NABCA Unplugged

FILED MAY 19, 2010

Dear Client:

In the daily pursuit of beer news, sometimes it pays to go off the beaten path and traverse new ground. So it was with my attendance at the National Association of Beverage Control Association (NABCA) Conference, a yearly confab for the 20 control jurisdiction regulators (18 control states, plus one control county of Montgomery County, Maryland, and a city in Minnesota). Since 25% of Americans live in control states, it's an oft-overlooked yet important part of the alcohol beverage structure in the US. You'll recall that control states have a government monopoly on the wholesaling and/or retailing of spirits and/or wine, with beer distributed by the license system except in Montgomery County, where the whole enchilada is sold through the county.

So your editor chose his disguise carefully -- short sleeve shirt and tie and fireman's cap -- and made the schlepp to Marco Island, Florida. One immediate observation was that there was nary a brewery executive in sight (except one from MillerCoors). In honesty, we probably could've used at least one on a panel discussing the balance between regulation and marketing, not to mention tax equalization, as there was a bit of piling on the beer business. One scientist on the panel claimed that 3/4 of alcohol related traffic accidents are caused by beer drinking (Ed. Note: that's what is reported, and we suspect it's over-reported as drunk drivers notoriously use the fallback line of "I had a couple of beers" when asked by cops if they've been drinking). When discussing the disparity between beer and spirits taxes, one panelist suggested raising beer taxes to match spirits (the old equalization argument). Alarmingly, that got lots of nods from control regulators (and spirits execs) in the audience. Remember that in most control states, the regulator markets/distributes/retails the spirits but just regulates the beer, so there's naturally a cozier relationship between spirits companies and control state regulators who are, after all, their largest customers. But Pernod-Ricard's Paul Duffy stopped short of publicly recommending that beer taxes be raised to spirits levels. And besides, said the head of Montgomery County, Maryland's liquor control, "politics is the art of the possible," and culturally beer and wine have always been treated differently than spirits. Then it was revealed that that none of the panelists could think of one single country in the world where beer is taxed at the same rate as spirits.

Sazarac chief Mark Brown also noted that drinking 750ml of 3.2 beer is much different than drinking a 750ml of pure grain spirits, as one will get you buzzed and one will kill you. Still, "the lines have blurred" between beer and spirits when you have a beer like Tactical Nuclear Penguin at 64 proof and a cordial spirit at 30 proof. The lower ABV spirit is nevertheless taxed at a much higher rate, which can "create market distortions." That's lead to the rise in malternatives that walk like a spirit and quack like a spirit, but are taxed as beer because their origin of production is malt-based. The general consensus: Tax alcohol beverages based purely on ABV. But again, due to inertia and the political reality, that's not likely to happen anytime soon.


NBWA chief Craig Purser did carry the flag for beer on a panel later about finding common ground among the industry players, including Dr. Peter Cressy of DISCUS and David Jabour of Twin Liquors of Austin. During the hour session, including Q&A, the Care Act surprisingly never came up, even though clearly Discus and NBWA disagree heartily on it (but I suppose the panel was about finding common ground, so everybody played nice). "We do an awful lot in Washington for a common cause," said Dr. Cressy, most commonly on fighting against tax increases and responsibility programs.

While the Care Act didn't come up specifically, Craig did bring up the need to deal with "the significant industry changes with supplier consolidation and retailer pressures" and "challenges to our regulatory structure through litigation." Craig pointed out that we have circuit courts in conflict. "You guys know that when these lawsuits come to your jurisdiction, you're the ones on the hook. Craig pointed to circuit court conflicts on volume caps, which "creates uncertainty for you on how to deal with different size suppliers," as well as conflicts on requiring face-to-face purchases and quantity discounts, as well as newer lawsuits coming from online retailers. And of course, we have the case "where our largest brewer was denied a wholesale license in Illinois, with a resulting lawsuit." These lawsuits, coupled with the move in many states to privatize for a quick buck and/or deregulate by defunding, are a "threat to state regulators and control state models," says Craig. He pointed to the UK as an example of what can happen when retailers get too big and start offering aggressive lose leaders to move tonnage. "The US system is the single best system in the world," noted Craig. "It's not perfect, but it's "worked well" for 75 years to "create a balance" that "is the envy of other countries."


On yet another panel, Craig Wolf of the Wine and Spirits Wholesalers of America, Steve Gross of the California Wine Institute, and Nida Samona of the Michigan Liquor Control Board debated the pros and cons, as they see it at least, of the Care Act.

