Increased Tariffs Harm U.S. Businesses in the Wine and Spirits Industry
Rewritten Article Title: Here's the Devastating Impact of Proposed 200% Tariff on European Wine and Spirits on American Businesses
For centuries, wine and spirits have knitted cultures and economies together. However, a proposed 200% tariff on European wine and spirits looms, threatening this delicate equilibrium - not by hurting European producers, but by crippling American businesses that lurk in its shadows. Ranging from small family-owned distributors to independent restaurants and retailers, the financial consequences of such tariffs would be rampant and devastating.
On March 12, a roundtable discussion, spearheaded by Ben Aneff, co-owner of Tribeca Wine Merchants in New York and head of the U.S. Wine Trade Alliance, assembled key voices from the wine and hospitality industries to voice their concerns regarding these proposed tariffs. Their message was clear: tariffs on imported wine don't merely affect store shelves and restaurant menus; they threaten an entire economic ecosystem, with the majority of the financial benefits of selling European wine remaining within the U.S.
The U.S. Wine Business Model Explained
Unlike other industries, the American wine and spirits sector operates under a three-tier system, a legal construct built post-Prohibition. In this model, imported wines must transverse three layers of businesses - importers, distributors, and retailers or restaurants - prior to reaching the consumer. This infrastructure implies that a considerable share of the economic benefit of selling imported wine is retained within American hands.
"For every dollar spent on a bottle of European wine, $4.52 is channeled to U.S. businesses," Aneff stated. "This is the primary reason why these tariffs would spark a disproportionate impact on domestic businesses, rather than on European wineries - their supposed intended target."
The Consequences of the Three-Tier System for U.S. Businesses
The three-tier system was established to regulate alcohol sales and curb monopolies. yet it also gives rise to a unique economic structure, where American businesses handle nearly every stage of the import and sale of wine. Unlike industries where foreign producers can sell directly to consumers, European wine producers are compelled to negotiate with U.S. importers and distributors, preserving a considerable portion of the revenue for domestic entities.
This model was conceived when Prohibition was lifted in 1933, granting states the authority to regulate alcohol sales. In response, each state adopted the three-tier system, which stands today and even has been affirmed by the U.S. Supreme Court.
Aneff elucidated the significance of this system: "The three-tier system prohibits retailers, restaurateurs, and any other related businesses from purchasing wine directly from a producer. Instead, all wine must transfer through a distributor."
Here's how it works:
- A French or Italian winery cannot sell directly to a U.S. restaurant or retailer.
- Instead, the winery must sell to a U.S. importer, often a small, family-owned business.
- That importer must sell to a U.S. distributor, who maintains ties with multiple producers and tends to the overseas supply of wines in diverse states.
- Eventually, distributors sell the wine to restaurants, wine shops, and other retailers, who ultimately sell it to customers.
"This implies that most of the profit from selling European wine remains within the U.S., with multiple small businesses reaping the rewards along the way," Aneff underscored. "Therefore, when you levy a tariff on imported wine, it's not the European winery that takes the hit - it's every American business along this chain, all of whom rely on these sales."
In addition, Aneff raised another point: other industries don't face the same restrictions. "If a French fashion house wants to sell clothes in the U.S., they can open a store in New York or Dallas and garner all profits from sales. This isn't the case with wine, making tariffs uniquely injurious for small U.S. businesses."
The Effects on American Restaurants and Retailers
Restaurants, especially independent establishments, rely on alcohol sales as a primary revenue driver. Andy Fortgang, co-owner of Portland's Le Pigeon and Canard restaurants, explained the narrow profit margins involved:
"The restaurants I co-own operate with margins of 4% to 9%. Our most lucrative profit center is beverage sales," Fortgang noted. "If we lose this due to tariffs, we have no choice but to either lay off workers or shutter our businesses altogether."
Similarly, Lisa Perini, owner of Perini Ranch Steakhouse in Texas, highlighted the integral role of wine in the overall dining experience: "It's not just about profitability. When customers partake in a steak, they anticipate an assortment of wines. A steakhouse without wine would be incomprehensible."
Perini put it in perspective, elaborating on the economics of a $50 ribeye steak: 50% of the cost pertains to food, 40% goes to labor and overhead, while only about 10% is actual profit. With miniscule food-related income streams, restaurants heavily rely on alcohol sales which provide a lifeline to remain viable. If tariffs significantly inflate the cost of imported wine, that revenue source shrivels, putting restaurants in a perilous financial position. "Restaurants require wine sales to offset escalating food and labor costs," Perini explained. "Without this, our business model collapses."
Insights into Distributor's Perspective and the Importance of Their Role
Harry Root, co-founder of Grassroots Wine Cellars in South Carolina, offered valuable insights into the critical function of distributors in maintaining the health of the U.S. wine industry. His company, a small business that partners with more than 600 other businesses, represents 80 U.S. wineries and a substantial number of European producers.
