A New Role for Wine
Cooperatives in the USA:
The Experience of Wisconsin’s Cumpulsory
Wine Distribution Cooperatives
Abstract:
An examination into examine how the cooperative business
model is being used by Wisconsin’s artisanal wine producers to
meet state liquor control mandates, compete with wine industry
distributors, differentiate their local wines from wine industry
products and promote their viticulture districts, family farm
businesses, LOHAS merchandise, wine trail opportunities and agritourism
The United Nations General Assembly’s declaration of this year, 2012, as the
International Year of Cooperatives is proving to be more than a courteous
acknowledgement of roles that cooperatives have grown to play as economic
development drivers. It has brought attention to the cooperative model’s relevance to
social enterprise initiatives appearing as B Corporations, L3Cs and Nonprofit
Organization controlled business subsidiaries in the US, as Community Interest
Corporations in the United Kingdom and as fourth sector enterprises in other parts of the
world. It has also led to a forums and celebrations that are providing timely
opportunities for public and private sectors to meet about cooperatives in their own
and other communities and to learn how these democratically governed businesses
can stimulate and stabilize regional development.
The year has also come at a time when a variety of industries including those that
affect and buoy winemaking are confounded by tsunami scale disruptions in capital,
trade, consumer demand and production. Public concerns about quality assurance,
self-dealing by corporate directors, lack of concern for long term environmental
conservation and growing threats of impending breakdowns in food, healthcare,
transportation, education and civil society systems is undermining consumer
confidence.
Though one might think circumstances that are shaping this Year of Cooperatives would be
driving people to drink, it is not performing in that way at all. Record numbers of consumers
are enrolling in credit unions which as an aggregate group now control as $1 Trillion and
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earnings for US Agriculture Cooperatives are reported by the USDA to be increasing at a rate of
4 % a year. Cooperative business models around the world are demonstrating durability in
times of economic stress and are delivering higher and more reliable sales earnings to large
numbers of small scale agriculture producers. This is proving to be the case for wine
cooperatives in South America, Europe, Southern Africa, and Australia/New Zealand.
The implications of cooperative business models for the US wine industry, particularly in
respect to family farm based artisanal winemakers is only now beginning to be probed in the
US. Opportunities for production, purchasing and marketing are being probed, particularly in
areas where economies and efficiencies of scale can be achieved. Tobacco settlement dollars
are being invested into a Maryland wine production cooperative; explorations of collaborative
brokering have been undertaken by New Jersey winemakers and, in Wisconsin, two Wine
Cooperatives have formed to take advantage of wine distribution opportunities made possible
by the 2007 Wisconsin Act 85. Some of these initiatives are being driven by state
governments’ efforts to protect regional wine industry development. Others by efforts to avoid
complaints from out of state winemakers about constraint of trade issues that emerged as a
result of a 2005 Supreme Court ruling on Granholm v. Heald (#03-1116, May 16, 2005), that
overturned Michigan and New York laws that that barred out-of-state winemakers from selling
directly to consumers.
According to an account of the court’s ruling for a Duke Law School newsletter in 2005, by J.
Alexander Tanford, a Professor of Law at Indiana University-Bloomington and counsel1 of
record for the Plaintiffs, Eleanor Heald, et al,
Most states [at the time of the ruling] regulate the sale of alcoholic beverages,
including wine, through a three-tier distribution system. Separate licenses are
required for producers, wholesalers, and retailers. The three-tier scheme is
preserved by a complex set of overlapping state and federal regulations. No
producer may sell and ship wine directly to a consumer. This prohibition on direct
sales substantially limits consumer access to wine. There are about 3,000 wineries
in the country and [at the time of the ruling] only 150 have broad national
wholesale distribution. Small wineries, especially new start-up businesses, cannot
get wholesale distribution, but depend for their economic survival on direct
shipping. Consumers who live in the 24 states that prohibit direct shipping simply
cannot get much of the wine produced in the country, and must buy their wine
locally.
States’ responses to this ruling have been cautious and in many respects, guided by
wine brokers and distributors who have had much to gain by protecting their role in a
three tier system that requires an authorized distributor or broker to ship, convey and
wholesale wines to retail outlets. The rules on the sale and shipping of wines vary
dramatically from state to state. In some, such as Oregon, no restrictions are imposed
1
http://www.law.duke.edu/publiclaw/supremecourtonline/commentary/gravhea
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on farm based winemakers seeking to directly market their wines as retailers, as
wholesalers or as E-Commerce fulfillment centers. In others, such as New Jersey, longlived disputes about Alcoholic Beverage Commission regulations resulted in a heatedly
contested new 2012 Wine Shipping Law. This allows microenterprise scale wine
producers (250,000 gallons or less) to sell and ship wines directly to consumers over the
age of 21, to retail wines at as many as 15 outlets in the state as well as at their winery,
and to wholesale wines directly to restaurants, liquor stores and caterers. The new law
makes NJ the 40th state to address shipping law issues raised by Granholm vs. Heald
ruling.
