Formalization of Wine’s ‘Fifth Column’: Third-party Marketers
May 14th, 2012
Editor’s Note: The following post is part of our series on the Third Party Providers
“A compliant and effective e-commerce sales platform [is] now in place and available. There is a Fifth Column of wine sales now…The evolution and momentum of the Fifth Column of wine sales leads us to believe the genie is finally out of the bottle and there is no putting it back for state-to-state and direct wine e-commerce.”
The historical metaphor of the “Fifth Column” is new to the world of wine marketing. As used by Rob McMillan and the authors of Silicon Valley Bank’s recent “State of the Wine Industry” report, it is a reference to the Spanish Civil War of the 1930s and the idea that “an ad-hoc group of loyalists emerging from within the city [of Madrid] who would rise up against the incumbent order”. Silicon Valley Bank uses the term to refer to a “group of wine businesses partnering with producers to sell direct”.
The Silicon Valley Bank report is referring to various companies in the wine industry that have been founded to support direct to consumer sales such as logistics, compliance, third party marketers and others companies that, taken together, provide suppliers with a support system for getting wine into the hands of consumers across the country.
From our perspective, another way of understanding the “Fifth Column” is the recognition that after many fits and start, innovations, failures, successes and the introduction of new technologies, the wine industry now has new paths to market by which new and old customers can be cultivated with confidence. We view the emergence of compliantly operating third party marketers as the final piece of the “fifth column” puzzle.
The first glimpse of the real value that third party marketers provide to the direct-to-consumer market came during the recent recession when these talented marketers were able to use private or “flash” sales, membership platforms and outstandingly executed e-mail marketing campaigns to help suppliers move through distressed inventory during a decline in demand. Third party marketers played a key role putting suppliers’ wines in front of motivated consumers.
While some people have predicted either the end of the road for these marketers as inventory has dried up and the recession wanes, or the end of firms that focus on discounting, we believe that the third party marketer is here to stay and will continue to play an important role not only in giving suppliers a new path to market, but in introducing brands to new customers.
Third party marketers, flash sites, and email marketers in a number of industries continue to thrive. In large part this is occurring because consumers have become accustomed to using these services and appear to be quite comfortable with either encountering singular products on a daily basis or allowing the products to “come to them” via trusted vendors and marketers. We see the same thing happening in the wine consumer world.
In fact, we are convinced that 2012 is the year that third party wine marketers will demonstrate not only their staying power but also their long term importance to the wine consumer and wine supplier that they bring together. We recommend that everyone working in the direct-to-consumer channel carefully read the new Silicon Valley Bank “State of the Industry” report with particular focus on their understanding of the “Fifth Column”. It explains what we are seeing put into practice: The formalization of a new channel to successfully cultivate new customers and sell more wine.
The First of May Brings the First of Direct Wine Shipping to the Garden State
May 1st, 2012
Spring brings more than flowers this year for supporters of direct shipping. After three and a half months of anticipation and preparation, the New Jersey Division of Alcoholic Beverage Control posted checklists, forms and applications on their site, making S 3172 a reality for the wine industry. Effective May 1, New Jersey is accepting applications for the Out-of-State Winery License from wineries producing less than 250,000 gallons (roughly 105,000 cases) annually. Annual production dictates the fee for the new license:
- Less than 1,000 gallons – $63
- Between 1,000 and 2,500 gallons – $125
- Between 2,500 and 30,000 gallons – $250
- Between 30,000 and 50,000 gallons – $375
- Between 50,000 and 250,000 gallons – $938
In addition to the listed winery license fees, New Jersey will make out-of-state wineries work hard for entry into the 40th U.S. state to allow direct shipping. The latest information indicates out-of-state wineries must: 1) register their business with the Secretary of State ($125); 2) register their business with the Division of Taxation for payment of state sales and excise taxes; 3) post a beverage tax bond (ranging from $1,000 to $1,000,000 depending on anticipated sales); and 4) submit the license application with the fee, outlined above, to the New Jersey Alcoholic Beverage Control (NJ ABC). New Jersey also requires all products shipped into the state to be brand-registered at a cost of $23 per label.
In an unanticipated twist, corporate laws in New Jersey require any foreign (non-New Jersey) corporation that secures a license from a state agency (for example, a wine shipper’s license from the NJ ABC) to establish nexus with the state. With this nexus, out-of-state winery licensees must also annually file corporate income tax and pay a minimum of $500/year, depending on gross revenues. Partnerships are also subject to a tax of $150/partner/year and annual filing. All wineries applying for the license should be aware that they are subject to this requirement.
