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Tuesday, September 11, 2012

Regulating Liquor: the Role of Distributor

Part two in the Oregonian's series on Oregon's liquor laws looks at the little-understood middleman in the equation, the distributor.  Most of this article revolves around wine distribution--about which I'm completely clueless--but does touch on the larger system.  Author Harry Esteve rounds up some of the more interesting aspects of the laws:
  • Retailers must pay cash when they receive alcohol, which gives distributors a distinct advantage: they "buy big volumes on credit, then sell it for cash, giving them weeks of float with other people's money."
  • Beer distributors have exclusive territories (eliminating competition), which they can bequeath to their heirs (remember Cindy McCain?).
  •  Retailers can't pick up alcohol from producers--it has to be distributed--and they can't even shift inventory between stores.  That also has to be distributed.
  • Vintners have to ship their wines to Salem for storage until they're taxed and "released" for sale.  Even wine sold at a winery must go to Salem and them come back.
Other relevant facts:
  • "A few decades ago, the number of distributors hovered around 20,000 nationally, with fewer than 1,000 wineries. Today, the United States boasts some 7,000 wineries, while the number of distributors has dwindled to fewer than 500."
  • Distributors have an impressive lobbying infrastructure to protect their status (and their man in Oregon, Paul Romain, is one of Salem's most powerful lobbyists).
Esteve paints a stark portrait, concluding with a quote by grocery lobbyist John LiLorenzo to wrap everything up:  "These are Byzantine rules that have a purpose.  The purpose is to guarantee that a privileged group always makes money, just by being there. That's what this is all about."

I think it's worthwhile to add a caveat or fifteen here.  If we were to start from scratch, would we grant distributors so much power in the alcohol equation?  Probably not.  Some of the laws seem unnecessarily protectionist or baroque--that system of shipping wines to sit in Salem before they can be sold at a winery is astounding.  But there are a few reasons we would keep the distributor in the picture.

Not every country uses distributors.  In England, breweries can own their own pubs and distribute to them.  This has its own unintended consequences.  The business model for breweries pens out if they own their own pubs, but it's much harder if they're selling to pub chains or grocery stores.  Little guys struggle there.  And they have their own tax issues.  In the museum at Burton upon Trent, they show the office of the tax collector that was housed inside the Bass Brewery.  The law was so complex they required a government employee on site at all times.  How do you think that would go down in America?

But beyond that, distributors can help small producers.  It wasn't always the case.  Early in the microbrewing era, small breweries had a hard time getting distributors to carry their product because retailers didn't understand or want it.  But now that equation has flipped.  Even very small breweries find distribution.  There's a reason even little hole-in-the-wall convenience stores have obscure local micros--distributors.  The state of Oregon has also been good to update its rules to adapt to the changing market.  Now breweries can self-distribute if they brew below a certain amount--a figure raised to 5,000 barrels a couple sessions back.  (Hats off to Darron Welch at Pelican who helped shepherd that along.)

When I first started writing about beer in the late 90s, small breweries had an ambivalent relationship to distributors.  At the time, distribution was a lot harder to get, and little guys like Hair of the Dog were not getting to bigger stores.  Now the opposite is true.  Little guys, who couldn't compete in price wars and quantity discounts--as is now happening in Washington--are happy to have distributors getting their product to market. (I know there are people in the industry who read this blog, and if you'd like to further illuminate the issue, I'd welcome on- or off-the-record comments.)

I doubt many Oregonians think there's nothing to fix in the state's liquor laws.  It's probably time to tinker with the laws governing distribution.  But as with any complex system, the issues aren't black and white.

4 comments:

Anonymous said...

Blogspot ate my comment :(

Anonymous said...

You should contact Paul Romain for a rebuttal about the numerous factual errors in this Oregonian series.

Samurai Artist said...

Maybe I am reading it wrong but I am not sure I get the "beer distributors have exclusive territories" statement. There are many overlapping beer distributors. The only exclusivity would be with the specific brand/brewer. Like 2 distributors could not be selling Hopworks beer to the same bars. That also just makes common sense.

Bob the Boozer said...

Why can't we just say the OLCC is old and antiquated?

We need to end state control of liquor and move into the 21 century and leave this post Prohibition crap behind. OLCC are just a bunch of old school fat cats raking in all the money and telling the community they have a purpose. Of course, their main purpose is acquiring YOUR money and inflating the cost of your booze.

Either that or bootlegging far cheaper booze from CA may the next best business option. ;-)

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