The Great Privatization Push of 2010

FILED JANUARY 6, 2010

Dear Client:

There are several pushes going on in various control states to privatize or at least partially privatize their alcohol industry, and nowhere is the fight more contentious than in North Carolina. Privatization champions have been aided by a string of controversies fueled by the local newspaper, the StarNews. This story is a cautionary tale to control state regulators of how quickly things can turn sour if they take the eye off the ball.

At the heart of the North Carolina scandal are two controversies that have fed the privateers:

1. An executive with Diageo North America in November took 32 North Carolina ABC regulators to a nice dinner at Del Frisco's that got splashed in the paper, particularly since it cost $12,700. This little mini-scandal was loud enough in the papers to hand the privatization folks plenty of public fodder for their PR cannon. But then, this:

2. It was just revealed that a father and son who ran a county ABC board received pretty healthy salaries and even healthier bonuses for public servants. The father, Billy Williams, received $232,000 in salary a year, plus a $30,000 bonus. His son, Bradley Williams, received $115,500 and a $20,000 bonus. Pretty steep, but hey, maybe they right a tight and profitable ship (in fact, we've learned that they do: their county brings in $4.4 million in profits for the state in liquor sales, with the highest profit margin in the state of 14%). But they make more than the state ABC Commission chairman and the state administrator. Oops. When this was made public, the goat manure hit the fan. Yesterday, three members of the county ABC which oversaw the Williams' salaries resigned. Interim ABC board members were assigned.

Meanwhile, North Carolina has appointed a committee to investigate whether or not the state's ABC system for spirits sales should stay, go, or just be tweaked. One reason is that there are such wide disparities in rules and compensation across the state. After all the brou-haha in the press, Gov Perdue has even gotten into the fray, and told local reporters that "you may see some public-private partnership there." The ABC board chairman even said the system needs to be "updated." However, we've gotten word from a well-placed insider that the Guv and the Legislature are really just looking at system reforms, not necessarily privatization. "[Privatization] doesn't appear to be translating to a legislative push for 2010," says our source. So that's a comfort.

Even some in the media aren't convinced of privatization: Says the Salisbury Post in an editorial: "North Carolina has a lax way of managing ABC systems; each is a separate entity with its own board and practices. Raleigh's greatest involvement seems to be operating a liquor warehouse and collecting tax revenue. That has worked well for a long time, and it might yet. The state should be reluctant to privatize ABC sales and let all the profits go to store operators instead of local and state government."

Regardless, this tempest in a teapot illustrates how things can really turn south fast for control states.

Pennsylvania has also tossed around the idea of privatization.

OUR TAKE: Control states, when done right, work. There's always going to be the odd-scandal or two, but in general the system has worked for 71 years for the states who have them. The original vision by Rockefeller, Fosdick, and Scott in their landmark book, Toward Liquor Control, was the cornerstone of the reasoning and the structure of many control jurisdictions. As John D. Rockefeller wrote, "If carefully laid plans of control are not made, the old evils against which prohibition was invoked can easily return." The trick is once those controls are set, to enforce the laws, be consistent, and avoid any appearance of cronyism or nepotism. Control systems work. To wit, we give you the story below:

CHEAP BOOZE FUELS UK NEW YEAR'S. "New Year's Heave", "Binge Drinkers should Pay", "New Year's Eve Will Cost 23 million Pounds". The headlines out of the UK about New Year's Eve benders hit a fever pitch in the early days of the new year, with the Sun showing pic after pic of revelers laying in the snow, with some who seemed to have forgotten to check the weather before they dressed for the evening and ventured forth. The Sun reported that in the county of West Midlands, in the center of England, the Ambulance Service said they dealt with an emergency call every nine seconds in the first three hours of 2010. Contrast that with the coverage in the US, which in comparison was benign, and it appears that our license and control state systems are doing a better job of at least keeping scantily clad ladies from passing out in the snow.

Big Brewers Drag on 2009 Volume Results

In a rare glimpse at early results of year around off-premise scan data volumes, and 6 out of the top 10 brewers were down for the year. The results, from Bill Pecoriello at ConsumerEdge Research, show that the beer industry was down 1.6% for the 52 weeks. Other observations from Bill:

-Bud Light Golden Wheat peaked in October at 0.4 share. It has "already stalled out", writes Bill, and now volume share stands at 0.2. "It seems difficult to see this as a success given the spending behind the brand."
-Select 55 also "remains an insignificant brand with share of just 0.1%."
-Bud Light lost 0.90 share, Bud lost 0.70, partially offset by Natty Light up 0.60 share.
-MillerCoors underlying share has improved and have remained stable in the latest four and six weeks.
-MillerCoors achieved 0.2 share point gain, mostly gaining from Key Light gaining 0.4 share points, 0.2 gain from MGD 64, and 0.2 gains from High Life.
-But Miller Lite remains an anchor, down 0.3 share points.
-Crown was the only major brewer with negative pricing. Crown lost 0.1 points in the latest four weeks, says Bill.

Lachky Making Ad Waves in Financial World

Legendary former A-B adman Bob Lachky has taken his beer ad expertise to the financial world. Scottrade, a stock brokerage firm based in St. Louis, which previously featured banal ads with its founder in a helicopter, hired Bob to fire up its ads. Ad Age reports that Bob oversaw new ads which are the "first foray into creative consulting for Mr. Lachky" after leaving A-B. Says Ad Age:

"Scottrade CMO Chris Moloney said market trends persuaded the company, traditionally a major online advertiser, to pursue a new, humorous TV-heavy campaign early last year, but the St. Louis-based company was struggling to get what it wanted out of its agencies. So it called Mr. Lachky, who managed a large stable of roster shops at A-B, 'to get our agencies to deliver a more-focused level of creative.'"

See one ad, click here: http://link.brightcove.com/services/player/bcpid1543292789?bctid=60612182001

Says Bob: "It was one of those times when the light bulb just goes on across the room....A few months ago I really didn't know that much about the space. These guys are always teasing me that [beer drinkers] are easier to talk to than [investors]."


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Until tomorrow, Harry

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