New York Reaches Deal with Distributors and Phusion to Cease CAB Sales

FILED NOVEMBER 15, 2010

Dear Client:

The Truth Squad emerged from its Autumn slumber in droves on Friday on the caffeinated alcohol beverage issue, and a few themes emerged. But before we get into that, this:

The New York State Liquor Authority struck a deal with the New York State Beer Wholesalers Association and Phusion Projects to voluntarily discontinue selling caffeinated alcohol beverages. NYSBWA president Steve Harris said, "The Association's Executive Committee is recommending to the rest of our membership that the entirety of our membership comply with the Chairman's request beginning next week. We are pleased to be a partner in the process of resolving the tangled issues that have surrounded these products."

In the deal reached over the weekend, Four Loko and others will voluntarily cease shipments into the state. Shipments will stop effective Friday, November 19. New York wholesalers will have until December 10 to deplete their existing inventory and retail accounts will have time after that to sell through inventory as well. Phusion will begin selling a non-caffeinated version of Four Loko in the state after that. This solution solves the issue of whether the NY Liquor Authority has the right to ban the products, which was in question. Predictably, Senator Chuck Schumer said that he'd rather have the NYSLA ban the products, presumably because that would give him a political win, but the end result is the same.

Phusion Projects told BBD in a release that they "think this is a great example of what can be accomplished when Suppliers, Wholesalers, and Regulators work together to find solutions." As a part of the agreement, Phusion will also "support the state's alcohol education and awareness programs and have offered to work with the state on a continuing basis to improve and enhance them. We were the first company to take this proactive, voluntary step. And we think it shows that we are not turning a deaf ear to what's going on: that a select few have chosen to abuse our products, drink them while underage or break the law and sell them to minors."

Also as part of the agreement, Phusion reserves the right to "apply to resume the sale and distribution of caffeinated alcoholic beverages, including Four Loko, in the state of New York if emerging science, regulatory developments or other relevant changes in circumstances arise. The same applies if other alcoholic beverage companies are allowed to distribute and sell caffeinated alcoholic beverages in New York." This is a smart step on Phusion's part, as it keeps the door open to them.

DISTRIBUTORS SPEAK. Leave it to beer distributors to cut to the chase: While everybody seems to be fixated on the caffein issue, the real issue is the price to alcohol content ratio, say distribs. It's low. Says one distributor: "We have been carrying the product and like everyone else, appreciate the bump in sales it has provided. With that said, it has been with reluctance. For us, it's not really the caffeine, but the high alcohol that is concerning. When you buy what is considered a single serve package with nearly the same alcohol content as a six pack of beer, you really aren't buying the product for moderate drinking are you?"

We also are sensing more willingness from distributors to give up the business. Four distributors told us they have either discontinued the products or are about to. In fact, one large distributor will likely be announcing today that they are voluntarily discontinuing Phusion and United Brands products. Others are still mulling it. "Is it really worth it?" say several distributors to BBD. Another common theme is A-B's quietly coming out with 12% Tilt with flavors (though no stimulants).

On the issue of NBWA's reticence, most distributors agreed with our assessment that it may be a little early for them to weigh in, considering that they represent a wide swath of 1,500 distributors with divergent views. But, as one distributor put it best: "This seems like an opportunity for the NBWA to make a statement for states rights. I think they should go on record saying they support individual states right to deal with this as they best deem appropriate while asking the FDA and TTB to give guidance."

Another distributors "Harry, how can the NBWA advocate in Congress for the right of states to set their own regulations on alcohol and then weigh in on caffeinated alcohol beverages as a national issue? The role of the NBWA has to be as a resource to individual states. The discussions about these products properly belong to the individual state associations. NBWA is not a public health advocacy organization. It is a national trade association that protects a state based regulated marketplace."

Yet another distributor writes: "There are lots of questions to be considered but I didn't realize there are at least ten based on your excellent reflection in this morning's BBD. It is interesting to note that suppliers are seeking guidance from NBWA, by questioning where NBWA stands. It wasn't too long ago that distributors looked to suppliers for guidance on such matters. This is obviously one of those issues that needs to be carfully considered before an organization representing many, in an industry that gets a lot of media attention, makes a public statement. Meanwhile, the states are doing what the U.S. Regulatory system expects of them. NBWA's position on that system is well publicised. Thanks for your educated and logical view on this sesitive issue."

