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Business of Wine: The Road Ahead: Gallo's Entry and I-1183 Signal Change for State's Wine Sector, Puget Sound Business Journal

August 17, 2012


On May 31, the Washington State Supreme Court upheld the citizen-sponsored liquor privatization measure, Initiative 1183. Much of the attention on I-1183 has centered on spirits, but the initiative has significant implications for Washington's wine industry as well.

I-1183, among other things, repealed the uniform pricing scheme for wine and lifted bans on quantity discounts, central warehousing, and "retail to retail" sales. Some of the protections and comforts that the old system afforded Washington wineries may be gone. For example, uniform pricing provided Washington wineries some protection from out-of-state competition. New opportunities will arise, however, as the Washington market becomes more attractive to outside investors.

Shortly after the state got out of the wine business, the world's largest family owned winery, E. & J. Gallo Winery, entered the Washington wine market when it purchased two well-known Washington labels, Columbia Winery and Covey Run Winery. I-1183 facilitates this transition by allowing, for example, a multistate winery to centrally warehouse and distribute all of its wines together, including its Washington labels. Gallo's foray into Washington exemplifies the state's changing wine landscape.

I-1183 is not the first time Washington's wine industry has had to adjust to reduced economic protections. In 1969, the state Legislature passed the California Wine Bill, which repealed then-existing tariffs on out-of-state wine. Wine economist Mike Veseth, author of "Wine Wars: The Curse of the Blue Nun, the Miracle of Two Buck Chuck, and the Revenge of the Terroirists," recalls that "many people predicted gloom and doom when the California Wine Bill opened up Washington to competition from California; instead, however, it precipitated the growth of Washington's premium wine industry." Suddenly forced to compete with California, some wineries folded or consolidated, but ultimately the quality of Washington wines dramatically improved. I-1183 continues to level the playing field. With these specific reforms, we may see a pronounced increase in the quantity of wine production.

Washington is the second largest producer of premium wine nationwide with more than 700 wineries, but consumers in other parts of the country might not know it. The vast majority of Washington wineries are small, often producing fewer than 5,000 cases per year and marketing exclusively in the Pacific Northwest. Larger investors now entering the market, such as Gallo, will presumably increase production and expand out-of-state sales. It remains to be seen whether a wider demand for Washington wine will follow suit, but consumers will have more opportunities to discover wines that Washingtonians have been enjoying for years.

Consumers might also see a reduction in the variety of wines being produced. Instead of experimenting with blends and styles, wineries with large-scale productions often focus on the more commercially viable wines. As the California wine industry experienced greater commercialization in the past, some wineries de-emphasized custom production runs, such as specialty ports and unique varietals. Consumers may experience changes in Washington wine offerings if their favorite winery is acquired by a larger company.

The Washington agricultural sector seems relatively upbeat and hopes to benefit from the prospective increase in wine production. Growers may plant additional acreage to meet new demand, but developing quality vines takes time. Growers with mature, quality fruit can expect to see a higher demand for their grapes. While Gallo acquired some grape contracts to serve its Washington wines, it did not purchase any vineyards. Assuming wine production increases, more grapes will be needed to service the demand. In the near term, some growers predict a shortage in premium grapes, which could drive up the price, force wineries to purchase grapes from other sources, or affect their ability to market a wine from a single appellation.

Expanding vineyards also coincides with the Washington Wine Commission's vision of the Washington wine industry — aggressive development and growth. The commission foresees the industry growing at a rate of 5 percent annually, up from the current annual growth of 3 percent. Gallo alone is rumored to be planning an increase of Columbia's production to 1 million cases per year over time.

Washington wineries face a brave new world of increased competition, investment and opportunity. While recent years have seen an explosion of small wineries in Washington, many of which are likely to be familiar only to local wine enthusiasts, this growth scenario is likely to change as out-of-state wineries acquire new assets here. Increasing competition carries a risk that some small or struggling wineries fail, but it may ultimately bolster the industry by increasing market exposure and developing demand for Washington wine outside the Pacific Northwest.

MARY JO NEWHOUSE is a shareholder in the Seattle office of Schwabe, Williamson & Wyatt. RYAN DUMM is a Schwabe summer associate.

As published Puget Sound Business Journal, August 17, 2012.