Fascinating discussion of “pay-to-play” issues – illegal inducements of cash or “things of value” to promote sales – at legal symposium sponsored by control state assn (NABCA) this morn in Alexandria, VA. Two speakers with extensive experience on regulator side but now in different positions detailed the difficult challenges that: 1) regulators face in enforcing current laws (and in even defining “thing of value”) and;

2) industry members face in trying to abide by those laws.  Rob Tobiassen, ex-chief counsel for TTB and now a consultant, pointed out fed challenges.  Bill Kelley, ex-general counsel for Mass Alc Bev Control Comm and now prexy of Beer Distribs of Mass, put this very hot topic in Mass context.  Recall, Mass ABCC has pending investigation of “pay-to-play” charges made last fall by craft brewer who put his grievances with on-premise retailers on social media.  They got picked up across internet and ultimately a blaring headline in Boston Globe. 

Rob acknowledged concerns among some in industry that “there haven’t been enough investigations” of pay-to- play and the “field has run amok.”  But there are reasons fed regulators have been cautious.  Fed statutes prohibit suppliers/distribs from providing money, equipment, supplies and other “things of value.”  These go back to post-Prohibition period.  But he also noted regs include specific exceptions (i.e. schematics to retailers).  Then too, certain inducements that might appear to be “things of value” could be interpreted as legitimate “pricing arrangements” between parties.  In famous Fedway case, now-Supreme Ct justice Ginsburg suggested that electronic goods passed to another tier could be viewed as form of quantity discount paid in goods, not product.   Then there is issue of resources to make such cases: they’re very “fact intensive” and are “potentially disruptive” to the industry, Rob pointed out.  (He didn’t mention it, but recall TTB has decision to make about Category Management; imagine how disruptive that could be to current practices.)  In addition, there have to be “means to induce,” willingness to induce, exclusions of competitive products (very hard to prove) and if you are in beer, gotta have similar state statute to proceed.  All of that adds up to lotsa hoops for feds to jump thru to make pay-to-play cases, in environment of very scarce resources and competing “public interests.”

Bill presented perhaps even more challenging issues for Mass ABCC in current pay-to-play investigation.

Mass regs prohibit giving money or “things of substantial value” to influence the purchase of alc bevs or discourage the purchase of competing bevs. That law only applies to license holders and does not prohibit anyone (i.e. retailers) from asking for such items or accepting them.  At the same time, there’s no definition for “things of substantial value” in alc bev regs, ABCC has published “no advisories or memos” on the topic, and phrase has different meanings in different areas of state law, i.e. criminal larceny, state ethics law.  At the same time, in practice ABCC has allowed even the giving of money to induce sales to consumers in the state for decades, via mail-in rebates.  What’s more, since the 80s Mass state Liquor Control Act has allowed quantity discounts at all 3 tiers, as high as 20% of the retail price, depending on the product. Mass threw out its post-and-hold regs years ago and retailers won a court case allowing them to “negotiate” prices with distributors, Bill pointed out.  So, “it’s fair to ask,” said Bill, “what conduct is prohibited and what exactly are we talking about when we discuss a ‘thing of value’ in Massachusetts?”  In his mind, “thing of value” is “undefined.”   Net-net: Mass ABCC faced with a “substantial challenge” here, asserted Bill.  No big new developments in case, Bill added, as ABC investigators have provided no details about who is involved and what data is being subpoenaed.

Another consideration inevitably pops in these discussions of trade practices.  When regs written, balance of power much different than now when big retailers have so much more leverage, tho little accountability under especially fed regs.  Given that shift and feeling that mkt has “run amok,” one atty made familiar “plea” to regulators to either take the laws off the books or enforce them. Given challenges above and the politics and pace of alc bev law reform over the years, hard to imagine either happening anytime soon. 

We left off lots of zeroes in our figure for Constellation volume in Okla City and Tulsa AB branches yesterday.  That figure is 1.2 mil cases, of course.  

In ceo Tom Long’s opening remarks to distribs at MillerCoors 2015 Distributor Convention yesterday, he struck several familiar chords and amplified some key notes: opportunity for (MC’s) premium lights, difference between MC and ABI, importance of quality, powering the high end and more. But he sounded a scarier motif too, saying “conventional wisdom is skeptical about your business because it questions the long-term future of the three-tier system which is under attack from virtually every direction.” And he tied that to “conventional wisdom” that is “skeptical about our business at MillerCoors because it questions the growth of American light lagers.”

