Is It Legal to Sell Wine You Don’t Own?

Posted on  | November 16, 2009  
Written by | Ian Griffith

The concept of “just-in-time” inventory has become a hot button issue in the wine trade recently. Businesses that sell wines they don’t physically own have been attracting attention from state regulators, and other areas of the trade. The California Alcoholic Beverage Control (CA-ABC) issued an advisory earlier this year that has had an impact on some business models and led some to suggest that any retailer selling wines they don’t own is operating illegally. This is not the case.

In a column 6 months ago, I outlined how Amazon has used the concept of “just-in-time” inventory to squeeze cost efficiencies from their supply chains. Ironically, Amazon announced in October that it was abandoning its project to sell wine online. There has been much commentary on how Amazon would only pay 50% of the sale price to wineries, and was overwhelmed by the interstate shipping laws. However it is more likely that the trade practice advisory from the CA-ABC about marketing models shut down the opportunity for Amazon to operate selling wine without a license. CA made it clear that “marketing agents” are not permitted to make business decisions such as pricing, to arrange delivery, and are not permitted to share in the profits of a sale. Doing so would be “availing” themselves of the privileges of a license which they do not own.

Along with the advisory on “marketing agents”, the CA-ABC added a caution that licensed retailers should only sell products they actually own. “To do otherwise could result in a consignment sale”, which is a violation of federal and state law. As the late Susan Cagann of FBM commented, “inventory cannot be returned if unsold. Any just in time delivery solutions should be carefully examined to ensure that the transaction is not a disguised consignment sale.” The scenario here is that a retailer makes a deal with a winery or wholesaler to sell a quantity of wine at a negotiated price. The wine is delivered to the retailer, who sells only part of the allocation and returns the rest, paying for the amount sold. This is probably a consignment sale and as such would be in violation of federal and state alcohol law.

If a retailer receives an order from a customer for an item that the store doesn’t have in stock, whether that customer walks into the store or identifies the items on the store website, that is probably not a consignment sale. There are several common trade practices, including the sale of wine futures, that rely on the sale of products that a store doesn’t have in stock, yet these are not consignment sales as unsold goods are not returned to the wholesaler or supplier.

While perfectly legal, virtual inventory has been the focus of concern from suppliers who see their products online at low prices. Wine-Searcher has become such a fixture of the industry that retailers will check the price of an item online before agreeing to buy it from a distributor. Using prices on Wine-Searcher they decide how they want to position their price relative to other retailers online and calculate whether there is enough room for their customary margin. Often suppliers will bring a retailer a deal but say they don’t want to see the item on Wine-Searcher. The distributor doesn’t want to offer a deep deal for a large commitment only to have other stores question their prices.

Easy access to pricing information on Wine-Searcher presents both an opportunity and a challenge for the trade. A well-priced store can attract a lot of sales, but the trick is to find a sweet spot where the sales remain profitable while the price isn’t so high that it becomes unattractive. Distributors also have pricing tools available to them with post-offs and 1-case discounts where they can make the price more attract to a retailer who buys the wine.

Some hoped that with Amazon’s entry into the wine business they would have a champion with deep pockets to fight their battles on interstate shipping and liberalizing the rules for marketing agents. I suspect those were always unrealistic expectations. However there remain opportunities for licensed retailers who list virtual inventory to offer vast selections of products and to help the trade make visible everything available in the marketplace.

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