Brewing a new three-tier system.
Legislative threats raise the possibility of changes in the status quo.
It is possible that the beer business could evolve into something like the food business by the end of this decade, if the current trend in court decisions and supplier actions continues. Remaining wholesalers will be big, and they will do less warehousing. They will sell themselves as promoters and merchandisers of "leisure beverage" products.
"The special status of alcoholic beverages appears to be evaporating in the glare of commercial and legal heat," opines beer industry attorney Mark Rodman. He cites supplier, legislative and court actions over the past two decades that have been chipping away at that supposed Rock of Gibralter, the three-tier system.
Alcoholic beverages have been a moral and religious football since this country began. As far back as the 1700s, lines were drawn over whether beer, wine and spirits should even be made available. The Supreme Court finally decided to leave the matter in local hands. In effect, it said that beer wine and spirits were a special class of consumable, and states could regulate them free of restraints imposed by the "Commerce Clause" of the U.S. Constitution. That clause prohibits states from unduly interfering with trade and commerce among themselves.
As recently as 1980, the Court reaffirmed this interstate trade exception in the case of California Retail Liquor Dealers Association vs. Midcal Aluminum (Midcal). It held that the 21st Amendment gives states "virtually complete" control over alcoholic beverages:
(1) whether to permit their importation or sale, and (2) how to structure their system of distribution.
The court intended that states would use the 21st Amendment power to "promote temperance," and "prevent suppliers from abusing their economic power," that is, keep the trade free of the gangsterism that characterized life before Prohibition.
A huge body of law grew up around this 21st amendment matter--three-tier structures to separate supplier, wholesaler and retail licensees, at-rest, primary source, fair dealing and other statutes.
Suppliers, government and courts have all sworn their fealty to it, and retailers and wholesalers have assumed the whole thing was set in stone.
Changing the rules
But apparently it isn't.
Instead of hundreds of small brewers that freckled America in the 1930s, today there are less than two dozen regional and national giants brewing most of America's beer. The hundreds of wholesalers who formerly handled the small brewer's products in local areas have likewise decreased through mergers and buyouts. Now, there are a few large distributors left in each territory, and most handle a wide range of non-alcoholic products besides beer. Consolidation has not been limited to the beer business, of course. Retailers also amalgamated into giants that span states, regions and the nation.
These commercial shifts have moved beyond the venues of state liquor laws, which were designed to protect and encourage local enterprises. They do not speak to regional corporations that centralize procurement, pool-buy and do multi-market merchandising programs which cross state lines. That is federal territory.
Increasingly, the inconsistent state regulations, which cover everything from packaging to alcohol content to pricing and shipping, hinder the commerce of regional and global enterprises. One often hears retailers and wholesalers comment that, "Each time you cross a state border, you enter another country."
Naturally, regional retailers that handle national products seek single sources of supply for those products, and consistent pricing for them, too.
That begs several questions. Are state regulations obsolete, and should they be overhauled? Are wholesalers, with their local orientation and pricing, also obsolete, or are they still the brewer's bridge to retailers, and guarantors of product quality?
Knocking the rock
With the brewer's and retailer's playing field expanded to regional size, local conflicts over alcoholic beverages can blow into interstate problems. And these days, federal courts tend to apply the Commerce Clause and anti-trust tests against state's regulatory rights, rather than using the 21st Amendment to protect them.
Agreeing with laissez-faire economists, courts now demand that regulations be tested in terms of consumer benefits: do they promote efficiency and assure the lowest possible price? Is there any reason to prohibit vertical integration? Don't the benefits of vertical integration outweigh its risks?
"In this free market atmosphere, the courts began seeing the three-tier laws as protectionist," said Rodman. "Why would a state be allowed to restrict commerce in alcoholic beverages, but not in cigarettes, dairy or other packaged foods?"
In effect, the three-tier system enables states to monopolize alcoholic beverage trade, and restrict access to and participation in it. Free market courts take a narrow view of that.
Federal courts struck down price affirmation (Healy v. Beer Institute, Connecticut), price-posting (Midcal, California), come-to-rest laws (Barry v. Quality Brands, Washington, D.C.), and sided with suppliers against "good cause" provisions in franchise security (A-Mart v. Seagram & Son, Nevada). They tacitly approved vertical integration as long as it did not abuse economic power, and remained consistent with "long-standing pro-competitive arrangements" (Foremost Sales v. BATF, Illionois).
Inside state lines, legislators are blurring licensing laws. Throughout the 1980s, dozens of states legalized brewpubs, creating new multi-tier licenses such as supplier-retailer, and supplier-wholesaler-retailer.
Whither three tiers?
The consensus has become that, though the states are backed by the 21st Amendment, the laws they have developed, including the three-tier system, neither promote temperance (that is, prevent alcohol abuse), nor prevent abuses of economic power.
Where does this leave the three-tier system? Apparently, while the role of insuring that everybody in the business has a license and pays taxes, and that beverages get distributed efficiently
Alcohol abuse does not hinge on licensing laws, franchise agreements, or where in a state cases of beer come to rest.
Abuses of economic power mostly fall under civil, criminal and antitrust laws already on state books.
In fact, current alcohol abuse debates do not focus on the three-tier system, but on education and economics, particularly pricing and taxation.
Paradoxically, while free market policy makers press for lower prices to benefit consumers, temperance advocates press for "sin taxes" to drive prices up, and hopefully reduce consumption.
Yet price regulation does not promote temperance either. No one has established a direct link between pricing and alcohol abuse, despite the best efforts of MADD, SADD and CPSI (Center for Science in the Public Interest).
