Category: Legal

Don’t “Blow Off” Cybersecurity

Cyndi
person wearing a black jacket

By: Mark Sangster, Vice President and Industry Security Strategist, eSentire

Martin Luther, the famous German theologian and religious reformer, is credited with saying “Beer is made by men, wine by God.” Had he lived another 475 years, he likely would have added that “Cybercrime is made by the Devil.”  And, he wouldn’t have been too far off.

  Cybercrime is insidious: It knows no borders and as we’ve seen, knows no bounds. In fact, a report from Cybersecurity Ventures predicted that the global cost of cybercrime will reach $6 trillion USD this year. According to the 2019 Cost of Cybercrime study by Accenture and the Ponemon Institute, the average cost of cybercrime to a U.S. organization was $13 million — a significant sum. And, a report from my own company eSentire found that cybercriminals netted more than $45 million in the first four months of 2021 alone. But before you start thinking that means cybercriminals only go after the big guys, consider the fact that it’s small and medium-sized businesses (SMB) that are the primary targets for data breaches (Data Breach Investigation Report, Verizon 2020).

  To be sure, there are threat actors that are out to make trouble, whether it’s disrupting critical fuel pipelines or, like the modern-day equivalent of sleeper agents, quietly accessing classified systems to gather top-secret information or cripple it at a later date. However, what most companies encounter comes as the result of unadulterated greed from a run-of-the-mill cyber crook. Just like your average street criminal, these people attack businesses because that’s where the money is. And like it or not, SMBs, such as family-run wineries and vineyards, make for low-hanging fruit. Cyber attacks on the wine, spirits and beer industry have ramped up in the past year including hits on Brown-Forman, E & J Gallo Winery, Molson Coors, and the Campari Group.

The Earth Is Mine. (What About Your Network?)

  On the one hand, it’s a brave new world for the farming and production aspects of winemaking, thanks to automation advances. But on the other hand, a great deal of manual labor is involved, and despite advances, the wine industry is still considered very much old-school, lagging behind other industries when it comes to the use of technology.

  When you consider the production process from grape to glass, some of the greatest risk of cyber exposure lies on the farming side. Growing the perfect grape comes with a lot of moving parts, and like other production businesses, enterprise resource planning (ERP) systems are in place to track a variety of processes, from what pesticide was applied on which date,  to the costs involved, etc. Whereas how these things are tracked will vary from vineyard to vineyard, the common denominator is that in most cases the people interacting with these systems are predominantly field workers who might not be the most tech-savvy. Add to this the fact that many front-line remote systems are loosely managed and run on personal field laptops or mobile devices, and you have an ideal attack vector.

  Regardless of whether you are operating a small, family-run vineyard or have a large-scale wine operation, you face an even greater risk each time you sit down at your desk. The vast majority of cyberattacks begin with malware, typically embedded in an attachment sent with a seemingly innocuous email. Maybe it’s an invoice from a distributor you work with, maybe it’s your bookkeeper asking you to review a document, or maybe it’s a complete stranger, hoping you’ll slip up, open his attachment, and launch a malware script that will encrypt your data until you give in to his demands.

  While unsecured computer systems and mobile devices are common attack vectors, it’s safe to assume that as your operation grows, so too does your attack surface. Now wine operations have barcoded, inventory-tracking devices that are used on a remote workflow in the field. That information is fed into a central ERP system that’s tied to another automation system, and so on throughout the production process, as tank temperatures and acidity levels are monitored. Then, too, consider the controls that regulate humidity levels inside a facility or the transfer of wine from tank to tank. Any and all of these systems can be tampered with and if they are, it can negatively affect the end product and your business.

Data, Decanted

  Outside the confines of your vineyard or winery lie even further risks. Supply chains are attractive targets not just for the information they hold but the damage they can inflict if disrupted. Distributors, especially smaller ones, often track depletions manually and share updates via email. Consider the example of a small warehouse in Kansas City that might have 20 pallets of your wine and little to no security solutions in place and then consider how quickly a threat vector could spread via a spreadsheet attachment.

  On the retail side of wine operations, both on- and off-premise operations, offer up other strike zones. Each of these channels has its own supply and inventory management systems that track activity all the way out to individual shops, bars, and restaurants, which again, may or may not have the strongest security posture.

  Nor can you overlook the direct-to-consumer aspect. Customer relationship management(CRM) systems that are used to manage your wine club or market tasting events hold a wealth of personal information, not to mention credit card numbers. They’re gold mines for those looking to sell that information on the Dark Web for a tidy profit and scarily enough, you might never know you’ve been compromised.

Just Enough Rain to Stress the Vine: A walk in the cloud(s)

  In the face of myriad risk and attack vectors, it’s tempting to take the path of least resistance, and send up a prayer that you’ll be among the lucky ones to not suffer a cyber breach. But in today’s climate, that’s risking a lot more than bottle shock. Companies today, regardless of their size or industry, need to assume that it’s not a matter of if they will be targeted by cyber crime, but when. Depending on your size and budget, running a full-scale Security Operations Center might not be in the cards, but there are steps you should be taking to protect your business today and in the future:

●    Suspicious emails should trigger the same reaction as a wine that’s corked. Avoid it at all costs. Phishing emails are a popular attack vector, and unless you know what to look for (and how), you are putting yourself and your company at risk each and every day. Educate your staff on what to look for and make sure that whatever training they receive is specific to the vineyard/wine industry. People like to think they won’t fall for the “Congratulations! You’re a winner” emails, but are they prepared to investigate those emails from your attorney or best vendor? Additionally, you should ensure that your department systems are segmented, preferably using the principles of Zero Trust. That way, if one person accidentally opens a malicious email, they won’t be granting a hacker access to the whole system.

●    Maintain Security Hygiene: Network systems need to be maintained and cared for just as you would oak barrels. Security  hygiene is a critical component of cybersecurity and at the very least should include:

1.   Regularly patch and update your software You’d be surprised at the number of breaches that could have been avoided simply by keeping software systems patched and up-to-date. It’s estimated that a third of all data breaches come as a result of unpatched vulnerabilities when patches were available. (Looking at you, Equifax).

2.   Two-Factor Authentication Is a MUST . Make sure to implement two-factor authentication around all of your company’s key software applications and systems, providing an additional layer of security. Never, ever reuse passwords across accounts or devices, and if your budget allows, implement solutions that employ a Software Defined Perimeter (SDP) approach. Be aware, however, that while these solutions offer advanced security, because they are more complex they are costlier; plus, there are the added costs associated with hiring staff who have the proper expertise to manage them.

3.   Operate on a need-to-know-basis. In general, it’s a good idea to limit the amount of network access your employees have — compromised accounts can be used to create shadow employee accounts which in turn can be used to move around a network. It’s especially important that top-level executives and owners aren’t given the full set of keys to the kingdom just because they’re the boss. Senior-level employees and owners are prime targets for cybercriminals looking for ways to infiltrate a system and move around with impunity. Someone might ask why your front-desk staff is nosing around a payroll system, but no one will question the boss.

4.   Virtual private networks (VPN) are more than a good idea. They provide secure and encrypted connections between systems (files shares, email servers, etc.) and ensure that your communications can’t be intercepted.

5.   Lock down your operational technology (OT) systems and ensure that they are not left internet-facing.

●   Automation technology is complicated and protecting it, even more so. You can’t assume that everyone further down the supply chain is taking a serious approach to cybersecurity or even knows where to start. It’s incumbent on you to protect your business, so talk to the experts. Be sure to talk with your insurance providers, legal team and other key vendors to ensure you have a plan in place for when the inevitable happens.

Something to Think About

  Too often, companies fail to adequately protect themselves against cybercrime, because they are laboring under a trifecta of misconceptions:

●   “We’re not a bank or even a household brand name so we aren’t a target.” This is a prime example of absolutist thinking and the harm it can cause. To the thief, even the poorest person has something worth stealing.

●   “We could never defend ourselves against massive ransomware gangs and state-sponsored actors so why even try?” When it comes to the average cybercriminal, Thomas Crowne they are not. That said, there’s no reason to stand up when the bullets are flying. By carrying out basic cyber protections you can reduce your risk by up to 80 percent.

●   “We never saw it coming.” In the world of cybersecurity, by the time you see the red flag, it’s too late. Heed the little signs. They won’t all pan out to be cyber attacks, but when things go bump in the cybernight, it usually means there’s a monster there. It just hasn’t struck yet.

  The wine industry has a long and storied history and holds an important place in culture and daily life. From small vineyards to wine conglomerates, there are financial gains to be made for the hacker looking to grow his ill-gotten gains. By following some basic steps, you can ensure that cyber criminals are the only ones claiming sour grapes.

About the Author

  Mark Sangster is vice president and industry security strategist at eSentire. He is the author of No Safe Harbor: The Inside Truth About Cybercrime and How to Protect Your Business. Mark is an award-winning speaker at international conferences and prestigious stages including the Harvard Law School and RSAConference. He has appeared on CNN News Hour to provide expert opinion on international cybercrime issues, and is a go-to subject matter expert for leading publications and media outlets including the Wall Street Journal and Forbes when covering major data breach events.

The Pandemic’s Impact on the Wine & Spirits Industry

Cyndi
man in mask looking at wine section

By: Quinton Jay

The year 2020 was a complicated one for the wine and spirits industry. According to information published in Beverage Industry, the sale of wine at retail and convenience stores grew by some 11.4% in multi-outlet stores throughout the 52 weeks between December 1st, 2019, and November 29th, 2020, and champagne, as well as other sparking wines, saw year-over-year growth by nearly 29%, topping sales at roughly $1.6 billion.

  This boost to wine sales, however, could not fully offset the losses incurred by many other businesses throughout the wine and spirits (WS) industry.

  Fortunately, the U.S. seems to have since turned a corner in the pandemic struggle, and most restaurants and other WS businesses like wineries, distilleries, and breweries (WDBs) that were able to survive the brunt of the COVID-19 pandemic’s impact are now back open and able to serve customers indoors, or at least in some form of hybrid indoor-outdoor seating arrangement. While this return to normalcy should help the WS industry experience an upswing capable of putting business back on track, some industry experts are still analyzing the true depth of impact the pandemic has had on the industry and the businesses in it, regardless of whether those businesses survived the pandemic’s fallout or not.

  One such expert is Quinton Jay, a WS industry expert, Japanese whisky otaku, and industry consultant with more than 20 years of experience in owning, building, operating, and investing in businesses–specifically those in the wine and beverage industry. We recently sat down with Quinton to learn more about the trends he saw arise within the WS industry throughout the events of last year’s pandemic, how those trends impacted the WS industry as a whole, and where he sees the industry heading over the next few years as a result.

