Free Trade and the Beverage Business. It's Time.

As BevX is a magazine aimed to serve the beverage consumer, I am compelled to discuss a recent and pending piece of legislation that could significantly impact all alcohol beverage consumers. While I prefer to bring fun, informative, and lighter material to our readers I feel that it is necessary to bring this to your attention. We can’t sit silently by and hope for the best. Trust me, I will take a great deal of grief for writing this. While you are reading this my email and phone will be buzzing. So be it.

H.R. 5034 - Comprehensive Alcohol Regulatory Effectiveness (CARE) Act of 2010 is perhaps the most damaging piece of legislation concerning the alcohol beverage consumer and producer since the 18th Amendment. For those of you who took a snooze in Constitutional history class, the 18th Amendment is best known simply as Prohibition. H.R. 5034 was written by the National Beer Wholesalers Association (NBWA) with support form the Wine & Spirit Wholesalers Associations (WSWA). What does this mean to you? Higher prices, limited choices, and no more wine club packages to your door.

As is their wont, they have wrapped the bill in passionate language and symbolism; CARE. Come on, who doesn’t care? If you really care you’ll support this bill… Nice try but we are on to you.

At its heart, H.R. 5034 seeks to give states and distributors total control and to most importantly put an end to legal challenges to the “three-tier” system. (More on the three-tier system later.) Alcohol distributors have a cozy, legally protected role in the sale of alcohol in the US. Lately, this has been successfully challenged in courts most notably in Granholm v. Heald, 544 U.S. 460 in 2005. This case sought to assert the rights of you, the consumer, to buy wine directly from out-of-state wineries.

The powerful Wine & Spirits and Beer Wholesalers lobbies do not like having the commerce law evoked in favor of the consumer. With H.R. 5034 they seek to stop what they call frivolous lawsuits in defense of the consumer. If passed, all future challenges would be mute.

This is a big and bold bite at the apple. Typically lobbying groups take a measured approach looking to cook their target over time with the sum of their legislative efforts. This is a one fell swoop attempt for the distributors to seize total control, limit your choices at their whim, control prices, and make it criminal for you to receive a bottle of wine directly from your favorite winery.

Further they are attempting to wrap themselves in the cloak of states rights. A quick look at the voting record of the 100 plus co-sponsors will reveal a legislative body that couldn’t give a rip about states rights. Why go to the Federal government to assert states’ rights?

The threat that this horribly controlling and restrictive bill imposes must be taken seriously. The bill has been assigned to the House Judiciary committee, chaired by John Conyers from Michigan. This is troublesome in so far that the National Beer Wholesalers Association is one of Conyers top-five donors. As always, follow the money.

H.R. 5034 is opposed by the Specialty Wine Retailers Association, The Kentucky Distillers Association, Distilled Spirits Council of the United States (DISCUS), Craft Brewers Association, The Wine Institute, and many others.

Brandon Arnold, the director of government affairs at Cato Institute condemned H.R. 5034 as a bill that “would shut down and probably reverse the growing trend of legalizing direct wine shipping. Even worse, it would essentially eviscerate an important part of the Constitution as it pertains to alcohol.”

Again, this bill is very troubling especially in an era where legislators both support and denounce bills that they have never read let alone comprehend.

Understanding the Three-Tier System
While it’s certainly not a secret, the nation’s alcohol beverage wholesalers would rather that you were not aware of the mandated three-tier system and their desperate fight to keep it. The three-tiers are producers, distributors, and retailers. Retailers include on-premise sellers like restaurants and bars. In practice a producer (winery, brewery, or distiller) or an importer, sells to a distributor who then sells to retailers that sells to you, the consumer.

The alcohol wholesaler is in a protected class. They need not serve their clients, (the Wine, Beer, and Spirits producers) the retailers, and certainly not the consumer. The basic framework of the laws adopted post in Prohibition America created the special status that the alcohol wholesalers enjoy. On the state level, many powerful wholesalers have made their position more concrete setting up rules whereby a brand is prohibited to move from one wholesaler to another. This fact was clearly demonstrated when three of the Midwest’s top craft brewers Bell's, Boulevard, and New Glarus Brewing where shut out of Illinois for a period of years for daring to seek a wholesaler that would effectively sell their products.