On top of direct shipping capabilities for Out-of-State Wineries, with the payment of an additional fee (from $100 to $1000 depending on annual production), licensees may ship directly to New Jersey retailers. Common carriers are not allowed to ship these orders to retailers, and price posting is required on products for sale to retailers. Additionally, licensees have the option to open up to 16 tasting rooms within New Jersey for a fee of $250/site.
Here are the forms referenced in New Jersey’s checklist and instructions, in order of appearance:
- Register for taxes
- Obtain a Beverage Tax Bond
- Complete the Out-of-State Winery License Application
- For each label, complete the Brand Registration Application (Instructions)
- Bi-monthly, file the Alcoholic Beverage Tax Return with Supplemental Schedule
We realize that the application process in New Jersey is a little daunting, so ShipCompliant has already geared up EasyWineLicensing.com to facilitate the licensing process. Visit www.easywinelicensing.com before May 15th with the coupon code “EWLNJ” and save 35% off ShipCompliant service fees to obtain a New Jersey direct shipping license.
Licensees should have the opportunity to accept or reject each third party wine order
April 19th, 2012
Editor’s Note: The following post is part of our series on the Third Party Providers
In the quickly evolving world of third party wine marketing, it’s important that marketers and licensed sellers work together in such a way that puts the licensed seller in full control of all aspects of each transaction. One of the most important elements of control is the concept of acceptance. 
Why Acceptance?
The fundamental concepts behind third party marketing are quite simple on the surface: A third party provider (TPP) places and merchandises products from licensed wineries on its website, mobile application or platform, then solicits requests from consumers who would like to purchase the products, and passes the request on to the licensee for final sale and fulfillment.
Below the surface, the process can be much more complex. Technology has advanced to a point where almost all aspects of third party sales can be completely automated. For example, all of the following functions can be completed in real-time within seconds of the consumer actually clicking the button to complete/submit their order:
- Third Party Providers (TPPs) can dynamically display product information that licensed sellers have authorized for placement
- Inventory levels can be fully synchronized and reserved
- Sales tax can be calculated precisely based on the licensed seller’s tax preferences
- A comprehensive compliance check can be run against the licensed seller’s permits and volume from other channels
- Consumer age can be affirmed and validated
- Credit card funds can be authorized and reserved
- Orders can be released to the licensed seller’s preferred fulfillment location
In the past, many of these steps were typically carried out through some combination of phone, fax, snail mail, carrier pigeons, smoke, and mirrors. But today, as TPPs increasingly look for a world-class quality of service for their customers, automation and efficiency are paramount.
At the core of compliant third party marketing is the notion that licensed sellers are always fully in control of all aspects of each transaction. Although one could probably argue that the order-acceptance process could also be established contractually, we believe that it’s important for the licensed seller to always have an option to interrupt the automated flow so that they have every confidence in the orders that are fulfilled on their behalf, prior to payment capture and fulfillment.
Another significant consideration is that regulatory agencies place tremendous importance on this step. In its October 2011 Advisory on the issue of Third Party Providers the California Department of Alcoholic Beverage Control wrote, “The licensee responsible for the sale must be clearly identified and must ultimately control the transaction, including any decisions concerning acceptance or rejection of such orders.” It makes sense that regulators want to ensure that there is a licensee involved that they know is in control and that they can hold accountable for orders that are shipped into their state.
The Nuts and Bolts
An easy way to implement an acceptance mechanism is for the TPP to send an email with the order requests to the licensee for their review. Licensed sellers can then review the order details, and will likely consider the following when evaluating whether or not they would like to accept or reject the order:
- Compliance: Has this order request been checked for compliance, and aggregated against my other order sources (my winery website, wine club, tasting room, and phone orders)? Has the consumer’s age been affirmed and/or validated using an online age verification service.
- Pricing: Are the prices for the requested items within the predetermined ranges I established with this TPP?
- Inventory: Do I have sufficient inventory for these items to fulfill this request?
- Advertising Fee: Is the advertising/customer acquisition fee (if applicable) for this order request within the predetermined range that I established with this TPP?
- Sales Tax: Has the appropriate amount of sales tax been collected based on my tax preferences in the destination state?
If the answer to all of these questions is yes, then the licensee should have no reason to reject the order requests, and can therefore feel comfortable accepting them. Once the requests are accepted by the licensee, the orders can be released to the designated fulfillment location, and payment can be captured (note: payment should ideally be authorized at the time of transaction, but captured after acceptance and fulfillment).
The acceptance email can be implemented in a way that batches order requests over set periods of time (daily, twice/daily, every 4 hours, etc.). Each licensee may have different preferences about both the timing of the emails (during local business hours, for example), and the review period (4 hours, 8 hours, etc.), based on their desired level of control. This preferences-based method of acceptance is what we implemented into ShipCompliant’s MarketPlace platform, as we believe it provides a good amount of flexibility for licensed sellers.
