Industry members who sought full 9 th Circuit Ct of Appeals review of controversial Retail Digital Network tied

house case rewarded with “rare en banc review,” reports NBWA’s Alcohol Law blog. General counsel Paul

Pisano calls this a “very important development.” Allows state of Calif, distrib assns, craft brewers and others

another shot to uphold state’s restrictions of direct or indirect payments to retailers by other industry members.

Recall, case involved 3d-party biz (Retail Digital Network) that provided ads in retail stores, paid for by

suppliers and distribs, “then sharing that funding with the licensed retailers.” State, distribs and small brewers

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argued that violated tied house laws that bar giving things of value to retailers. They cited specific previous

case in Calif that upheld law. Lower ct agreed, but 3-judge panel on 9 th Circuit reversed lower ct opinion and

sent case back for more fact-finding. Panel suggested 1st Amendment law had changed and Calif law might

violate commercial speech rights. If Calif law tossed, “there is a serious risk of a flood of illegal payments

disguised as pay for advertising,” Calif beer, wine and spirits distrib assns warned earlier this yr. Now, entire

Appeals Ct court will “further examine this important alcohol regulatory issue,” Paul wrote for alcohol law

blog.

After TTB accepted record

$750K offer-in- compromise from Craft Beer Guild for “pay to play” activity, Boston Globe talked to TTB’s

Robert Angelo “who vowed his agency would now take a ‘hard stand’ against pay to play,” wrote the Globe.

Robert, who is director of TTB’s Trade Investigations Division, also acknowledged that govt had not vigorously

enforced fed prohibition against slotting fees, but added that pay to play “getting a lot more emphasis now.”

More Investigations; TTB “Signals National Crackdown” TTB’s Robert Angelo characterized this offer-in-

compromise “as a warning to beer distributors everywhere,” wrote Globe. “Feds…signal national crackdown,”

headlined paper. “You’re going to see further investigations in this area,” Robert told Globe. I would hope that

industry members take notice of this, and take notice of the fact that this is a very significant [settlement]. I

don’t want industry members to consider getting caught the cost of doing business. I want them to realize there

are significant consequences if we catch you committing slotting violations.” Notice duly taken.

Don’t forget this newly activist TTB has also gotten offers-in- compromise from AB and MC in last 12 months

on consignment sales, and put kibosh on Kroger’s CatMan plan with Southern Wine and Spirits. So at very

least, we’re in new phase where Feds are paying much more attention to purported violations.

“Enforcement Works Best…When Evenly Applied,” Stone’s Greg Koch told Globe Long-time critic of pay to

play, Stone Brewing co-founder Greg Koch, also quoted in Globe on two interesting points others have raised:

the singling out of CBG as only distrib tagged here and brewer complicity. “Enforcement works best when it’s

evenly and effectively applied,” said Greg. He also noted pay to play “doesn’t happen without the implicit

cooperation of brewers and wholesalers.” Recall, Mass ABCC investigation tied CBG payments back to

suppliers. On question of extent of TTB’s future activity, alc bev atty Marc Sorini reminded that CBG’s offer in

compromise “an easy one for them [TTB]. It will have some deterrent effect, absolutely, but it didn’t take a lot

of resources or a crystal ball to piggyback on the state investigation.”

Hangin’ the Pirate in MA Led to Lull in Pay to Play, Attys Say Speaking on a panel with Marc at Beer

INSIGHTS Seminar earlier this week, another veteran alc bev atty, Mike Moses, “applauded” Mass ABCC

investigation and publicity surrounding issue there. He likened actions to “hanging the pirate in the harbor” to

make an example. After Mass actions, Mike heard from clients across US which suggested “a lull in some of

the shenanigans that were going on” as industry players suspected other states would follow. On same panel,

director of NJ Beer Wholesalers assn, and ex-head of NJ ABC, Mike Halfacre agreed: “Anecdotally speaking,

