After years of legal battles, public relations campaigns, and development of new technologies, direct shipping of wine is now mainstream in much of the United States. Last year, volume of direct-shipped wine was up 15.3% to 5.78 million cases, with consumer spending growing 15.5% to $2.69 billion, according to the 2018 Direct to Consumer Wine Shipping Report by Sovos and Wines & Vines. The channel continues to gain steam this year, and is on pace to eclipse 6 million cases and $3 billion in sales by year-end, to reach nearly 2% of the U.S. wine market in volume and 5% in sales. And those figures include only wines shipped directly from wineries to consumers—not wines shipped from retailers to consumers, which pass through the supplier and wholesale tiers. Those sales, according to Wine.com, are estimated at a further $1 billion.

Direct shipments from wineries, known as direct-to-consumer (DTC), are now clearly part of the wine-selling landscape, particularly for smaller wineries. Since the Granholm v. Heald U.S. Supreme Court decision back in 2005, the number of states where wines can legally be shipped has risen from 31 to 46. “That’s been a steady drumbeat,” notes Larry Cormier, general manager of ShipCompliant by Sovos. “Technology is making it possible for people to enjoy the business of direct-to-consumer, and it’s also being used by the states to gain greater visibility into transactions.” Limited production players (less than 1,000 cases annually) make up 42% of sales, while wineries making between 1,000-5,000 cases comprise a 38% share, according to ShipCompliant by Sovos. Medium-size wineries (50,000-500,000 cases) currently account for 23% of the total value of the channel, and saw their direct-to-consumer sales rise 37% last year.

Pennsylvania recently embraced interstate direct wine shipping, and DTC sales have been growing fast ever since: Last year was the first full calendar year for direct wine shipments in the Keystone State, and it became the nation’s No.-10 DTC destination by volume and No.-11 by value. “Act 39 of 2016, which included the most comprehensive changes to the Pennsylvania Liquor Code since Prohibition, opened the door to a new direct wine shipping industry in Pennsylvania beginning in August 2016,” says Pennsylvania Liquor Control Board (PLCB) chairman Tim Holden. Pennsylvanians can now order up to 36 cases annually, per producer, to be direct-shipped to their homes from more than 1,000 licensed direct wine shippers. In the second half of 2016, some 59,000 cases of wine were shipped into the state, and in 2017 that number jumped to 152,000 cases valued at $57 million, according to the 2018 Direct to Consumer Wine Shipping Report.

It’s a far cry from two decades ago, when the DTC channel was all but nonexistent and wineries struggled to get on distributors’ radar. At the time of the Granholm decision in 2005, DTC still totaled only 500,000 cases. Today, smaller wineries are often content to stick with DTC and leave the three-tier system to larger players. With new technology and an expanded market, it’s much easier for wineries to connect directly—usually through tasting rooms at first, followed by online or wine club purchases.

At Beckham Estate Vineyard in Oregon’s Willamette Valley, DTC accounts for about 85% of the winery’s 2,000-plus-case production. The remainder is sold in small quantities—primarily to restaurants in London, New York, Chicago, and Washington, D.C. Annedria Beckham—who co-owns Beckham Estate Vineyard with her husband, Andrew—has seen recent interest from wholesalers who want to handle her wines. “We have to take a look at it, because we have quite a bit of projected growth over the next couple of years,” Beckham says. But she adds that a three-tier approach would likely require a shift in product range and pricing structure. “Our wines are priced for the consumer audience in our tasting room,” she notes. “Distributors are our partners, and they’re out promoting our wines for us. But if we get on a great restaurant wine list and a customer then can’t find the wine in their local market, they’ll go directly to my website and order from me.”

Acumen Winery, a boutique producer that opened in 2010 in Napa Valley, sells about 20% of its wine direct-to-consumer. “On the winery direct side we’re pretty stoked, because there’s a lot more at stake,” says Acumen director of sales Gordon Waggoner. “That side has dramatically improved.”

Larger, more established winemakers stress the importance of the three-tier system even as they work to develop a stronger DTC presence. “Three-tier is critical to our success, as is DTC,” says Peter Mondavi Jr. of Charles Krug Winery. “We don’t view it as one or the other. They’re complementary, for a couple of reasons. The wines we’re selling for DTC are higher-priced—sometimes considerably so. They’re very small-production items that don’t move very fast within the three-tier system. They need a lot more hand-holding.”

Mike Reynolds, president of Napa’s Hall & Walt Wines, agrees that both channels are important in developing a comprehensive brand strategy. “We continue to work and support and sell wines through the three-tier system because not everyone will connect with us locally,” Reynolds says. “We want to have a presence in wine shops and restaurants around the country. It’s important for us to play there. But for those people who are really passionate about wine and want rare, hard-to-get labels, we have that for them.”