WS Trends Resulting From COVID-19

  According to Jay, one of the most widespread trends that impacted the WS industry as a result of the pandemic was the increase in the amount of WS businesses – including WDBs – that began offering e-commerce and Omnichannel retail marketing. By offering these channels, businesses across the entire WS industry were able to continue selling products directly to consumers (D2C), saving many businesses from having to shut their doors to customers – both online and offline – for good.

  “Methods like Omnichannel retail allowed businesses in the industry to continue selling products D2C,” Jay tells us. “For many businesses, especially WDBs, this was the difference between surviving the pandemic or not.”

  Along with the growing trend of Omnichannel retail marketing, many business owners in the WS industry have experienced what Jay refers to as “business fatigue.” This feeling of fatigue is one that many business owners who experienced the pandemic can sympathize with, but for the WS industry specifically, it could mean more owners of WDBs, restaurants, eateries, or other businesses preparing for financial exits from their ventures.

  “Business fatigue is a real thing,” Jay tells us, “and rather than simply close up shop and call it a day, the better option for business owners is to sell their company to someone willing to acquire, rebrand, and revitalize it.” This trend of business fatigue, according to Jay, could hint at other ways as to how the pandemic left a lasting impact on the industry.

The Lasting Impact of COVID-19 on the WS Industry

  In describing the ways that Omnichannel retail marketing has affected the WS industry in recent years, Jay also mentions the historical lack of innovation – particularly technological innovation – within the industry. In mentioning this, it begs the question as to just how innovation, both during the pandemic and immediately following it, will evolve both for businesses and consumers.

  “Many WDBs and other businesses in this industry aren’t necessarily at the forefront of innovation, especially when it comes to growing their market share,” Jay says. However, as Jay continues to explain it, the writing is literally on the wall for the continued growth of Omnichannel retail, given the industry’s historical customer demographics, current and emerging technologies, as well as the ever-evolving nature and growing competitiveness of the WS industry’s supply chains.

  “The U.S. has been lagging behind much of the world in Omnichannel retail offerings, obtaining less than 10% of all global e-commerce sales for the WS industry compared to China’s roughly 25% share,” says Jay.

  In these matters, Jay’s predictions may not be far off from aggregated industry data. For instance, according to McKinsey’s 2021 Consumer Report, e-commerce sales in the U.S. were projected in 2019 to reach 24% of all retail sales by 2024. This projection later increased to 33% by June of 2020 after the onset of the COVID-19 pandemic, seeing larger growth in e-commerce retail across the U.S. in six months than it had over the past 10 years.

  “As we continue to emerge from the pandemic,” Jay continues, “I expect many more businesses in the WS industry – especially WDBs – will begin offering or broaden their offerings regarding Omnichannel retail as more American consumers opt for D2C retail channels.”

What’s Next for the WS Industry

  As a result of the COVID-19 pandemic, every global industry was forced to evolve virtually overnight. The WS industry was no different. Along with broader implementations of Omnichannel and D2C retail methods and deeper technological innovations, Jay tells us that he also expects many businesses in the industry to rethink the way they operate internally and interact with customers on all levels.

  “Overall, I think the pandemic has left many business owners in this industry feeling defeated,” Jay says. “As a result, we can expect to see an increasing number of companies in this industry become more creative in the ways they can target, reach, and sell their products to consumers, as well as become more innovative in the ways that they handle and react to crisis situations.”

  Indeed, the revitalization of crisis management detail is one vital aspect that every business that survived the pandemic will inevitably have to revisit. For the WS industry in particular, this could mean the addition or inclusion of additional D2C sales channels (similar to the inclusion of Omnichannel retail), but also the way that many establishments in the industry hire and retain talented employees.

  “The U.S. has been experiencing a hiring crisis over the last few months,” Jay adds, “and tons of restaurants, eateries, WDBs, and other businesses that survived the pandemic initially are now struggling to keep up with increased consumer demand as the threat of COVID-19 wanes. By implementing policies that promote employee safety and wellness, offering more competitive wages, and remaining adaptable enough to stay ahead of society’s ever-changing curve, the industry as a whole can prevent the detrimental effects that came as a result of last year’s pandemic from having such a deep and lasting impact in the future.”

How to Succeed in WS Post-Covid

  As Jay mentions, there are a number of precautionary methods and strategies that business owners and managers, and other industry professionals in WS can use to better protect their businesses from suffering in ways similar to how they may have during the onset of the COVID-19 pandemic.

  “The first step every business in the WS industry should take is to implement more actionable mea

sures in planning their business strategy,” Jay says. “Start by taking a look at what types and quantities of grapes you have coming in, what bulk wine you have in the tank, your total count of bottled finished goods, and become intimately familiar with your sales run rate: if you know those 4 things, you can plan out your business very well and forecast what your business should be focusing on acquiring in order to avoid jamming up your supply chain.”

  For example, if your winery business finds that its sale run rate has slowed down, perhaps the winery needs to look at selling its bulk wine (wine in barrel or tank), or perhaps can temporarily focus on committing fewer grapes for an upcoming vintage. However, once any particular wine has been bottled, that’s it, which is why Jay says to avoid bottling your inventory until you know what your sales run rate is and how it directly impacts your business. While selling out of a certain inventory item can sometimes be a boon for your business, not selling enough can cause inventories to back up, alerting you that your business will need to discount other items and sell that portion of your inventory faster in order to get back into balance.

  A second method WS businesses should consider, according to Jay, is to revisit and revitalize their plan regarding capital management, or the funding of their business initiatives as they pertain to the needs of a business’s financing or cash flow.

  “Most business owners and professionals in the industry want their business to grow,” Jay adds, “but don’t realize how much money they need, especially regarding the lead time required for fine wines and of many products in the industry as a whole, especially aged beverage products.”

  Indeed, as Jay explains, it can often take one year for most white wines and Pinots to be made and bottled, as well as 2-3 years on average for wines like high-end cabernets. Most red wines can take anywhere between 12-30 months to properly process in-barrel and add to their in-bottle age time from Grape to Bottle. This, of course, takes cash, which is why planning your capital budget is just as important as your sales plan.

  By carefully considering these crucial factors to any business in the industry, Jay explains that they can be better positioned to survive in the face of the next inevitable threat the industry will face in the years to come.

The Supply Chain Executive Order and Review

Cyndi
The Executive Order and Review

Following the guidance Executive Order 14017, signed by President Biden on February 24, 2021, many federal agencies have begun the process of reviewing their supply chain. The guiding purpose of the Executive Order is to make America’s supply chains less vulnerable to disruptions such as pandemics, cyber-attacks, and economic competition and less reliant on foreign supplies, workforces, or stockpiles instead of domestic industry and businesses.

The Executive Order directs numerous federal agencies, in coordination with the Assistant to the President for National Security affairs (APNSA) and the Assistant to the President for Economic Policy (APEP) to identify vulnerabilities in important US supply chains and subsequently develop policy recommendations and plans to ensure the security and resilience of those supply chains going forward.

The Executive Order mandated review of two categories of supply chain vulnerabilities. First, a 100-day review of four sectors: semiconductor manufacturing and advanced packaging; high-capacity batteries; critical minerals and strategic materials, and pharmaceuticals and active pharmaceutical ingredients.

Second, a one-year review of supply chains for six “industrial bases”: defense; public health and biological preparedness; information and communications technology; energy; transportation, and agricultural commodities and food products.

Following these reviews, the APNSA, APEP, and the relevant agencies will submit reports to the President detailing their findings and actions taken in advancement of the Executive Order as well as recommendations to further strengthen the supply chain.

What Next?

At present, no firm rules or regulations have been set forth, but the expectation is that there could be a mixed bag of additional compliance “burdens” (e.g., trade restrictions) in some instances and “incentives” (e.g., tax credits, federal procurements) in others. While the Executive Order and subsequent regulatory changes likely will not have the power to directly modify the supply chains of private companies, possible regulatory changes could, as a practical matter, necessitate modification. Such regulations might include imposition of additional tariffs to push companies away from certain suppliers, additional import requirements on certain goods from certain countries, inclusion of certain foreign companies to the Entity List, or modification of federal procurement regulations to favor domestic goods (as already seems to be happening with the expansion of Buy American domestic content thresholds).

Federal agencies have begun issuing public notices and requesting public comments to assist in the evaluation of relevant supply chains. For example, the Department of Commerce requested comments (submission deadline of November 4, 2021) regarding the information and communications technology supply chain. Other agencies, including the Department of Transportation, Department of Energy, Department of Agriculture, and Department of Defense have also issue requests for public comment.

Companies participating in any of the supply chains identified by the Executive Order should consider participating in these requests for public comments as these supply chain review will more than likely lead to policy, regulatory, and compliance changes. Additionally, companies will want to keep an eye on the regulations that develop from these reviews in order to adequately prepare for additional compliance standards and capitalize on possible new business opportunities.

 
headshot of Dan
Dan has practiced law in Silicon Valley since 1977. The Firm’s practice is limited to regulatory law, government contract law, and international trade law matters. Dan has received the prestigious “Silicon Valley Service Provider of the Year” award as voted by influential attorneys in Silicon Valley.He has represented many very large global companies and he has worked on the massive US Government SETI (Search for Extra Terrestrial Intelligence) project as well as FOEKE (worldwide nuclear plant design certification), the Olympic Games, the first Obama town hall worldwide webinar, among other leading worldwide projects.

Dan has lectured to the World Trade Association, has taught law for UCLA, Santa Clara University Law School and their MBA program, lectured to the NPMA at Stanford University, and for the University of Texas School of Law.

Dan has lectured to various National and regional attorney associations about Government contract and international trade law matters. He has provided input to the US Government regarding the structure of regulations relating to encryption (cybersecurity). He has been interviewed about international law by the Washington Post, Reuters and other newspapers.

He is the author of four books unrelated to law, one of which was a best seller for the publisher, and of dozens of legal articles published in periodicals, technical and university journals distributed throughout the world. He serves as an expert witness in United States Federal Court regarding his area of expertise.

Changes to Gift Tax Exemption Laws Could Affect Winery Estate Planning

Cyndi
estate planning worksheet

By: Kemp Moyer and Sachi Danish, BPM LLP 

For owner-operators of wineries and other closely held businesses, now may be an opportune time to maximize estate planning through the utilization of gifts of ownership interests. The Tax Cuts and Jobs Act (TCJA) of 2017 has been broadly seen as favorable to businesses, high-net-worth individuals and estates, including the temporary doubling of the lifetime federal exemption for gift, estate and generation-skipping taxes, which stands at $11.7 million in 2021.  