Wine shipping and retailing laws throughout the US are relics of the 20th century’s
Prohibition Laws which were overturned on a national level in the 1930s. The disputes
that arose from efforts of winemakers to dispense with brokers’ costs and to sell wines
directly whether they were or were not operating in a given state has led to the
formation of two unusual marketing cooperatives in the state of Wisconsin: Wisconsin
Winery Coop with 29 wine producer members and Badger State Winery Cooperative
with 17 wine producer members.2 These cooperatives formed to comply with state
requirements that vineyard based wineries adhere to the state’s three tier system for
alcoholic beverages and wholesale their wines through licensed distributors. Though
they had not sought to use the cooperative model for this purpose, they report that
they are enjoying benefits in areas such as promotion that are leading them to explore
other areas where they could realize economies and efficiencies of scale in their
merchandising and fulfillment activities.
The experience of the Wisconsin cooperatives is in some respects at variance with those
of other wine cooperatives. The members did not decide on their own to form a
cooperative in order to realize an array of benefits. They have not yet seen the
cooperative to be a way for them to form of new wine blends that make use of their
cold climate grapes, or to constructively exploit their three viticulture districts’
reputations. They were not intent on securing economies of scale resulting from group
purchasing and production practices and they had resisted the law until compelled to
abide by it. Before forming their cooperatives, members felt threatened by the state’s
decision to restrict their direct sales activities and wanted also to avoid conflict with
large wine marketing enterprises’ objections to state protectionist practices.
In the case of the Wisconsin Winery Coop, they have begun to see that the
cooperative model provides them with a way to finance heightened promotions and
attract tourists to their wineries. They are after three years looking at other ways to build
links between artisanal production, publicize the state’s viticulture districts and promote
the renaissance of wine as a cultural and culinary expression of their region. Coop
leaders and members are interested in finding out how they might as a group move
toward the advancement of viticulture blends that could rival the state’s cheese
industry as a state linked product. The coop members make a one-time nonrefundable $500 member investment to join the coop and pay $7 a case to the
2
Interviews with Marion Weglarz, President of Wisconsin Winery Cooperative Board of Directors and Herdie
Baisden, President of Badger State Winery Cooperative Board of Directors
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cooperative to cover accounting and state revenue reporting costs and to support an
aggressive marketing campaign of a Wisconsin Area Wine Trail. An accounting firm
manages the invoicing, collections and disbursal of funds for every sale made by a
cooperative member and reports to the State Department of Revenue about wine sales
made on a monthly basis.
In the case of Badger State Wine Cooperative, members want to do no more than adhere to the
compulsions of the law and move their wines through transparent channels to customers. They
have a bank handle invoicing, collections, and disbursals of funds to members. No patronage
distributions have yet been made but plans are in place to explore how to go about doing this
as a surplus is available to support this.
The experience in Wisconsin might eventually provide a model for developing wine industries in
areas where winemaking remains rooted to artisanal standards.
Cooperatives were factors in efforts to expand markets for Chilean and South African wines and
are today helping to stabilize established wine production centers in Italy, France, Spain,
Portugal and Germany. In some cases they have operated as de facto industry guardians and
gatekeepers setting standards for production and distribution that also allow them to dominate
the industry. This was the case for South Africa’s Koöperatieve Wijnbouwers Vereniging van
Zuid-Afrika (KWV) which imposed standards and grades for growers for a fifty year period that
ended with apartheid. It is certainly the case for Italy’s Cantina Sociale cooperative which is
today producing nearly sixty percent of the wine sourced from locally Italian grown grapes.