New Jersey was a much quieter summer after what happened in Massachusetts.” Action in MA, “definitely had

an impact.” Will feds forge ahead? Robert’s clearly signaling “yes.” On our panel, Marc said “it would be

great if there were real enforcement that works.” But Marc believes pirate not really hung in Mass, but rather

“given a haircut.” And given ongoing lawsuit there, and other factors, Marc remains “a skeptic” about big fed

push (tho his comments came 2 days before CBG’s offer in compromise). He reminded that feds have no

jurisdiction over retailers and that in tagging distribs/brewers it faces high hurdles of proving competing brands

excluded from outlets and “willingness.” If feds do move, they’ll “have to be very careful about the cases they

choose or face difficult challenges” in the courts. Stay tuned.

After TTB accepted record

$750K offer-in- compromise from Craft Beer Guild for “pay to play” activity, Boston Globe talked to TTB’s

Robert Angelo “who vowed his agency would now take a ‘hard stand’ against pay to play,” wrote the Globe.

Robert, who is director of TTB’s Trade Investigations Division, also acknowledged that govt had not vigorously

enforced fed prohibition against slotting fees, but added that pay to play “getting a lot more emphasis now.”

More Investigations; TTB “Signals National Crackdown” TTB’s Robert Angelo characterized this offer-in-

compromise “as a warning to beer distributors everywhere,” wrote Globe. “Feds…signal national crackdown,”

headlined paper. “You’re going to see further investigations in this area,” Robert told Globe. I would hope that

industry members take notice of this, and take notice of the fact that this is a very significant [settlement]. I

don’t want industry members to consider getting caught the cost of doing business. I want them to realize there

are significant consequences if we catch you committing slotting violations.” Notice duly taken.

Don’t forget this newly activist TTB has also gotten offers-in- compromise from AB and MC in last 12 months

on consignment sales, and put kibosh on Kroger’s CatMan plan with Southern Wine and Spirits. So at very

least, we’re in new phase where Feds are paying much more attention to purported violations.

“Enforcement Works Best…When Evenly Applied,” Stone’s Greg Koch told Globe Long-time critic of pay to

play, Stone Brewing co-founder Greg Koch, also quoted in Globe on two interesting points others have raised:

the singling out of CBG as only distrib tagged here and brewer complicity. “Enforcement works best when it’s

evenly and effectively applied,” said Greg. He also noted pay to play “doesn’t happen without the implicit

cooperation of brewers and wholesalers.” Recall, Mass ABCC investigation tied CBG payments back to

suppliers. On question of extent of TTB’s future activity, alc bev atty Marc Sorini reminded that CBG’s offer in

compromise “an easy one for them [TTB]. It will have some deterrent effect, absolutely, but it didn’t take a lot

of resources or a crystal ball to piggyback on the state investigation.”

Hangin’ the Pirate in MA Led to Lull in Pay to Play, Attys Say Speaking on a panel with Marc at Beer

INSIGHTS Seminar earlier this week, another veteran alc bev atty, Mike Moses, “applauded” Mass ABCC

investigation and publicity surrounding issue there. He likened actions to “hanging the pirate in the harbor” to

make an example. After Mass actions, Mike heard from clients across US which suggested “a lull in some of

the shenanigans that were going on” as industry players suspected other states would follow. On same panel,

director of NJ Beer Wholesalers assn, and ex-head of NJ ABC, Mike Halfacre agreed: “Anecdotally speaking,

New Jersey was a much quieter summer after what happened in Massachusetts.” Action in MA, “definitely had

an impact.” Will feds forge ahead? Robert’s clearly signaling “yes.” On our panel, Marc said “it would be

great if there were real enforcement that works.” But Marc believes pirate not really hung in Mass, but rather

“given a haircut.” And given ongoing lawsuit there, and other factors, Marc remains “a skeptic” about big fed

push (tho his comments came 2 days before CBG’s offer in compromise). He reminded that feds have no

jurisdiction over retailers and that in tagging distribs/brewers it faces high hurdles of proving competing brands

excluded from outlets and “willingness.” If feds do move, they’ll “have to be very careful about the cases they

choose or face difficult challenges” in the courts. Stay tuned.

