The landscape for independent wine and spirits retailers in Tennessee has shifted significantly in recent years, with wine added to the list of items that grocers can sell and Sunday sales of beverage alcohol now permitted. But the U.S. Supreme Court will assess the most potentially disruptive shift later this year. The High Court’s decision could uphold the strict state laws governing spirits and wine retailers, or it could bring a sea change to the way alcohol is sold in Tennessee and beyond.
At press time, oral arguments in the case of the Tennessee Wine & Spirits Retailers Association (TWSRA) v. Blair were set to begin January 16. Blair is in reference to Zack Blair, interim director of the Tennessee Alcoholic Beverage Commission (ABC). The Commission gave Total Wine & More, the largest U.S. independent retailer of fine wine, a license to sell beverage alcohol despite the fact that the company’s owners did not meet Tennessee’s requirement of two-year residency prior to obtaining a license.
According to the Supreme Court’s blog, the court will decide whether the 21st Amendment empowers states to regulate liquor sales by granting retail or wholesale licenses only to individuals or entities that have resided in-state for a specified period of time, as is consistent with the Dormant Commerce Clause. The decision, which is expected in summer 2019, has Tennessee retailers on tenterhooks. “This case could either strengthen and uphold the 21st Amendment, or result in massive changes,” says Charles Sonnenberg, owner of Nashville-based Frugal MacDoogal. “Although the suit specifically concerns Tennessee’s residency requirements, the reverberations from it could change the three-tier system. The Supreme Court hasn’t taken a case involving beverage alcohol sales since 2005, and that one was much narrower. This isn’t just a tweak—it could be a massive game-changer.”
The Case
Total Wine & More, which has 176 stores, opened its first Tennessee location in Knoxville in mid-2018. That came after the Sixth Circuit Court of Appeals upheld a ruling that struck down a Tennessee law requiring those seeking a permit to sell beverage alcohol to have lived in the state for a minimum of two years. According to published reports, Total Wine had planned to open a second store—the current maximum under Tennessee law—but at press time had yet to do so.
The TWSRA appealed that Sixth Circuit decision, paving the way for the Supreme Court assessment of the case. “It’s a purely Constitutional issue,” says Richard Colbert, an attorney with Kay Griffin, PLLC, the firm representing the TWSRA. “It involves a Tennessee law that’s a durational residency requirement for someone to obtain a license to operate a retail liquor store; the question is whether that law is constitutional. The ABC says the law is unconstitutional under the Dormant Commerce Clause, or Negative Commerce Clause, because it represents a state’s interference with interstate commerce. We say it’s constitutional under Section 2 of the 21st Amendment, which effectively operates as an exception to the normal operation of the Commerce Clause by giving states the power to regulate liquor sales within their borders.”
Colbert also notes that the 2005 landmark Granholm v. Heald Supreme Court decision—which ruled that states could not allow in-state wineries to ship wine directly to consumers but prohibit out-of-state wineries from doing the same—was unique in that it involved discrimination against out-of-state products and producers that was occurring outside of the normal three-tier system. “In Granholm, the court upheld the three-tier system under which states regulate liquor sales,” he says. “The court said that system is unquestionably legitimate.”
While the current case is specifically about Tennessee’s residency requirement, it more broadly questions the role of the state in policing sales of beverage alcohol within its borders. Depending on the Court’s decision, the implications could be as far-reaching as allowing for nationwide interstate shipping by retailers, as well as a possible challenge to the requirement of use of the three-tier system for distribution and sale of beverage alcohol.
Prominent independent retailers in Tennessee are keen to protect the status quo even as they brace for a possible change in the playing field. “Total Wine is trying to be all three tiers of the system,” says Joe Anderson, owner of Wine & Spirits Cellar in Maryville, Tennessee, just south of Knoxville. He contends that the ABC was wrong in its decision to grant Total Wine a license. “The ABC gave it to them illegally,” Anderson says. While not in his immediate area, Anderson says Total Wine is having an impact on all Tennessee retailers.
Other retailers around the state are certainly on high alert. “We’re small business retailers looking out for our own interests,” says Josh Hammond, owner and president of Buster’s Liquors & Wines in Memphis. “At the end of the day, we got into this game under a certain set of rules. The dynamic with Total Wine could create a completely different playing field.”
Frugal Macdoogal’s Sonnenberg says that if the Supreme Court rules against the TWSRA, he’s confident he can compete, but he foresees many independent retailers having to fold. “I’ve competed with Total Wine in both North Carolina and South Carolina for 20 years, and we’ve flourished even though they’re a major force in those markets,” Sonnenberg says. “Based on that, I think we’ll continue to do just fine if and when Total Wine comes to Nashville. However, I believe they’ll devastate many other retailers—particularly in the booming new suburbs that are affluent, where it’s already extremely competitive because of the number of stores.”