  However, the combination of a new administration, as well as increasing federal deficits in the wake of the COVID-19 pandemic fallout and federal response, means the higher lifetime exemption may be in jeopardy. Many in the tax policy and preparation communities are expecting the recently elected Congress and administration to accelerate the rollback of the exemption increase. Sweeping changes have been proposed by the Biden administration and now it is widely considered just a matter of when and how much. Among the potential early targets is the larger estate tax exemption, which will sunset back to pre-TCJA baselines at the end of 2025 without further action from Congress.  

Estate and Gift Tax Law 

  As noted previously, the current gift, estate and generating skipping tax (GST) exemption amount is approximately $11.7 million per individual. This exemption amount is currently required under the law to be cut by 50% in 2026, to about $6 million per person, depending on adjustments made for inflation. This reduction is built into current law, and it has created a use-it or lose-it opportunity for high-net-worth individuals. However, the following Biden proposals are even more dramatic: 

• Reduce the estate and GST exemption to $3.5 million and only permit $1 million in tax-free lifetime gifts. 

• Increase the estate tax rate significantly from 40% up to a 65% top rate. 

• Eliminate the stepped-up basis rules at death. This would be a significant change as a carryover basis may create an income tax at death (“death tax”) or upon later sale on all appreciated property.  

• Limit valuation discounts between family members. 

• Include grantor trusts in the grantor’s estate and eliminate use of short-term grantor retained annuity trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs). 

• Limit duration of GST trusts. 

  The above proposals make it urgent to address your estate tax planning now, rather than waiting for what the future may bring, although planners must also consider the possibility of retroactive law changes. 

  Some estate and gift opportunities to consider under current law include: 

• Use your annual exclusion gifts of up to $15,000 per person ($30,000 if both parents make gifts to that individual). Over time, these gifts can accumulate into significant amounts. These amounts could be on top of direct payments to a provider for medical services or educational tuition for anyone, related or not, which are not considered gifts.  

• Make large gifts of assets with potentially depressed values and subject to discounts. Leverage the current $11.7 million unified credit amount with gifts of fractional interests in real property or ownership interests in a family or closely held business that qualify for valuation discounts. To protect against retroactive changes to the $11.7 million gift exemption amount planners should also consider use of disclaimers, formula gifts, and lifetime qualified terminal interest property (QTIP) trust elections as part of the planning with trusts. 

• Make low-interest loans to children. Loans for homes or business opportunities are often very attractive, with August 2021’s Applicable Federal Rates (AFRs) at .19% for loans three years or less, 1.00% for loans more than three years and not more than nine years, and 1.87% for loans more than nine years. 

• Gifts and sales to intentionally defective grantor trusts (IDGTs) can be used to transfer cash, securities, business interests, real property and other investment assets to descendants in a tax-beneficial manner. The sale or gift of assets from the parents or grantors to an IDGT is not subject to income tax, because the grantors are treated as having sold the assets to themselves. Only gift tax is due on the transfer. Assets transferred to the IDGT remain in the trust and grow outside the grantor’s estate, allowing them to appreciate tax-free. 

  Owner-operators of successful businesses likely already have some familiarity with the estate tax. This tax works in conjunction with the federal gift tax, which applies to transfers of property during one’s lifetime. In theory, both estate transfers and gifts made during one’s lifetime are currently taxed at a maximum marginal rate of 40%. 

  The gift tax annual exclusion allows individuals to gift up to $15,000 per recipient per year tax-free. The lifetime gift tax exemption currently stands at $11.7 million, and this maximum amount represents the sum of all taxable gift, estate, and generation-skipping giving allowed before taxes are due. The temporary nature of the current higher lifetime exemption has created a level of urgency in many estate strategies. 

  There are proposals in Congress to reduce the estate and GST tax exemption to $3.5 million and the gift tax exemption to $1 million, limit valuation discounts for family businesses, and trigger income tax when gifts and transfers of appreciated property exceed $1 million.  Political analysts expect these proposals to be among the Democrats’ top priorities, not to just increase taxes but to redistribute wealth in our country. This puts some pressure on larger estates that may be affected, including many winery owners. To utilize the higher lifetime exemption before it expires, many high-net-worth individuals are acting urgently to accelerate their estate planning strategies to avoid a much greater potential estate tax burden. 

Winery Ownership Estate Planning 

  Even in an increasingly corporatized wine space, many wineries continue to be family-owned businesses. Many owners of closely held wineries, desiring to keep their legacy in the family, already intend to pass down the business upon their death to their children or other inheritors. The increasing likelihood of a rollback on the lifetime exemption means winery owners may want to consider transferring at least some portion of their business in the near future via gifts, or sales to IDGTs rather than waiting until death. Gifts and sales of appreciated assets may trigger immediate to grantor trusts are  

  While certain wine industry segments have recovered to or even exceeded their pre-COVID sales, many closely held wineries are experiencing challenges such as reduced tasting room visits and lower sales to restaurant customers due to COVID-19, which often contributes to a lower business valuation. A lower valuation means a smaller gift in the eyes of the IRS, and less estate taxes or even avoiding them altogether. 

  The benefits of any reduction in business value due to the pandemic and the availability of the favorable tax rules related to grantor trusts may not be here for long. This is a unique opportunity for winery owners to take care of what they were already planning to do down the line, while taking advantage of historically favorable tax conditions. Estate planning is a process, not a one-time trust agreement, and as you become more educated in the process through your trusted advisors including your attorney, accountant, wealth and insurance advisors, your ability to make the key decisions in the process will become easier. 

  Kemp Moyer is Certified Valuation Analyst and a Director in the Advisory practice leading the Firm’s Valuations and Appraisals team at BPM LLP.  

  Sachi Danish is a Director in Tax Private Client Services and leads the Estate & Trust practice for BPM. 

Post-Pandemic: How Small Wineries & Vintners Can Get Back to Business, Better!

Cyndi
people toasting with wine glasses

By: Rod Hughes

Wildfires, faulty tanks, flooding, a pandemic, lockdowns, water shortages, tornados, tropical storms – the past two years have been, in a word, biblical in terms of challenges faced by vintners and winemakers.

  However, like the rest of the U.S. economy, there are signs of positivity on the horizon. Pandemic restrictions are loosening, and Americans seem eager to travel and resume their former leisure activities. This includes touring wineries as well as resuming their search for those great bottles to share with friends.

  This reality presents both opportunities and challenges to those in the winemaking industry.

  The challenges are not inconsequential: Northern California wineries faced savage wildfires in 2017, 2019 and 2020, leaving many around the country with the impression California wineries were irreparably harmed. In parts of Maryland, some wineries are still trying to put the pieces back together after Tropical Storm Isaias last summer. And let’s not forget the pandemic shutdowns, limited capacity re-openings and economic pain felt universally across all wineries. 

  However, the opportunities for those that made it through may be just as powerful.

EAST COAST SOLUTION

  One example is Old York Cellars Winery in Ringoes, New Jersey. Shutdown in March 2020 like much of the country due to COVID-19, owner David Wolin — a former attorney — gathered his staff and brainstormed.  (Photo: David is 3rd on the left)

  “We knew what we couldn’t do, and it was a lot,” Wolin explained. “The question was what could we do in this new environment?”

  Wolin and his team quickly turned to one of the major challenges for independent wineries: direct shipping to consumers.

  Winery direct-to-consumer shipping is legal in 47 U.S. states, each of which regulates its own system. Regulations, taxes and various packaging requirements can vary. However, Wolin and his team had time on their hands (they would reopen, albeit under strict New Jersey Department of Health restrictions, with limited capacity in June 2020). So Wolin put his legal training to work and secured approval to ship his Old York Cellar wines to 15 other states as well as Washington, D.C.

  In short order, he found a niche market and started shipping wine as far as California and Oregon. Much of the direct shipment was coupled with virtual wine tastings as customers reached out from all over the U.S. looking for creative ways to stay connected with friends and family through virtual activities. By the end of 2020, Old York Cellars experienced a 545 percent increase in online sales and swung from an early 2020 revenue loss of more than 70 percent to end the year up by 13 percent overall.

  For this New Jersey winery, its pandemic recovery began when it took on one of an independent winery’s biggest sales obstacles and found a way to turn it into a success.

WEST COAST SOLUTION

  Another example of finding opportunity amid challenge is Healdsburg’s Longboard Vineyards in California’s famous Sonoma wine region. Like Wolin in New Jersey, Longboard’s Head of Hospitality Heidi Dittloff and Oded Shakked, the owner and winemaker, had to reinvent the business following the March 2020 shutdowns.

  “We were at a stand-still, like a lot of businesses at that point, trying to figure out how to stop hemorrhaging cash while also looking for new revenue sources,” explained Dittloff. Like many pre-pandemic wineries, Longboard’s online sales were only between 1 and 3 percent of its annual revenue.

  “Of course, looking back, ecommerce seems like the default route. Just take your sales online. Simple, right? Um, no,” said Dittloff.

  Like many small wineries, outdated software and robust websites tailored for ecommerce sales had not been a priority. Before COVID-19, it could take shoppers up to 10 clicks to purchase a bottle of wine on a typical small winery’s website. In the age of Amazon’s One-Click mindset, that’s nine clicks too many.

  Dittloff’s solution was to re-examine the sales funnels for Longboard.

  The majority (more than 70 percent) of sales for most wineries before the pandemic came from three areas: tasting rooms, wine clubs and wholesale. The shutdowns and later limited capacity requirements of 2020 effectively took in-person sales off the table, as wholesale transactions dipped temporarily. Pivoting to touchless curbside pick-up and leveraging their wine clubs helped, but the key to surviving was replacing the lost tasting room sales funnel. Longboard accomplished this through what Dittloff called “data hygiene.”

  This meant closely examining all consumer data available, understanding new buyers versus pre-COVID buyers, and designing offers that matched buyers’ needs. To do this well, Longboard also had to reinvent its website as well as completely overhaul its shopping cart to create a more user-friendly environment that limited clicks, provided buyers with their order history and created stunning visuals. This also meant updating the winery’s Point-of-Purchase system.

  “None of this was cheap,” Shakked noted. “But it was either invest or vanish because no one knew back then how long the pandemic shutdowns would last.”

