Road Trip

We are on a road trip across the country - going back East for the holidays. A few months ago I wrote about transporting liquor across state lines. Not that we're doing it, but, driving across 9 state lines, I am thinking about these rules again.

Moving? Can you take your liquor cabinet?

Firing Under-performers Part 2: Why?

image by Shoes on Wires

In Part 1 of our Firing Under-performers post, we discussed the What of state alcohol franchise laws. Today, we wonder why these are still needed.

The purpose underlying the franchise laws was originally to check the power of suppliers over the middle (distributor) and lower (retailer) tiers. The large manufacturers were able to bully distributors by withholding or canceling contracts for perceived poor performance.

The stakeholders in the different tiers, however, have changed in form and power since these laws came into effect. While smaller distributors (who the franchise laws were initially intended to protect) have consolidated, the number of small craft wineries, breweries and distilleries have grown (the TTB approved 224 breweries and 625 wineries in 2008 alone).

So, now, the wholesale, or middle, tier has additional protections, while the smaller manufacturers can no longer command the attention of the large distribution and retail houses. Most manufacturers and retailers in franchise states often find themselves required to deal with only one or two distributors in a given geographic area.

Not only are smaller manufactures limited to a few distributors, they cannot demand that their product be treated a certain way, cannot impose sales quotas, nor even easily fire a distributor.

Firing Under-performers Part 1: What?

image by Shoes on Wires

As we mentioned last week, business is not simply business when it comes to the alcoholic beverage industry. A brewery, winery, or distillery unhappy with a distributor cannot simply fire the distributor.

Many states have adopted detailed franchise laws governing the relationship between a manufacturer and its wholesaler, or distributor. State alcohol franchise laws often require a manufacturer to appoint an exclusive distributor for its products in a specific area for a specific time. The manufacturer is then prohibited from allowing any other distributor to sell that brand of beer, wine, or liquor in that location.

The manufacturer also cannot change distributors until the alcohol control division is notified with a document signed by both parties. Imagine how hard it will be to get the distributor you are trying to fire to sign this document. Most of the franchise laws also specify when a manufacturer may terminate its contract with the distributor. In most states with special franchise laws for the alcohol industry a manufacturer may not fire a distributor without just case, or good cause.

Good cause often does not include poor sales records, or even a change of ownership in the manufacturer or the distributor. In fact, in some states the manufacturer cannot enforce sales quotas on distributors. Good cause for terminating a distributor usually does include a revocation of the distributor’s license or the bankruptcy of the distributor. At least there is a little logic in the laws.

So, if a distributor fails to sell your beer, or fails to comply with your reasonable requirements (cold storage), it will be difficult to fire the distributor. And, until the state alcohol division is notified of the change, you cannot use a new distributor to sell that product in the area.

We will discuss the whys of the state franchise laws in the next post.

Drunken Fish

image by laszlo-photo

We’ve seen various mentions of an Ohio law that makes it illegal to give alcohol to a fish. Really? What were they thinking? We did a little research to see if Ohio legislators are really concerned about drunken fish reeking havoc on the town. Turns out, at least one silly law is no longer on the Ohio books.

But, how did the law make it onto the books in the first place? My first thought was of the gold-fish swallowing fad. Maybe the fish were paralyzed or killed with booze to keep them from wriggling. Or, perhaps to add a little extra punch to the dare.

I also read an explanation that the law was enacted in response to a great depression era activity of pouring moonshine into small lakes full of fish to grab a quick meal. Frankly, I find this less likely than the first scenario. It seems more efficient to drink the hooch than try to get floating fish in a lake.

City's Abuse of Power in Revoking Rights to Sell Alcohol

image by NoiseCollusion

Many alcoholic beverage laws are reactions to a perceived evil, or a nuisance. While the legislature should protect the public, it should not be able to do so at the expense of private rights.

In the case of the Singhs, who own New Grand Save Mart, the city of Stockton revoked their right to sell alcohol at their store due to crime in the market’s parking lot. The market, which has been selling alcohol legally for 60 years, is in a “high crime area, [and] its parking lot has been a center of criminal activity, from loitering, public drunkenness, gambling and narcotics activity to assaults, robberies and homicides.” The police went after the market’s liquor license because they believed it was the initial attraction for the loiterers, which lead to other crimes.

Rather than fight the bad behavior to reduce the crime problems, the city revoked the Singhs’ rights to sell alcohol. For two years the city did nothing to attempt to fix the problems in the market’s parking lot. Instead, the city placed the blame on the Singhs and “sought revocation without regard to what the law required.”

The California Court of Appeals, in an unpublished opinion, decided that the city had overstepped: “violated the dictates of due process, as well as its own municipal code.” The US Supreme Court has held that police power in abating a nuisance must be reasonable, and “not unduly oppressive upon individuals. The [L]egislature may not, under the guise of protecting the public interests, arbitrarily interfere with private business, or impose unusual and unnecessary restrictions upon lawful occupations…” In this case, the city did not take, or even consider, less drastic steps to abate the problems before revoking the Singhs’ rights.

Governments should fight the real problems of crime, rather than blame alcohol vendors.

It's Just Business

image by joebeone

A local couple want to buy a café. A grocer wants to acquire a few more stores. A restauranteur wants to purchase several brewpubs. A venture capitalist wants to buy a vineyard and sell some wine. Simple, right? Negotiate a contract for the sale, sign on the dotted line, and accomplish the goal.

What should be simple business transactions become complicated in the alcohol industry. In all the scenarios above, the new owners must be approved by the appropriate alcoholic beverage control board (and the TTB in the case of manufacturers and wholesalers) before they can take over the business. New owners must independently qualify for a license before any alcohol is produced under their ownership. This means going through the initial application process for an alcohol license (including detailed background checks; personal, business, and bank references; and financial statements).

One of the most often overlooked items in business acquisitions is the alcohol license. By the time anyone remembers it, closing is days away. Unfortunately, the new owners will be operating illegally without their own license, and subject to increased taxes and large fines. In the case of the retail license, only state approval is necessary. Manufacturers of alcohol, on the other hand, need both TTB and state approval. This can lead to last minute price re-negotiations and complicated service agreements.

The regulatory maze of alcohol control is a gremlin in alcohol industry business transactions. A brewer unsatisfied with a distributor’s performance cannot simply fire the distributor. A chef cannot simply decide to serve homemade liqueurs. A conglomerate cannot simply purchase a company that owns hotels and restaurants. We will delve into each of the scenarios described above in the coming weeks.

Happy Thanksgiving!

image by Vik Nanda