Further, in Pennsylvania this year, the Liquor Control Board (PLCB) decided that quantity discounts are okay. It found no evidence (in the State Street Beer & Pop case) that resulting lower bar prices translated into increased consumption.
The two things that have slowed alcoholic beverage sales have nothing to do with state regulation: demographic shifts and anti-abuse programs.
Alcoholic beverages continue to sell. The market is polarizing to high and low-end brands, mid-market brands are in decline, and consumers simply adjust their budgets to fit the pricing structure.
This raises pointed questions about where the wholesale business is going.
In the Quality Brands case, the court stopped the District of Columbia from forcing a wholesaler to keep its warehouse inside the District, a plan that would have protected labor interests and the local tax base. The court confused things, however, saying that Washington, D.C. borders do not qualify as state lines because Congress administers the District, and the court did not want to confront it.
If Quality Brands were affirmed by federal appeals court, it could open the way to interstate wholesale and retail business in alcoholic beverages.
That happens to some extent anyway, in the form of transshipping. Whether legal (as in Indiana) or not, it makes a myth of exclusive wholesaler territories.
The fates of wholesalers can rest on supplier business decisions, too. One example is the brewery consolidations that are continuing to thin wholesaler ranks. Another is when a brewer assumes management of a franchise operation, as A-B is doing in New York. A third could be the effects of corporate reorganization, like Heileman's recent filing for Chapter 11.
Meanwhile, other actions continue to blur three-tier lines.
The New York Liquor Control Board saw no problem with Alan Bond acquiring New York City's St. Regis Hotel, including its on-premise facilities. Upstate, the legislature granted Guinness a special legislative permit to underwrite $50 million dollars of renovation to a Lake Placid sports complex, which include on-premise facilities. England's Bass Brewing now owns the Holiday Inn hotel chain and its franchise system. And, in Florida and California, A-B announced its plans to open brewpubs in its theme parks, a move which raises the trial balloon of tied houses, and wins exception to three-tier laws.
With A-B and Miller rapaciously gobbling share points from Stroh and Heileman, particularly in their traditional northeastern and midwestern strongholds, the two brewers now join most other second-tier suppliers in fighting to maintain volume. What options do wholesalers and second-tier brewers have?
The market is already creating the first option.
As A-B and Miller houses consolidate and become exclusive, remaining wholesalers have diversified into other brands and products, even as they merge and buy each other out. In many cases, they are building inventories of non-alcohol products, and performing functions of food brokers.
Some wholesalers may simply start billing themselves as the houses handling alternative beers--regional, microbrewed and imported products.
Another possibility on the horizon is for the second-tier brewers to make direct deals with high-ACV regional accounts, shipping it to their wholesalers to inventory, then paying them for particular functions: delivery, marketing, merchandising and/or rotation. The wholesaler would warehouse and handle all local business, including on-premise, just as before, and still be free to take on other brands.
As Heileman's distributor development vice president, Randy Hull, notes, wholeslers who compete against A-B and Miller houses "can't survive on their brewer's seven to nine percent shares. But, take three seven percents, and that wholesaler has a viable business."
Rodman asserts that the Greene v. General Foods decision opens the door for direct deals. If the retailer warehouses, or sells stock out before its rotation date, the brewer can give them a lower price.
"You end up pricing based on value added, on service," says Rodman. "The wholesaler still performs the service function. The next step is just drop everything on the dock, like the bakery business does, and offer retailers partial rack service, full-rack service or drop service."
The up side is good brewery volume and economies of scale, a guaranteed place on the retailer's shelf, since this is now the retailer's brand, sold at low unit costs. The retailer might even be willing to invest in warehousing to carry beer inventory.
But there's a bigger down-side.
The wholesalers' revenue structure would be changed from commissions to fees, and they would be squeezed between the brewery's desire for volume and the retailer's desire for low prices. Wholesalers already subsidize the brewer and retailer, first by fronting the cash for shipments, then by warehousing the products, merchandising and rotating them.
Retailers may shy from presenting their own beer brand if the market is trending down, or for fear of competing with already established brands.
Brewers may shy from this plan because they say their beer is perishable, and wholesalers are needed to rotate stock and perform quality control.
There is debate whether beer is actually perishable. Rodman, and a number of retailers who decline to be named, assert it is a packaged product with a shelf life of six months.
"Bread is perishable," Rodman states, "but wholesalers have extended their pull dates when wholesalers couldn't afford to warehouse or dump the beer. European beer takes a month to get here by ship, but they don't have code dates on their bottles, and they don't have trouble selling it."
Domestic breweries may follow the European lead and relax the freshness issue in order to survive. As A-B and Miller houses go exclusive, secondary lines and importers will not be able to reach the shelf on the coat-tails of an A-B or Miller house anymore.
"If A-B and Miller come in with 70 percent of the retailer's volume on two trucks, is there room on the shelves for multi-brand houses?" says Rodman. "Effectively, they are shut out from the shelf. If you have a bottle law state, where a retailer has to accept bottle returns of all brands and packages, he has a disincentive to handle multiple brands, in order to reduce storage space and labor. He'll do what he does in soda, bread or cereal. The manufacturer buys space, drops the product at the warehouse, and the retailer guarantees to put it on the shelf."
As market forces surrounding alcoholic beverages lead to further changes in the players and how they operate, there may be changes in the way these beverages are viewed. Americans may continue to see beer, wine and spirits as special kinds of drinks, and single them out for special taxes and education programs. But for regulators, and the industries that manufacture, distribute and sell them, they are becoming commodities to produce and market like other food products.
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|Title Annotation:||1990 Statistical Study|
|Publication:||Modern Brewery Age|
|Date:||Mar 11, 1991|
|Previous Article:||Wholesaler focus.|
|Next Article:||On the bright side.|