Costco Ruling Partly Reversed

“Big win for state and distribs.”

In a decision with major implications for the three-tier system, the Ninth Circuit Court of Appeals largely reversed a lower court ruling that deemed unconstitutional many of Washington State’s alcohol-beverage trade laws.

Costco Wholesale Corp. had argued successfully in district court that a range of state laws, including bans on volume discounts and credit, were preempted by the Sherman antitrust act.

The Appeals Court disagreed. From the 47-page ruling:

“We disagree with the district court’s conclusions that the central warehousing ban, the volume discount ban, the delivered pricing requirement, the credit ban, the uniform pricing requirement and the minimum mark-up are hybrid restraints of trade subject to Sherman Act preemption.”

Miller CEO: 3 Tier Best for Beer Business

Independent distributors “essential to the future of the American beer industry,” Long says.

The three-tier system is the best business model for the beer industry, Miller Brewing Company President and CEO Tom Long said during a speech at the National Beer Wholesalers Association.

The reason: distributors have unique local market insights and relationships.

From the speech:

“… I believe, when you look at it against any reasonable alternative, it would be very difficult to match the three-tier system’s ability to deliver market development that is truly multi-local… the entrepreneurial instincts of local owners and operators… and the heritage and passion of the families that built this business into what it is today.

“That multi-local nature of the middle tier allows local relationships between local customers and a penetration up and down the street, that in my view, is the backbone of the business… on-premise… one drink at a time ... with consistent long-term focus building brand worth in the local market.”

Because of this, “independent beer distributors are essential to the future of the American beer industry,” Long said.

Also essential to the beer industry is unity among wholesalers and brewers on the key public policy issues.

From the speech:

“I have been in the beer industry long enough to know that the brewers and the NBWA don’t always see every issue exactly the same. But I’ve also been around long enough to know that when we do have differences that we are pretty good at working things out. …

“And my great hope is that every time there is an issue to be resolved -- be it an economic issue between us and an individual distributor… or be it an industry-wide issue that affects us all -- that you will find the Miller Brewing Company to be good, helpful partners… and that our conversations are guided by strong mutual respect and a shared appreciation for the fact that neither one of us has much of chance of succeeding without the other.”

Appeals Court Issues Stay Order in Costco Case

Prevents rush to address alcohol beverage laws.

The U.S. Ninth Circuit Court yesterday extended the stay of a lower court ruling that would have required the Washington State Legislature to rewrite the state alcohol beverage laws by May 1.

The lower court last year ruled that a host of the state's alcohol beverage control laws were unconstitutional. It gave the state legislature until May 1 to change the law.

Yesterday's appeals court ruling gives the legislature breathing room.

"The stay of the district court's judgment is continued in effect until further order of this court or until issuance of the mandate," the court wrote.

Beer Business Daily called the ruling "a victory for three-tier advocates and for small brewers, but it remains to be seen what will happen in the actual appeal."

To see a copy of the ruling, click here.

To see Beer Business Daily, click here (subscription only).

Coke Bottlers Drop Powerade Suit

Direct shipping at issue.

An undisclosed number of Coca Cola bottlers have dropped a lawsuit challenging the soft drink giant’s plans to ship Powerade directly to Wal-Mart warehouses.

A group of 60 bottlers last year argued that the direct shipping plan -- which bypassed the traditional direct store delivery model -- violated their contracts. They claimed Coca-Cola Co. might strike similar deals for other beverages.

The bottlers also sued Coca-Cola Enterprises and Coca-Cola Bottling Company.

Under the agreement, Coke will join the bottlers in “testing various route to market service systems to bring company products to customers who require special services,” according to a Coke release.

The lawsuit was closely followed by beer distributors because it touched on contractual provisions regarding warehouse delivery and exclusive territories. While there are substantial differences between the two industries, it was believed legal precedents set in the court cases could affect the beer system later.

Coke’s press release can be seen here.

An Associated Press article covering the story can be seen here.

Court Moves Up Costco Case

Now slated for March.

The federal appeals court late last week slated its hearing on a case crucial to the three-tier system for March 5 through March 9.

The so-called Costco case – in which Costco Wholesale Corp. successfully challenged a host of Washington state laws governing alcohol beverage sales and pricing -- was expected to be heard in the summer or fall.

However, as Beer Marketer’s Insights (subscription required) notes, the Ninth Circuit Court of Appeals didn’t extend a stay order maintaining the status quo. The stay order, issued by the lower court, lasts the duration of the legislative session.

BMI says this could lead to an “interesting situation” as a ruling likely won’t be issued until near the May 7 close of the legislative session:

If (court) extends stay, legislature gets "free pass" and doesn't have to act. If stay not extended, could add pressure to act with little time cushion. Then again, if legislature changes laws on its own, that could moot appeal.

Brew Magazine did a deep dive into the Costco case and its repercussions for the beer business back in April. You can find it here.

Miller CEO: Retailers Need Distributors More than Ever

Local knowledge is crucial.

The changing nature of the retail environment is making distributors more important, not less, to big chains such as Costco, Miller Brewing Company CEO Tom Long in a speech Thursday to the California Beer and Beverage Distributors.