Ongoing Evolution
Total Wine’s entry into Tennessee, and its possible expansion pending the Supreme Court decision, is one of multiple major changes that the state’s independent retailers have faced in recent years. The most prominent include the extension of wine sales to supermarkets, which began on July 1, 2016, and the start of Sunday sales of alcoholic beverages, which began on July 1, 2018 for package stores and January 1, 2019 for supermarkets. Many independent retailers say they only grudgingly open their doors on Sundays—they feel compelled to do so because their competition is open. But generally speaking, sales haven’t spiked as a result. Jimmy Cole, current president of the TWSRA and owner of Poplar Wine & Spirits in Memphis suburb Collierville, says he experienced a “small net positive” in sales from opening on Sunday. “But it’s taking away from Saturday sales,” he says, noting that the Sunday sales in grocery stores starting this year will likely negatively impact that small bump.
“The worry was that it was just going to spread out sales—there wouldn’t be any extra gains,” says Hammond of Buster’s. “I’d say that’s holding somewhat true. We’re open on Sunday with limited hours from 11 a.m. to 6 p.m., and while we’ve had a slight gain, I don’t know that it’s enough to offset the cost.” James Woodard, owner of Cool Springs Wines & Spirits in Franklin, agrees. “There are more labor costs to achieve the same sales level on Sundays,” he notes.
The bigger impact has come from the addition of wine to supermarkets. Two and a half years after implementation, independent retailers say the expansion still hurts, although some have been able to make up a portion of the business elsewhere. When the expansion happened, independent retailers were allowed to begin selling beer and food, which was previously prohibited.
Anderson of Wine & Spirits Cellar says his sales are down by about $50,000 a year, and he was forced to lay off two employees because of the drop-off. For Cole, wine sales are down by about 20%. “It’s been a significant decline, and that’s pretty consistent with the retailers I’ve talked to,” he says. “Prior to wine in grocery stores, about 65% of our business was wine, whereas now it’s only 42% of business.”
For many of these independent Tennessee retailers, mainstream wine brands took the biggest hit. “The grocery stores almost exclusively handle what I would call market brands from the big producers, so we’ve seen a drawback on that,” Cole says. “We carry a more esoteric selection than some, so we’ve been able to maintain those labels. But it’s interesting—customers who were once looking for more unique bottles are now willing to settle, throwing something in the cart at the grocery store. The convenience factor trumps price and quality.”
Cole says that his wine pricing—along with that of many other independent retailers—is typically lower than that of grocery stores. Tennessee law requires each individual store to order products for its respective location. Grocery stores can’t make a chain-wide purchase, and may not have the storage space to buy and store wine in bulk. “There are quantity discounts available and those quantity discounts are done on the day of purchase, meaning that if you want to buy 100 cases of Brand X, you have to take it all tomorrow,” Cole notes. “For a lot of people, including groceries, that’s restrictive.”
Some retailers have reacted by altering their product mix to focus more on higher-end and obscure wines. “Our average wine price has moved up significantly, and our selection of anything under $10 has slimmed down,” says Sonnenberg of Frugal Macdoogal. “We have full representation, but instead of stocking 40 Chardonnays in the $6-$9 range, we’ve cut it dramatically—maybe half or a third of that. As a result, we’ve brought in more esoteric wines in the sweet spot of $12-$18 a bottle.”
Hammond of Buster’s has gone further, diversifying with additional high-end wines along with food and other items. “We expanded our store,” he says. “We put in a small gourmet area with packaged cheese and meat products, beer, and accessories, and we also renovated the store to give it an updated, modern feel. That’s proven to be successful for us. We’re not where we were—we lost about 16% of our overall business to wine in grocery stores. But these changes help offset some of that, and I like the trajectory we’re on. If we keep this up for several more years, then we’ll be more or less back to where we were before these new laws came into play, in terms of profitability.”
Economic Boom Times
Retailers say the current popularity of Bourbon and other whiskies is helping to boost sales. “Whisk(e)y sales have really lifted our business,” notes Woodard of Cool Springs. “Some of what we lost when wine went into grocery stores was made up by increased interest in brown spirits.” Cole of Poplar’s has also seen an uptick in sales. “We changed the dynamics of the store,” he says. “Our beer sales are up, as are our spirits sales. Customers are coming back and looking for some of the items that they’re not going to find in the chain stores.”
And more generally, the impact of the changes on independent retailers might have been softened by the current vibrant economy, which has people spending more on small luxuries. “Our business overall is still very good,” Frugal MacDoogal’s Sonnenberg says. “Part of that is due to the fact that the Nashville is economically absolutely red hot.”