In summary, the relatively straightforward process of creating an acceptance mechanism can really go a long way towards establishing the most important regulatory requirement for working with TPPs — licensee control. As wineries more and more look to work with TPPs that complement their brand and their direct to consumer strategy, relying on a robust and consistent acceptance mechanism becomes increasingly important.
Third Party Providers are Here…To Stay
April 1st, 2012
Last month I had the privilege of addressing a group of control state regulators, industry attorneys and key industry executives that gathered just outside Washington, DC for the National Alcohol Beverage Control Association’s (NABCA) Annual Legal Symposium. The topic of my panel was one that we have put significant focus on here at ShipCompliant and one that the wine industry has been struggling with for the past few years: Non-traditional wine businesses, otherwise known as Third Party Providers (TPPs).
For most small and medium sized wineries, the path to increased sales, increased margins and brand growth is direct-to-consumer sales. Yet, we recognize that the wine industry is at the tail end of the market expansion that resulted from state-based regulatory changes that came in the wake of the 2005 Granholm v. Heald US Supreme Court decision. When and if Pennsylvania and Massachusetts open their borders to direct to consumer shipping, all significant states will be open to producing wineries for direct-to-consumer sales.
WHAT NEXT?
We believe that after all the significant states open to direct-to-consumer sales, the next and most important opportunity for wineries to expand direct sales and attract new customers will result from the expansion of TPPs.
First, we want to be clear what we mean by a TPP. Flash and private sales sites, community buying operations, product advertising platforms, collective tasting rooms, multi-brand company websites, and other online wine marketers make up this category. This sector of the market has been limited, as many potential TPPs have stayed away from the wine industry because of regulatory uncertainty.
That uncertainty is diminishing and new opportunities are emerging.
NEW REGULATORY GUIDELINES ON THIRD PARTY PROVIDERS
The most important development that will lead to reduced uncertainty in the realm of online wine marketing was the issuance of guidelines in November on licensee (winery and retailer) and TPP interaction by the California ABC. This set of guidelines described the process by which funds need to be transferred and controlled, how wine offers must be structured, and how acceptance and fulfillment of orders must be undertaken in order for the collaboration between licensed wineries and importers and TPPs to be considered compliant with California ABC regulations and state laws.
In short, the CA ABC wants to ensure that the licensee is in full control of all aspects of each transaction, and that the licensee will ultimately be held accountable for any actions by the third party that is soliciting order requests on their behalf. It’s worth noting that this advisory is obviously California-specific. However, it serves as a great framework for other states to contemplate the issues of third-party marketing and hopefully each state will take a similarly collaborative approach.
While complex, this new set of guidelines by the California ABC does put in place a path to growth and innovation in the online wine marketing arena. This opening for Third Party Providers and online marketers could not have come at a better time. There are notable signs of recovery in the wine market. Additionally, the oversupply of grapes and bulk wine that has plagued the industry for the past few years appears to have dried up. The combination of fewer states left to open up for direct shipping and the need for small and medium sized wineries to continue to increase their customer base means that there is great potential for innovative marketing approaches.
A NEW SERIES OF BLOG POSTS ON THIRD PARTY PROVIDERS
We believe that great innovations in wine marketing will come via collaborative marketing efforts between TPPs and wineries that will help reach new and larger numbers of wine buyers. With this in mind, ShipCompliant is planning to publish a series of blog posts that focus specifically on the issues surrounding Third Party Providers and how licensed sellers can work with them efficiently, compliantly and profitably. We look forward to generating discussion on this important issue and further clarifying this new landscape for wine sales and marketing.
We’ll start the series with some of the questions that we addressed at the NABCA Legal Symposium, but also would love to hear what your biggest questions are. If you have questions, comments, or suggestions, please email us at blog (at) shipcompliant.com .
Out-of-State Shippers in Texas Get a Break on Excise Taxes – Until Now
January 26th, 2012
Texas recently sent an updated Direct Shipper’s Report (form C-240) along with a letter to Out-of-State Winery Direct Shippers, alerting the licensees of a change in the tax rate to be paid on wine sent to Texas residents from out-of-state. Until now, Texas has only required out-of-state direct shippers to pay $0.204 per gallon on all wine shipped. The taxes on vinous liquors listed on the revised form are equal to the taxes paid by in-state wineries and are as follows:
- Wine with an ABV of 14% or less – $0.204/gallon
- Wine with an ABV over 14% – $0.408/gallon
- Sparkling wine – $0.516/gallon
The updated rates are in effect for the current quarter (December – February), and the next payment is due on March 15th.
Texas Form C-240