Yet conventional wisdom has often been wrong, especially in beer biz, Tom pointed out. In fact “conventional wisdom” of one era can “look downright foolish” in next, he noted. “Conventional wisdom” of 1960s would have totally missed that AB would grow to half the biz, or later that light beers would grow to half the biz or that craft would take off like it has. “And now, in 2015… when the conventional wisdom is betting against the three-tier system and American light lagers…we are determined to prove that conventional wisdom wrong.”

Indeed, “the opportunity for our American light lagers is huge,” maintained Tom. And it’s not dependent on light returning to growth as a segment, according to Tom. Rather what’s required is “power of marketing” and “relentless salesmanship” of MC brands Miller Lite and Coors Light, which can then take share from Bud Light. MC already on right path to “rejuvenate” its top 2 brands, with Miller Lite improvement last yr.  Key to rejuvenation will be “quality” message that talks about “the physical quality of the beer itself and the quality of the brand representing the beer” as well as “the quality of the marketing behind the brands.”  Tom promised “lots of work” in new programs “that emphasizes the distinctive, authentic strengths of our beers.” 

Meanwhile, “we have a competitor who has a 55 share in light lagers,” a “weak consumer franchise” and is “the unconscious default-choice,” said Tom. So he reiterated his “great conviction that Miller Lite and Coors Light can grow” at same time “on a sustained basis” by taking share from Bud Light. Tom repeatedly contrasted MC approach to ABI. He also took shots at AB’s ads, making fun of its “up for whatever” slogan, (“spending a gazillion hyping a fictional town called ‘Whatever’”) and its Bud Super Bowl ad. That ad highlighted “fundamental” difference between AB and MC as Bud “attacked beer drinkers for taking their beer too seriously.” While “they call it ‘fussing’ and demean it, we call it ‘passion’ and romance it.”

MillerCoors “really is your best business partner” and is “the only major player that can and will help you defend the three tier system,” concluded Tom. In contrast, ABI believes “the key to creating value is acting massively” and “creating artificial mass-marketing spectacles, with massive moves to control more of the profit pool for themselves by attacking the three-tier system.” (Tom didn’t give specifics but readers can probably guess.) MC believes “the key to creating value is connecting” and “long-term success ultimately depends on people having a very personal connection to your beer brand.” More on MC meeting in next Beer Marketer’s INSIGHTS. 

“The biggest opportunity” for ABI’s global business and “value creation” is US, said ceo Carlos Brito at AB’s Wholesaler Excellence meeting earlier this week. And ABI’s big “gap” in US is “about our market share performance.” Once again, Brito said ABI is “committed to stabilize market share” in US “as long as we do it in a profitable and sustainable way.” ABI “added north of $200 million in sales and marketing” in North American zone last yr, he noted, with “vast majority” in US.  Indeed, ABI has “huge desire to invest big time” in US beer biz, said new North American prexy João Castro Neves, adding the “best is yet to come.” ABI is “seeing some positive trends” and “big bets gaining some traction.” And ABI will be “significantly increasing investments” in US again in 2015. “This is sort of a break year for us,” said João, noting that AB “funding our offense with a sense of urgency” and looking “to strengthen our relationship with some of our partners, especially you guys here.”

“Stated Objective: More Constructive Relationship” With Distribs Not just Joao, but several AB execs struck a better tone regarding importance of improving relationships with distribs, amidst some ongoing friction. Indeed, sales veep David Almeida said “improving communications” and developing a “more constructive relationship” is a “stated objective.” And veep Ricardo Melo, who recently added wholesaler development to his responsibilities, said that relationship with distribs is “one of biggest areas of opportunity for improvement.... Relationships matter” and AB wants to “take it to the next level” and “build trust” as that is “strongest factor” that “will improve future.”  While distribs overall more satisfied than they were before in Voice of Wholesaler survey, “several irritants” remain.  Lowest scores still on logistics, packaging and there are problems with innovation overstock. But Melo sees plenty of solutions, including Rita buyback program, many improvements already made on packaging and “more can be done.”  Finally, AB has started to investigate a move from “Born On” dating to “Freshest Before” dating. More on AB’s meeting in next Beer Marketer’s INSIGHTS.

