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New Regulations Push Wine Prices Up in Illinois

H. Lee Murphy
Posted: July 13, 1999

For years, wine lovers in Illinois have enjoyed some of the lowest retail prices in the nation, but that advantage is quickly evaporating in the wake of higher taxes and a controversial wholesale "franchise" law that took effect on July 1.

The tax hikes -- designed to help finance a new $12 billion statewide building program -- raise the assessment on wine from 23 cents a gallon to 73 cents, equal to about 10 cents per 750-ml bottle. But retailers and wineries are far more incensed over the franchise law, called the Wine and Spirits Industry Fair Dealing Act, which permits producers to cancel contracts with their distributors only for "just cause." Critics contend that such a law is tantamount to handing lifetime contracts to distributors and will severely reduce competition.

A consumer backlash arose in late June when the state's four major wholesalers, which control nearly 90 percent of Illinois' liquor volume, quietly revealed to retailers that they planned to push through sizable price increases, at least doubling the impact of the tax hikes. Angry merchants went public with the plans, and the wholesalers, under pressure from Gov. George Ryan, were forced to scale back their increases to about 3 percent. However, retailers fear another attempt to raise prices later this year after the current tussle has quieted.

"Shoppers used to travel from all over the Midwest to buy their wines here," said Fred Rosen, owner of Sam's Wines & Spirits in Chicago. "As prices go higher, Illinois residents in the future will be traveling to other states to buy their wines. The legislature has killed the golden goose here."

Because wineries that ship less than 10,000 cases annually into the state are exempt from the new franchise law, Rosen and other merchants are vowing to seek out more small producers for direct importation. Meanwhile, California's Kendall-Jackson Winery has filed suit in federal court in Chicago to overturn the new legislation and to sever its distribution pact with Judge & Dolph Ltd., the state's biggest wholesaler, owned by William Wirtz, the politically connected owner of the Chicago Blackhawks hockey team. More legal maneuvering from other wineries is anticipated.

"It's very important how a premium wine is presented and sold," said Jim Caudill, a vice president of Kendall-Jackson. "We're now being told that we must remain with a distributor no matter what their performance is. That's very disturbing. With no worries about their contracts, wholesalers won't be inclined to go the extra step necessary to support premium products."

Wholesalers complain that their costs have been rising in the face of razor-thin profit margins -- as little as 1 percent on a net basis, they claim. "Salaries and health insurance costs are up for us," said Anthony Terlato, chairman and chief executive of Paterno Imports Ltd. in Lake Bluff, Ill. "When I started in this business in 1955, there were more than 50 wholesale distributors in Chicago. There are just four big names remaining now. The hope is that this new law will preserve what's left."

In other consumer goods categories, wholesale-retail relationships are left to the vagaries of free enterprise. But the rules have always been different for liquor, asserts Paul Jenkins, executive director of the Wine and Spirits Distributors of Illinois. "Ever since Prohibition, it's been subjected to government intervention," he said. Franchise laws "ensure that I won't spend 25 years as a wholesaler working hard to develop a brand of wine in Illinois, then lose that brand with a single phone call from the winery," he added.

In the recent furor over rising prices, some lawmakers have suggested that they might be willing to rescind their votes on the franchise law. Even the governor, a newly elected Republican sympathetic to wholesalers' interests, has voiced some doubts. At least a few wineries have vowed to press for repeal, yet most observers believe that the law will remain standing. A legal injunction is also unlikely: Some 13 states have similar wholesaler protection laws, and courts in Pennsylvania, North Carolina and Connecticut have upheld these laws when challenged.

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