Opposition Rises to Cheap Blending Imports as Some Niagara Growers Face Bankruptcy

David Wiley and his family lost upwards of $700,000 last year when more than 400 tons of their Niagara grapes went unsold. A $4-million Ontario government bailout paid the Wileys about 20 cents on the dollar, forcing them to mortgage a farm that had been clear of debt for more than a generation. What's even worse is the Wileys face having most of their grapes remain unsold this year, too.

"So what am I supposed to do? It's not as if I could leave a field sit open," the owner of Glenview Vineyards told Wine Business Monthly. "The vines need to be pruned, sprayed, tied, suckered and thinned out. So I'm sinking dollar after dollar each day, which will either force me into bankruptcy or the Ontario government has to assume its responsibility to come up with a solution."

Wiley blamed the oversupply of local grapes on the provincial government allowing large processors to fill blended products bearing Cellared in Canada labels with up to 70 percent of inexpensive finished wine or grape juice from other countries.

Blending resulted in 44,000 tons of wine or juice being imported last year while 2,535 tons of local grapes rotted. Ontario issued a one-time bailout for growers but said there would be no more financial help until the Grape Growers of Ontario and Wine Council of Ontario worked out a strategy for balancing supply with demand.

The Cellared in Canada program was established in 1972 and then renewed in 2001. Only wineries in existence before 1994 have the option of blending under a grandparenting clause granted before free-trade rules applied. Most Cellared in Canada packaging also explains the product is made from a blend of domestic and imported wine, although this information is often in tiny print.

Allowing imports for blending was originally intended to give Ontario growers time to upgrade their vineyards. Wiley faulted the current and previous Ontario governments for failing to keep legislation up to speed with how quickly growers replaced old-style vines and began producing significant quantities of New World grapes.

"Just because the largest processors in Ontario can buy inexpensive product from other countries doesn't mean they don't bear a responsibility to the region that provides them with quality grapes and various other privileges," he added.

Along with a blending licence, those privileges include the right of wineries existing before 1994 to run offsite retail stores for their products.

Pressure is building from various sources to increase the amount of local grapes required in blended wine and to label the contents more precisely.

The Ontario Greenbelt Alliance, representing more than 80 community, health and environmental groups, wants the provincial government to immediately make it mandatory to have at least 50 percent local grape content in wine labelled as Cellared in Canada. (The Ontario requirement had once been 85 percent.)

"A number of Niagara grape farmers are having a hard time surviving because they can't compete with all the cheaper grape content being imported for Cellared in Canada wine," said Jennifer Foulds, spokesperson for Environmental Defence, the national association overseeing the Alliance's efforts. "The government needs to support the people trying to make a living in the 200-million-acre region that it has designated as an agricultural greenbelt."

The Alliance's "Put the O Back in LCBO" campaign also wants the Liquor Control Board of Ontario to increase the market share for local wines to 51 percent from 43. It's also calling on the independent retail stores to sell more 100 percent Ontario wine (reducing the amount of Cellared in Canada products now on their shelves or promoting them less).

Nothing would make Wiley happier. "Those Cellared in Canada wines, masquerading as local products, are causing more harm to our domestic industry than the cheap bottles of wine from Chile, Italy or France," he said.

He is equally upset at the LCBO for having staged past campaigns promoting Ontario wine in which Cellared in Canada products were featured side by side with 100 percent Ontario Vintners Quality Alliance (VQA) wine.

Foulds said the LCBO seems to be getting the message. "The improvement the LCBO has made this summer--which had to be in place before we launched our campaign--was to promote all VQA Ontario wines so there wasn't a mixed message about Cellared in Canada wine being made only from Ontario grapes."

The more than 100 wineries belonging to the Ontario Viniculture Association want changes to go farther. Along with 50 to 51 percent local content, OVA is demanding clearer labelling for Cellared in Canada products.   

"We're not against Cellared in Canada wine per se, but don't want them misrepresented as Canadian or local wine," explained Larry Paterson, OVA's secretary/administrator. "We want Cellared in Canada marked prominently on the front label instead of hidden in a tiny font somewhere on the back, often in the middle of a paragraph or with Cellared in one corner and in Canada in another corner."

OVA additionally wants a ban on labels that indicate a wine is cellared by a particular winery. "What does that tell anybody?" Paterson said.

The Wine Council's new chair says the WCO and Grape Growers of Ontario are working hard at figuring out a successful long-term strategy for the industry. "The process is not about finding a solution for this year," said Ed Madronic when told about the plight facing some growers. "It's really important that whatever we do in the short term will benefit the industry in the long term.

"It's very rare to have a wine region where the domestic share of market is only 43 percent," he added. "So the opportunity for sales growth is immense, and while most of that will come from VQA wine, some of it will also be from Cellared in Canadaproducts."

Wiley said he and other growers can't afford to wait. "The premier of Ontario has to decide whether there are too many growers and grapes in a region designated for agriculture or whether the regulations must be changed to support growers at a time when all the politicians keep talking about how important it is to buy local."

Supporting local growers could make a significant difference to the Ontario economy. According to a KPMG study, the economic spinoff for every bottle of 100 percent Ontario wine sold in the province is $11.50, compared to $7.72 for every Cellared in Canada bottle and only 67 cents for each imported bottle.

