>Unclear if this represents an increase in consumption </li></ul></ul><ul><li>“ Stings” in closed states show that shippers who violate state laws prohibiting direct shipping are also willing to violate laws prohibiting sale to minors </li></ul><ul><li>States that permit out-of-state direct shipment do not appear to think stings are worth the effort </li></ul>
  9. 9. Why online sales may not increase underage drinking <ul><li>Expense – Wines priced below $20 cost 33-83% more online (McLean study) </li></ul><ul><li>Requires waiting and timing of delivery when unsupervised minor is home </li></ul><ul><li>Large percentages of high school students already say alcohol is fairly or very easy to obtain </li></ul><ul><li>Most significant sources are home, friends, other adults, and retail purchase (for older minors) </li></ul><ul><li>“ Stings” find minors can purchase alcohol in stores 15-30% of the time </li></ul>
  10. 10. Less restrictive alternatives <ul><li>Require age verification when ordering and adult signature upon delivery (FedX and UPS policies require the latter) </li></ul><ul><li>Require out-of-state shippers to register and submit to state’s jurisdiction </li></ul><ul><li>States can seek injunction in federal court against out-of-state suppliers violating the state’s liquor laws </li></ul><ul><li>TTB (formerly ATF) can revoke a winery’s basic permit if the winery ships wine in violation of state law </li></ul><ul><li>Do these work? States that permit direct shipping surveyed by FTC staff report few or no complaints or problems with direct shipment to minors. </li></ul>
  11. 11. Temperance <ul><li>What is temperance? Reduced consumption? Reduced consumption by specific types of consumers? </li></ul><ul><li>Does a direct shipping ban target the consumers thought to drink excessively? </li></ul><ul><li>The ban increases prices…but only for relatively expensive wines. </li></ul>
  12. 12. Tax revenues <ul><li>13 “reciprocity” states forego tax revenues. </li></ul><ul><li>Some states (eg, NH), license out-of-state shippers and require them to remit taxes. </li></ul><ul><li>States that require out-of-state shippers to remit taxes report no problems with tax evasion. </li></ul><ul><li>Legalized direct shipping may reduce tax evasion. </li></ul>
  13. 13. Wine highlights generic e-commerce issues <ul><li>Legacy laws </li></ul><ul><li>Bans on sales by out-of-state firms (autos, real estate) </li></ul><ul><li>Physical presence requirements (mortgages, virtual schools, contact lenses) </li></ul><ul><li>Franchise law and competition (autos) </li></ul><ul><li>Licensing (law, real estate valuation, contact lenses, caskets, cyber-charter schools) </li></ul>
  14. 14. Implications for Policy Discourse <ul><li>“ Keep your eye on the ball” (ie, make sure they’re answering the right question!) </li></ul><ul><li>Seek less restrictive alternatives </li></ul><ul><li>Ignore the spin, read the studies </li></ul><ul><li>Not all “Level playing fields” are equal </li></ul><ul><li>Beware arguments that begin with “Our product is special” </li></ul>
  15. 15. “Our product is special” <ul><li>“ I want to call attention to the one fact about wine which makes it different from all of the other commodities…that difference being that it is an alcoholic beverage.” (state regulator) </li></ul><ul><li>“ We are not selling books, CDs, or wine, but a very sophisticated product…vehicles are different because they require service and are involved in recalls…” (auto dealer) </li></ul><ul><li>“ I think it is essential to keep in mind that we aren’t talking about contact lenses or caskets or wine bottles, that we’re talking about something very different when we’re talking about access to the justice system.” (law professor) </li></ul><ul><li>“… because pharmaceuticals are inherently dangerous products, the complicating factor is that unlike wine or contact lenses, if the pharmacy is a rogue site, is not monitoring the sales and monitoring what drugs you are buying and how those drugs may interact, that is the factor I’m trying to say is different…” (state official) </li></ul><ul><li>“ We that are the brick-and-mortar auctioneers that sell automobiles…make sure the title is filled out correctly, make sure the title is clear, and we make sure that the buyer’s going to get a good title that he can use to go get a tag.” (representative of auctioneer trade association) </li></ul><ul><li>“ Real estate is different and a real estate broker’s license is required if you provide that type of service over the Internet…” (state regulator) </li></ul>
  16. 16. For off-premises consumption (ie, What you can take home from this) <ul><li>Bans on direct wine shipping appear to generate substantial consumer costs, and there are less restrictive ways of accomplishing the proffered policy goals. </li></ul><ul><li>Other restrictions on e-commerce in a variety of industries may have similar effects on consumers and should be subjected to careful scrutiny. </li></ul><ul><li>The wine debate illustrates pitfalls and principles common to many policy discussions. </li></ul>