Many distributors don’t want to fuss with selling beverages from small producers. The sum of all sales from small, family-owned producers cannot add much to the distributors bottom-line. The sale of products from small producers may also bump an “important” brand from a retailer’s shelf or a restaurant’s wine list. Important brands offer marketing dollars above and beyond the dollars earned when making a sale. They also offer advertising support and incentives to the wholesaler’s sales staff. The little guys don’t have the budget for such efforts.

Often times wholesalers compel the brands they represent to hire local sales persons at the brands expense. Sometimes a vast majority of the sales from a given wholesaler comes as a result of the brand’s sales team, not the wholesaler’s sales team. Still, the wholesaler takes their full mark-up. Would such a relationship be allowed to persist if not for the protected status of the wholesaler?

Effectively, if the wholesalers in your state do not wish to offer an alcohol beverage, it simply may not be sold at retail within your state. Take for instance a tale of two brothers. One brother is a successful restaurant owner/operator in the eastern US. The other brother is an award winning winemaker on the west coast. The first brother would love to offer his brothers wines to his customers but no distributor in the state will offer the wines. The restaurateur is therefore prohibited from offering his brother’s wines.

Efforts have been underway to bring about a more open, free-market system that allow small wineries, distilleries, and breweries to better compete. Most states technically allow direct shipping to consumers while effectively discouraging it.

For instance, if you have a winery outside of New York but you wish to be able to ship to customers within New York you better be prepared to apply for three different types of permits and then file three different reports. In most cases these reports and their associated fees are to be filed quarterly. In Illinois out-of-state producers are required to apply for a direct shipping permit, pay all excise and sales taxes, and file all reports. Every applicant is required to obtain a bond for $1000 or 2x its estimated tax liability, whichever amount is greater.

Each state has its own regulations and it is fair and accurate to say that the requirements are simply too steep for many small producers to comply. To add further insult to injury most states have predetermined how many bottles or cases you may purchase from out-of-state producers each year. In some states, the amounts permitted are extremely low.

So You Want a Fight?
The latest efforts by the alcohol beverage wholesalers lobby are noteworthy in its reach but not out of character. They have continued to fight for greater control and will continue to do so until the consumers, producers, and retailers get the nerve to attack the three-tier system straight on. Why spend our efforts to point out that this latest bill is in clear violation of free commerce? The wholesalers have brought the fight to our doorstep once again; let’s win it for good.

I for one am calling for the abolishment of the outdated three-tier system. No more can we be content with small victories in halting the latest encroachments of the wholesalers. Without the three-tier system to protect them the wholesaler’s lobby will lose their bite and a great deal of the money that they throw around Washington to help preserve their anointed status. It is beyond a cruel irony that the mark-ups taken by alcohol wholesalers, ultimately paid by the consumer (often 20-30%) is then used in part to grease the political wheels in order to maintain the status quo. We must stop feeding the beast.

Killing the Three-tier System doesn’t mean the Death of the Wholesaler
Many reading this will falsely believe that I am calling for the end of alcohol wholesalers. This is far from the truth. In many cases, the alcohol wholesaler offers an invaluable service. They act as an agent of the brand enthusiastically selling and supporting the products in their local market. Most brands simply do not have the budget to have a brand representative present in each state. A good wholesaler is an extension of a brand’s sales and marketing team.

Further, the big brands and drinks companies could opt to self-distribute in certain markets. This would further open the wholesalers to take-on more midsized and small brands. It would also eliminate the heavy influence asserted by the mega brands within a wholesaler.

The abolishment of the three-tier system will simply put the wholesaler on equal footing with the producer and the retailer. All parties will be encouraged to act in each other’s mutual interest, as do distributors of all other products. It is not hard to imagine that contracts could stipulate that wineries would not sell directly to consumers served by wholesalers in their state. Rather a referral could link the would-be consumer to a local retailer served by the wholesaler. Where no such producer and wholesaler relationship exists the consumer could be free to order the products directly. I trust that my friends in beverage wholesalers are eager to compete and succeed.

Wholesalers and brands would be free to engage in contracts that protect their individual and mutual concerns. Wholesalers would be obliged to compete for brands and be compelled to maintain the relationship. Logic and free enterprise would rule the day and ultimately the consumer would be a lot better served. Too radical?

Further Reading

 A collection of alcohol producers and importers HERE

Stop H.R. 5034

This is sponsored by the  Specialty Wine Retailers Association and it's Executive Director Tom Wark. I consider Tom to be the leading authority on H.R. 5034

The Actual Bill