Final stab by consumer-plaintiffs to keep charges alive that AB waters down its beers “failed to stir much emotion” in US Appeals Ct in 6^th Circuit today, Courthouse News Service reports.  Recall, US Dist Ct tossed charges last yr.  AB pointed out then, and again today, that TTB regs allow 0.3 variation from what’s listed on label and actual ABV in package, and AB beers compliant with those regs.  Atty for plaintiffs acknowledged there had to be some variance, CNS reports, but said AB “should shoot for what is on the label.”  He cited Sup Ct decision that kept POM Wonderful’s charges of deception alive vs Coke over Coke product labeled “pomegranate blueberry” with just 0.3% pomegranate juice.  AB atty countered that fed laws in that case irrelevant to this ABV issue.  One Appeals Ct judge got to nub, saying consumers getting “the same buzz from 21 beers but should be getting it from 20 beers.”     

Last fall, US Dist Ct judge refused to drop rare antitrust charges vs a Miss AB wholesaler (Mitchell Dist) brought by aggrieved retailer, as we detailed in the Oct 20, 2014 beer marketer’s INSIGHTS.  Charges stemmed from activity back in fall 2010, and after several postponements, jury trial now on tap in US Dist Ct for late Apr.  Here’s summary of each side’s position, based on trial briefs.  

Mitchell Had Monopoly Power, Injured Retailer, Major Mart Claims  Retailer Major Mart, with 11 c-stores in northeast Miss, sez it will prove handful of charges under fed Sherman and Clayton Acts and state antitrust law, plus tortious interference.  Seeks jury verdict for injunction to stop Mitchell’s actions (which it sez are ongoing) and unspecified money damages, which would be trebled if jury decides antitrust charges proved.  Specifically, Major Mart sez it will show Mitchell has monopoly power (Mitchell has 70+ share, 17 counties).  Major sez it does not have to prove Mitchell “actually succeeded in raising prices or excluding competition,” only that it “had the power to do so.”  Retailer will also show Mitchell believed Major Mart tried to hurt Mitchell’s biz thru pricing and shelf space tactics and Mitchell therefore “retaliated” via “irrational acts” in short term aimed to improve its long-term position.  That retaliation included eliminating biz support, reducing and skipping deliveries, denying coupons, etc to “punish Major Mart and force it to give Mitchell greater shelf space and price parity.”  Jury will also be able to “infer,” Major Mart sez, that Mitchell had “specific intent” to monopolize, intent to damage Major Mart and that Mitchell “sought to punish Major Mart for favoring” competitors.  Tho Mitchell argues Major Mart’s overall sales did not suffer from the alleged actions, Major Mart’s expert witness will show that while biz “remained steady, Major Mart could have sold more beer overall as well as other products had Mitchell not engaged in its anticompetitive conduct.” 

No Monopoly Power, No Pricing Power, No Exclusion, No Injury, Sez Distrib  Mitchell denies any wrongdoing and insists its actions not only legal, but rational, given Major Mart’s decision to give preference to Miller and Coors products once the dispute began.  Specifically, Mitchell sez it lacks monopoly power in the market to “control prices and exclude competitors ‒ or a dangerous probability of achieving it.”  Not only is there “no evidence that Mitchell has ever exercised control over retail prices or could if it tried,” but Mitchell made no pricing demands, tho it did express that it would “certainly want price parity.”  Besides, Major always made its own price decisions, which sometimes clashed with Mitchell’s interests, including lowering Miller/Coors prices, which in turn raised their sales.  Nor did Mitchell engage in any “exclusionary conduct” vs the competing distribs.  Indeed, Mitchell simply sought to maintain its shelf space of about 50% in Major Mart even tho it had 73 share of the mkt. 

Nor did Major Mart suffer any “antitrust injury,” Mitchell sez, since Major Mart sold “significantly more beer distributed by Mitchell’s competitors ‒ which is, of course, precisely what Major Mart intended.”  Indeed, it was Major Mart who “launched a retaliatory campaign” vs Mitchell back in 2010 over an alleged profit loss of $1200 due to “incorrect pricing information.”  Mitchell said it had provided correct pricing info, but Major Mart reduced its shelf space, removed AB POS, eliminated Mitchell as preferred supplier, refused to allow Mitchell’s sales people access to coolers, reduced prices on competing brands and more.  That led to 50% dropoff in AB sales, but an “even larger increase” in other brands’ sales, resulting in an overall increase.  Mitchell did reduce deliveries to some, not all, of Major Mart’s stores subsequently, Mitchell acknowledges, but that was justified by the sales decline.  “Put simply,” Mitchell concludes, “Major Mart is claiming injury from the very result it set out to ‒ and did ‒ cause: a punitive reduction in the sales of AB beer, and a transfer from AB customers to other brands.”  