-- Julie Gedeon

New Markets Open for Tennessee, Kansas and Maine

For the first time in a couple of years, some new states have opened up to consumer direct wine shipping.

Tennessee Governor Signs Wine Bill into Law

As of July 1, 2009 Tennesseans will be able to have wine shipped directly to their homes under a new law signed by Governor Phil Bredesen. The law allows wineries that acquire a $300 license to ship up to three cases to Tennessee consumers per year. Tennessee was previously among 15 states that banned direct shipment of wine.

Bredesen previously signed into a law another measure to allow Tennesseans to bring home up to five cases of wine purchased from licensed out-of-state wineries to bring back home with them. That law was designed to overcome a recent federal appeals court opinion that found existing rules designed to promote Tennessee wineries unfair to competitors from outside the state.

Kansas Can Now Receive Direct Wine Shipments

Kansas governor Kathleen Sebelius signed SB 212 into law on June 25, which allows U.S. wineries to legally ship wine to Kansas residents. The new law became effective July 1, 2009, and allows licensed wineries who hold a valid Kansas Special Order Shipping license to ship up to 12 cases of wine to any one Kansas consumer or Kansas address per calendar year.

Non-Kansas wineries who are interested in shipping to Kansas must pay the $50 license fee, the $50 registration fee, and post a $750 surety or escrow bond with the ABC. The Special Order Shipping license authorizes a winery to ship wine upon order directly to Kansas consumers for personal or household use only, not for resale. Wineries can apply for shipping licenses at www.easywinelicensing.com.

Maine Opens up to Consumer Direct shipping

Maine was added to the list of those states licensed for direct shipping on June 12 when Governor John Baldacci signed HP 696/LD 1008.

According to the law, a farm winery or other winery holding a federal basic wine manufacturing permit, whether it is located within or outside the state, may obtain a wine direct shipper license by filing an application with the Liquor Licensing and Tax Division. Fees of up to $200, a copy of the applicant's current federal basic wine manufacturing permit and a list of wine labels to be shipped must be included with the application.

The law will permit out-of-state and Maine farm wineries to ship wine directly to consumers by common carrier, subject to the same taxes as if sold locally.

California ABC Issues Warning on Third Party Web Sales

The California Department of Alcoholic Beverage Control (ABC) in June issued an "industry advisory," raising concerns about online wine sales through "unlicensed third party service providers," websites where consumers can buy wine through a third party, also known as "marketing agents," "compliance agents" and "agents of the consumer." ABC said any party soliciting orders of alcoholic beverages for or on behalf of licensees is engaged in the "sale" of alcoholic beverages and must hold a license.

ABC cited regulations prohibiting producers, distributors or importers from "giving anything of value" to on-sale and off-sale retail licensees as well as laws prohibiting cooperative advertising by suppliers and retailers. The law prohibits suppliers from paying for the privilege of placing advertising on or in a retail premise.

While it is illegal to give "any premium, gift, or free goods in connection with the sale or distribution (including marketing) of alcoholic beverages," ABC said it has observed that many programs operated by third parties include "enticements or inducements to order alcoholic beverages," such as free shipping or free items with orders.

The department also said, when selling to consumers, licensees may only sell alcoholic beverages that they actually own at the time orders are received and that to do otherwise is a consignment sale between the retailer and supplier.

The department also raised concerns about fees being based on a percentage of the sale of alcoholic beverages and said it draws a distinction between sharing in the profits from the sale of alcoholic beverages and nominal transaction fees charged by credit card companies or banks. Financial service providers such as Visa may charge a transaction fee based upon a percentage of the sale, but the fee is otherwise unrelated to sale or promotion of the product. Amazon.com, on the other hand, has proposed paying wineries 47 percent of a wine's list price. There are also Internet companies that sell wine that charge wineries a transaction fee based on a percentage of the sale.

Revenue sharing is not permitted and is considered by regulators to be the act of the marketing agent "availing" itself of the privilege of the license of the seller. The advisory said "licensees" can be held accountable even if all so-called "prohibited activities" are conducted by a third party.

Matthew Seck, the chief of ABC's Trade Enforcement Unit, told Wine Business Monthly he was approached by various parties on the issue and "received complaints regarding unlicensed activity from people in the industry." He declined to discuss specific companies, saying, "We may or may not have investigations going, so I can't identify any individuals." Seck admitted there is little the ABC can do with respect to out-of-state companies but said wineries can be held responsible. "You can't let someone else use your license," he said.

John Hinman, an attorney who specializes in alcoholic beverage law, said that while the advisory "looks pretty grim," that there's not much there the ABC hasn't said before. "They put it all in one place," he said. "Now we have something specific we can address because I think they're wrong in a lot of areas."

"The ABC, for reasons unknown to me, has decided that they want to discourage marketing," Hinman said. "That's the message." He speculated that what ABC might really want is to encourage legislation that could clarify the issues.

ABC's advisory coincidently came two weeks after the issue was raised in an 85-page white paper on wine and social media released to the industry by VinTank last month. "It puts a question mark on how every marketing agent is doing their business," Paul Mabray, the chief executive of VinTank said of the ABC's advisory. "It's a redefinition, giving more clarity as well as more questions to address this new notion of marketing agent." wbm