Indeed, both Reynolds and Mondavi emphasize that the wines they sell through DTC are different from those they put through the three-tier system, so there really isn’t a conflict. “Of course we have our nationally distributed wines available in DTC, but the real focus is on very specific, unique wines, vineyard-designate wines, and different varietals that we don’t necessarily sell in the three-tier system,” Mondavi says. “The reason people come up here is to not only experience the history of where it all started in Napa Valley, but to obtain access to wines that you can’t get anywhere else.” At Hall & Walt, the strategy is similar. “We sell a limited number of wines in wholesale channels and do our best not to compete against ourselves,” Reynolds says. “Certainly never on price, and not through our online marketing.”

Natasha Hayes, vice president of marketing and direct-to-consumer for national brands at WX Brands, says that the two channels can be symbiotic. “Usually what we’re promoting is the stuff that’s not out in wholesale—labels that are unique and exclusive,” she says. “We’re building the brand out in wholesale with certain SKUs, then we’re creating unique accessibility for wines that have limited access. There’s not much conflict.” WX Brands, which owns a range of wines including Bread & Butter Wines, Jamieson Ranch Vineyards, Chronic Cellars, and others, also encourages retailers and key accounts to visit and experience the wineries firsthand.

Some players have largely eschewed traditional distribution in favor of DTC. Cameron Hughes Wine acts as a négoçiant, buying wine primarily from California and bottling it for sale under its own label, often at prices lower than similar-quality wine. The company doesn’t have a physical winery, but has wholeheartedly embraced DTC. According to co-founder and chief digital officer Jessica Kogan, about 5% of Cameron Hughes’ wines are sold through Costco, with the rest going through DTC.

Kogan notes the DTC channel is all about building relationships. “It brings you so much closer to a customer,” she says. “It’s no longer just a bottle sitting on a shelf. When you have a web presence, you can interact. You can place wine in a store, but if you don’t have wine online, you’re not serving your customer.”

Resistance At Retail

While wineries are hitting their stride with direct shipping, retailers are facing resistance on the shipping front. Since 2005, the retail tier has witnessed a decline in the number of states where they can legally ship, from 18 states to 14. Where enforcement was once lax in states where direct shipping isn’t legal, most of those states are now toughening their laws or cracking down hard. Last year, UPS and Fedex announced they would end wine deliveries to all states except for the 14 where shipping is legal, while Amazon announced its decision to drop internet wine sales.

In Illinois, lawmakers have made it a felony for out-of-state retailers to ship wine into their state. Meanwhile, Johnson Ho, owner of high-end retailer Pantheon Wine Shoppe in suburban Chicago, last year received a letter from state liquor control authorities in Maine threatening to confiscate any wines he ships there in the future. Sending holiday gift bottles out of state was once a major part of Ho’s business, but he was forced to end virtually all of it, cutting nearly a third of his revenues. “If you lived in Maine and wanted Romanée-Conti or Pétrus, you came to somebody like me,” Ho says. “There wasn’t much sold there by in-state retailers. But I can no longer serve those clients.”

The leading Illinois retailer, the 38-store Binny’s Beverage Depot chain, shut down all out-of-state shipping last year. “I believe in free markets and the free flow of goods and services across state lines,” Binny’s owner Michael Binstein said at the time. “Everybody loses, including Binny’s and its customers, when we get away from the gospel of free enterprise.”

Not surprisingly, wholesalers take a different view. Craig Wolf, who recently departed as CEO of the Wine & Spirits Wholesalers of America (WSWA), acknowledges that “the on-demand economy is here to stay.” Wolf says the best way to serve customers is through the three-tier system with sales through local retailers and options for home delivery. “Distributors aren’t fighting the same battle they fought 20 years ago,” he adds. “They’re not looking to repeal any direct shipping laws that allow wineries to ship across state lines. They’ll certainly point out the risks of interstate shipping, but are not seeking to go back on that issue.”

The WSWA is instead pushing a model that includes suppliers, wholesalers, and retailers, with home delivery from providers like Drizly that promise delivery in under an hour in select markets. That approach, he says, “ensures quality and ensures local taxes are paid, local jobs are preserved, and product integrity is maintained. When a bottle comes through the three-tier system, we know it went from a reputable supplier to a reputable wholesaler and then to a local retailer who then delivers it, with ID checks and proper tax collection all through the system. You get all the assurances of the three-tier system, but you also give the consumer exactly what they want when they want it.”