Hadda see this one comin’. Constellation Brands will be leaving AB branches in Okla City and Tulsa, totaling 1.2 cases of Constellation volume. It terminated AB branches as allowed by US Dept of Justice consent decree. Recall, Constellation terminated AB branches in Seattle, Pomona, Calif and Boston earlier this yr. With today’s announcement, Constellation will no longer be in any AB branches when deal is done.

Constellation will go with Capital Dist in Okla City as well as several distribs in Tulsa and surrounding area.  They are: LDF Sales & Dist in Tulsa, Pope in Enid, Southern Sales-Fisher Bev in Lawton, Jett in Clinton and Heart of America in Miami. Most if not all of those are MC distribs; Constellation already does biz with Fisher in Tex and Heart of America in Mo.

Constellation made its rationale clear earlier and reiterated again today that move will “create a little distance between us and our largest competitor,” said sr director of communications Mike McGrew, and “strategically” is the “best decision for us.”

Flying Dog didn’t “win” case in fed ct over its charge that Mich Liq Commission violated its 1st Amendment rights by denying Raging Bitch registration, as we erroneously suggested last week.  US Dist Ct never ruled on that specific issue.  It got dropped during the proceedings.  Dist Ct ruled only that commissioners were immune from damages.  That’s what Appeals Ct reversed, and that’s Flying Dog’s current victory.  For convoluted set of reasons, Appeals Ct ruled commissioners were not immune from damages if FD’s 1st Amendment rights were violated.  US Appeals Ct also wants US District Ct to “undertake this inquiry” into the 1st Amendment issue.   If there’s full blown trial on that issue, any damages depend on that ruling, and could be long way off.  

In Ontario, The Beer Store (owned by AB InBev, Molson Coors and Sapporo) “basically controls the market” with 80 share of retail sales, but now this arrangement is “under siege” once again, per NY Times report.  What began as a co-op of local Ontario brewers is now controlled by 3 large global brewers.  While calls for reform have failed “over the last nine decades,” that could change now that Ontario needs more cash and small brewer/consumer calls for more convenient shopping and competitive pricing are getting louder.  “I’m trying to come up with an analogy that doesn’t talk about communism, Russia,” said Moosehead prexy Andrew Oland about The Beer Store.  “Well it wouldn’t be a consumer experience consistent with the 21^st century,” he added. Smaller brewers balk at the hefty upfront fee of around $3500 US $$ to gain access to Beer Store and additional charge of $290 for each store they want to sell their beers in.

While a review of Ontario beer mkt led by “academics and business” leaders “ultimately” concluded gov’t controlled stores should stay, it also concluded Ontario should be getting more money out of The Beer Store.  The committee suggested Beer Store’s owners should be paying an annual “franchise fee” that they are prohibited from passing on to consumers, or give up their “monopoly.” “Truth be told, it is a highly, highly cost-efficient model for consumers,” said Stewart Glendinning, ceo Molson Coors Canada, in defense of arrangement. “I know what’s best for consumers,” and compared to other retail arrangements around world, “I can tell you this is a system that is low-cost and passes that along to the consumers,” he added.   Yet, as Times noted, a case of 24 Stella Artois bottles retails for around $38.50 while priced around $9 less at a Costco in Quebec.  Also, one ad against opening Ontario beer mkt to other retailers “darkly suggests” that changes in system “will unleash a wave of underage drinking.”     

A new bill, with proposal that’s been around since 2009, is being floated in NY State Assembly to change tax collection laws in order to help home d’s, the 4^th tier in state that retails lotsa beer and competes against larger middle-tier distribs.  Very convoluted language applies to off-premise sales, only to home d’s in New York City, requires price posting (and holding for 6 mos) and guarantees a 2-15% discount on sales to home d’s.  That’s likely to promote transshipping outside of NYC, one observer told Express.  “New York must maintain its four-tier distribution system,” declares bill in brief “justification” section at end, claiming that “wholesalers are using their exclusive agreements to unfairly undermine the non-contracted wholesalers” in the market.  Bill seeks to create what it calls “a government protected price differential” to protect home d’s, “who are threatened with extinction” because of “discriminatory pricing” of larger contracted distribs.  This would allegedly allow home d’s “to compete fairly” with wholesalers, supporters claim, and by collecting sales tax at the wholesale level instead of retail, “this bill will also help the State generate more revenue.”