Alcohol-pot parallels took yet another

leap forward on Election Day, beyond passage of recreational pot in 4 more states. Denver approved first-ever

expansion of pot use to bars/restaurants, as AP reports. Lotsa restrictions: 1) smoking pot only allowed outside;

2) bars need to get “approval” of neighbors; 3) staff training and operations plans are mandatory to prevent

underage use, spot over-intoxication. And it’s BYOP (bring your own pot), natch, since sales by bars still

prohibited. Other “non-service establishments,” like yoga centers and art galleries can also apply to operate

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“pot-smoking areas or hold events serving both pot and food and drink,” AP reports. “The entire goal of this

initiative is to provide adults with private places where they can consume cannabis so they’re not consuming in

public” (still banned), said Mason Tvert, spokesman for Marijuana Policy Project. Gives not only tourists a

place to partake, but also parents who may not want to use pot at home and tenants living where landlords bar

use. Elsewhere, Alaska working on rules to set up “tasting rooms,” Calif’s law allows for pot clubs and remains

to be seen how Nevada, Maine and Mass regulate where use allowed, according to AP. Final factoid:

Washington State Liquor Control and Cannabis Board “expects the tax haul” from pot sales -- $65 mil in fiscal

2015 on sales of $260 mil -- “to almost triple in 2016, bringing in more than was collected on alcohol last year,”

reports Prince George Citizen, a British Columbia paper.

As 3 industry attys debated 3-tier issues, trade practices and more at our Beer INSIGHTS Seminar earlier this

week, questions about efficacy of middle tier percolating in NY market and elsewhere. Distrib advocates point

to middle tier’s role in maintaining orderly markets and assisting states in regulation and tax collection. Yet

recent fed lawsuits and fed charges detailed ongoing scheme to smuggle liquor from Maryland to metro NYC to

evade taxes, as Express reported earlier this fall. Legal skirmishes involve Republic Natl Dist Co, Empire

Merchants, Breakthrough Bev Group and execs in those companies. Fed charges vs RNDC and its execs

subsequently dropped. And while it’s not clear whether any laws were violated, no one doubts that liquor’s

moving from MD to NYC or that NY losing tax revs. And this movement either enabled by distribs, or at very

least, certainly not foiled by them.

“Liquor bootlegging has cost New York about $1 billion in lost taxes in the past 15 years,” Crain’s New York

suggested in detailed dive into liquor and tobacco smuggling. Bootlegging booze to NYC not a new phenom,

natch. Last effort to reduce it involved law that would have required distribs to warehouse liquor/wine in state

for 24 hrs before shipping to retailers, to ensure proper tax stamps, Crain’s reports. Some liquor distribs

actually have warehouses in NJ for cost reasons and “bill never got out of committee as it became apparent that

those distributors weren’t willing to pay additional rent for in-state storage space,” according to Crain’s. Then

too, uptick in smuggling was one of “unforeseen consequences” of ex-NY Atty Gen Spitzer’s crackdown on

“pay to play” in NY about a decade ago. That crackdown resulted in $1.6 mil in fines paid by liquor distribs,

but also “a sudden spike in traffic on the decades-old Maryland-to- New York liquor smuggling route.” Again,

both feds and distribs themselves allege a distrib role in that smuggling.

That ain’t all. Further upstate in Albany, handful of retailers just sued Southern Wine & Spirits and successor

Southern Glazer’s for charging alcohol sales to retailers’ “will call” accounts (product held in warehouse until

delivery or retailer picks it up) that was never ordered by or delivered to those accounts. Retailers seek over $1

mil in damages, plus punitives. Retailer told Times-Union: “It’s not just me; it’s every bar in the state” dealing

with this practice. Retailers also apparently believe Southern reps sold over-ordered liquor on the side.

