Producers fighting for US law changes

Eighty years after the repeal of Prohibition in the US, vestiges of restrictive legislation remain. But the big spirits producers, led by Diageo, are fighting in the courts to have them deleted from state statute books.

In what has become known as the “Missouri Liquor Wars”, Diageo has fired its distributor in the Mid-Western state and moved its business to what it claims is a more efficient rival. This might seem a normal business practice, but Missouri is what is known as “franchise” state, one in which the producer is effectively locked into a particular distributor, the owner of which must reside locally. In all but name, the individual state ensures the continuing relationship and protects the status of the local wholesaler.

There are a dozen US states still operating the “franchise” distribution system, which was designed to get wholesalers to help states collect sales taxes and stop alcohol distribution falling into monopoly (gangster) hands, a key consideration in the immediate post-Prohibition era.

But that was in 1933. Today groups such as Diageo, Pernod Ricard and Bacardi complain that the franchise laws are long outdated, that they prop up inefficient local wholesalers and drive up distribution costs to the detriment of the consumer. They want the right to streamline their US distributor networks, a process that has been underway in “free” states for a number of years.

Along with the Distilled Spirits Council of the US, which represents domestic producers, they have been lobbying Washington since before last Christmas. An army of lobbyists has also pitched camp in Missouri’s state capital, Jefferson City, to oppose new legislation designed to underwrite the “franchise” system.

Earlier this year Diageo effectively fired its Missouri distributor, Major Brands of St Louis, in what has become a test case. The owner had died, considerably clouding the residency requirement of the 21st Amendment, and his widow alleges that Diageo demanded she sell Major Brands to a competitor or at least join forces with one as part of Diageo’s drive to consolidate its wholesaler network. Diageo, which Major Brands says accounts for 42% of its business, rejected that version of events in court.

Diageo’s deal with Major Brands of St Louis is now in the hands of US courts

Then within 24 hours in March, both Bacardi and Pernod Ricard announced they would move their distribution from Major Brands to Glazer Distributors, which operates in several states, and to which Diageo is transferring its Missouri business.

Writs and counter-suits have been flying, but both sides are claiming victory in the first court hearing. A St Louis district court upheld Missouri’s franchise law and found that Diageo had broken its contract with Major Brands. Importantly, however, the judge did not require Diageo to continue supplying the company.

The implication is that Diageo will be required to pay compensation to Major Brands but that it can switch to its preferred distributor.

But that was only the first round in what is set to be a long legal wrangle., It is also becoming the focus of a political battle, not only in Missouri but also in the other ”franchise” states such as Georgia and Arizona. If Missouri falls, conservatives believe, the others will be unable to resist change.

And big money is betting that the Missouri franchise system will be toppled. One of the world’s biggest investors, multi-billionaire Warren Buffett, is buying a small Missouri wholesaler to add to his nationwide trucking empire. A minute deal for him at this stage, but perhaps a precursor to bigger things.

Meanwhile, fine wine lovers in franchise states have hit the blogosphere to express fears that a consolidation of distributorships to represent the multi-national spirits brands would hit the availability of niche products and increase prices. The enlarged wholesalers, they fear, will not keep them in their portfolios, making them harder to source and more expensive as a result.