But at least one person thinks they should make a stand: Michele Simon, research and policy director for the Marin Institute. Michele thinks the NBWA leadership should "do the right thing" since they have positioned themselves " in alignment with public health on state-based regulation." What is the "right thing"? Michele thinks they should "call all on its members to voluntarily stop carrying the products, as some are already starting to do." Also, they should "call on the FDA to act. There are some areas where we need federal action and this is clearly one of them," and "call on other states to follow the lead of Utah, Michigan, Washington, and Oklahoma to ban these products. What better way to support state-based regulation then to encourage states to flex this muscle when it's most needed?" Michele believes there's "little risk" in NBWA taking these steps to "make an important step toward building respect in the public health world."

For its part, Phusion Projects has posted an "open letter" to state and federal regulators, asking them to consider that whatever regulations they see fit to enact, they at least apply to all forms of alcohol and not just those like Four Loko. Chris Hunter at Phusion told BBD in Friday that "the key here is that we are willing to work with states and the federal government and we have to push for uniform standards. It doesn't make sense to allow some products to caffeine and alcohol, but not others, or some products to contain 12% alcohol, but not others, or some products to be in a 24 oz can, but not others. You get the idea....As you mention in your piece, this is a bigger issue than just Four Loko and we welcome the opportunity to work with the alcohol industry as a whole to come up with realistic, uniform, long term solutions."

So what other things are the Truth Squad saying? Here are a few points made:

"Your suggestion that policymakers and others think carefully about this issue is a good one. Additionally, I find it ironic in the extreme that suppliers would suggest that NBWA actively "demonize" a product (what could be more demonizing than to advocate that a product be banned, pulled off the shelves, or boycotted?) when one of the suppliers' main criticisms of communication surrounding the CARE Act is that NBWA was "demonizing" alcoholic beverages. Should only products from otherwise- marginal players be subject to demonization? The truth is that NBWA never demonized anything, but advocated for effective state-based regulation. States are now looking at caffeinated alcoholic beverages. Working with state execs, encouraging all parties to look objectively at all the evi dence, and engaging regulators, suppliers, and distributors in dialogue-- and not necessarily conversation in the trade press-- is exactly what NBWA should be doing. NBWA should assist regulators when appropriate, not attempt to substitute itself for them." -A. Distributor

"I am thinking that as a distributor I want to do the right thing but am confused to the point that if we show our hand what products will be on the hit list next. Does a brand like this need to be sold through liquor channels? Does a brand like this need to be sold hot only? The problem is that you can walk in a store spend less than two dollars and have a cold ready to drink 24 oz can that will light you up in a matter of minutes. Do these brands need to be only offered in select smaller sizes, like a 7 oz can at the same price as 24 oz cans? Do distributors nationwide not carry these brands and open up the argument of no access to market like some of the crafts claim? ABI and Miller Coors showed responsibility these folks should too. One other thing I have noticed is this brand skews to young adults who normally drink light beers. These brands may be part of the reason while the domestic light beers are slightly down. Have you seen the new Core package with absinthe listed on the label? Public safety is a huge concern on my mind. I hope the suppliers of these brands feel the same. I have heard on many occasions that the owners (suppliers) of these brands do not care they just want to make money. I carry two of these brands. I hope in the end they follow ABI and Miller Coors. Our industry gets enough heat as it is now, this just keep bringing more heat." -A. Distributor

"There is one important thing I disagree with when it comes to Four Loko. It is the claim that mixing stimulants and alcohol is dangerous. This issue it is not the stimulants. The issue is the 12% alcohol. If you remember back when Sparks first rolled out, it was right around 6%. I think Jason and Chris are good guys, but they were a little na´ve to think that they could get away with increasing the alcohol to 12%. I still think the product should be legal, but I think the writing is on the wall. The bitter pill to swallow for a lot of Loko distributors is that this brand has become a major revenue generator.....The other great thing about Loko for Blue/Silver distributors is that it is a convenience animal. It attacks AB share in a channel they dominate." -A. Distributor

"I must ask which state workers in Pennsylvania, Oklahoma, Michigan and Washington approved these products in the first place? If they are dangerous now, were they not dangerous then? What about the TTB? What about freedom? What about a commercial enterprise producing a legal product in the United States of America?....All over college kids are drinking too much...you'd think that hasn't happened before (except for hundreds of years)." -A. Distributor

So lots of opinions out there, folks. Stay tuned for further developments.

Until tomorrow, Harry

"Hollywood is a marvelous place to live, if you're an orange."
-Stewart Udall

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