Wednesday, January 12, 2011

From The Tennessean Jan.8, 2011

Tennessee’s Other Wine Bill

Humboldt, TN- How do you create good jobs in the rural counties of Tennessee without millions of dollars in incentives?  You deregulate Tennessee’s wine industry and farm wineries.  North Carolina has done it.  Virginia and Missouri have done it, as well. As you can see, Tennessee has overlooked this potential job creator and tourism draw, while neighboring states ring up sales (and tax revenue) at a quickening pace.

Annual Economic Impact of State Wine Industry
North Carolina
$900 Million*
$701 Million**
$600 Million***
$140 Million****

*2007 data.  Source: North Carolina State Department of Commerce
**2007 data.  Source:  Missouri Department of Agriculture
***2007 data.  Source:  WineAmerica
****2007 data.  Source:  University of Tennessee

When you look at the number of wineries in our neighboring states, you start to realize what is happening:
Virginia has 205 wineries, North Carolina has 112, and Missouri has 114.  Tennessee has 41. 

The King’s Ransom

Tennessee spends lavishly when it comes to bringing manufacturing to our state, with many incentive packages for large manufacturers surpassing $100 Million.   According to the Tennessee Department of Economic Development, Tennessee paid around $197 million in cash incentives and tax breaks to bring the Nissan headquarters to Franklin.  The Volkswagen deal is approaching $500 million.  Wineries would locate here for much less­, at virtually no cost to the state.  A small change in Tennessee’s regulations would have an immediate impact on jobs in our state.

Tennessee’s Rural Counties in a State of Crisis

Tennessee’s official unemployment rate in November 2010 was 9.4%.  That’s high by any standards.  If you take out the metropolitan counties, you will see that Tennessee’s rural unemployment is closer to 13 or 14%. Tennessee’s manufacturing base has been eroding since the 1980’s when jobs began moving to Mexico and overseas.  According to Manufacturer’s News, Inc., Tennessee lost over 144,464 manufacturing jobs between 2001 and 2009.  Those are jobs that are hard to get back.   And as mentioned earlier, it costs Tennessee hundreds of millions of dollars to bring manufacturing jobs to our state. The timing could not be more suited to change Tennessee’s farm winery laws so we can start growing our tax base again, putting farmers back to work, and returning Tennessee’s tourism dollars back home and away from neighboring states. 

Poised for growth

Here in Humboldt is one of Western Tennessee’s best-kept secrets: Crown Winery. Started just a couple of years ago by Peter and Rita Howard it is the only winery outside of California that runs completely on solar power.  Crown Winery has already been an award winner at the Indy International Wine Competition last year. This place has a real international feel to it, from the Tuscan style main tasting room and winery building to the newly planted rows of Sangiovese grapes.  The international influence comes from its owners, who spent a great deal of time overseas.  Peter, a British gas physicist, and Rita, a West-Tennessee native and former Miss Tennessee, met while skiing in Austria.  Rita was an actress at the time.

Despite their talents and great wine, Crown Winery faces an uphill climb.  Their market is presently limited to on-premise sales and special events because they are not a high-volume producer. Crown Winery is presently utilizing one of Tennessee’s wholesalers, but the system is just not a good fit for small wineries like theirs.  The average winery customer for a wholesaler makes at least 20,000 cases of wine a year and many make much more than that.  The owners of Crown Winery say they could increase their capacity if they had additional ways to sell their wine.  The ability to sell directly to restaurants and hotels would be a great start.  By utilizing a state non-profit distributor for small wineries they could accomplish this.

The Front Lines-Tennessee’s Restaurant Industry

One of the most popular Italian restaurants in the area is found here in Jackson just off I-40: Baudo’s Italian Restaurant.  With a great wine list from all over the world, something is missing. You won’t find one wine made in Tennessee.  The owner Sharon Baudo says she would love to sell wine from the Crown Winery, made just 10 minutes up the road, but buying it from a wholesaler(with at least a 30% markup from the producer), paying the 15% tax on gross sales of alcohol in restaurants, the 10% sales tax, (not to mention Tennessee’s annual privilege tax) it just doesn’t make economic sense.  The price of the Tennessee wine wouldn’t be able to compete with the high volume wineries from California and the West Coast.  Taking the wholesaler’s 30% markup out of the equation would certainly level the playing field for Tennessee wines.