"Small business distribution companies like the one my wife and I started 20 years ago depend on imported wine much like restaurants do," Root explained. "Approximately 60% of our revenue emanates from imported wine, constituting about 75% of our gross profit."
Root stressed that these profits enable distributors to support U.S. wineries: "We're more than happy to engage with small Californian and Oregonian producers, often on lower profit margins because we believe in their endeavors. However, without a well-functioning import system, we lose the capability to financially support these wines in the market."
In the past, when tariffs were implemented at 25%, Root's firm experienced a sudden spike in expenses. "This kept us from investing in American producers, reduced our financial reserves for employees, and hampered our goal to grow the business," he explained. "Restaurants expect us to provide wines that generate strong profits, and imported wines help us achieve this while simultaneously offering exposure to smaller U.S. wineries."
"We continually struggle, work with up-and-coming wineries in the U.S., those we aspire to aid in their success," Root continued. "However, we do so effectively because we can sell Prosecco and other European wines at much higher margins, facilitating the distribution of more artisan wineries in the U.S."
Lessons We Can Draw from the Canada Tariffs
Through the recent trade dispute between the U.S and Canada, we can glean valuable lessons. Following a 25% tariff on Canadian imports, six of Canada's 10 provinces - (Ontario, Quebec, Manitoba, British Columbia, New Brunswick, and Nova Scotia) - removing U.S. wines and spirits from shelves, effectively isolating a significant export market for American producers.
Canada is the largest importer of U.S. alcoholic beverages, purchasing $1.1 billion worth of American wine and spirits in 2023. This abrupt loss of market access has resulted in instantaneous financial repercussions for American producers, including Kentucky, which exported $43 million worth of whiskey to Canada in the previous year. With no access to Canadian shelves, U.S. businesses now face the daunting prospect of overproduction, exorbitant storage costs, and the need to find alternative, less lucrative markets. The Wine & Spirits Wholesalers of America forecast these trade barriers will destabilize supply chains, drive up prices, and endanger U.S. wine and spirits producers.
For Canada, the ramifications are equally significant. A staggering 70% of the wine consumed in Canada is imported, with the U.S. routinely providing 10 to 15% of these imports. With U.S. wines expunged from stores, consumers have fewer options, and numerous Canadian importers are left with unsellable stock. Many Canadian importers operate on a consignment basis, meaning they do not receive payment until the product sells. With U.S. products unexpectedly withdrawn from shelves, these businesses now bear substantial financial risks. Moreover, market shares are shifting towards France (30-35%) and Italy (20-25%), making it all the more challenging for U.S. wines to reclaim their foothold even if trade relations improve.
Beyond wine, many American craft breweries and distilleries rely on Canadian barley, a preferred ingredient due to limited U.S. supply and superior quality. If Canadian exports to the U.S. are curtailed, production costs for small brewers and distillers will escalate, resulting in increased consumer prices. Manymay find themselves forced to reduce production or cease operations entirely, weakening the U.S. craft beer and spirits market.
The Wider Implications: Why Tariffs Pose a Threat to the Wine Industry
The U.S.-Canada trade dispute offers a chilling warning about what may ensue when trade barriers proliferate in the wine and spirits industry. Removing U.S. wines and spirits from Canadian shelves has done more damage than a simple tariff - eliminating an entire export market overnight.
The proposed 200% tariff on European wine and spirits is not a policy that aims to bolster American industry - it is one that aims to maim it. From independent restaurants and wine retailers to small distributors and even U.S. wineries, the cascading effects of such a tariff would be calamitous.
The wine industry is an intricate global ecosystem, and the U.S. wine economy thrives on a balance between domestic and imported products. Disrupting this equilibrium with sweeping tariffs would be shortsighted and costly - one that America's small businesses can ill afford.
Kelby James Russell, winemaker at Apollo's Praise Winery, articulated it succinctly: "Wine has been a traded commodity for over 6,000 years, uniting people with different cultures and regions. People don't merely consume wine, they fall in love with it. Anything that limits access to such experiences, through tariffs or economic barriers, puts the very essence of what makes wine special at risk."
Although there are undeniable financial stakes, there is also an emotional and cultural impact at play. Imposing restrictions on the availability of European wines doesn't just undermine businesses - it dilutes the broader wine appreciation experience and the connections it fosters among producers and consumers worldwide.
- Tariffs on imported wine don't just affect store shelves and restaurant menus; they threaten an entire economic ecosystem, with the majority of the financial benefits of selling European wine remaining within the U.S.
- Unlike other industries, the American wine and spirits sector operates under a three-tier system, a legal construct built post-Prohibition. This structure implies that most of the profit from selling European wine remains within the U.S., with multiple small businesses reaping the rewards along the way.
- For a restaurant like Portland's Le Pigeon and Canard, alcohol sales, particularly wine, serve as a primary revenue driver. If they lose this due to tariffs, they have no choice but to either lay off workers or shutter their businesses altogether.