  With improved customer reach and systems tied to aggressive outreach on social media to bloggers and area businesses, Longboard grew its online sales from 1 to 30 percent of its revenue, replacing nearly all of its lost tasting room sales. The key to growth in 2021 and beyond, said Dittloff, is to maintain those online sales as restrictions ease and the tasting room business returns.

  “There’s a lot of opportunity for wineries like ours to come out of this pandemic stronger than when it began,” said Shakked. “Pursuing those new sales funnels and making better, smarter use of data will be critical to that future growth.”

ONGOING SOLUTIONS

  For many independent wineries and vintners, undertaking the paperwork headaches, sales tax collection and reporting, as well as the logistics of shipping wine to dozens of other states, is too heavy of a lift. For some, so is a complete overhaul of its web, ecommerce and POS systems.

  This is where a solid communications strategy can play an integral role in helping independent wineries rebound from both the pandemic and all that came before it.

REINVENTION

  One early and likely ongoing solution that will continue to be needed is the reinvention of outdoor spaces. Despite re-openings, some customers aren’t going to be completely comfortable going back indoors. This means, especially for the purposes of enticing wine club and other regional customers, developing seasonal or quarterly “makeovers” of outdoor spaces. While the upfront costs and sweat equity can be considerable, they can be recouped through a thoughtful email and social media campaign promoting the spaces. Done well, these reinvented spaces can present customers with something new or different to see several times per year while also purchasing your wines.

  Old York Cellars has done this successfully, creating a Winter Wine Village on its 28-acre property in late 2020 and early 2021, complete with decorative cabanas, high-end fire pits and posh outdoor furniture. A tented “Spring Wine Village” offers a similar vibe at Old York Cellars with a focus on new views, a dining menu and a return of outdoor entertainment, as well. Cana Vineyards & Winery in Middleburg, Virginia took a similar approach, creating 10 cozy fire pit areas on the lawn overlooking its 43-acre property and nearby mountains. Patio heaters on the winery’s outdoor decks and front porch created warm winter spaces along with ceiling heaters and an outdoor pavilion with stunning stone fireplace. S’more kits were also available for purchase.

  By mixing up the outdoor experience for customers, small wineries can offer something fresh and new for regional customers, road-trippers and wine club members to bring them back. These outdoor makeovers also present opportunities for email marketing and public relations to introduce customers to a remodeled venue as well as special offers.

A COLLECTIVE VOICE

  Additionally, small wineries should closely examine working with their local grower’s associations and/or chambers of commerce to come together with a single voice on their industry. Consumers are likely to remain unsure of what is and isn’t possible with travel and tourism businesses for some time. Using a collective voice to let travelers know that area wineries are open for business is key.

  Partnering with other business or marketing associations can also reveal additional opportunities for wineries to grow their way out of the pandemic and its economic challenges. A great example of this type of partnership is the collaboration of the Napa and Sonoma wineries working with LuxeSF, a B2B partner network comprised of sales and marketing professionals focused on luxury marketing in the Bay Area. As recently as April 2021, LuxeSF hosted a panel of small wine producers to talk about what happened in their industry in 2020 and offer tips and best marketing practices going forward for independent vintners.

MAINTAINING THE PULSE

  Surveys, of course, are an ideal way to stay connected to winery customers. They have the added value of not being seen as an overt sales tactic. Not only can these surveys help to keep small wineries top-of-mind, but they can also be great tools for gauging customer sentiment and crowdsourcing ideas as the country reopens. For instance, a survey about how customers might feel about a “garden party event” this summer or fall is a great way to gauge how to best address the potential use of masks as well as possible turn-out.

  Surveys about continued virtual tastings, satisfaction with prior wine shipments and ecommerce experiences can also provide vital insights into the continued strength and likelihood of these pandemic-induced sales channels.

BECOMING PUBLISHERS

  Finally, and this is a recommendation that should not be dismissed out of hand, wineries need to become content publishers.

  The world has changed, and we’re now in the experience economy. A consumer’s personal experience with a brand, service or winery can drive sales. And in a world where smartphones are ubiquitous and even grandparents are mostly on one form of social media or another, wineries need to feed consumers’ insatiable appetite for content.

  If wineries produce no other form of content (and they should produce a variety, just like their wines), it must be video. Video content should run the gamut, including tours of the vineyards, the first crush of the season, 3 to 5-minute video winemaker interviews on topics for aficionados, as well as casual tasting room tourists, 30-second event update videos and more. These videos should be shared across all the winery’s social platforms and promoted via email marketing and the website. Consumers are 37 times more likely to engage with a piece of video content than a newsletter, blog or long-form article.

  But that video needs to be brief and packed with good, non-sales information. They also need not be slickly produced. In fact, millennials and Gen Z consumers find simple smartphone videos to be “more authentic.”

  The pandemic is just the latest in a string of challenges to wineries, but it’s also likely to have one of the most profound and lasting effects on the industry. The good news is all wineries will have ample opportunities to rebound from this latest challenge, but it won’t be a return to normal or even a “new normal.” Rather, what comes next must be a new approach to how the business of wineries and vineyards are conducted and how they engage with their customers.

ABOUT THE AUTHOR  Rod Hughes is vice president and principal with Kimball Hughes Public Relations. A former journalist and frequent public speaker, he can be reached via email at rhughes@kimballpr.com or by phone at (610) 559-758

Simplified Risk Management for Your Winery

Cyndi
risk management on paper

By: Michael Harding, Senior Risk Solution Specialist, Markel Specialty

Take a look around. You must be so proud of where your winery is today! You’ve worked very hard to develop, finesse, and grow your winery to what you see in front of you. Countless hours and limited staffing have created a place of pride!

  You took a lot of risks to get your winery to where you are today. In fact, your winery probably wouldn’t exist if you hadn’t taken some of those risks. But now that it is more established, the risks are more significant – there is just so much more to lose! A serious calamity could be detrimental to all that you’ve built. And, unfortunately in today’s “mid-COVID” economic environment, limited staffing may present many challenges to your winery and it may be difficult to allot sufficient time to think about the many ways your winery might be impacted by previously unthought-of risks. Risks can be managed, however. Whether your winery is small or large, you have the responsibility to your employees, your clients, and yourself to invest in risk management planning.

  A lot of winery businesses only think about buying insurance when they think about risk management. However, many wineries don’t give much thought to other ways that they can protect their winery from the numerous risks that they face. Some risks are random and unpredictable (like weather and acts of nature). Others are more predictable and can be planned for – such as costs of supplies, overhead, new hires, and equipment replacement. There are also the other kinds of events that can – and do – happen almost anytime; they can disrupt your operations, take a chunk out of your reserves, kill your bank account, and cripple or destroy your winery.

  Trying to get your arms around all potential risks and attempting to completely eliminate them is unrealistic. On the other hand, not paying enough attention to relevant risk management issue can leave you unprotected. To that end, it makes sense to be cautious. The biggest challenge in risk management is to find the proper balance between peace of mind and running your winery.       

  Simply stated, risk management is a discipline for dealing with uncertainty. It provides you with an approach to recognize and confront the threats you face. Risk can be very complicated, but it doesn’t have to be. Every winery can start with a simple, easy-to-follow plan that can manage and lessen risk. If needed, you can expand from there.

Getting Started

  Risk management goes beyond just identifying risk; it is about learning to weigh your risks and making decisions about which risks deserve immediate attention.

  There are many ways to undertake risk identification; the key is using a system that allows you to identify major risks facing your winery. It is important to make a list and examine every risk, no matter how small; they could develop into something more serious over time. To begin, a risk assessment might  start by examining some of the different aspects of running your winery. You could look at your:

1.  Management practices

2.  Hiring and volunteer policies

3.  Training

4.  Staff, guest, and visitor safety

5.  Growing, harvesting, and production methods

6.  Insurance coverage

7.  Property and facilities

8.  Warehousing

9.  Workers compensation

10. Crisis and emergency planning

11. Auto and mobile equipment exposures

12. Social media

  Although this might, at first glance, appear to be complicated and involved, a simple way to start your own self-assessment that may be useful is to gather a few members of your staff representing various functions of your winery, and conduct a brainstorming session by asking a few questions:

1. What can go wrong?

2. What are you concerned about?

3. What will we do to prevent harm from occurring?

4. What will you do to lessen the worry?

5. How will you finance?

  Your answers to each will provide you with a direction for necessary action.

  From this session, you’ll undoubtedly have a sizable list with many concerns. And, just making a list of all possible risks is not enough. It is easy to quickly become overwhelmed, so you’ll need a way to take the risks you’re facing and put them into perspective. Not all risks are created equal. Risk management is not just about identifying risk; it is about learning to weigh various risks and making decisions about which risks deserve immediate attention. In doing this you will often find that your winery’s vulnerability to a risk is often a function of financial impact. What are the odds that a particular risk will materialize, and  how much is it likely to cost? How much does your winery stand to lose as a result? This helps quantify which risks are worth worrying about and which are not.

Using a Risk Matrix in Your Risk Assessment

  A risk matrix is a valuable tool you can use to help determine both the likelihood and the consequences of any particular risk. It helps you focus your attention on those issues that have higher consequences. In such a matrix, the likelihood is rated from probable to improbable and the consequences are rated from acceptable to intolerable. A risk that is almost certain to occur but has few serious consequences needs little attention. This enables you to identify and mitigate risks that may be less certain but have greater consequences.

Prioritize Your List

  Once you’ve assessed your risks, you can begin to take steps to control them – giving priority to those with the greatest likelihood of occurrence and/or biggest potential impact.

  Select appropriate risk management strategies and implement your plan. Here are four basic risk management techniques that can be used individually or in combination to address virtually most every risk you face:

1.    Avoid it: Whenever you can’t do something with a high degree of safety, you should choose avoidance as a risk management technique. Don’t engage in an activity or provide a service that pose too great a risk. In some cases, avoidance is the best technique because many wineries don’t have the financial resources required to fund the training, supervision, or other safety measures. Always ask, “Is there something we could do to provide this safely?” If the answer is “yes”, risk modification (#2 – next) may be more practical.

2.    Change it or modification: Modification is simply changing an activity or service to make it safer. Policies and procedures are examples of risk modification. For example, if a winery is concerned about the risk of using unsafe drivers make deliveries, they might add Department of Motor Vehicle (DMV) record checks to its screening process.

3.    Take it on yourself/retention: A winery may decide that other available techniques above aren’t suitable and it will retain the risk of harm or loss. For example, when a winery purchases liability insurance and elects a $1,000 deductible, it’s retaining risk. Where organizations get into trouble is when risk is retained unintentionally, such as within the exclusions of their insurance policy.

