Why Costco is Important
Posted by Matthew Mann on January 31st, 2008Reading this week’s Costco v. Hoen decision by the U.S. Ninth Circuit Court of Appeals is enough to make any non-lawyer’s eyes glaze over. Much of the legal analysis is about just that, what line of analysis should be applied when making the decision as to whether the state of Washington’s rights protected by the 21st Amendment to regulate alcohol is trumped by the antitrust provisions of the Sherman Antitrust Act. Important stuff, but not interesting reading for most people. The ultimate result turned on the Circuit Court’s rejecting the District Court’s analytical framework, thereby reaching the opposite conclusion. All of the esoterica about “post and hold” and “central warehousing” issues are important to industry professionals but the layperson probably doesn’t much care about such things. So why is this decision important? Costco is important because the Circuit Court made a point of applying an analytical framework that would shore up the current three-tier system at a time when it has been slowly chipped away by free trade advocates, of which I am one, I should say. This line of analytical reasoning will no doubt be used by future courts looking to uphold the current system. I frequently speak of legal precedent and it’s importance in this blog and this case sets a huge precedent by reversing a trend towards modernizing the three-tier system. There are merits to the three-tier system and I’m not one looking to entirely junk it in favor of a free-for-all system. But the system needs to catch up to modern technology and the way business is done in the 21st century. This decision is one that will hinder that prospect for some time.
January 31st, 2008 at 2:34 pm
It is too bad that us winos are rarely legal beagles because I agree with you that the next 5 or so years are critical to the way we operate within and understand the three-tier system. Huge retail outlets like Costco are thinking only of themselves with legal action like this. It’s funny that they may ultimately litigate their way right out of business. After all, the largest challenge to smaller more customer-service oriented retailers is simply getting noticed by large distributors so they can get the wine they want and the price they need. Remove the three-tier system and these small (small compared to Costco, but oftentimes quite important to small wineries) retailers can now get noticed by like-minded suppliers. I know of many wineries that would simply be happy to be able to count on selling their current outputs with some assurance. It’s these people that drive “cult wines” and high QPR wines. Recount all the hot new prospects of the last 5 or so years and I think you’ll find that big importers and distributors are usually late to the party. Cut out the middle man and the small retailers are to gain.
It’s also true that distributors serve a very important logistical function which is simply overhead management. Does Costco really think it’s saving money by multiplying their supply maintenance supplies several-fold? Eliminate importers and distributors and sure, your per bottle costs go down. But then think of the vast and expensive warehouse space and trucking network necessary as well as the labyrinthine customs processes and I think you’re looking at a different picture.
Lastly, it’s only a matter of time before consumers get wise. Costco et al are simply undermining their own customer base, here. Because the dirty little secret of all of this isn’t that they’re going after producers and want to cut costs. The reality is they want to control producers and control costs. This will lead to the ejection of brands with an accrued prestige value beyond what Costco thinks prudent to be replaced with controlled brands of questionable quality and pedigree.
What’s really amazing about all this is that distributors haven’t thought of it first. After all, no additional licensing or legal action is necessary for distributors to get more heavily involved in supply. While many have, none have staked their businesses on that model and none seem to be fighting the big retailers. And I’d have to say that big nationwide distributors like Southern and Republic-National have a substantial stake in the game as well as pockets deep enough to have their voice heard. Their acquiescence is telling.
I do agree that the three tier system needs substantial modernization. I do agree that importers and distributors are oftentimes good for nothing and bring the whole industry down. What I don’t agree with is that somehow not letting Costco of all companies to fail is somehow a step back in regards to that modernization.
January 31st, 2008 at 6:03 pm
Jason, you made several insightful points about law, Costco and the three-tier system. The legal axiom is bad facts make bad law. One implication of your comments is that Costco probably never should have brought this case in the first place. Case selection in pursuing an action on the appellate level is critical to getting the result you desire. In pursuing this case Costco may have hurt themselves more than helped by creating precedent which will entrench the three-tier system as it is currently in place. This is my concern. Your comparison of Costco’s activities and role in the market as being more akin to distributors than to smaller retailers is spot on. In desiring to take on what is essentially a distributor function they cannot help but to take on the burdens of that role as well. Their model relies on controlling producers to minimize costs so they seem willing to take on that burden in exchange for the control it engenders. The net result is the same streamlining of market access to small producers that currently exists in the three-tier system. It is this streamlining of consumer access and market availability, whether by distributors or, by proxy, by market actors like Costco, that leads me to the ultimate conclusion that this decision will hinder change to the three-tier system. While I don’t mourn Costco being on the short end of this decision, I fear that the court’s taking the protectionist side in this issue will be ammunition for other courts to do the same. This would include cases involving much needed revisions to the system brought forth by more worthy litigants. Lawyers are trained to argue by analogy and it seems reasonable to expect attorneys representing those that want to keep the system as is to use this case as a cudgel to beat back the trend of the past few years towards opening markets to small players and greater consumer choice. Granholm was such a narrowly focused ruling that many legitimate avenues of market access to consumers remain to be decided and the Costco ruling seems to me to be a vote towards status quo.
February 2nd, 2008 at 11:01 pm
I think we are talking apples and oranges here most good wineries do not produce huge quantities of wine. Second what better place to store the wine than with the producer, we live in a time that any point in the country is no more than 5 days away. Warehousing wine is a very tenuous situation do you think most distributors maintain their facilities at 55 degrees? I think distributors are no longer necessary in todays world and all the different state laws just cause paperwork that also drives up prices. Direct shipping is a win win situation let distributors warehouse liquor and beer.
Costco will never be a destination for great wine, just cheap prices let them sell beer and vodka. Great wineries are not interested in nor need to market through Costco or distriibutors when the demand for their wine lets them do all winery direct sales.