More than half of the vineyards and wine production of France is being sourced from members
of regional cooperatives and commentators have indicated that “Nearly two in every three
German vine-growers today belong to the local co-operative, although their vineyards are often
a small, part-time activity which therefore, cumulatively, represent almost a third of the total
German area under vine ”3
The Wisconsin cooperatives could thus provide a test case for examining how small vintners can
exploit the cooperative model to stimulate development and maintain artisanal wine
production in the state. They also offer a way for relatively small scale producers to withstand
the competition they experience when industrial scale wine enterprises wholesale their
products to local outlets, restaurants and stores. The Wisconsin cooperatives have potential to
allow winemakers to keep pace with growing interest in local foods and wines and provide
3
Mike Veseth, The Wine Economist Blog – August 9, 2011, wineeconomist.com
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them with ways to reach and appeal to consumers whose purchasing decisions are affected by
LOHAS (Lifestyles of Health and Sustainability) issues.4
For the purposes of this paper, I have settled on a definition of a cooperative as low-profit or
for profit organizations in which a group of members share the risks and benefits of jointly
owning though not necessarily operating a business. The model took on its current form of
democratic, transparent governance over professional management and patronage based
distributions of profits in 19th century England when a group of 28 weavers and artisans in
Rochdale organized a general store to secure economies in their purchase of needed supplies,
dry goods and food. Their model performed and endured as a community resource and has
since taken on a wide variety of forms organized by farmers merchandisers, artists,
manufacturers, power system operators, public agencies, healthcare and service providers,
credit unions, and, for my purposes in the talk I am proposing, wine production and sale.
The links between artisanal winemakers, specialty vine growers, viticulture districts and
cooperatives are being tested today by a group of Wisconsin winemakers who are today being
compelled to wholesale their wines through cooperatives they have been required to form by
state law. Their experience points to a business model that could serve as a regional economic
development tool and that could lead to similar cooperatives in other states and in developing
nations with nascent wine industries. Unlike many other wine industry cooperatives, the two
Wisconsin cooperatives formed to do nothing more than promote and wholesale their
members’ wines. In many settings, this work has been carried out by trade associations that
enjoy support from State Departments of Commerce and/or Agriculture. In the case of
Wisconsin’s cooperatives, the cooperative model is being used to assure compliance with the
state Department of Revenue’s three tier taxing system and compliance with the state’s
alcoholic beverage regulations.
Wisconsin Winery Co-op and Badger State Winery Cooperative formed in 2008 to assure the
state and their members’ protection from constraint of trade lawsuits. Initially, 30 winemakers
were members of the former and 13 were members of the latter. They were assisted by David
Ward, Director of Government Relations & Dairy at Cooperative Network, a Madison,
Wisconsin service and consulting organization engaged by the State to support formation of
distribution cooperatives for small scale (25,000 gallons or less a year) winemakers. Though Act
85 had allowed for as many as six distribution cooperatives, only two were formed. It is
unlikely that more will organize as the authorization for these distribution licenses ended last
year.
The State of Wisconsin, like New Jersey, New York, Pennsylvania and others, recognize
that the state’s economy and its development of agri-tourism and sustainable farmland
are well served by winegrowers and winemakers. They have observed that constraints
4
NOTE: This category of consumer was defined by the Neilson group at the end of the 20 th Century and is now
encompassing about 27% of adult purchasers in the United States.
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on shipping affects earning opportunities for emerging wine enterprises and that few
such wineries are able to produce sufficient quantities to warrant attention and service
from traditional wine brokers and distributors. These states’ winemakers associations
were not equipped to mount expensive and time consuming defenses of practices that
aimed to afford market access advantages to state based and state grape sourced
winemakers. Disputes of Granholm vs. Heald were not production and alternative
initiatives opened doors to large scale wine producers that were already dominating
local and state wine markets. In New Jersey, less than 2% of wine consumed by one of
the nation’s largest wine drinking market is from NJ vintners. In Wisconsin, about 3% of
wine consumed in the state is from local sources. Initiatives like the NJ 2012 Wine
Shipping Law and the 2007 Wisconsin Wine Act aim to reverse this.
The 2007 Wisconsin Wine Act 85 requires state wine producers to wholesale their wines
through licensed distributors and allows producers of less than 25,000 gallons to do so
through a winemaker member run distribution cooperative. Wine producers can fulfill
sales through E-Commerce on their own but must move all off of farm based direct
sales to customers through the cooperative. It removed the right of winemakers to sell
wines outside of the state’s audited three-tier system and did not address how or if
adjustments might be made to support wine production or supply purchasing
cooperatives. The latter might present a problem for cooperative members in light of
the caps on production for each member and the latter should not be a problem if
members choose to pursue joint purchasing of bottles, equipment and supplies.
At present, cooperative members do not collaborate through the cooperatives on
production or purchasing. All promote their own wines and do not work to promote
wines with other vintners in their vita culture districts or through their local counties or
regions by assigning emblems about these relationships onto their bottles or in their
promotional materials. All continue to sell their wines at their vineyards (or in the case of
one member at their wine production facility) and fulfill orders from in state customers
as well as from out of state customers on their own. They simply use the distribution
license available to them as cooperative members to carry out their business. The one
exception to their standard practices is the requirement that invoices be paid to the
cooperative which withholds a service fee to manage receivables and pay members
the remaining proceeds of their sales. This fee affords a sustainable, private revenue
stream for the promotion of the state’s wines and allows independent producers to
conform to commercial codes that industrial wine marketing agents claimed were
being violated.