4.    Share it: Risk sharing involves sharing risk with another through a contract. (Insurance is an example that shares the financial impact of risks.)

  Monitor and update the risk management program. Your winery is a dynamic one that constantly faces new challenges and opportunities. Risk management techniques and plans should be reviewed periodically to make certain that they remain the most appropriate strategy for your needs and circumstances.

Conclusion

  The ultimate goal for your winery regarding risk is to create a culture where risk is routinely examined and managed, simply as part of your organization’s overall business process. Risk management starts with the management of a winery. By operating in a transparent and ethical manner, a lot of risks are mitigated by promoting a sense of accountability.

We can’t know what lies ahead, but we do want to be prepared to respond to future events effectively and gracefully. Make a conscious effort to identify and manage your exposures. Ask:

•    Can you avoid or eliminate the risk?

•    If not, can you control or mitigate the risk?

•    Can you transfer the responsibility of finance?

  Reckless leaders take reckless risks; prudent leaders take calculated risks. Risk management is the “calculator”.  Kayode Omosebi

YOUR RISK MANAGEMENT PROGRAM

  The next step is to involve others in your efforts. Remember that an effective risk management program can never be the responsibility of one individual. If you’ve already engaged a group, task force, or committee in identifying risks and strategies, you’re well on your way to implementing a risk management program.

  Keep in mind that many effective strategies for managing risk in a winery may not require any additional expenses. Time, attention, and resolve may be all that’s needed to increase the safety of vital assets. Give your team a deadline—a  date by which you plan to have made significant progress in achieving your risk management goals. Review your progress frequently and set new goals as you achieve the existing ones.

  As we have discussed, risk management need not be a complex and bewildering array of technical terms, actuarial tables, or probability statistics. On the contrary, risk management is, in large part, the application of healthy doses of common sense and sound planning.

  Remember that the simpler the risk management strategy is, the more likely it is that it will be applied. Yes, there may be items that are not considered in the first iteration of the plan, but at the outset, it is more important that your program be comprehensible rather than comprehensive. As you continue to develop and refine your plan, what now seems new and strange will become second nature.

  As time passes, your plan should become more inclusive as you address more risks in order of their priority. As stated at the beginning of this article, risk management is a process not a task, therefore it is important to constantly review what you are doing, celebrate your triumphs, and analyze the reasons behind any setbacks.

Demystifying Wholesale Wine Distribution

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stock of wine

By: Becky Garrison

  At the virtual Oregon Wine Symposium held February 16-19, 2020, Jeff Lewis, Director of Education & National Sales, Revana Portfolio, and Colin Eddy, National Sales Manager, NW Wine Company, presented a seminar titled “Demystifying Wine Distribution: A Winery Toolkit to Help Build and Navigate Wholesale Distribution Across the United States.” They designed the seminar for winemakers looking to enter the wholesale channel for the first time, and those with existing distribution looking to expand their markets.

  Lewis and Eddy opened their conversation with a brief history of the 21st Amendment ratified on December 5, 1933, which repealed the 18th Amendment that launched prohibition. The 21st Amendment left it up to the states to govern the production and sale of alcohol. While every state has its own specific regulations, most stuck to the 3-Tier System separating producer, distributor and retailer.

  According to Lewis and Eddy, this 3-Tier System has multiple benefits. From a regulatory and educational point of view, this system ensures the safe handling of alcohol so that the final prod-ucts are safe for consumers. From an economic angle, this creates billions of dollars of local, state and federal tax revenue. The commercial benefits prevent a given winery from dominating the marketplace.

  Eddy said a key advantage of expanding into wholesale distribution is a daily representation of your brand. “You’ve got salespeople out there telling the story of your brand and letting custom-ers sample your wares. No one can be everywhere.”

  Distribution also ensures the ability to deliver products to licensed accounts in designated territo-ries and collect payment in accordance with state and federal laws so that both the manufacturer and producer get paid on agreed-upon terms.

  Another development that began in 2020 was a rise of online wine sales, with consumers pur-chasing bottles directly from a winery, a website like wine.com or an online service such as Drizly. Large wholesalers rolled out online purchasing websites that allowed retail shops, bars and restaurants to purchase wines online without the presence of sales representatives. “The les-son here is that people are comfortable having wine delivered to their home, and online platforms are getting future customers easier and safer access. That is something that’s going to continue,” Eddy said.

Achieving Success in the Wholesale Distribution Market

  Winemakers interested in expanding their sales should first ask themselves why they are inter-ested in wholesale distribution. “It’s important to remember you’re creating a whole new sales channel, and with that comes a whole set of variables,” said Lewis.

  Among those variables include how existing sales channels will interact with this new wholesale channel and how a wholesale distribution channel will impact the sales of wine clubs or winery-only wines. Is there enough wine in production to execute this plan?

  Lewis and Eddy broke down their approach into a toolkit designed to help winemakers achieve success in the wholesale distribution market. Their first recommendation is to review the current distribution landscape. Currently, there are 1,126 unique wine distributors across the U.S. In breaking down these numbers, 37% of these distributors reside in four states, with 141 distribu-tors in California alone. Also, the list of distributors continues to shrink and consolidate market share. Presently, the top ten distributors as follows: 

Southern Glazers Wine & Spirits

https://www.southernglazers.com

• 45 States

• 119 offices

• 1100+ wineries represented

•225 Oregon Wineries Represented (total U.S. market share 32%)

Republic National Distributing (RNDC)

https://www.rndc-usa.com

• 23 States

• 94 offices

• 1000+ wineries represented

• Major recent acquisitions in Young’s Market (2020) and Opici FL (2021) (total U.S. market share 19%)

Johnson Brothers

https://www.johnsonbrothers.com/suppliers

• 23 States

• 36 offices

• 430+ wineries represented California only

• 70+ Wineries represented (total U.S. market share 10%)

Breakthru Beverage Group

https://www.breakthrubev.com

• 16 States

• 40 offices

• 660+ wineries represented

Empire Distributors, Inc.

https://empiredist.com

• 4 States

• GA, NC, TN, CO 580+

• wineries represented

WineBow

https://www.winebow.com

• 22 States

•. 600+ wineries represented

• National Wholesaler R. Importer

Heidelberg Distributing Company

https://heidelbergdistributing.com

• 2 states OH/KY, 90+ wineries represented

• Services 26,000 retailers

Wine Warehouse

http://winewarehouse.com

• California ONLY

• 70+ wineries represented

Horizon Beverage

https://www.horizonbeverage.com

• 5 States

• Northeast Based

• 260+ wineries represented

Empire Merchants

https://www.empiremerchants.com

• New York only

  At present, there are 11,000 wineries, with 80% producing less than 5,000 cases a year. Another 16% of wineries are classified as small, producing 5,000 to 49,999 cases, 2% are medium pro-ducing 50,000 to 4,999,999 cases, and 1% are large wineries that generate 500,000 cases or more.

  Next, they said to explore what markets to target. An analysis of the desired markets will help determine which distributors would work best for those particular products you’re looking to sell. Where are people consuming wines, and which wines are they drinking?

  Along those lines, look at regulations in these particular states to assess if this is a market where it makes sense to enter at this junction.

  Presently, 13 states are one-price states. In these states, there’s no different pricing for restaurants or retail outlets and no quantity discounts.

•    Kansas,

•    Missouri

•    Oklahoma

•    Oregon

•    Virginia

•    New Hampshire

•    Utah

•    Idaho

•    Montana

•    New Jersey

•    Mississippi

•    Pennsylvania

•    Ohio. Also,

  Channel pricing is prohibited in 16 states. In these states, you cannot separate on- and off-premise pricing.

•    Kansas

•    Oklahoma

•    Virginia

•    New Hampshire

•    Utah

•    New York

•    Arizona

•    Washington

•    Idaho

•    Oregon

•    Montana

•    New Jersey

•    Mississippi

•    North Carolina

•    Ohio

•    Pennsylvania

  In addition, quantity discounts are restricted in Connecticut, Idaho, Kansas, Louisiana, Maine, Missouri, Minnesota, North Carolina, Ohio and Oklahoma.

  Next, Lewis and Eddy addressed state-controlled and franchise markets. Unless one has particu-larly strong relationships in an individual state, these markets do not represent an ideal place to start, and it can become difficult to change distributors should the need arise.

  The state-controlled markets are in Pennsylvania, Mississippi, Utah, Wyoming, New Hampshire and Maryland (Montgomery County), where the wholesaler acts as a broker to the state, or you sell directly to the state as the manufacturer, creating another “tier” to sell through.

  The franchise market is loosely defined as a market or defined territory in which one has a con-tractually binding agreement of representation with a wholesaler. Generally speaking, franchise markets protect the wholesaler or distributor from losing revenue and brands they’ve worked to build over time. Before entering into one of these markets, research the franchise law agreements for that particular state and define the parameters around potential future releases. If possible, sign a contract with these parameters. Thirteen states are currently under a franchise market.

•   Connecticut

•   Georgia

•   Idaho

•   Maine

•   Massachusetts

•   Michigan

•   Montana

•   New Mexico

•   North Carolina

•   Ohio

•   Tennessee

•   Vermont

•   Virginia

  The final market type they addressed was price posting. In certain markets, the winery and dis-tributor must post their wholesale pricing in advance with the state. The five states that require monthly price postings are Connecticut, Delaware, Missouri, New Jersey and New York. Also, they touched briefly on special situations like SS packs, Cuvée cases, and other “work-around methods” in pricing wines for different premise-types.

Choosing a Wholesale Distributor

  Lewis and Eddy advocate asking your pre-existing relationships which distributors they would recommend. Also, define the distribution partner’s territory and assess if their market focus is in sync with those markets you’re looking to target. Then look at those distributors and determine where your positioning might be within their portfolio.

  Examine the number of their active accounts with a particular focus on those deemed their key accounts. Will a new brand get buried because they represent other similar varietals that will re-ceive greater attention from this distributor, or can they market a new brand effectively? Does the pricing for your wine fit in with this distributor’s portfolio? Where are their most active sales channels? For example, if a distributor primarily targets bars and restaurants for sales, they will not be the best fit for a winery looking to enter the retail market.

  Lewis added that another huge part of this equation is the sales team and territory. “You might end up splitting a state up because these mid-level and smaller distributors aren’t big enough to cover an entire state.”