Mel Dick, president of the wine division and senior vice president of Southern Glazer’s Wine & Spirits, also stresses the importance of the traditional structure for wine sales. “The three-tier system is still the most profitable and safest route to market for beverage alcohol suppliers,” Dick argues. “It prevents underage access and ensures tax collection. We think direct-to-consumer models are most successful and effective with companies that work in partnership with the three-tier system, such as Drizly.”

But retailers are seeking to change the laws in their favor, and are working through their state legislatures to try and do so. Over the past two years, direct-shipping legislation has been introduced in New York, Connecticut, Alabama, Maine, and Texas, and lawsuits have challenged  restrictions in Michigan, Illinois, and Missouri. “The technology is here to stay,” says Daniel Posner, president of the National Association of Wine Retailers, and owner of Grapes the Wine Co. in White Plains, New York. “Consumers want choice. They want good selection, and they want good prices. They should be able to get that in 2018.” Wolf of the WSWA also argues that the wholesale tier has expanded the range of wines available to consumers, but acknowledges that there’s limited space at retail for the market’s ever-expanding number of wines. “There’s more choice on the shelves today than there ever has been,” he says. “There are also more wineries than ever before, and only so much retail shelf space. There’s no shortage of wine in our inventories. But there are now 8,000 wineries, whereas 30 years ago there were 700.”

Rob McMillan, founder and executive vice president of Silicon Valley Bank Wine Division, sees things a bit differently. He notes that distributors have a constitutionally protected monopoly given that states have the ability to legislate the movement of alcohol within their borders. “The liquor wholesalers have done a good job of protecting that monopoly over the years,” he says. “But without wineries being able to go direct, we would have seen the collapse of a lot of small, family-owned wineries.”

Perfecting The Skill

As DTC has become a permanent fixture of the wine landscape, wineries are ratcheting up their commitment to stay on the cutting edge. “Stakeholders are much more willing to invest in the right technologies and the right people,” notes Sandra Hess, who launched the consulting agency DTC Wine Workshops in 2014. “Years ago, wineries would just find a warm body, stick them in the tasting room and have them do what they could on the direct side, whether managing the online store or improving processes. Now it’s about finding a more sophisticated manager to head up the DTC channel. There’s training and more strategic planning—how to leverage strategic plans and tools to change the bottom line, not only in person but online, as well. Wineries are also seeking frontline staff members who understand hospitality management.”

Hess adds that wineries are also taking a more analytical approach. “Data analytics at the DTC level are everything,” she says. “We’re constantly looking at analytics in different buckets—first time visitors versus repeat versus club and member segment. For us, the foundation must be built on knowing how to segment your data properly, and how to provide meaningful opportunities to re-engage within each of those segments.” Other steps could include using that data to proactively pursue customers. “Instead of waiting for people to come to us, we do outreach using big data instead of leaving it to chance,” says McMillan. “That’s another point of development.”

Hess sees an opportunity for wineries not only to attract those customers to their facilities, but also to harness the power of “brand loyalists” who may or may not ever visit the winery. “The key is to let those who might never step foot in the tasting room self-identify through your website,” Hess says. “The other piece is, once you get to that point, how do you leverage your brand ambassadors? How do you establish a formal brand ambassador program to let your loyalists do most of your marketing and sales for you?”

As suppliers grapple with their next moves, others are taking baby steps into DTC. But most agree that it will continue to gain share in the coming years. McMillan goes so far as to say it’s crucial for survival. “For all the regions, in terms of sales it’s not a choice,” McMillan says. “A tasting room is survival. If you don’t have one and if you don’t have direct-to-consumer as the focal point of your winery, you’re going to fail.”

When direct wine shipping was being analyzed in the early days of the new millennium, there was a general consensus it would likely plateau at 5% of the total wine market. Fast-forward 20 years, and it appears to have surged past that level with room left to grow. “The combination of winery DTC plus retailer three-tier e-commerce can absolutely reach a 10% share in the long term,” says Rich Bergsund, CEO of online wine retailer Wine.com. “If we do this right, a lot of that 10% will be incremental industry growth—inspiring new, younger consumers to discover the wine lifestyle.”

Cormier of ShipCompliant cites a poll of state regulators at a recent Napa convention that showed they expect wine shipments to consumers to one day exceed 25% of the market. “That’s the way the world is going,” he says. “It’s about convenience, and accessing something you can’t get at your local retailer.”

“Wine can be a difficult category to bring online, but the benefits to online engagement for the consumer, learning and purchasing are very powerful,” Bergsund says. “That will drive major growth in online retail.”