Exporting Tennessee Wine?

In early 2011 Crown Winery plans to export a portion of its wine to England for sale.  How ironic that they can sell their wine for profit 5,000 miles away, but can’t sell it 5 miles down the road.  You start to understand the frustration Tennessee winery owners have and how hungry they are for a change. 

Not an Easy Business in Tennessee

In addition to the added cost that is incurred by using a wholesaler in Tennessee, there is also a “tied-house” relationship that is created.  Tied-house means that once a winery signs on with a particular wholesaler, they can never exit that contract, not even in death.  So no matter how successful or unsuccessful that wholesaler is with your product or how much time they choose to devote to your product, as a winery you have no other options.  It is illegal to change or to void the contract.  The economic truth is that the wholesalers must focus on their high volume accounts, and most Tennessee wineries don’t fall into that category.

The wine business isn’t that profitable to start with.   Grape vines take at least 3 years to produce grapes that are suitable for wine making. Then add another year for aging, and you are looking at a minimum of 4–5 years before you even have a product to sell.  Most wineries don’t expect payback on the initial investment for at least 10 years.  It is a true labor of love.  Neither of the Howards from Crown Winery have taken a paycheck since they started their winery.

The Plan

The Tennessee legislature will most likely see a reprisal of the ‘wine sales in grocery stores’ debate in 2011.  Whether or not that will succeed is anyone’s guess. I believe Tennessee has another wine bill that could be introduced; one that has great potential to get through committee and be voted on in 2011.  It mirrors what Virginia and North Carolina have already done.  Virginia presently allows its small state wineries (those that produce less than 3,000 cases/year) to self-distribute through a state non-profit company that has been set up called the Virginia Wine Distribution Company.  These smaller wineries “sell” their product to this company, and for $5 a case (or another nominal amount,) they can sell directly to restaurants, hotels, and package stores.  The logistics is up to them.  Now keep in mind, any wineries over the 3,000 case amount will continue (if they so choose) to use the state’s 3-tier system. That means selling to a wholesaler who then turns around and sells it to the retailer.  The wholesalers come out just fine in this deal; they continue to handle the larger wineries. Very little of their business comes from Tennessee wineries anyway—less than 1% in most cases.  Virginia is able to legally allow their in-state wineries to self-distribute through the non-profit company, a method that has survived numerous legal challenges.  Previous methods used by Virginia have been overturned in the Federal Courts as violations of the Interstate Commerce Act.

I encourage you to get involved and let your legislator know you support Tennessee wineries and their proposal to self-distribute through a state non-profit system.  It’s a compromise and a bill that works for everyone.  It keeps the state’s 3-tier system intact for large producers and gives the smaller wineries a chance to succeed.

Another initiative being re-introduced this year allows Tennessee wineries to sell at a small number of off-site locations, closer to interstates and population centers.  It would also allow Tennessee wineries to sell at special events and festivals, too.  This would be a great boost to our in-state wineries, as well.

Winds of Change?

In June 2009, the General Assembly passed a law that will allow “spirits” to be made and sold in all Tennessee counties that are not currently “dry.” According to BusinessTN’s July 2009 article “Spirits of the Times,” Bill Owens, president of the American Distilling Institute, says that new distilleries lead to tax and tourism revenues, jobs, and new markets for local farmers. According to Owens, seven jobs are created for every one person working in a distillery, "providing employment for farmers, truck drivers, retailers, wholesalers and others.”

As the 107th Tennessee General Assembly convenes in January, members will be part of history.  For the first time since Reconstruction, the governor’s office and both the state House and Senate will be majority Republican. 
With 23 new faces in the House alone, the legislature will be taking on a new identity.   Let’s hope their first act of business is job creation.  Look no further than Tennessee’s wine industry to create skilled jobs and stimulate tourism.  And you don’t have to pay millions of dollars to do it.

By Chris Albonetti
A freelance writer on the subject of Wine and Winemaking, Chris is a member of TVOS (Tennessee Viticultural and Oenological Society), and publishes a blog on Home Winemaking and the Wine Industry.  You can follow his blog at

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