  Be sure to explore the distributor’s overall operation. What is the size of their staff, and is this staff commissioned? Who are the key decision-makers, and what is their overall reputation with-in the wine industry? Is there an ownership change or other management issues? Are they look-ing to consolidate or expand? What is their timeline for paying their wineries, and do they pay them on time? Does their warehouse and inventory practices work for your particular needs?

  They recommend the SevenFifty website https://go.sevenfifty.com/ as a valuable source in identifying brand competitors and researching distributors, as well as price positioning and mar-ket positioning. The website also allows you to look at which producers wholesale distributors have in their book.

Launching a Wholesale Distribution Program

  Before releasing a particular wine, be sure your sales reps and brand managers have adequate resources so they can tell the story behind this vintage. Be clear where you want your wine sold, as well as the pricing for placements. Along those lines, register your labels when applicable, and allow for ample time for this registration process to be completed. Determine if you need addi-tional staff to manage both this new sales channel and inventory.

  When planning a market visit to a distributor, timing is everything. Many distributors hold their general sales meetings on Mondays and Fridays, with most of their sales staff in attendance. Hence, these meetings represent an opportunity to tell the brand’s story and have the staff taste these wines.

  When going on a distributor ride-along, be mindful that most ride-alongs occur Tuesday through Thursday from 10:00 a.m. to 5:00 p.m. The typical visit is six accounts, though it could be any-where from five to nine with a break for lunch. (You will be expected to pay for lunch). Ask to see a list of accounts you will be visiting in advance. In particular, you need to know if you are visiting on- or off-premise accounts, as that will impact your attire and the sales materials you need to bring. Know your pricing and be prepared with collateral. During these visits, be flexi-ble. The distributor arranged an entire day of appointments around your wines, so be mindful when they need to do tasks such as putting in an order. Also, expect the occasional cancellation.

  A few things Eddy suggested to keep in mind once you have a distributor in place include monthly tracking to check your inventory and update your distributor on progress versus goals. He said wineries should know when it’s time to change pricing and be aware of chain presenta-tion schedules. “You need to be clear with your distributor regarding where you want your wines sold.”

  Finally, nothing is more important than having a plan. “Have a plan going in. Check up on it, and follow up,” said Eddy.

Don’t Get Caught Off Guard During Wildfire Season

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By: Michael Harding, Senior Risk Solution Specialist, Markel Specialty

Weather conditions and natural disasters occasionally take a toll on vineyards and other agricultural production systems. Due to climate change and recurring droughts, some of which are severe, the frequency and severity of wildfires is expected to increase. These risks highlight the need for winegrowers and winery owners to be as prepared as possible to reduce risk.

Putting Your Plan Together

  Many wineries may have already revisited their evacuation plans and filed them with their respective state agencies. Staying current of wildfire season developments can help enhance your ongoing planning and preparedness. Technology can also support your wildland fire planning and response. Additional planning resources by the American Red Cross are available at: www.redcross.org/get-help/how-to-prepare-for-emergencies/types-of-emergencies/wildfire.html

Steps to Take Before a Wildland Fire Event

•    Take a close look at your winery’s communication protocol for evacuations. Everyone should have a clear understanding of any community alarms that signal when you need to evacuate. Assign specific accountabilities to staff so everyone works collectively to achieve a positive outcome of protecting lives and property.

•    Work with your regional Forest Service to better understand emergency evacuation procedures in your area.

•    Coordinate with the American Red Cross, FEMA, and other emergency agencies to give them the locations of your evacuation sites. Invite your local fire department out as part of a fire pre-incident plan. They should be provided a map of your property, highlighting planned evacuation routes. They can also offer technical assistance to support your plan.

•    Prepare and post route maps for each site, including alternate routes. With a large fire, you may need to use “Plan B.”

•    Consider forming a cooperative agreement with another site to share resources and serve as an evacuation site.

•    Identify key equipment to be evacuated, including computers and other vital records. As part of your business continuity planning, programs should already have information backed up and stored remotely. But, in case you don’t, practice removing this equipment as part of your practice response.

•    Stock an ample supply of water and easily-prepared foods until rescue arrives.

Controlling Wildland Fire Exposures

  Wildland fires are one of the most catastrophic threats to wineries.  Protecting your structures from ignition and fire damage is an important program objective second only to an evacuation plan. Taking precautions ahead of time can help reduce the exposure of a wildfire intrusion. There are a number of proactive measures a winery can take to mitigate the property damage a wildland fire can cause.

  To support a fire adaptive community philosophy, the local fire department or authority having jurisdiction for your winery should require you to develop a landscape plan for your property. It is wise to seek their advice and incorporate their recommendations as you develop a plan specific to your location. You can learn more about fire adaptive community planning at the Fire Adaptive Communities, www.fireadapted.org

  According to the NFPA 1144 – Reducing Structure Ignition Hazards from Wildland Fires, fire protection plans should address four zones around a property.

What are the primary threats to property during a wildfire?

Research around property destruction vs. property survival in wildfires point to embers and small flames as the main way that the majority of properties ignite in wildfires. Embers are burning pieces of airborne wood and/or vegetation that can be carried more than a mile through the wind, they can cause spot fires and ignite structures, debris and other objects.

  There are methods for property owners to prepare their structures to withstand ember attacks and minimize the likelihood of flames or surface fire touching the structure or any attachments. Experiments, models and post-fire studies have shown structures ignite due to the condition of the structure and everything around it, up to 200’ from the foundation.  This is called the Structure Ignition Zone.

What is the Structure Ignition Zone?

  The concept of the structure ignition zone was developed by retired USDA Forest Service fire scientist Jack Cohen in the late 1990’s, following some breakthrough experimental research into how structures ignite due to the effects of radiant heat. 

The structure ignition zone is divided into three zones; immediate, intermediate and extended.

Immediate Zone

  The structure and the area 0-5’ from the furthest attached exterior point of the structure; defined as a non-combustible area. Science tells us this is the most important zone to take immediate action on as it is the most vulnerable to embers.

  START WITH THE STRUCTURES then move into the landscaping section of the Immediate Zone.

•    Clean roofs and gutters of dead leaves, debris and pine needles that could catch embers.

•    Replace or repair any loose or missing shingles or roof tiles to prevent ember penetration.

•    Reduce embers that could pass through vents in the eaves by installing 1/8” metal mesh screening.

•    Clean debris from exterior attic vents and install 1/8” metal mesh screening to reduce embers.

•    Repair or replace damaged or loose window screens and any broken windows. Screen or box-in areas below patios and decks with wire mesh to prevent debris and combustible materials from accumulating.

•    Move any flammable material away from wall exteriors – wooden pallets, mulch, flammable plants, leaves and needles, firewood piles – anything that can burn. Remove anything stored underneath decks or porches.

Intermediate Zone

  5-30’ from the furthest exterior point of the structure.  Landscaping/hardscaping – employing careful landscaping or creating breaks that can help influence and decrease fire behavior.

•    Clear vegetation from under large stationary propane tanks.

•    Create fuel breaks with driveways, walkways/paths, patios, and decks.

•    Keep lawns and native grasses mowed to a height of 4”.

•    Remove ladder fuels (vegetation under trees) so a surface fire cannot reach the crowns. Prune trees up to 6-10’ from the ground; for shorter trees do not exceed 1/3 of the overall tree height.

•    Space trees to have a minimum of 18’ between crowns with the distance increasing with the percentage of slope.

•    Tree placement should be planned to ensure the mature canopy is no closer than 10’ to the edge of the structure.

•    Tree and shrubs in this zone should be limited to small clusters of a few each to break up the continuity of the vegetation across the landscape.

Extended Zone

  30-100’, out to 200’. Landscaping – the goal here is not to eliminate fire but to interrupt fire’s path and keep flames smaller and on the ground.

•    Dispose of heavy accumulations of ground litter/debris.

•    Remove dead plant and tree material.

•    Remove small conifers growing between mature trees.

•    Remove vegetation adjacent to storage sheds or other outbuildings within this area.

•    Trees 30 to 60’ from the structure should have at least 12’ between canopy tops.

•    Trees 60 to 100’ from the structure should have at least 6’ between the canopy tops.

If an Evacuation Becomes Evident

•    If possible, identify the location and direction of the fire event. Remain cognizant that this can quickly change direction and speed.

•    Clearly explain your evacuation procedures to all that may be involved.

•    Identify special medical needs and gather emergency equipment and necessities, including trauma supplies for ready access.

•    Designate enough vehicles to evacuate everyone safely. Reinforce safe driving practices with all drivers.

•    Equip staff with emergency communications equipment (cell phones, walkie-talkies, whistles, flares, colored smoke canisters, etc.). Ask your local jurisdiction authority for suggestions.

•    Load key equipment, vital records, food, and water.

•    Ask qualified associates to disconnect and move LP gas tanks to a safer location, such as a gravel lot, or follow the manufacturer’s instructions to empty the tanks.

•    Warn firefighters of underground fuel storage or LP gas tanks before you leave.

  Making your facility fire resistant can help reduce property loss. However, keep in mind that these steps should be done only by assigned staff in conjunction with an evacuation and never require or allow staff to remain behind. Close and secure all doors and windows once combustible materials have been moved away from these openings.

•    Wet down buildings and roofs. There are commercial grade fire retardant products available that can help support your efforts to protect your property. But do your research ahead of time; and don’t let the application of these products reduce the priority of evacuating.

•    Have qualified personnel cut down trees in the fire path, bulldoze a firebreak, and cut field grass as short as possible.

•    Remove brush and dry vegetation near buildings.

Fire evacuation – What you need to know

  During wildfire season, you may be forced to evacuate in a hurry. People are your first priority; to include guests, staff and firefighters. Most fire evacuations provide at least a three-hour notice; but due to the scope of your operation, you may need to do it sooner. Take proactive steps before and during an evacuation to reduce anxiety and avoid injuries. Plan, prepare and practice.

Filing Claims

  In the event your area experiences a wildfire event, it is highly likely it will not only be monitored by your insurance agent, in addition to your insurance company. Pre-loss documentation, such as video recordings and pictures of buildings, business personal property inventories, should be up to date and included as part of your evacuation materials. Working with your agent is a great resource to understand what might be necessary to help with documentation, if you should need it.