Southern offered “unsatisfactory financial settlement and refused to acknowledge a systemic practice of padded

bills and charges for product never ordered,” retailer’s atty told Times-Union. “To my knowledge the SLA

[state liquor authority] is investigating this matter,” he said. Neither SLA nor atty for Southern commented.

Hits keep coming for Mass

distrib Craft Beer Guild, tagged by state for pay-to- play and with lawsuit recently by Shelton Bros. TTB just

accepted offer in compromise from CBG in amount of $750K over allegations that CBG “paid ‘slotting fees’ by

furnishing things of value to various retailers in order to obtain favorable product placement and shelf space” at

“various places in Massachusetts” between Jan 2013 and Oct 2014. “This is the largest offer in compromise

that TTB has recovered from a single industry member for trade practice violations,” TTB said in release,

adding alleged activity by CBG is “sort of pay to play activity [that] is incompatible with fair competition and

will be actively investigated by TTB.” CBG acknowledged “it has agreed to a $750,000 offer in compromise”

with TTB “in connection with a review that originated from a 2014” Mass ABCC investigation. “CBG fully

cooperated with the TTB,” it sez, and “continues to pursue a legal appeal of the February 11, 2016 decision” by

ABCC.

Those who hung in ’til very end of Beer Insights Seminar yesterday were rewarded with truly revealing slide

from consultant Bump Williams. He surveyed brewers, distribs and retailers about their “growth strategies”

goin’ forward. Listed top 10 for each. Most important observation: very little in common across these 3 lists.

So brewers, distribs and retailers ain’t at all aligned on how to grow beer and/or their own bizzes, and even less

so in 2016 than 2015. Among other issues, brewers lookin’ at beefin’ up share of mind for their brands,

expanding their footprints, direct retail sales to consumers, flavors/innovations and “become local,” natch.

Local and flavors included among retail strategies too. But top priorities for retailers: increasing foot traffic,

space mgt, shopper loyalty, cross-category merchandising, basically improving service to customers to keep

’em in store and buyin’ more. What are distribs focused on? Top 5: delivery efficiencies, picking up new

brands, eliminating OLD beer losses, identifying profitable brands and reducing SKUs. This lack of alignment

between tiers will make growth of beer category that much more difficult in 2017, Bump believes.

Coupla other observations, especially from distrib list. Nothin’ about supporting/boosting efforts to build

mainstream beers, still the bulk of the biz, or the category overall. Indeed, “new brands,” hot brands, “craft

spirits” and “profitable brands” are clear priorities (not that mainstream can’t be profitable), even while “cut

loose” [presumably underperforming] brewers and SKUs also on list. Note too prominence of eliminating old

beer losses as #3 strategy. We’ve noticed lotsa “dusty bottles” at retail lately and had this discussion with a few

folks at seminar. No doubt, old beer gettin’ to be a more common and more expensive proposition for distribs

these days and getting increased attention, along with consumer confusion, SKU reduction, impact of resets and

how expanding retail sales of craft brewers (taprooms/tasting rooms) affecting on- and off-premise beer biz.

Those who hung in ’til very end of Beer Insights Seminar yesterday were rewarded with truly revealing slide

from consultant Bump Williams. He surveyed brewers, distribs and retailers about their “growth strategies”

goin’ forward. Listed top 10 for each. Most important observation: very little in common across these 3 lists.

So brewers, distribs and retailers ain’t at all aligned on how to grow beer and/or their own bizzes, and even less

so in 2016 than 2015. Among other issues, brewers lookin’ at beefin’ up share of mind for their brands,

expanding their footprints, direct retail sales to consumers, flavors/innovations and “become local,” natch.

Local and flavors included among retail strategies too. But top priorities for retailers: increasing foot traffic,

space mgt, shopper loyalty, cross-category merchandising, basically improving service to customers to keep

’em in store and buyin’ more. What are distribs focused on? Top 5: delivery efficiencies, picking up new

brands, eliminating OLD beer losses, identifying profitable brands and reducing SKUs. This lack of alignment

between tiers will make growth of beer category that much more difficult in 2017, Bump believes.

