Prohibition hangs over exports

Ruud Maasdam and Dorien Vermaas at their vineyard.

When Ruud Maasdam and Dorien Vermaas decided to export wine from their small Marlborough vineyard to the United States, they thought their chances were pretty good.

After careers with tech giants Oracle and Apple, the husband-and-wife team understood how Americans did business. In 2000, New Zealand wine exports to the US were climbing. And their winery, Staete Landt, boasted a stellar rating from a prestigious wine magazine.

Five years later, they are struggling just to put their wine in places where a customer might see it.

Demand for New Zealand wine is higher than ever before in the US. Yet the country's arcane maze of alcohol laws means many New Zealand wineries find that their biggest challenge is getting onto liquor store shelves.

"A lot of people look at the growth of the US market, and say, can't I just sell my wine?" said Rory Callahan, president of Wine and Food Associates, a market development firm. "But the barriers to entry are incredible."

Although most Americans see wine as just another commodity, its sale is still governed by a three-tier system introduced when Prohibition ended in 1933, said Matthew Botting, a California-based alcohol and beverage lawyer.

Shaped by the moral concerns of the temperance movement, this system required distributors to act as middlemen between producers and retailers, Botting said.

But over the past 40 years, mergers have reduced the number of distributors from 11,000 to 500, meaning that two or three wholesalers per state determine which wines reach stores and restaurants, according to the Coalition for Free Trade, a wine industry group.

"This consolidation prevents about two-thirds of wine being made from reaching the consumer," Callahan said.

To complicate matters further, all 50 states write their own alcohol laws. And because most New Zealand wineries do not produce enough to supply a national importer, they must build relationships with importers and distributors state by state, said David Strada, New Zealand Winegrowers' US representative.

Maasdam and Vermaas plan to export a third of Staete Landt's wine to the US. Despite their small size, they found a national importer in five months. But the importer broke the contract, Maasdam said, leaving 10 per cent of the vintage sitting in a warehouse.

After that, the couple went local, but it wasn't easy to locate suitable partners. They found companies that seemed ideal, only to see their wine knocked off distributors' lists after more mergers.

Despite numerous promotional visits, they still only sell in a handful of states. Their goal is 10.

With the weak US dollar eroding profit margins for New Zealand wineries by up to 30 per cent, the couple was "constantly rethinking whether it's feasible for a small company to sell in the US". But larger companies must also fight to hold distributors' attention.

Villa Maria entered the US through a national importer in the late 1990s. Its US sales and marketing manager, Stuart Devine, spends 40 weeks a year travelling to maintain Villa Maria's profile with wholesalers and buyers.

The three-tier system means that instead of competing with American or other foreign brands in retail outlets, New Zealand wines are battling each other for representation by an importer or wholesaler, said representatives from several wineries. 

Consequently, the New Zealand industry is closely monitoring a Supreme Court decision that could be the "first manifestation of cracks in the three-tier system," said Callahan.

The decision, issued last month, is expected to increase opportunities for American wineries to ship straight to customers in different states.

This would not immediately affect foreign firms, but the legal ruling "goes far beyond wineries", said Matthew Botting. He said the decision could influence attempts by retailers to bypass distributors too.

However, the US$32 billion wholesaler industry is expected to aggressively lobby state lawmakers to preserve the stronghold it has held since the bootlegging days ended.

Despite the difficulties, New Zealand's image in the US is glowing, said professionals across the industry.

New Zealand Winegrowers expects the US to overtake the UK as New Zealand's largest wine export market by 2005.

For New Zealand firms to succeed in such a tough market, they must choose importers and wholesalers carefully to match their size and style, said Alana Gower, New Zealand Trade and Enterprise's New York Trade Commissioner.

That's a lesson that Staete Landt learned the hard way.

Its wines are thriving in 15 countries, but in the US, they have "thrown out all ideas about volume", Maasdam said.

Instead, they're focusing on small partners that understand their wine and will promote it enthusiastically.