Reference

•    NFPA 1144 – Reducing Structure Ignition Hazards from Wildland Fires, 2018 Edition. National Fire Protection Association. Quincy, MA 02169, 2018

•    Fire Adaptive Communities. Fire Adapted Communities Learning Network.

      www.fireadaptednetwork.org

•    Wildfire Safety.http://www.redcross.org/get-help/how-to-prepare-for-emergencies/types-of-emergencies/wildfire.html. © 2019 The American National Red Cross

  This document is intended for general information purposes only, and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an “as is” basis, without warranty of any kind. This document can’t be assumed to contain every acceptable safety and compliance procedures or that additional procedures might not be appropriate under the circumstances.  Markel does not guarantee that this information is or can be relied on for compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability.  This publication is not intended to be legal, underwriting, or any other type of professional advice.  Persons requiring advice should consult an independent adviser.  Markel does not guarantee any particular outcome and makes no commitment to update any information herein, or remove any items that are no longer accurate or complete.   Furthermore, Markel does not assume any liability to any person or organization for loss of damage caused by or resulting from any reliance placed on that content.

Litigation of Herbicide Drift Cases

Cyndi
a small helicopter in the sky

By: Brian D. Kaider, Esq

Chemical drift, the movement of herbicide/pesticide to unintended areas from the site of application, is a continuing problem in many farming areas, including vineyards.  In the Nov/Dec 2019 issue of The Grapevine Magazine, Judit Monis and I wrote an article (https://thegrapevinemagazine.net/2019/11/herbicide-drift-a-common-issue-affecting-vineyards-worldwide/) describing how herbicide drift affects vineyards and some of the legal causes of action that may be available to those who have suffered damage to their crops  

In the July/August issue, another article (https://thegrapevinemagazine.net/2020/06/liability-coverage-for-chemical-drift/) addressed insurance coverage for herbicide drift.  This article will focus on litigation of these cases, including the types of evidence needed to pursue or defend against the claims.  As with any legal issue, the details will vary from state to state and from case to case, depending upon the facts.  So, this article is not intended to convey legal advice, but rather to provide background information of the types of issues that may arise.

  To frame the discussion, we will discuss a hypothetical case in which Victoria is the owner of a vineyard who discovers damage to her vines, such as distorted leaves, defoliation of some vines, and damaged fruit.  She believes a neighboring farmer, Stephen, applied an herbicide to his soybean fields, which are adjacent to Victoria’s vineyard, that damaged her vines.  As a first step, Victoria should look to her own insurance policy to see if damage caused by third parties is covered.  If so, and if the policy covers the extend of the damage to her property, Victoria’s best option may be to simply file a claim with her insurance.  Assuming that not to be the case, Victoria may need to file a lawsuit.

  Before going to court, Victoria has to have a reasonable basis for alleging that Stephen is responsible for the damage to her vineyard.  So, when she speaks with her attorney, the litigation process begins with a “pre-suit” investigation.  Because the effects on her plants are likely to change over time, it is critical that Victoria start to document the damage as soon as she notices it.  She should take photographs and detailed notes about the condition of her vines, the location and extent of the damage on her property, as well as weather and environmental conditions, and she should update this information regularly.  If she has any knowledge or reason to believe that Stephen applied an herbicide to his soybean fields prior noticing the damage to her vines, she should document that information as thoroughly as possible. 

  Causation is always an issue in these cases.  Victoria will have to show that it was Stephen’s chemical application that caused the damage to her vines.  So, she should also attempt to collect data that would rule out any other cause of the damage.  For example, she should have thorough documentation of all chemicals that she has applied to her own property, she should note the location of farms other than Stephen’s in the area, whether she has seen them apply chemicals, and what the prevailing wind patterns are in her area.  She should also take samples from her vines to be sent for analysis to determine, if possible, to which herbicide(s) the vine has been exposed.

  Once the pre-suit investigation is complete and there is a reasonable basis to assert that Stephen caused the damage to her crop, Victoria’s attorney will prepare a Complaint and file it in the relevant court.  This begins the official litigation process. 

  When Stephen receives the complaint, he will have a certain amount of time to respond, typically with an Answer to the Complaint.  As his attorney begins to prepare the Answer, he will need to begin collecting information, as well, including documentation of the time, place, and manner of all chemicals he has applied to his land. 

  The vast majority of all lawsuits settle out-of-court rather than reaching trial.  While the parties may reach settlement at any time, there are three points at which it is most common.  The first is during the Complaint/Answer stage.  At this point, the parties have not expended a great deal of money on the litigation process and if it is very clear which party is in the wrong or if the damages are not substantial compared to the cost of litigating, it is often prudent to settle at this stage.  If the parties do not settle, the case will proceed to the “discovery” phase, and things get expensive very quickly.

  Discovery is the process by which the parties seek information from one another in order to evaluate the strength of the claims and defenses and to obtain evidence they will use at trial.  There are four main forms of discovery: document requests, interrogatories, requests for admission, and depositions.  Document requests, as the name suggests, is the process of asking the other party for documents or other tangible evidence.  Interrogatories are written questions that the other party has to answer in writing.  Requests for admission present a series of statements and require the other party to admit or deny the truth of those statements.  And depositions are a process where a person is placed under oath and asked questions to which they must respond on-the-spot.  There is typically a court reporter there taking a transcript of the questions and answers and they are often videotaped, as well.  All four of these processes take a tremendous amount of attorney time and are, therefore, very costly.  Discovery is often the most expensive part of a lawsuit.

  Whether the case involves negligence, strict liability, trespass, and/or nuisance, there are several issues that will almost certainly arise in discovery.  As the plaintiff, some of the materials that Victoria should request include:

•   documentation of the time, place, and manner of all chemical applications on Stephen’s land, including the type of chemical, who applied it, how it was applied, the quantity, and the environmental conditions at the time of application

•   copies of the labels and/or package inserts for the chemicals

•   information about crop buffer zones or setbacks on Stephen’s property and/or request permission to inspect the property to measure these areas 

•   a copy of any and all insurance policies that cover Stephen’s land

  In preparation of his defense, Stephen will not only want to seek information that undermines the case against him, but also evidence that supports his affirmative defenses and/or counterclaims.  He will want, for example:

•    documentation of all chemical applications on Victoria’s land

•    all information Victoria has on chemical applications by third parties not in the case

•    historical records about the health of Victoria’s vines and crop yields from prior years

•    detailed accounting of the number of allegedly affected vines and their condition

•    documentation of Victoria’s current and previous irrigation practices

•    documentation of insects or other pests on the land in current and prior years

•    any other information that could suggest that the damage to Victoria’s crops was caused by something other than Stephen’s chemical application

•    documentation of any and all tests Victoria has had conducted on her vines before or after the commencement of the litigation

  Discovery may also involve the services of experts.  Both sides may use experts to support or refute the theory that the damage to Victoria’s crops was caused by Stephen’s chemicals.  Each expert may submit a written report and is then likely to be deposed in order to try to undermine or discredit that report.

  The court will set a specific time period during which discovery must occur.  When that window closes, there is generally no more exchange of evidence between the parties.  This is the second point in which it is common to settle the case.  Each side is then in full possession of all of the evidence that may be presented.  Often it becomes clear from discovery that one side’s position has significant weaknesses and is likely to lose if the case goes to trial.  Since it will still require a significant investment of time and money to see the case to the end, it makes sense in that instance to reach settlement between the parties.

  If again the parties do not settle, they will begin to prepare for trial.  Typically, this involves a variety of written motions asking the court to rule on certain issues in the case.  There may be summary judgment motions requesting that the court rule in a party’s favor as a matter of law.  One or more parties may file evidentiary motions seeking to exclude certain information from the judge or jury’s consideration.  There are also many procedural issues for the court to decide, such as what instructions will be given to the jury, how much time each party will be allowed to present its case, etc.  Depending upon the outcome of these various issues, a third opportunity to settle the case often presents itself just before trial.  For example, if the court rules that a key piece of one party’s evidence is inadmissible, that party may be more inclined to throw in the towel.

  Of course, if the parties still do not settle, the case will then go to trial.  Litigation is not to be entered into lightly.  The costs for each party to take a case all the way to trial will almost certainly reach six figures and, for more complicated matters, could reach seven. 

  As always an ounce of prevention is worth a pound of cure.  If you are applying herbicides to your property, there are several precautions that can help keep you from affecting neighboring properties and exposing yourself to legal liability.  First, examine the surrounding properties to identify potentially vulnerable crops.  Some states even have listings of vulnerable crops that may help guide your choices.  Second, make sure you fully understand the chemicals you are applying and what crops may be adversely affected.  The University of Kentucky has a great resource website to cross reference herbicides, what weeds they affect, and which crops are vulnerable or resistant to the herbicide (https://www.uky.edu/Ag/Horticulture/masabni/xreflist.htm).  Third, when applying chemicals, be sure to follow the manufacturer’s instructions to the letter and document everything, including date, time, volume of chemical, manner of application, and environmental conditions.

  Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry.  He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation. 

For more information please email or call…bkaider@kaiderlaw.com

(240) 308-8032

Understanding the Domino Effect of the European Wine Tariffs

Cyndi
finger pushing euro block

By: Tracey L. Kelley

At press time, the Office of the United States Trade Representative is deciding the revised outcome of a controversial decision from 2019: an increase in import tariffs for European wines by 25%. This action is part of a World Trade Organization judgment against the European Union to end subsidies granted to aerospace giant Airbus. The USTR issued the tariff hike in response to what it believed to be an unfair disadvantage to U.S.-based competitor Boeing.

  In February 2020, the USTR announced it wouldn’t raise European wine tariffs to 100%, but for the upcoming review, it’s unclear if last year’s decision will be upheld, or if those WTO tariffs will shift to other European products. 

  To provide a more tailored scope of the issue, The Grapevine Magazine talked with Benjamin Aneff, president of the U.S. Wine Trade Alliance and managing partner of Tribeca Wine Merchants in New York City; and Eric Faber, chief operating officer of Cutting Edge Solutions in Cincinnati, a wine import and distribution business.

Why the Tariffs Create Conflict

  The Grapevine Magazine (GV): Let’s break down the issue for the layperson: what does U.S. and European wine have to do with Airbus and Boeing?

  Benjamin Aneff (BA): Great question. Nothing. Unfortunately, the USTR has decided to put large tariffs on most wines from the EU because of the dispute involving Airbus and Boeing. It’s incredibly unfortunate, given that these tariffs do roughly four times the economic damage to U.S. businesses than they do their targets overseas. They’re back-firing and hurting mostly small, family-owned businesses in the U.S.

  Eric Faber (EF): I’ve heard the arguments that these tariffs protect American jobs, that people can just buy domestic wines instead of European. In some cases, this may be true, but to believe this about the wine industry shows a complete lack of understanding into how our industry uniquely works and how it’s connected. These connections exist based on an industry that is among the most regulated in the U.S. Companies shouldn’t be asked to change their business model because of an international trade dispute of an unrelated industry.

