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Tuesday, July 1, 2008
Liquor distributors serve as crux of industry |
Source: The Business Ledger
Jun 17th
The liquor industry in Illinois is not only a highly profitable one but also heavily taxed and regulated.
Much of the responsibility for that regulation falls on the distributor, or wholesaler, to make sure that all parties participating in the federally established three-tiered system follow its litany of rules and policies.
That three-tiered process of liquor distribution in the United States was established in 1933 in accordance with the ratification of the 21st amendment, which repealed Prohibition-which from 1920-33 prohibited the manufacturing and sale of alcoholic beverages.
Lawmakers of the time sought to control every aspect of the alcohol industry, from the time the ingredients are plucked from the fields up until the moment of its consumption, by setting up state and federal regulatory agencies to closely monitor each phase.
This would assure that the rampant industry abuses of the pre-Prohibition era-which included inadequate tax collection and oversight of who was being sold alcohol, as well as widespread collusion between suppliers and retailers-would not again become an issue.
"The state's said that the way to prevent the abuses of the past was to create somebody that is responsible to the state, between the retailer and the manufacturer," said Bill Olson, president of the Associated Beer Distributors of Illinois (ABDI).
That middle tier is the wholesaler: an entity overseen by each state whose responsibility it is to uphold federal and state regulations related to the purchase, movement and sale of alcohol. By inserting a buffer between the supplier and vendor, states could effectively control tax collection, oversee fair practices within the marketplace and assure that only licensed retailers are selling to licensed consumers.
Illinois distributors are charged with overseeing 58 breweries and nearly 21,000 retailers. In the wine and spirits arena, 30 distributors account for 99.98 percent of all wine and spirits distributed in the state-98 percent of which is comprised of just two distributors, Judge & Dolph and Southern Wine and Spirits.
"Distributors have different contracts with different suppliers," said Paul Jenkins, executive director of the Wine and Spirits Distributors of Illinois. "That's why people say there will never be more than two major distributors."
Wine and spirits manufacturers contract each brand, based on product type and price point, with only one of the major wholesalers-while the direct competitor of that product contracts with the other distributor. Retailers must contract with both distributors or risk punishment from the Illinois Liquor Control Commission.
"It becomes a way of regulating the competition in the marketplace so that we cannot do things that will drive us back to the roaring '20s, when drinks were a nickel," Jenkins said.
Tax collection and licensure is another duty of distribution companies, said Julie Sznewajs, a spokesperson for Judge & Dolph, Ltd., a subsidiary of the Wirtz Beverage Company.
"There needs to be a reliable system and distributors are the responsible party for collecting state and local taxes," she said.
The three-tiered system, and the taxes associated with it, has become a huge moneymaker for both the federal government and the states. In Illinois alone, the direct impact of the liquor industry in 2007 resulted in 39,250 jobs, nearly $1 billion in wages and an overall economic contribution of more than $2.6 billion.
In addition, taxes on alcohol-which total more than $1 billion annually in Illinois-are higher than any product in the nation, by far. A 2005 tax burden study prepared by Global Insight, Inc. and The Parthenon Group found that the tax burden borne on beer consumers is more than 68 percent higher than average for the U.S. economy, with taxes representing 41 percent of the retail price of beer.
In comparison, total federal, state and local taxes equal 24 percent of all other purchases in the U.S.
"It's a unique product with unique properties that all states have said needs to be closely monitored and regulated," said ABDI's Olson.
By supervising retail establishments and making sure all products stay fresh, while also serving as licensers for suppliers and retailers, the distributors help ensure quality control, which has been an issue in many eastern European countries.
"That doesn't happen in the U.S.," said Olson, "because the product is monitored from the time it's produced all the way through (the distributors) and through the retail licensee to the consumer. So it's a safety function that we also provide."
Wholesalers also play an integral part in the marketing process through the creation of point of sale merchandising, displays and promotions.
Critics of the three-tiered process say that distributors aren't necessary and hamper free trade, which is afforded every other product in the country. Illinois House Bill 429, which outlaws the purchase of wine and spirits from out-of-state retailers, went into effect on June 1 of this year and has outraged consumers who are accustomed to buying their liquor from online sellers.
"How can we ensure there isn't a box (of liquor) that turns up at the door of a dorm room for three 18-year-olds?" said Jenkins. "That box not only contains a controlled substance, it also contains a product we didn't get any taxes on and we can do no enforcement on.
"The three-tired system is flawed but there is nothing better that anyone has come up with to address these fundamental concerns that exist even 70 years later."
Industry experts agree that at no point in the foreseeable future will the three-tiered system be changed or repealed, meaning the distribution and sale of alcohol through wholesalers will continue to be big business in Illinois and throughout the U.S.
"Think about it: it's the only product that has been legal, then made illegal by a constitutional amendment and the re-legalized by virtue of another constitutional amendment," said Olson.
"Most of the constitution deals with human rights and government restrictions. (Alcohol) is the only issue that deals with a product and how the government feels it should be handled." |
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