Monday, February 5, 2007

The patron nursing a highball on a stool at the local tavern might wonder why Texas' wholesale liquor distributors are spending big money to push package stores out of selling spirits to bars and restaurants. Distributors, who gave a total of $1.38 million to state officials late last year, want to change the law that requires bars and restaurants to buy their liquor from package stores instead of distributors.Read the article at the Austin American-Statesman

Liquor stores shaken,stirred, by distributors' plan

Distributors want direct sales, but savings aren't a sure thing

By Mark Lisheron
Monday, February 05, 2007

The patron nursing a highball on a stool at the local tavern might wonder why Texas' wholesale liquor distributors are spending big money to push package stores out of selling spirits to bars and restaurants.

Distributors, who gave a total of $1.38 million to state officials late last year, want to change the law that requires bars and restaurants to buy their liquor from package stores instead of distributors. Cutting out the middleman, they argue, tends to lower the price of drinks. The package stores, stung by the businesses that supply them, say handing the liquor business over to a few wholesale distributors will reduce competition and, ultimately, raise the price of a drink.
Greg Wonsmos Package store advocate says distributor plan would eliminate competition.

Both sides are probably right. But because businesses are not required to disclose their markups, it's anybody's guess what it might mean for the cost of a cocktail in Texas if the Legislature gives distributors what they want.

One thing is certain: It will be a knock-down, drag-out fight.

The package stores will fight hard for their livelihood, and the liquor wholesalers are likely to keep coming back to the Legislature until they succeed.

"Our view is that this is a silly law that creates additional costs in the system," said Alan Gray, spokesman for the liquor distributors' lobbying efforts.

Countered Greg Wonsmos, president of the Texas Package Stores Association: "Under the wholesaler plan, all competition is eliminated by law. That would be an outrage."

The fight comes at a time when traditional methods of getting products of all kinds to market are being challenged in the nation's statehouses and in the courts. The challenge has come from the Internet, which brings customers and manufacturers together directly, and large retailers such as Wal-Mart and Costco, which are a combination of wholesale distributor and package store. The bottom line for these new retailers is selling at the lowest price.

These new business forces are, in some instances, sidestepping politics altogether, taking on decades-old laws and monopolistic practices in court.

"Most of the laws passed by states to regulate businesses are simply attempts to limit competition in the marketplace," said Lino Graglia, an antitrust and constitutional law expert at the University of Texas School of Law. "Courts are recognizing that there is more value in free markets."

Package law unusual

Under Texas law, liquor manufacturers sell to liquor distributors, who in turn sell to about 2,300 retail package stores, which sell to consumers. About 600 of those stores have special permits to sell to the more than 9,000 bars and restaurants holding mixed-beverage permits.

Texas is one of three states — Kansas and South Carolina are the others — that have this additional link in the chain of commerce for liquor. In all states, most beer and wine is sold by their manufacturers to distributors who, in turn, sell them to retail stores, including restaurants and bars.

The Legislature passed the package store law in 1971 as a companion to a law allowing restaurants and bars to sell liquor by the drink. Worried that this new market would cost them business, package stores successfully lobbied to require that businesses selling drinks buy their liquor from them. Since then, the state's restaurants and bars, which sold about $3.6 billion in mixed drinks and paid more than $500 million in mixed beverage taxes in 2006, have absorbed or passed along any markups from both the wholesale distributor and the package store to their customers.

"I can't think of any reason why this law makes sense," Graglia said. "All you have done is add an unnecessary market impediment."

Gray said wholesalers have long agreed with that assessment but have been reluctant to antagonize businesses that, in many cases, have been their longtime customers.

Gray insists that no single event caused the wholesale distributors to change their minds but says a change was overdue.

"We know that not only can we take costs out of the system but at a much higher level of service to our customers," Gray said.

Making a statement

The proposed change appears to have taken on a new urgency in November, when the wholesalers began making campaign contributions to most of Texas' 150 state lawmakers, as well as $100,000 to Gov. Rick Perry. A total of $1.38 million in donations by BG Distribution Partners, a political action committee representing the two largest distributors in the state, was reported in January. The money was given after the elections but before the Legislature convened Jan. 9.

Craig McDonald, director of Texans for Public Justice, which tracks the influence of money in politics, said the money is among the largest sums spent by a single PAC in a decade. BG Distribution Partners represents Glazer's in Dallas and Republic Beverage Co. in San Antonio.

"It was a dramatic gesture that was designed to get noticed," he said. "We live in a pay-to-play state, and this told each legislator who got a donation that they are ready to play."

Executives with Glazer's and Republic revealed their plan at a meeting with package store representatives in November, said Wonsmos, who is CEO of Centennial Fine Wines and Spirits in Dallas. The wholesalers, he said, showed little concern for the impact it would have on the specially licensed liquor stores.

The Package Stores Association estimates that 500 of the 600 package stores licensed to sell to restaurants and bars would go out of business and thousands of their employees would be out of jobs. The other roughly 1,800 package stores that are licensed to sell to the general public would not be affected.

Most of the big package liquor stores in Austin, such as Twin Liquors, Spec's and Austin Wine Merchants, sell to bars and restaurants. Phone calls to managers and owners at those businesses were not returned.

But Wonsmos said the proposed legislation "means dire consequences for Texas businesses. A wholesaler monopoly would eliminate choice in who bars and restaurants do business with; it would increase costs for thousands of businesses and cost thousands of local employees their jobs."

Competition within wholesale distribution itself has been sharply curbed over the years. When the package store law passed in 1971, there were hundreds of distributors in Texas, about 20 of them major players. When Gray began lobbying for the industry in 1992, there were eight major companies.

Today, there are two: Glazer's and Republic control nearly all of the major liquor brands and most of the business.

The consolidation of the wholesale sector also reflects the consolidations of some of the larger liquor manufacturers.

Guaranteed savings?

Choosing between the package stores and the wholesale distributors isn't as easy as a simple cost saving, said Richie Jackson, president of the Texas Restaurant Association.

Big-volume chain restaurants that buy their liquor in bulk believe they can save considerably by not having to pay the markups of both the wholesaler that sells to the package store and the package store that sells to them, Jackson said.

There is, however, no guarantee that wholesale distributors will pass along the savings they say the change in the law will create, and small independent restaurants have expressed concerns that they might lose the individualized service they get from their favorite package store.

Ron Weiss, a managing partner in Jeffrey's, a well-known independent Austin restaurant, said he was initially all for the wholesale distributors' plan. He has since become less certain.

"It's not a clear-cut issue," Weiss said. "Unless there is a true cost savings, there is no reason to want the law changed. You can't attach a value to the service element of doing business with package stores."

Liquor laws in Texas

1933: Prohibition ends. Sale of liquor is prohibited unless counties, cities or justice of the peace precincts hold a referendum in which voters approve liquor sales.

1971: Legislature approves the sale of liquor by the drink. At the same time, it establishes a three-tiered system of sales: manufacturers, distributors and package stores, and bars and restaurants.

1979: Federal law allows people to brew up to 200 gallons of beer at home, paving the way for the microbrewing boom.

1993: Legislature passes bill allowing brew pubs, the 42nd state to do so.

2003: Voters approve a constitutional amendment that authorizes all Texas wineries to operate, sell wine for on-premises and off-premises consumption, and conduct wine tasting. In contrast with other entities, wineries are exempt from the 'wet' or 'dry' status of the political subdivisions in which they are located.

2005: Legislature overwhelmingly approves a law allowing state wineries to ship directly to consumers. Texas consumers are allowed to buy directly from out-of-state wineries.