New York Bottle Law Goes Retro
Will the Brewers Help?

FILED SEPTEMBER 2, 2009

Dear Client:

Retroactive, that is. But first, let's get caught up. Recall that New York passed an amendment to their bottle bill which increased the handling fee that wholesalers pay to retailers and recycling centers from 2 cents to 3.5 cents per container, and that was supposed to go into effect on June 1. And the state also said it will take 80% of the unredeemed deposits, thankee very much, previously kept by distributors to help offset the price of handling returnables, which was supposed to be effective April 15. They also extended the bottle deposits to bottled water, and of course they came up with the idea of a New York-only UPC code, which the lawyers tell me would have serious constitutional problems.

The water guys and soft drink guys sued for injunctive relief. The judge they got was vacation-sitting for the regular judge, and he gave a favorable ruling to the beverage guys, enjoining the entire law until April 2010. Yeehaw, let's break out the bottled water. But wait a minute: The regular judge came back and basically said, hold your horses. She kept the injunction on the UPC code because of its obvious legal problems, and she kept the injunction including bottled water for the moment, but overturned the earlier judge and asked the water and soft drink guys to come back into her courtroom in October and explain why they can't get with the program before April 2010.

So the judge said the state can start enforcing distributors to pay them the 80% of unredeemed deposits pronto. Problem is, the state has decided to require those payments retroactive from April 15. Wow. That means that distributors will have to pay the unredeemed deposits before they were able to take pricing up to help offset it.

That's not all. To make matters worse, the New York State Department of Environmental Conservation has a "proposed" letter floating around out there (Update: It is now posted on their website) that asks distributors to pay the difference in the bottle fee, 1.5 cents per bottle, retroactive from June 1. And you're going to love this: The DEC says it knows it may be difficult to come up with the cash all at once, so in typical New York fashion it asks distributors to basically try to cut a payment plan with each redemption center.

I know many of you think I make things up to make the news more interesting, but in the beer business I don't have to. Reality is stranger than fiction. Says the state DEC:

"To the extent that you have not paid the 3.5-cent handling fee on containers accepted since June 1,2009, you must pay dealers and redemption centers the additional 1.5 cents per container on those containers. DEC realizes that it may be difficult to immediately issue payments to all dealers and redemption centers of these handling fees on previously accepted containers. You may make agreements with dealers and redemption centers specifying arrangements for payment of the additional 1.5-cent handling fee increase on previously accepted containers. Absent an agreement specifying alternative arrangements, you are responsible for making prompt payments of all handling fee amounts now due and owing."

The New York state beer distributor's association has been in communication with the governor's office and no decision has been made as of presstime. The letter from the DEC refers distributors to a website for more information. Not surprisingly, the website sends back an error message saying "Page Missing." Your state government hard at work.

It's a big deal. Even smaller distributors will have to come up with hundreds of thousands of dollars, and larger operations will have to pay into the millions. "It's a hot button issue," says one distributor. "We could have a cash crisis on our hands." One large New York distributor told BBD that the retroactive implementation of the escheat of 80% of the unredeemed will cost it approximately $3.5 million, and the retroactive implementation of the increased handling fee will cost it about an additional $2 million. That's a lot of money, I don't care how big you are.

WILL BREWERS HELP? BBD has learned A-B is currently considering a proposal out of their north eastern regional office where their New York distributors will take their prices up in early October, but A-B would defer taking up their FOBs to distributors until November. This proposal has just been a verbal at this point, and no decisions have been made.

Meanwhile, MillerCoors has been silent as to what they will do, if anything, but their New York distributors have made it plain that they may have to take their pricing up even more than they would have, just to try to made up some of that lost money that goes to the state.


FEMSA CHAIRMAN: BEWARE WAL-MART CENTRAL WAREHOUSING

In a refreshing Q&A session for the Stanford Business School, FEMSA chairman and ceo Jose Antonio Fernandez gave his interesting views on a variety of topics. Here are the highlights:

ON DIRECT SHIPPING. "The commercial agenda of consumer product goods companies, you have to control it yourself. If you go to Wal-Mart and let them do cross-docking, they'll tell you, 'You don't have to distribute your beers to all our stores. You just bring them to one site, and we will distribute them all over the country.' When you accept that, you are dead. They will control your prices, and control your inventory."

ON FAMILY CONTROL. "This company was founded by five families since 1890. Since then, one of the families were responsible for running the companies, and four were shareholders..... So the company has been very institutional since the very beginning. There's a professional preference to have minutes of every meeting, be very transparent, and that has been evolving quite well. When we became public, I was not running the company yet. We had the need for new policies, and not have the families deciding things.... Today, I can prove to anybody that there is no family influence in any special way to the board. The only difference is I have one meeting with the five families to let them know what is happening. Half of the board members are independent. And everything is decided by the board. I've never been in a position to favor one type of shareholder over another. And if I ever was asked to, I would leave the company."

ON LONGTERM VIEW. "One of the advantages of having family ownership, or private ownership of certain equity, is that the longterm view is there, and that is very important. None of these controlling families are there because they want to sell the stock someday. We are always making decisions that will influence the numbers in the future, not the next quarter. If you make decisions to make the next quarter look nice, you are killing the company."

ON SWINE FLU AND NARCOS. "Seeing these crises, Mexico is a typical emerging country, with all the problems, which is every period of time we have some political or economic crises. This is the first time that the crises weren't caused by Mexicans [laughter]....there are a lot of controls that the federal government needs to enact to fight the drug lords in a more efficient way.....honestly, president Calderon has fought very bravely, but it's very hard. They are very powerful families with the largest business with the largest margins. He is fighting them bravely, using the army, and has been successful."

REGARDING "THE MOST INTERESTING MAN" CAMPAIGN. "Some people told us, it's not going to work. We did focus groups and I saw so many people loving it..... The other big thing is that it has been discovered gradually by [consumers]. We don't advertise it on the Super Bowl. That's too fast. We have lots of hits on YouTube. It's a funny thing that doesn't talk bad about beer. I don't think that the jokes on beer ads that makes guys look dumb is good for beer. Beer is one of the best products in the world. It is very old. Beer is the best alcoholism fighter that you can find in a country. It's proved in many ways, that the high per capita consumption of beer in a country are the countries with the lower alcoholism rates, because you drink more liquid with less alcohol. And if you drink good beer, you can live a long and healthy life, as long as you don't drink too much. I keep saying, I just want everybody drinking just one of our beers every day, but not more than one."

Amen to that.


Until tomorrow, Harry

"The ability to delude yourself may be an important survival tool."
-Jane Wagner

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