  The truth is that these tariffs may cause job losses and business closures in Europe, but they will cause job losses for the American small businesses who rely on these wines for their livelihood. Ambassador Robert E. Lighthizer, the USTR, can try to tell us it will simply lead to new American jobs, but that only shows his lack of knowledge about our industry.

  It’s an industry that—unlike Boeing and Airbus—has always paid its fair share of taxes. In fact, the regulation of alcohol means we pay more than most businesses. We don’t get the tax breaks that massive companies like Boeing, Amazon, Apple and others enjoy. Taxes on the alcohol industry help provide billions of dollars to state and local governments. And we’re more than happy to do so, but we shouldn’t be burdened as a result of the poor practices of two of the largest companies on the planet.

  Airbus has recently offered a solution to this entire dispute, and it’s equivalent to the changes made in regard to Boeing. If the goal is to punish Airbus for its misgivings, then punish that industry. But leave the lives of millions of hard-working Americans who aren’t affiliated out of it.

  GV: What would be the direct impact of the 25% tariff increase on small- to medium-sized producers/vintners, and what tangible change happens for them if it’s defeated?

  (BA): Well, ending these tariffs would certainly help small- to medium-sized producers in the U.S., particularly producers looking for distributors that rely on this access to market. These are the companies that actually make sure those small producers in, say, Oregon or California, can make it to the shelf of a wine store or get poured in a restaurant in Chicago, Dallas or New York.

  When distributors are having trouble financially—which they are now due to the tariffs—it’s much harder for them to take the risk of bringing on a new U.S. producer, which generally are unknown and require time and capital investments from distributors. It’s less clear how it helps producers in, say, France.

  There’s pre-pandemic data from the Global Trade Atlas that showed, despite a huge drop in wine exports from France to the U.S. after the enactment of the tariffs, the overall wine exports from France actually grew. In a nutshell, they sold their wine elsewhere. This is just one of the reasons why these tariffs are such a bad idea. They do significantly more damage to the U.S., and they’re incredibly unlikely to influence the EU to change behavior.

  (EF): Should the tariff be justifiably rolled back, things will mostly go back to normal. I say “mostly” because the pandemic has its own role to play in our industry, which adds to the need for the tariffs to be lifted.

  The European wineries we work with love the American wine market and experiencing the amazing wine and restaurant culture so many Americans have worked hard to create. Right now, they’re facing difficult choices about where to sell their products and how to maintain their businesses in the face of tariffs. I think it’s important for Americans to know that the effect on European wineries isn’t money lost from paying the tariffs—because American businesses pay them. It’s from lost sales due to price increases and importers downsizing or going out of business.

  From a larger view, you don’t have to look farther back into our history than the Smoot-Hawley Act of 1930 to see the negative effects tariffs can have on our own economy and the global economy we’re part of. It turned a difficult recession into the Great Depression. It set people back 20 years and created a “lost generation” across the world. These tariffs will harm people across the globe, so by lifting them, we give small businesses—specifically here at home—the opportunity to be successful, experience growth and create jobs.  

The Domino Effect

  GV: As an example, how does an import/distribution company balance its portfolio to include both international and U.S. wine products?

  (EF): We strive to have a portfolio that represents top producers from around the world, specifically boutique producers that fit our model in terms of quality and price point. Domestic wines are the backbone of our portfolio. 

  Like most small distributors, it’s important to have a good mix of products from around the world so we can provide our accounts with a wide variety of options. Domestic wines are certainly a large part of this, and the balance is largely driven by the demands of our customers and the wine-buying public. For us to be successful, we work with producers that we believe in and that our customers have a desire to purchase. While we have very strict standards for the producers we add to our portfolio, we’re ultimately driven by the market.

  The other part of this is profitability. We typically work on lower margins on domestic wines than we do on imported wines, specifically the wines we import ourselves. The slightly-higher margins we make on European wines allow us to keep our prices on our domestic portfolio lower. This is commonplace for most companies in our industry.

  GV: What type of trickle-down effect does the tariff issue have?

  EF: The tariff has an enormous impact on importers and distributors. Many people who argue the tariffs are a penalty on the producers, or the countries on which they have been levied, are simply wrong. We pay the tariffs—not the producers and not the EU.

  A 25% tariff means prices on those products have to go up for importers and distributors to maintain their ability to function. In a state like Ohio, for example, we’re legally required to have a certain margin to our accounts to maintain state tax revenue. We legally can’t make less on the wines, so we have to charge more. This means our retailers and restaurants must raise their prices to the consumer.

  While this may not be the case in every state, no industry could suddenly take a loss of 25% or even 15% of its margin and still be successful. How do people pay employees if they don’t make any money on the products they sell?

  In terms of how this affects domestic producers, the biggest issue outside of distribution is money. Our industry works on “terms”—meaning, we pay for our products typically 30 days after receiving them. This model has been set for decades. But with tariffs, they’re paid as the product clears customs. This creates a significant problem in terms of cash flow.

  So if we’re typically paying a few thousand dollars to clear product into the country, and suddenly have to pay upwards of $25,000, that depletes our bank account in a way our long-standing model wasn’t prepared for and makes it more difficult to pay our domestic suppliers on time.

  We also have to pay our employees, our bills and our taxes. If it takes longer for our domestic partners to get paid, this cash flow problem moves on to them, then to their vendors.

  GV: If certain import relationships fail, do fewer distributors mean fewer channels of retail and restaurant opportunities for U.S. products? Why?

  EF: That’s an excellent question and raises one of the most important points of this debate. If our company relies on a mix of producers from the U.S., Europe and other countries to be successful, then eliminating sales from one of these avenues would force us to close. If companies like Cutting Edge go out of business or contract significantly less, who will sell domestic wines to restaurants or independent retailers that the wineries rely on as the largest part of their sales network? For most domestic wineries, they can’t sustain their business through direct-to-consumer sales alone.

  This leaves wineries without a home. It’s not as simple as just finding another distributor if you’re a domestic winery. Boutique American wineries need to be in a portfolio that gives their products appropriate attention to attract sales and create valuable placements in restaurants and independent retail. They have to find someone who cares about their wines and their stories, someone who can pay for the products, and who can actively promote their products to accounts and consumers.

  Larger, multi-state distributors typically don’t work with smaller domestic producers because it isn’t a part of their business model. They have obligations to their own, typically larger and more corporate, partners. This means that smaller wineries have no focus in their portfolio.

  To sum it up from the point of view of our domestic producers: if 20 Oregon producers suddenly lose their distribution in a state like Ohio, maybe 10 will eventually find a new home and those that do will likely lose significant sales because the new distributor has to essentially re-build the brand in its own portfolio. This is especially daunting when you look at the current climate in our industry as a result of COVID-19. If a producer loses representation in just a small number of states, especially now, it would likely lead to bankruptcy.

  GV: Please explain why a zero-tariff policy on wine imports benefits U.S. producers/vintners in our wine industry.

  BA: Wine from the EU is a keystone species for the health of the U.S. wine market. It represents critical profit margins for tens of thousands of U.S. wine businesses–the same businesses that sell wines from the United States. If those businesses are weak, it’s going to be harder for them to adequately support particularly small- and medium-sized U.S. producers.

  Those wines are often handsels from distributors, retailers and restaurants. That means you need more staff, more time for training, more samples. Further, there may come a point where U.S. distributors are so weakened by tariffs that they’re forced to ask for lower prices from everyone. That’s what happens when companies industry-wide are faced with such hardship. U.S. domestic producers could be one of the first impacted by this need.

  Bottom line, the entire wine industry, from producers to distributors, to restaurants and retailers, are significantly better off when there aren’t tariffs on wine.

Make Connections in Congress

  GV: At press time, the U.S. will have experienced more than 5 million COVID cases, and many wineries continue to be shuttered or downsized in production and tourism. How do you encourage them to take an active stance on this issue when so many other factors have them at a disadvantage? What immediate results will they see from their activism?

  EF: We’ve worked with dozens of domestic wineries to raise awareness of the tariff situation and how it will negatively affect them. I’ve spoken to many of them personally to get them involved, as have countless other distributors. No independent domestic winery thinks the tariffs will benefit them in the short- or long-term.

  We’ve helped provide information on how to contact their elected officials and make their case to members of Congress, the administration, and the USTR. Many have spoken out publicly to condemn the tariffs. People like Jason Lett of Eyrie Vineyards in Oregon have led the charge to raise awareness amongst their peers. They need a strong economy here at home to promote their brands and continue to operate their businesses, and strong partnerships with successful distributors to weather the current storm.

  It’s tough to say what results any of us will see from our activism on this issue because we don’t get to make the final decision. As a community, we have been able to gain support from elected officials from both sides of the aisle and raise public awareness of the negative effects the tariffs will have. Hopefully, awareness will lead to a better understanding of why it’s so important to remove the tariffs currently in place.

  Truly, if there’s anything positive from the battle against tariffs, it’s been the coming together of so many in our industry from all facets: importers, distributors, domestic producers, European producers, restaurants and retailers. I’ve even had wineries we work with in Australia and Chile ask how they can help. All see the incredibly negative outcome of these tariffs on the American wine industry and are united in standing against them. Hopefully, this will help to sway the decision-makers.

  BA: There are so many hardships right now, in every corner of our country. I would say the voices of U.S. wineries can be incredibly impactful with their representatives. We are so interconnected; I think many see how clearly that we rise and fall together. 

  We don’t begrudge the job of the U.S. government to protect our trade interests abroad, but there are better, less damaging ways to do so. We’re all trying to get back up off the mat right now. It’s the wrong time to try to pull the rug out from underneath us.

  Though the public can no longer submit comments to USTR, Congress can! Tell your elected officials, both in the House and Senate, to reach out to the USTR and voice their opposition to these tariffs. There are better ways to influence the EU than a tariff policy that does disproportionate damage to mom and pop businesses in the U.S.—particularly during a pandemic that just saw the U.S. economy contract by 33%. [Editor’s note: The carousel date for the expected USTR announcement regarding its decision, was August 12. Look for an update on thegrapevinemagazine.net]

  When the wine industry is healthy, everyone benefits. When we’re suffering, we all see the impact. Bottom line, we’re in this together.

UPDATE: August 31, 2020; Update from the U.S. Wine Trade Alliance: “The USTR published their decision regarding the August 2020 carousel for the WTO / Airbus award. The tariffs on wine remain the same, with no changes to either tariff percent or category.” Read the full statement here.