As big chains both consolidate and expand their footprint, they are becoming more headquarters-centric. For suppliers that means increasingly taking the lead in the relationship.

For distributors it means the opportunity to become retailers’ local market experts. Knowledge and insights are crucial to retailers as they try to develop their brand image and tailor their stores to local demographics. This expertise comes on top of the distributors’ role as the “DSD Army” for retailers (a function that would cost retailers thousands of labor hours to replicate).

From Long’s speech:

“There is a growing need for local insights -- insights that can only be mined from people connected to the community, people who service the stores on a regular basis, people who see what trends are going on locally. So retailers will have a need for distributors who can feed them this type of information. And it’s going to be up to the distributors and suppliers to find a way to make that happen together.”

Brewers can help ensure their distributors get their fair share of growing chain store beer volume by delivering programming that complements the store “brand.” Meeting the needs of big retailers has driven Miller’s increased investment in chain capability.

By delivering value to retailers, brewers and distributors can put to rest some of the fears for the future of the three-tier system raised by the Costco case and other legal challenges.

Again from Long’s speech:

“If we keep our eyeballs continually focused on making our retailers as successful as possible, we will have demonstrated the true economic value that the three-tier system delivers to retailers…and that will ultimately make the Costco litigation moot.”

Beer Marketer’s Insights Express (subscription required) has more about the speech.

New Rules

The rules of the beer business are changing. Part four of a weeklong series.

For nearly three decades, the American beer industry operated by some very basic rules. Big brewers marketed big brands with big television advertising campaigns, and distributors pushed hard with big floor displays.

But now the game is changing. Retailers increasingly influence the consumer marketplace, a trend with implications for suppliers and distributors. And while the big brewers once focused almost exclusively on big brands they're now trying to mine niches. .

The latest issue of print Brew looks at seven old rules and their replacements. And it looks ahead to dynamics that are shaping future rules.

If you would like a subscription to the print version of Brew, drop us an email.

Now, on to rules six and seven.

Old Rule: Suppliers hold the power
New Rule: Retailers call the shots

The three-tier system was established, in part, to ensure that suppliers would not exert undue influence over the bars and stores that sold alcohol beverages to consumers.

It seems a quaint concern now, as national grocery chains and big boxes such as Wal-Mart Stores Inc. and Costco Wholesale Corp. have increased their influence on the retail landscape. And indeed, they’re now flexing their muscles in the alcohol-beverage category.

“Super centers” have snared a growing number of shoppers going for “beer trips” – even as fewer are going to grocery stores. In 2005, 33.1 million beer trips were made to super centers (including Kmart, Target and Wal-Mart Supercenters), up 64 percent from 2001, according to figures from ACNielsen. Beer trips to grocery stores slid by 9.2 percent to 264.7 million in the same period.

This shift forces suppliers and distributors to go to market differently than they have in the past. It’s increasingly the role of suppliers to deal with the national retailers in figuring out everything from packaging to promotions — and to help their distributors in those relationships.

That’s one reason Coors has been emphasizing chain execution. And for Miller, Top priorities have been strategic accounts and convenience stores as well as improving planning and sharpening the way it translates brand ideas into retail.

Old Rule: Stack ’em high and watch ’em fly
New Rule: … And sell the small if the margin’s tall

For decades, the leading domestic brewers concentrated almost exclusively on big brands that they sold through big advertising campaigns.

But with more consumers seeking imports and crafts, the brewers need to broaden their focus. They must continue to capitalize on the power of their scale – the size of their brands and their clout with retailers – even as they play profitably in niches. Both approaches are required.

It’s challenging. It requires patience and focus. But there are signs that the brewers can do this. Coors Brewing Company’s success with Blue Moon Belgian White ale (a brand that may have prospered because it was left on its own) is one example. Miller’s success with Jacob Leinenkugel Brewing Company is another case study.

The leading brewers will always depend on their flagship brands, which are the preference of most U.S. beer drinkers. Indeed, Miller CEO Tom Long said at recent distributor meetings that the brewer’s top three priorities are Miller Lite, Miller Lite and Miller Lite.

But the leading brewers increasingly recognize that small is beautiful.

Coke, Bottlers Try to Reach Settlement in Powerade Case

Will report back to court in December.

Coca-Cola Co. and a group of more than 55 bottlers are trying to settle the lawsuit the bottlers filed against Coke and No. 1 bottler Coca Cola Enterprises over their plan to ship Powerade directly to Wal-Mart Stores Inc. warehouses. A reason for the move: The selection of Sandy Douglas as head of Coke's North American business could “improve chances of a settlement,” the Atlanta Journal-Constitution reported. The bottlers want to “seek a business solution” the story quoted a bottler attorney as saying.

Beer Business Daily suggests that such an arrangement likely would be a "payment and a per-case “encroachment fee” paid by Coke to the bypassed bottlers."

The story noted that since filing the suit in February, bottlers have discovered CCE planned to ship Minute Maid directly to Valero Energy and Dasani bottled water to Costco. This breaks from the traditional direct to store delivery model.