Coupla other observations, especially from distrib list. Nothin’ about supporting/boosting efforts to build

mainstream beers, still the bulk of the biz, or the category overall. Indeed, “new brands,” hot brands, “craft

spirits” and “profitable brands” are clear priorities (not that mainstream can’t be profitable), even while “cut

loose” [presumably underperforming] brewers and SKUs also on list. Note too prominence of eliminating old

beer losses as #3 strategy. We’ve noticed lotsa “dusty bottles” at retail lately and had this discussion with a few

folks at seminar. No doubt, old beer gettin’ to be a more common and more expensive proposition for distribs

these days and getting increased attention, along with consumer confusion, SKU reduction, impact of resets and

how expanding retail sales of craft brewers (taprooms/tasting rooms) affecting on- and off-premise beer biz.

Modelo

Especial now 15.4 share of $$ sales in Los Angeles metro area IRI multi-outlet + convenience for last 12 weeks

thru Oct 30. That’s up 2.23 share from last yr and way ahead of Bud Light in period. Bud Light at 12.53 share

of $$, down 1.22. What’s more Modelo Especial continues up at double-digit clip, while Bud Light down at

double-digit rate in nation’s largest scan mkt. Bud Light still at 16 share of volume, 3 share ahead of Especial

by cases.

AB sold $116.7 mil worth of beer in LA last 12 weeks, compared to Constellation’s $115.6 mil (including

Ballast Point). They are running neck-and- neck, with AB at 29.7 share of $$, down 1.9, while Constellation at

29.4, up 2.8. Nearly a 5 point swing. AB $$ sales down $9.8 mil, 7.7% in 12 week period, while Constellation

up $8.8 mil, 8.2%. Meanwhile, MillerCoors down to 17.7 share, lost 1.1 share as its $$ sales down 8% too in

period. Heineken at 10.1 share, down 0.56, with $$ sales also down 7%. So 4 players still have almost 88 share

of LA mkt, but some big swings and one big winner.

But even while Constellation closing in on #1 position in LA metro, one potential chink in its armor has

emerged in form of Corona in LA. Corona $$ sales down 7% for last 12 weeks and it lost 0.5 share to 8.3. So

Modelo Especial almost 2x as large as Corona here. Interestingly, Corona still doing just fine nationally. $$

sales up 10% in IRI nationally during same period. Also worth noting, Pacifico up double digits, over 2 share

of $$ and a top 10 brand in LA scans. So it’s coming on, bigger than Dos Equis or Michelob Ultra there. And

while AB’s Montejo brand sales almost cut in half in LA, Estrella Jalisco at 0.7 share of $$ last 12 weeks, in top

25 brands.

Interesting chart shown by Constellation Brands Beer Division prexy Paul Hetterich at both STZ’s Investors

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Day and Beer INSIGHTS Seminar illustrated ongoing ascension of high end beer in major metro areas. High-

end brands are 2 of top-5 slots in IRI $$ sales in 6 top metro areas these days, sometimes the top-2 slots. For

example, Corona and Heineken are #1 and #2 in NYC and in Miami, he showed. Corona Extra and Modelo

Especial are #1 and #2 in San Fran/Oakland. Modelo Especial #1 and Corona Extra #3 in LA (all data is IRI

MULC for 12 weeks thru Sep 4). And in 2 midwestern mkts in top 10 metro areas, Modelo is #2 and Corona #4

in Chi, while Corona is #4 and Modelo Especial #5 in Dallas/Fort Worth.

Dallas/Fort Worth is the only mkt of these 6 metro areas where premium light beers still held the top 3

positions. It’s also the only one of these where the #1 national brand Bud Light is still #1 brand (it’s #2 in just

LA), tho it’s in top 5 in all 6 cities. Budweiser is #5 in LA, San Fran/Oak and Miami, #4 in NYC. In general,

the high end keeps getting more powerful position in these top cities, and will spread from there, Paul

maintained, part of what gives him confidence of continued high-end growth.