THE OPINION OF DISTRIBUTORS. Craig noted that there has been over a dozen years of litigation with no end in sight, with over half of our states having to deal with this issue. The litigation, says Craig, is clearly designed to deregulate alcohol at the state level. "There's no question about that....but the question is what do you do about it?" Options are to have uncertainty in the marketplace, or do something about it. "We decided something needed to be done about it....E nough is enough." Craig contend that states need to choose their own regulations with input from all parties that won't then be second guessed by a federal judge. When we go into a state legislature, says Craig, "we win some and we lose some," noting that 38 states allow direct shipping. The statehouse "is place for that debate" as it's the people of the state that should make that dec ision, particularly since cultures vary widely by state.

So what does this bill do? Craig says the Care Act gives states primary authority to regulate alcohol, which is "not a controversial thought." It's actually consistent with the 21st Amendment. The bill also gives states a more free hand to regulate alcohol, but without being facially discriminatory without justification. "This is not an altering concept," says Craig, but rather incorporates Granholm without overturning direct shipping laws. The next section gives states the "presumption of validity" and puts the burden of proof on plaintiff.

So, will this bill change the balance of power. No, says Craig. "There's a lot of hyperbole out there" but the only thing that's disrupting the balance of power are the lawsuits. "We are trying to establish the equilibrium." He notes that wholesalers have not challenged an existing direct shipping law, and distributors are not interested in having different labeling or advertising rules for different states. He said the WSWA is meeting with other industry members (Discus, WI, etc) later in the month to hear their concerns and that there will likely be a " next iteration of the bill" which "will address some of their issues."

THE OPINION OF WINERIES. Steve Gross of the Wine Institute had a different take, obviously, warning that the bill may go further than intended, including giving states more power to pass different laws for taxation, labeling, product safety standards, and advertising. And Steve takes issue with distributors comparing our system to the UK. "Nothing that has been done by a supplier" has resulted in anything that moves us toward a UK model, says Steve. "We do think," however, that the conflict between wholesalers and suppliers is what is driving this bill.

Regarding litigation, Steve says that the "avalanche of litigation" has now turned into a "trickle." There have been only two cases filed in the last 12 months, and a majority of cases were already in the pipeline at the time of Granholm. Yes, a few new cases have been brought by retailers, but states have won a preponderance of those cases. Steve doesn't think there has been an avalanche of litigation that needs " draconian" measures. "We need that balancing of state and federal laws," says Steve. Also, says Steve, the bill could open up a lot of unintended consequences beyond the lawsuits, with consequences for the FAA Act, and a disregard for past Supreme Court rulings. It would give states a "free pass to discriminate."

THE OPINION OF A STATE REGULATOR. Then came Nida Samona, chief regulator in Michigan, who noted that she doesn't represent WSWA or NBWA, but is speaking as a Michigan regulator, just like the ones at NABCA. Nida says the Care Act is about states' rights and "my rights to enforce the 21st Amendment" which was created to protect the welfare of the people in the state of Michigan and all the states. and your respective states. While alcohol is a product that can be enjoyed and beneficial and a great revenue generator, "this iis not a glass of water or coffee or Diet Coke," she reminds. It's got an age limit, and there is a reason for that. It must be regulated.

Why does Nida want the Care Act to pass? It's not to increase taxes or create labeling laws. They can do all that now. What she needs the act for is to shift the burden of proof for the lawsuits, to "make them show why are they suing you." It's a "chipping away of 3 tier system" that helps this industry and protects citizens.
Anytime there is negative press about alcohol, "it does not make any of us look good."

As a result of the online retailer lawsuit in Michigan, "I lose control over them." Michigan's remedy was to shut down in-state retailers from delivering to their customers, even though she has direct control over them as local businesses. That hurts Michigan retailers because a California retailer wants to ship direct. "If you as regulators don't find that as a concern, then let me talk to you afterwards. That is a scarry concept," she says.

"Every lawsuit is chipping away at what we do, at protecting the three-tier system, regulating the product and keeping our states with the revenue they need.....This should be a concern. She expressed dismay that the spirits industry, which does much to fight underage drinking and responsibility, turns around and opposes this law. "I don't understand. I'd love to talk to Discus more about it, she says, particularly since Michigan is spirits number one state.

Nida reminds that she testified before the Judicial sub-committee hearing in Washington about her "frustration" at having money bled out of the system because of deregulation from lawsuits. If that's how it's going to be, she says, at least let me fight them in court "fairly" (with the Care Act). Pretty strong stuff.


HEARD ON THE STREET. Despite buzz of a coming price war, we are also getting early buzz of a big general price increase lead by A-B coming in certain markets, which is surprising given the soft volume. Also hearing that May hasn't been such a great boon for volume, with weather being cold and wet in many places. What are you seeing?

COORS LIGHT unveiled an online sweepstakes offering eight grand prize trips to the 16th Annual Coca Cola Essence Music Festival in New Orleans, July 2-4.

Until tomorrow, Harry

"I knew I was an unwanted baby when I saw that my bath toys were a toaster and a radio."
-Joan Rivers

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