The case has been followed closely by beer distributors since it touches on issues of territorial exclusivity and the growing influence of big box retailers.

Judge Issues Stay in Costco Case

In other three tier news: Va. Regulations upheld; Could U.S. trade reps use state regs as a bargaining chip in global talks?

A federal district judge on Thursday issued a stay on a ruling that Washington state’s three-tier system violates antitrust laws and needs to be overhauled.

The stay gives the state Legislature until May 1 to address the laws.

The judge, U.S. District Judge Marsha Pechman, in April ruled that a wide range of the state’s laws governing alcohol beverage distribution violated antitrust laws and needed to be scrapped. Among the provisions targeted: volume discounts to retailers, requirement that deliveries be paid with cash instead of credit and a minimum mark up requirement for producers and distributors.

The Seattle Post Intelligencer has the story.

In other three-tier developments this week, the U.S. Fourth Circuit Court of Appeals upheld parts of Virginia’s alcohol beverage code that treat out-of-state entities differently from in-state entities.

Specifically, the laws said state stores could only sell wine made in Virginia and limited the amount of wine Virginians could bring in from out-of-state for personal consumption.

The decision reversed a district court ruling. Beer Marketer’s Insights Express reported:

Appeals Ct ruled the Dist Ct had erred when it concluded these 2 laws "unconstitutionally discriminated against interstate commerce."

Finally, an interesting story in Thursday’s Beer Business Daily cited a Canadian trade treaty analyst who raised the possibility that U.S. trade negotiators could offer up “dismantling of state-based regulation of alcohol to other countries as a bargaining chip during World Trade Organization treaty negotiations.”

The story quoted Jim Grieshaber-Otto, a treaty analyst at Cedar Isle Research in Ontario.

…there is an “underlying tension” between regulators and trade negotiators, as the former want the status quo while the latter wishes to open up markets to free trade …

And trade barriers (like cash laws, residency requirements, credit terms, dry areas, really any restriction on trade within a state) are like bargaining chips to be doled out.

To be sure it’s all speculation at this point. And the article notes that U.S. negotiators have given oral assurances not to offer up state regulation. But, the article says, “it is still in the crosshairs as the European Union in particular has requested to include alcohol beverage when breaking down local regulations.”

Power Play on Powerade

Wal-Mart proposed creating private-label energy drink.

The Coca-Cola Co. and its biggest bottler decided to ship energy drink Powerade directly to Wal-Mart warehouses after the world's biggest retailer said it would create its own energy drink as an alternative, according to a court filing.

The shift to direct shipment -- which triggered a lawsuit by Coke bottlers claiming it violated their contracts -- underscores how giant retailers seek flexibility in a cutthroat market. (This issue was discussed in the April edition of print "Brew.")

Given the challenges to the legal structure of the three-tier system, the four-month-old Coke case is being closely followed by beer distributors. They are watching it because it touches on contractual provisions regarding warehouse delivery and exclusive territories. Legal precedents set in the case could affect the beer industry system later.

In the June 9 issue of Beer Business Daily, Harry Schuhmacher addresses the implications for beer distributors. His take (subscription required): Wal-Mart sought direct delivery because of service problems. To the extent distributors do a better job at DSD than bottlers, they should be shielded from this scenario.

Update: Here's a copy of the filing.

Three-tier fight heats up in Texas

Court OKs out-of-state retailers to direct ship

A federal district court in Texas on May 22 issued an agreed preliminary injunction that paves the way for out-of-state retailers to ship wine directly to Texas consumers. Indeed, the retailers don’t need to apply or obtain a permit from the Texas Alcoholic Beverage Commission according to the ruling.

The injunction came out of a year-old suit brought against the Texas Alcholic Beverage Commission Administrator by two wine retailers and three consumers.

Regulators are enjoined from enforcing provisions of the state code that “operates to impede or interfere with the sale and delivery, by a carrier permitted under the Tex. Alco. Bev. Code...of wine from an out-of-state retailer to an adult Texas consumer anywhere in Texas,” the injunction says.

The ruling underscores how challenges to the three-tier system are being pursued across the country on a number of fronts. It’s a trend that’s expected to continue in wake of Costco Wholesale Corp. successfully challenging a variety of control laws in Washington. That decision is being appealed by the state and wholesalers.

WA State appeals Costco ruling

The courtroom fight over the legality of Washington state's control laws -- and indirectly those of other states -- is going into round two.

As expected, the Washington State Liquor Control Board is appealing a federal court decision last month that invalidated a host of alcohol beverage control laws. Ruling in favor of Costco Wholesale Corp., Judge Marsha Pechman said regulations such as a ban on quantity discounts violated antitrust laws and were not justified under the 21st Amendment.

That amendment ended Prohibition and gave states broad powers to regulate alcohol beverage sales.

The state argues the judge tilted the scales excessively toward the federal side.

"This case is about Washington state's right under the 21st Amendment to regulate alcohol sale as the citizens see fit," Assistant Attorney General David Hankins said in a written statement. "The judge failed to properly balance this important right against federal policy to promote interstate commerce."