Interviews have been conducted with cooperative stakeholders, with representatives of
the Wisconsin Wine Growers Association, with the Wine Specialist at the Wisconsin
Department of Agriculture and with the Wisconsin Department of Revenue. Advice
was also sought from the Agriculture Extension of the University of Wisconsin and from
staff at Cooperative Network who initially decried the law because it compelled a
category of members to form a cooperative. Additional conversations were held with
Scott Domini, a NJ vintner and former executive on the Garden State Wine Growers
Association and current executive board member of the South Jersey Tourism Council.
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The earnings of the cooperatives were held by their leaders to be proprietary but both
reports they are ready to pass on patronage distributions to their members. These are
payments based on their activity as regards sales of wines through the cooperatives.
They are certainly covering their costs and developing a basis for exploring ways to
exploit the growing LOHAS (Lifestyle of Health and Sustainability) markets in their regions.
It should be noted that growth of wine production in Wisconsin has been dramatic.
From 45 producers in the mid-1990s to today the ranks have almost doubled from to 80
bonded producers today. Opening the doors to easy and cost effective shipping of
wines allows producers access to year round sales that would otherwise be denied and
creates a platform for them. Of the 80 wine producers with Class B licenses from the
Wisconsin’s Department of Revenue, there is one super nova, Wollensheim Winery,
which operates in the Lakes Vitaculture District that is home to their winery alone. It
produces more than 250,000 liters of wine a year and is a major tourist attraction in its
region. The others are scattered and for the most part relatively small. Some artisanal
producers elect to sell only through their farms or tasting rooms, others have chosen to
stay with or use brokers, 47 are persisting with the cooperatives. In part because these
allow them to reach customers that would otherwise not be available to them.
It is in respect to the burgeoning LOHAS markets in the state among residents and
tourists that growth opportunities for the state’s wine industry are in fact highly likely.
There are clearly links between Wisconsin’s emerging network of regional and community
artisanal wine producers and the growing interest being shown for local, “naturally” grown foods. Many
winemakers are being sought out by retailers seeking local and source identified foods.
The LOHAS market is proving to be an important driver for “green,” local, sustainable economies and the
scale of its presence in a community is a good indicator for an artisanal food producer’s success. It has
been tracked by agriculture market and consumer packaged goods (CPG) industry analysts since 2002
when the term was introduced by Dr. Paul Ray, a co-author of The Cultural Creatives, and Frank Lampe,
founder and former editorial director of the LOHAS Journal, at a symposium on sustainable societies.
The A.C. Nielson Research group has been monitoring and reporting on this consumer base for a variety
of clients including the Natural Marketing Institute. Its research staff has observed that despite
recessionary trends, the 2010 LOHAS market, characterized as one that “incorporates environmental
and social responsibility as well as personal concerns about health and wellness into …purchase
decisions (www.lohas.com/Lohas-Consumer),” had grown to $290 Billion.
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LOHAS consumers are driving the growth of a mainstream movement toward a “green” economy. Their
beliefs, wants and desires are significant
factors in the emergence of Food Hubs.
They should not be overlooked,
particularly because their presence is
widespread
and
impervious
to
demographic factors such as age,
earnings and geography. According to
the Natural Marketing Institute, “83
percent of consumers representing four
generations, Baby Boomers, Milennials,
Gen Ys and Gen Zs, are buying” on the
basis of their values as well as their
pocketbooks
(http://www.lohas.com/LohasConsumer and
http://www.lohas.com/content/we-areall-green-consumers-now-and-future).
The size and scope of the LOHAS market
is illustrated in Chart 1, which depicts
Green Purchasing Behavior in 2009, the year that marks the height of the current economic downturn.
Despite economic adversity, 29 % of consumers were still paying premium prices for natural and organic
food and buying it with frequency. Preferences are being shown for products perceived to be healthier
for those who purchase them and for their communities in which they live, even during a period of
spending constraint. During a four-year period between 2007 and 2011, local food purchasing by LOHAS
minded consumers in the US grew from $5 Billion to $7.8 Billion. This market segment has have also
shown that its members attach greater value to local origination of foods offered for sale than they do
to organic certification. In large measure, the trends that characterize the growth of local foods’
preferences and market share (illustrated in Charts 2, 3 and 4 below) have had an effect on the rapid
development of Food Hubs in rural and urban communities throughout the nation.
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Reaching the new channels for sales is something that the Wisconsin wine cooperatives can and
should do. The current laws that govern them need however to be modified to permit their
members more flexibility and to also extend the scale of production for the vintners,
particularly for collaboratively produced or blended wine products.
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